CUNA’s Elimination of Accrued Account Balance for Post-Retirement Health Care Upheld by Seventh Circuit

Employees and Executives in Chicago that participate in an ERISA employee benefit plan often wonder whether once an employer gives a benefit, the employer can later take it away. Recently, CUNA Mutual did just that, and in an opinion with which this author disagrees (in both result and reasoning), the Court of Appeals for the Seventh Circuit ruled 2-1 that CUNA’s action was not improper. Sullivan v. CUNA Mut. Ins. Society, No. 10-1558, 2011 U.S. App. LEXIS 16413 (7th Cir. Aug. 10, 2011)

Years ago, CUNA adopted a policy in order to incentivize employees not to use their sick days, whereby unused sick days could be saved for retirement and a monetary value allocated to those sick days could be used to credit premiums the retirees would have to pay for post-retirement health insurance coverage. In 2008, CUNA had accumulated a recognized liability for all these unused sick days on its books totaling over $120 million. With one swift stroke of a pen, CUNA eliminated the liability, and recorded a gain for the same amount on its books, telling all its retirees they could no longer use the sick day balance to pay for post-retirement health care.

The retirees sued, alleging CUNA engaged in a prohibited transaction by diverting plan assets to itself. Writing for the split-panel majority, Judge Easterbrook reasoned that (1) unlike pension plans, welfare benefit plans do not need to be funded under ERISA § 301, and (2) welfare plan benefits do not vest. Judge Easterbook also reasoned that the sick-leave balances were not plan assets, because they were mere bookkeeping liabilities.

The Court, however, seemed to have overlooked clear statutory and regulatory language that counters this reasoning. True, funding rules only apply to pension plans, not welfare benefit plans. But ERISA clearly requires that all plan assets, whether pension plan or welfare plan, be held in trust. ERISA §§ 401, 403. Next, ERISA provides little for a definition of plan assets, and directs the Department of Labor to define the term in regulations. ERISA § 3(42). The regulations provide that any amount that an employee pays to an employer towards an employee benefit plan becomes a plan asset shortly after the funds can reasonably be segregated from the employer’s general assets. 29 C.F.R. § 2510.3-102(a)(1). It would appear that when the workers elected not to use their sick days, they paid these sick days (which under the plan had a corresponding monetary value) to the plan, and upon the end of the calendar year, the employer had an obligation to place the value of the sick days in a trust pursuant to ERISA § 403.