By Amanda Sonneborn, Sam Schwartz-Fenwick and Megan Troy

On August 10, 2011, in Sullivan v. CUNA Mutual Ins. Society (Case No. 10-1558), a divided panel for the U.S. Court of Appeals for the Seventh Circuit held that the district court did not err in granting the employer’s motion for summary judgment in a class action brought by former employees alleging that its decision to amend an unfunded retiree health care plan violated ERISA.

The retiree health care plan originally allowed retirees to use their unused sick-leave balances as credit towards the shared cost of the health-care premiums during retirement. CUNA Mutual amended the plan to eliminate the sick-leave credit provision and to require retirees to pay 100% of the cost of their health care premiums. Retirees claimed that they had a vested right to an unchanged benefit and that the amendment was unlawful. Retirees further claimed that this amendment was a prohibited transaction because it diverted plan assets, the remaining sick-leave balances, from the Plan to the employer.

As to the plaintiffs’ claim for vested benefits, the Court agreed that the plan amendment did not violate ERISA, because the Plan specifically contained a clause reserving the right to modify or eliminate benefits. This gave the Plan the right to modify the use of the sick-leave balance to pay for premiums. Citing CIGNA Corp. v. Amara, 131 S.Ct. 1866 (2011), which held that silence in an SPD about a feature of a pension plan does not override language in the plan itself, the Court held that the failure to restate a reservation of rights in a benefit election form does not override the reservation of rights language in the plan itself. The Court also rejected the claim that sick-leave balances constituted a Plan asset. It found that these balances were liabilities representing amounts that CUNA Mutual had promised to contribute to the Plan from its general corporate revenues. As such, the Court held that no assets were diverted by the amendment and there was no prohibited transaction.

Judge Hamilton dissented to the portion of the decision affirming dismissal of plaintiffs’ claims based on the cancellation of their unused sick leave accounts. He acknowledged that courts generally find that reservation-of-rights clauses trump promises that seem to conflict with them, but the better approach would be to allow district courts to craft appropriate equitable remedies under a theory of promissory estoppel based on detrimental reliance.

If there was ever any doubt in the past, this decision confirms the importance for all plan sponsors of maintaining a well-drafted reservation of rights clause in plan documents.