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John Sullivan, et al., Individually v. Cuna Mutualinsurancesociety and

August 10, 2011


Appeal from the United States District Court for the Western District of Wisconsin. No. 09-cv-455-vis-Barbara B. Crabb, Judge.

The opinion of the court was delivered by: Easterbrook, Chief Judge.


Before EASTERBROOK, Chief Judge, and MANION and HAMILTON, Circuit Judges.

CUNA Mutual Insurance

Society maintains a health-care plan for the benefit of its retirees. Beginning in 1982 it gave retirees credit toward their share of the cost, if they had unused sick-leave balances. CUNA Mutual calculated how much each person's unused sick-leave days would be worth at that person's daily wage. Workers covered by a collective-bargaining agreement could choose between taking that sum in cash or putting it toward the retiree's premium. Management employees did not have that option. Executives who quit before retirement age, or who decided not to participate in the health plan, did not receive payment or any other form of compensation for unused sick leave. It had value only as a credit toward health-care costs during retirement.

Here is a simple example. An executive retires with unused sick leave valued at $50,000. CUNA Mutual contributes half of the $10,000 annual cost of health care; the employee is responsible for the rest. For 10 years, the employee's portion is met by drawing down the sick-leave balance at a rate of $5,000 a year. Effectively CUNA Mutual covers 100% of the medical-care costs for a decade. Beginning in year 11, the retiree must pay $5,000 a year as his share of the health-care plan, and CUNA Mutual contributes the other $5,000.

Things changed at the end of 2008. CUNA Mutual amended the Plan and stopped paying any part of retirees' health-care costs. This meant not only the end of CUNA Mutual's explicit payment, but also the end of retirees' ability to use their sick-leave balances to cover their portion, with one exception: Employees who could have taken their sick-leave balances in cash are treated as having done so and then invested that money in an account to be administered by the health-care plan. Thus retirees who formerly worked under a collective-bargaining agreement continue to have the benefit of their sick-leave balances. But after the 2008 change these balances are used to pay 100% of the cost (until each account is exhausted), rather than 50% or whatever other sharing ratio was in place when the person retired.

A class of retirees filed this suit under the Employee Retirement and Income Security Act. The class representatives are four retired executives who never had an option to take their sick-leave balances in cash, plus one retiree who had that option but elected to leave the money on deposit. The district court granted judgment on the pleadings to CUNA Mutual and its Plan. 683 F. Supp. 2d 918 (W.D. Wis. 2010).

Health care is a welfare-benefit plan under ERISA. The statute recognizes two principal differences between pension plans and welfare-benefit plans. First, although pension plans must be funded, with assets held in trust, welfare-benefit plans need not be funded. See 29 U.S.C. §1081(1) (exempting welfare-benefit plans from the funding requirements in §1083). CUNA Mutual operates its Plan on a pay-as-you-go basis; general corpo-rate revenues support all health-care benefits. Second, although pension benefits vest, welfare benefits do not. Employers are free to reduce or abolish benefits under welfare plans. See 29 U.S.C. §1051(1) (exempting welfare-benefit plans from the vesting rules in §§ 1052--61). Employers nonetheless may create vested welfare benefits by contract. See, e.g., Bidlack v. Wheelabrator Corp., 993 F.2d 603 (7th Cir. 1993) (en banc);

Vallone v. CNA Financial Corp., 375 F.3d 623, 632 (7th Cir. 2004). CUNA Mutual's health-care plan does not promise vested benefits, and each version has contained a clause reserving its right to modify or eliminate the benefit. For example, the 1995 version of the Plan provides: "The Employer expects the Plan to be permanent, but since future conditions affecting the employer cannot be anticipated or foreseen, the Employer must necessarily and does hereby reserve the rights to amend, modify or terminate the Plan . . . at any time by action of its Board." Language of this kind permits amendments. See Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73 (1995).

One more legal proposition sets the stage for this appeal. The fiduciary duties created by ERISA are limited to the administration of a plan. When deciding what benefits to include in a plan, an employer is free to prefer its own interest (and that of its investors) over the interests of employees and retirees. See Hughes Aircraft Co. v. Jacobson, 525 U.S. 432 (1999); Lockheed Corp. v. Spink, 517 U.S. 882 (1996). CUNA Mutual therefore was entitled to cut back on health benefits even though this dashed retirees' expectations. But it still had to comply with any specific requirements in ERISA and the Plan's organic documents.

The retirees' principal argument is that CUNA Mutual violated 29 U.S.C. §1106(a)(1)(D) by diverting plan assets to itself. This subsection prohibits any "transfer to, or use by or for the benefit of a party in interest, of any assets of the plan". An employer is a statutory "party in interest". 29 U.S.C. §1002(14)(C).

According to the retirees, sick-leave balances are assets of the Plan, assets that CUNA Mutual appropriated. They observe that, when CUNA Mutual amended the Plan, its balance sheet reflected a gain of more than $120 million. This must be the value of the seized assets, the retirees believe.

Plaintiffs misunderstand the nature of the sick-leave balances and the reasons why CUNA Mutual revised its accounting treatment. The sick-leave accounts of former managers don't contain money and never did. They were not assets of the Plan, which always has been financed by cash from both retirees and CUNA Mutual. Far from being assets, these balances were liabilities: they represented amounts that CUNA Mutual had agreed to contribute to the Plan in lieu of cash from retirees. Any given retiree might have deemed the balance a personal asset, in the sense that it represented CUNA Mutual's promise not to ask the ...

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