The 7th Circuit Court of Appeals has ruled on a case involving a change in treatment of unused sick-leave pay.

A 3-member panel at the court agreed 2-1 to uphold a lower court ruling that supported the ability of CUNA Mutual Insurance Society, Madison, Wis., to eliminate an unused sick-leave pay program.

CUNA Mutual, the defendant in the case — John Sullivan et al. vs. CUNA Mutual Insurance Society and Cuna Mutual Group Medical Plan for Retirees, Number 10-1558 — has a health plan for retirees. Starting in 1982, the company set up a system that let employees use unused sick-leave pay to help pay for the retiree’s portion of the retiree health coverage costs.

CUNA Mutual paid half of the premiums for the plan.

Management employees had to use their unused sick-leave pay to pay for their share of the retiree benefits premiums. Union workers could choose between taking the sick-leave balance in cash or using it to pay retiree health premiums.

In 2008, CUNA Mutual stopped paying for any portion of the retiree health plan’s costs, and it stopped letting management employees use unused sick-leave pay to pay for retiree health benefits.

If a retiree had been in the union and would have had the right to take some or all of the sick-leave balance in cash, CUNA Mutual would put that amount in an account to be administered by the retiree health plan. In that case, the retiree would have to use the account or private funds to pay 100% of the cost of the retiree health coverage.

John Sullivan and three other retired CUNA Mutual executives sued the company on behalf of a class of plaintiffs that included all CUNA Mutual retirees affected by the change in the unused sick-leave policy.

Chief Judge Frank Easterbrook writes in an opinion for the majority that, under the Employee Retirement Income Security Act (ERISA), pension benefits vest but welfare benefits do not.

“Employers are free to reduce or abolish benefits under welfare plans,” Easterbrook says.

Some plan documents, including enrollment forms, did not indicate that CUNA Mutual had the right to change required retiree health benefits contributions or eliminate the benefits altogether.

“Tthe absence from any given communication of language reserving a right to amend a plan is some distance from the presence of language negating that entitlement,” Easterbrook says. “Silence is just that–silence. Participants need more than silence to establish vested rights to lifetime benefits.”

Requiring employers to put every warning in every form, such as plan election forms and summary plan descriptions, would make the forms too complex, Easterbrook says.

“If silence in election forms and summary plan descriptions cannot override the express terms of the formal plan, silence in the long years before retirement (the decades when employees had to decide 200 days a year whether to work or call in sick) cannot override a plan’s express terms,” Easterbrook says.

One judge on the 7th Circuit panel, Judge David Hamilton, dissented from the portion of the decision affirming dismissal of the plaintiffs’ claims based on the cancellation of their unused sick-leave accounts.

ERISA is supposed to protect employees’ benefits, and CUNA Mutual’s decision cost the retirees $121 million in unused sick-pay value, Hamitlon says.

“In this case,” Hamilton says, “the company is using ERISA as a shield to deny these employees any remedy for the broken $121 million promise.”

ERISA plan fiduciaries have a fiduciary duty not to mislead plan participants, and the fiduciaries in this case should have known that the plan participants mistakenly believed that the unused sick-leave pay benefits were vested, Hamilton says.

“Unless and until either the Supreme Court or Congress acts, the lesson for other employees from this case and the other cases of broken promises to retirees is clear: An employer’s reservation of rights usually means that its promises are written in disappearing ink,” Hamilton says. “Employees should give no weight to such promises in deciding whether to stick with their jobs (or whether to call in sick, in this case).”

CUNA Mutual says in a statement that the company has an obligation to protect the company’s financial position and its policyholders.

“We made the very difficult decision to eliminate the company-funded subsidies for retiree health insurance premiums,” the company says. “We are pleased two courts have upheld CUNA Mutual’s right and authority to make changes to these type of benefit plans.”

Other sick leave coverage from National Underwriter Life & Health: