Public records indicate that PepsiCo, Inc., may have settled an Employee Retirement Income Security Act (ERISA) challenge to its ability to change the terms of its retiree health benefits program. The settlement terms remain confidential. However, the issues raised in the case are instructive for employers.
Historically, PepsiCo provided health insurance benefits to all eligible retirees and their partners. As of January 1, 2025, the company converted all retirees over 65 to a private Medicare marketplace model, a significant shift from employer-sponsored group health coverage to employer-provided subsidies for private insurance coverage. This type of transition has been increasingly common among companies offering retiree health benefits, primarily to contain costs. However, retirees have brought legal challenges to these changes, arguing that companies may not unilaterally modify their vested benefits.
Under ERISA, welfare benefit plans, including health insurance, are not subject to minimum vesting standards like pension benefits. As a result, ERISA does not prevent employers from modifying or terminating welfare benefit plans. However, employees may agree, via contract, to provide vested retiree health benefits for a specified period. Where such a contract exists, the employer may not unilaterally modify or terminate the benefits. When litigation ensues, retirees have the burden of proving their benefits are vested by contract.
A court must examine various factors to determine whether welfare benefit plans are vested. The most significant of these considerations is the language of the plan documents. In particular, the courts will determine whether the plan clearly states that benefits are to continue for the retirees’ lifetimes or for a specific period, or whether the employer reserves the right to modify or terminate benefits. Provisions such as these are strong evidence against vesting.
For instance, courts will consider any provisions that explicitly limit the duration of benefit coverage to active employment or to the terms of a collective bargaining agreement, indicating that the benefits are not vested. Likewise, provisions that coordinate retiree health benefits with Medicare or other coverage may indicate a lack of vesting.
Furthermore, even if plan documents suggest vesting, employers still have expansive authority to modify the terms of the plan, acting as plan “settlors” rather than plan fiduciaries. For example, the decision to amend a benefit plan is a plan design or structure function that does not involve the employer’s fiduciary duties, which encompass actions such as the administration of plan assets. Therefore, as long as employers have not contracted to provide vested benefits, they generally can modify welfare benefit plans.
In the PepsiCo case, retirees challenged the company’s transition of their health benefits to the Medicare marketplace model, arguing that the company had contractually agreed to provide them with vested lifetime traditional group health coverage. Typically, these claims rely on summary plan descriptions and other written communications that created a reasonable expectation of continued, unchanged coverage. Even if the documents contain a reservation of rights provision, the retirees may argue that it is ambiguous or inconsistent with the employer’s other representations.
The U.S. District Court for the Southern District of New York granted PepsiCo’s motion to dismiss, finding that the retirees had failed to state viable claims under ERISA. In response, the plaintiffs voluntarily withdrew the suit, which suggests a potential settlement.
Settlement of ERISA retiree benefits cases may involve various provisions, including:
- Financial compensation for reduced benefits or to fund continued coverage;
- Benefit structure modifications to address concerns raised in the claims;
- Transition support for retirees as they navigate changes to benefits; and
- No admission of liability or wrongdoing.
Employers should consider some strategies to avoid ERISA litigation over the retiree benefits plans, including health insurance coverage. Before making any changes to benefits, employers should carefully review all plan documents and communications to assess the potential for legal challenges related to vesting. Next, all plan documents should prominently reserve the employer’s right to consistently review benefits and, if necessary, modify or terminate them. All communications to retirees should be clear and consistent with plan documents, avoiding the appearance of “guarantees” or “lifetime” benefits unless that is the intention. Regular review of plan documents and assistance from legal counsel can also help mitigate risk.
If employers choose to make benefit changes, they should provide sufficient notice and transition assistance to retirees to minimize legal risk. Before announcing changes, employers also should perform a cost-benefit analysis to determine whether the potential savings from the changes outweigh the costs of defending litigation.
The PepsiCo dispute is indicative of broader trends in employer-sponsored retiree health benefits. Increased healthcare costs and life expectancies have reduced or eliminated retiree health coverage at many companies. Medicare’s availability has also reduced the need for employer-sponsored health insurance for retirees over 65. Plus, the flexibility that employers have under ERISA to avoid vesting of welfare benefits in the absence of a contract — unlike pension benefits — often serves as the impetus for modifying or terminating these benefits.
In addition, certain legislation has further increased employer costs. For instance, the No Surprises Act led to increased disputes over billing for out-of-network emergency care and air ambulance services. When employers lose these disputes, they often must pay 20–40 times the typical in-network rate for care. Likewise, the Mental Health Parity and Addiction Equity Act (MPHAEA) requires that mental health and substance use disorder benefits be equivalent to medical and surgical benefits. The MHPAEA has also heightened the risk of litigation if employer modifications to retiree benefit plans fail to comply with parity requirements.
More specifically, transitioning to a defined contribution benefit system, such as a health reimbursement arrangement or similar account, is increasingly commonplace. This type of model allows retirees to purchase individual Medicare supplements or Medicare Advantage plans through a private exchange, emphasizing individual choice. For employers, this benefit structure allows greater cost predictability and the ability to outsource most of the administrative burden.
However, this model can produce challenges for retirees. They may experience higher out-of-pocket costs or fewer benefits than those provided by the employer’s group plan.
Successfully using the Medicare marketplace can be complex and the employer’s subsidy may be insufficient to purchase comparable coverage. With the steadily rising cost of healthcare, which greatly outpaces general inflation, retirees are likely to experience increased costs, leading to delays in care, refusal of treatment, and medical debt.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.
