John McGann v. H & H Music Company
14 Employee Benefits Cas. (BNA) 1729, 946 F.2d 401, 1991 U.S. App. LEXIS 26056 (1991)
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Rule of Law:
Under Section 510 of ERISA, employers are not prohibited from altering the terms of an employee welfare benefit plan, even if the amendment is prompted by an employee's specific illness and results in reduced coverage, provided the plan documents reserve the employer's right to make such amendments and the change applies to all beneficiaries.
Facts:
- John McGann was an employee of H & H Music Company, which provided a group medical plan with a lifetime benefit maximum of $1,000,000.
- In December 1987, McGann was diagnosed with AIDS.
- Shortly thereafter, McGann informed H & H Music of his diagnosis and began submitting claims for reimbursement under the plan.
- In July 1988, H & H Music informed employees that it was amending the medical plan, effective August 1, 1988.
- The amended plan specifically limited lifetime benefits for AIDS-related claims to $5,000, while no similar cap was placed on any other catastrophic illness.
- The plan documents contained a clause stating, 'The Plan Sponsor may terminate or amend the Plan at any time.'
- At the time of the plan amendment, McGann was the only H & H Music employee known to have AIDS.
Procedural Posture:
- John McGann sued H & H Music Company, Brook Mays Music Company, and General American Life Insurance Company in the U.S. District Court.
- The defendants filed a motion for summary judgment.
- The district court granted the defendants' motion for summary judgment, holding that an employer has an absolute right to alter the terms of a medical plan.
- McGann (appellant) appealed the district court's judgment to the United States Court of Appeals for the Fifth Circuit.
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Issue:
Does an employer violate Section 510 of ERISA by reducing the lifetime benefit cap for a specific illness after learning an employee has contracted that illness, when the health plan explicitly reserves the employer's right to amend its terms and the change applies to all plan beneficiaries?
Opinions:
Majority - Garwood, Circuit Judge
No. An employer's amendment of a health benefit plan to reduce coverage for a specific illness does not, by itself, constitute discrimination under Section 510 of ERISA. The court reasoned that Section 510 prohibits discrimination against an employee for exercising a right or to interfere with the attainment of an entitled right, but it does not prevent an employer from modifying the plan itself. McGann had no vested right to a permanent $1,000,000 benefit, as the plan expressly reserved H & H Music's right to amend its terms at any time. The court distinguished between actions targeting an individual's employment relationship (e.g., termination) and modifications to the plan's general terms. Because the $5,000 AIDS cap applied to all employees, not just McGann, it was a legitimate plan modification, not prohibited discrimination against an individual. The court concluded that ERISA allows employers the flexibility to manage the costs of welfare plans, which includes the freedom to create, modify, or terminate benefits for particular conditions.
Analysis:
This decision significantly clarifies the scope of Section 510 of ERISA, establishing that its anti-discrimination provisions apply to the employer-employee relationship rather than to the content of the benefit plan itself. It solidifies the principle that welfare benefits, unlike pension benefits, do not vest and can be modified at the employer's discretion if the plan reserves that right. The ruling provides employers with broad latitude to amend health plans to control costs, even if the change is prompted by a specific employee's expensive illness and appears discriminatory on its face. This precedent limits employees' ability to challenge benefit reductions for specific diseases under ERISA, shifting the focus from the fairness of the plan's terms to whether the employer took adverse action against the employee's employment status.
