Introduction

Employees of state and local governments in Maryland are often offered traditional pension benefits, as well as retiree medical coverage, as part of their compensation. These benefits are garnering significant attention as it becomes clear, in Maryland and elsewhere, that many of these pension plans have not set aside sufficient funds to pay benefits, and that retiree medical costs are often not funded in advance. The lack of sufficient funding can place significant fiscal strain on state and local governments and, in turn, on state and local taxpayers. At the same time, efforts to modify the benefits are a significant concern for employees who have planned around the availability of such benefits.[1] Given the importance of this issue for all stakeholders, this brief examines the legal protections afforded such benefits in the state of Maryland.

Summary

It is well established under Maryland law that accrued pension benefits may not be changed absent extraordinary circumstances. In other words, pension changes may not have a retroactive effect, and must preserve any benefit earned through the date of the change. Prospective changes can, however, be made, as long as those changes are “reasonable.” Further, changes can be freely made with respect to participants who have not yet satisfied the minimum service requirement to become entitled to a benefit under the plan (commonly referred to as becoming “vested”).

The rules for retiree medical changes are more fact-specific. The general rule is that retiree medical benefits are not legally protected and can be changed at any time and for any reason. The employer can, however, take action that changes that result, for example, by explicitly promising employees those benefits for a specified period of time. In addition, because retiree medical benefits are often offered at the local, rather than state, level, such benefits are often included in collective bargaining agreements. Where a collective bargaining agreement provides for such benefits, it is the terms of the agreement that govern. While collective bargaining agreements are typically effective only for a limited duration, the contract may provide that the promise of retiree medical benefits survives the expiration of the agreement.