The Importance Of Being Precise In Summary Plan Descriptions: A Review Of Recent Cases

Thursday, April 1, 2004 - 01:00

The Summary Plan Description, or SPD, for your employee welfare benefit plans is the document that tells plan participants what rights they have and how to act and protect those rights. The Employee Retirement Income Security Act ("ERISA") contains extensive regulations on what has to be contained in these SPDs. Failure to comply with these regulations can create conflict between the plan and its participants, and can lead to costly litigation.

SPDs and language interpretation were at issue in a number of recent cases. As seen by these decisions, it is becoming increasingly important for employers to ensure that SPDs accurately reflect the terms of a master plan document and that they comply with the minimum standards set forth in ERISA.

In January, 2003, the U.S. Court of Appeals for the Eleventh Circuit found that a disability benefit plan participant was not required to exhaust his administrative remedies before filing a lawsuit because the plan's SPD could reasonably be read as making exhaustion optional (Watts v. BellSouth Telecommunications Inc., 316 F.3d 1203, 29 EBC 2195 (11th Cir. 2003). The court recognized an exception to the general exhaustion doctrine used in ERISA cases when an SPD can reasonably be read as a whole to make exhaustion of administrative remedies optional.

The SPD at issue included a section pertaining to administrative appeals that provided that a claimant who wished to appeal a claim denial had to submit the appeal in writing within 60 days. However, in another section entitled "Your Rights Under ERISA," the SPD provided that if a claim for benefits was denied, the claimant "may file" a lawsuit in state or federal court. The Court found that whether a claimant's reading of an SPD is reasonable should be judged from the "perspective of the average plan participant." In support, the appeals court cited ERISA Section 102(a), which provides that an SPD "shall be written in a manner calculated to be understood by the average plan participant."

In Helfrich v. Carle Clinic Association, 328 F.3d 915, 30 EBC 1587 (7th Cir. 2003), cert. denied 12/8/03, the U.S. Supreme Court let stand a decision by the Seventh Circuit Court of Appeals that found that the language in a SPD prevails over statements contained in an employee handbook and other employer communications. At issue was a claim by two employees alleging the employer reneged on its promise that the employees would receive pensions that could be as large as 50 percent of their average earnings. In reality, to keep its tax-qualified status, the total annual pension available under the plan could not exceed $160,000. The employees alleged that the employer handed out three short summaries at different times and in each of these summaries there was no mention of the $160,000 cap.

The Appeals Court said that documents prepared by an employer do not supersede those documents that establish the terms of a pension plan. "One summary plan description is in the record," the Court observed." This document ... is 21 single-spaced pages. It fully describes the cap required by statute as a condition of tax deferral. The three documents that plaintiffs call 'summaries' do not look remotely like SPDs and must have been prepared by [the employer] rather than by the plan." The Appeals Court concluded that the summaries did not qualify as SPDs and could not be enforced because they conflicted with the master plan's terms.

In July, 2003, the U.S. Court of Appeals for the Third Circuit weighed in on ERISA's SPD requirements when it ruled that, when an ERISA plan's language conflicts with the plan's SPD, the SPD must control (Burstein v. Retirement Account Plan for Employees of Allegheny Health Education and Research Foundation, 336 F.3d 365, 30 EBC 2121 (3d Cir. 2003). The Third Circuit found that pension plan participants could continue in their litigation alleging that their benefits were fully vested even though the plan was partially terminated. The plan contained language indicating that termination of the plan would not result in immediate vesting. However, the plan's SPD stated that upon termination of the plan, benefits would become fully vested. In deciding that SPDs control when in conflict with an ERISA plan, the court found that the SPD is the document to which the lay employee is likely to refer in obtaining information about the plan and in making decisions affected by the terms of the plan.

Also in July, the U.S. Court of Appeals for the Second Circuit found that a retirement plan's SPD violated ERISA's disclosure requirements when it failed to apprise plan participants that they needed to file an affidavit if they wanted their domestic partners to receive pre-retirement survivor income benefits (Burke v. Kodak Retirement Income Plan, 336 F.3d 103, 30 EBC 2345 (2d Cir. 2003). The court found that although the employer distributed to employees a handbook and an SPD that had 16 references to the domestic partner affidavit requirement, the SPD's failure to specifically include the requirement in a section pertaining to survivor benefits violated ERISA.

As these decisions demonstrate, it is extremely important to make sure that your SPDs and your employee handbooks or other benefits handouts are all providing the same information as is contained in the plan itself. Further, that information has to be provided in a manner that is ERISA-compliant. If your SPDs are not accurate, or if they do not contain all of the information ERISA requires, your company could end up engaged in costly plan litigation.

Many times, plan participants make requests for SPDs or plan documents when they are considering litigation against a plan or an employer as a tool to trigger the $100 a day statutory penalty under ERISA Section 502(c). But the liability applies only to whomever is designated by the plan document as the plan administrator, which could be the employer, an insurance company or some other third party.

The designation of plan administrator was a key issue in Addison v. Hartford Life & Accident Insurance, a December 2003 decision from the District Court for the Eastern District of Tennessee. In this case, a plan participant sued an insurance company claiming that the insurance company failed to provide her with the requested plan documentation. The Court found that the insurance company was not the "plan administrator" designated by the plan document. The employer was actually named as the plan administrator. Therefore, the penalties statute did not apply to make the insurer liable.

While this decision seems like a great win for insurance companies, it also reaffirms to employers that, if they are designated as plan administrators by the plan, it is the employer's responsibility to comply with ERISA notice requirements. An employer who is also a plan administrator cannot rely on an insurance company to provide documentation such as a SPD. If the SPD is not properly distributed, or if it is missing required provisions, the plan administrator will be liable for the ERISA breach. Employers who simply rely on insurance companies for these documents may find themselves subject to ERISA penalties. Employers must also make certain that the distribution process is such that plan participants all obtain required notices and summaries.

Keith R. McMurdy is Principal and Chair Employee Benefits Practice Group Grotta, Glassman & Hoffman, p.a., with offices in New York City, Long Island, New Jersey, Los Angeles and San Francisco. Keith may be contacted at 973-992-4800, or via e-mail at