Not All Plan Documents Are Created Equal: Common Mistakes in Health & Welfare Plan Disclosures, Contributed by Isabella Lee and Tiffany Downs, Ford & Harrison LLP
Many plan sponsors rely on their insurance carriers or third-party service providers to provide documents describing their health and welfare plans for distribution to employees. These documents may take the form of an insurance policy, certificate of insurance, or summary of benefits booklet (collectively “provided documents”).
Plan sponsors will maintain and distribute provided documents as their plans’ summary plan descriptions (SPDs) and/or plan documents. However, often times provided documents do not contain the required plan information and will not satisfy a plan sponsor’s disclosure obligations under the Employee Retirement Income Security Act of 1974 (ERISA). Moreover, insurers or service providers do not draft policies with ERISA compliance in mind. Therefore, these documents may include or omit important language that could result in a plan sponsor taking on unnecessary liability.
Often times the provided documents do not contain all of the information that is required in a plan document or SPD.
Most plan sponsors are aware that they must have a plan document and summary plan description (SPD) for each health and welfare benefit offering. These disclosures serve the important purpose of informing participants about the benefits the plan provides, how the plan operates, and their rights relating to those benefits.
Among other things, the plan document and SPD must specify the plan administrator’s name and contact information, the agent for service process for the plan, eligibility provisions, the plan’s other fiduciaries, the statement of ERISA rights, the plan’s funding, and the plan’s claim procedures. Further, the plan documents must include disclosures required by other federal laws, including COBRA, HIPAA, Healthcare Reform, FMLA, and USERRA.
In order to ensure their plan disclosures are ERISA-compliant, plan sponsors should review their provided documents to confirm that they contain all of the necessary information.
Courts have imposed financial penalties against plan sponsors who provide non-ERISA compliant insurance documents in lieu of a SPD.
In Killian v. Concert Health Plan,1 the plan sponsor responded within 30 days to a request for an SPD. However, rather than provide an actual SPD, the plan sponsor tendered a copy of the plan’s 50-page certificate of insurance and a copy of the plan sponsor’s benefits summary. The court rejected the plan sponsor’s submissions, finding that they did not constitute an ERISA-compliant SPD. In so holding, the court concluded that a certificate of insurance cannot constitute both the comprehensive benefits portion of the policy and the summary thereof. The employee benefits summary also lacked “several essential SPD requirements” such as official names of the plan or the plan administrator, the administrator’s contact information, the plan sponsor’s EIN, the name and address of the agent for service of legal process, claims review procedures, or the mandatory, consolidated statement of ERISA rights. The court further held that the plan sponsor should have been aware of ERISA’s requirements for SPDs.
Penalties for failure to provide plan documents of up to $110 per day from the date of failure or refusal may be imposed.2 The actual amount may vary based on the court’s discretion. Factors in the court’s decision include the length of delay, bad faith, and harm to the participant.3
Plan administrators are liable for failures to comply with information requests, even if they have a third-party claims administrator.
Plan sponsors typically serve as the plan administrator for their welfare benefit plans. Often, plan administrators will delegate their claims administration to a third-party service provider, such as an insurance company. However, plan administrators are ultimately liable for statutory penalties due to failure to produce plan documents. Therefore, an insurance company who serves as the claims administrator may not be held responsible for the welfare benefit plan’s purported failure to produce documents.4
Eligibility provisions may not address whether coverage applies to all worker categories.
Eligibility provisions in plan documents and SPDs will dictate whether an employee is eligible to participate in a benefit plan. Typically, eligibility provisions describe eligible employees as “employees who work 30+ hours a week” or “full-time employees.” However, such provisions do not account for non-traditional employment types, such as independent contractors, temporary workers, leased employees, seasonal employees, or other discrete groups of workers.
By failing to spell out which workers are entitled to benefits coverage, plan sponsors may take on unintended liability for benefits coverage. In Vizcaino v. Microsoft Corp.,5 a class of workers classified as contractors sued for participation in various Microsoft benefit plans (including a stock option plan). After years of litigation, the court concluded that the former contractors were common-law employees of Microsoft and entitled to the company’s benefits. Microsoft settled the case in 2000 for $97 million.
The lessons from the Microsoft case carry forward to health and welfare plans. Broadly worded eligibility provisions may result in unexpected and substantial liability for employee benefits to workers that plan sponsors believed to be excluded from coverage. Plan sponsors should review eligibility provisions to ensure that the benefits they provide are, indeed, what they intended.
Amendments to an SPD may not carry out a plan sponsor’s intended changes if the plan document is not similarly amended.
The Supreme Court’s decision last year in Cigna Corp. v. Amara6 held that the formal plan document is what controls the benefits, not the plan summaries (i.e. the SPDs). A plan’s SPD provisions will change as insurance carriers or third-party service providers update the insurance policy, certificate of insurance, or informational booklet to reflect coverage changes. However, plan sponsors often do not realize that the underlying plan document must also be amended. Therefore, the plan sponsor and plan participants may be relying on the SPD, when the relevant provisions are governed by the plan document.
Accordingly, plan sponsors must ensure that their plan documents and SPDs do not conflict and provide the benefits they intended.
Provided documents may not contain the “magic language” that expressly grants the plan administrator’s final discretionary review.
Plan language regarding a plan administrator’s decisionmaking authority dictates the applicable standard of review if a claims decision is brought before a court.
Where a plan document expressly provides that the plan administrator has “discretionary authority” to interpret and administer the plan’s terms and to make factual determinations, a court will review a plan’s decision under an “abuse of discretion” standard. The abuse of discretion standard is a more favorable standard of review, because it requires a plaintiff to show that the plan administrator’s decision was “arbitrary and capricious.” In other words, a court will uphold the plan administrator’s interpretation of a plan unless the decision was without reason, unsupported by substantial evidence, or erroneous as a matter of law.
Without plan language granting a plan administrator “discretionary authority,” a reviewing court will apply the less favorable “de novo” standard of review. De novo review enables the court to review claims without any deference to the prior decisions and consider additional information.
Plan sponsors will want to ensure that their plan disclosures contain the “magic language” so that they receive the most favorable standard of review should the plan’s benefits determinations be scrutinized by a court.
Provided documents often do not designate the claims administrator as a named fiduciary.
Plan sponsors typically delegate their plan administrator discretion to make benefits determinations to a third-party administrator (TPA) who serves as the claims administrator. Where the TPA also drafts the provided documents, such documents may fail to designate the TPA as a named fiduciary.
Plan disclosures should name any persons or entities who perform fiduciary functions, such as exercising discretionary responsibility, authority, or control over plan management decisions and disposition of Plan assets, as named fiduciaries. Fiduciaries must act solely in the best interest of the plan and its participants. Due to the higher standard to which they are held, fiduciaries are more likely to engage in careful review of claims and benefits determinations, as they may be personally liable for damages to the plan resulting from breaches of their fiduciary duties.
The plan disclosures may reference procedures required by other federal laws but not actually contain such procedures.
ERISA § 609(a) requires group health plans to provide benefits in accordance with the applicable requirements of any qualified medical child support order (QMCSO). Further, ERISA requires that a group health plan have written QMCSO procedures to distribute to participants. Additionally, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) requires that a group health plan’s plan documents contain provisions that require the privacy and security of individuals’ protected health information.
Frequently, provided documents will reference QMCSO or HIPAA procedures, and refer participants to the plan administrator for additional information or copies of such procedures. Unfortunately, plan sponsors frequently discover that provided documents do not contain the required procedures, their service providers do not draft such procedures for plan sponsors, and that the creation of any required procedures are their sole responsibility.
The plan documents may create contractual responsibilities on the plan sponsor that are not otherwise required under ERISA.
Plan sponsors may unknowingly use provided documents that were intended for fully insured plans for use with their self-insured benefits. In doing so, the plan sponsor creates potential liabilities for itself that were not required by ERISA but must nevertheless be upheld because the plan sponsor has unintentionally created a contractual agreement with plan participants.
Self-funded short-term disability benefits is a common scenario where this situation arises. Plan sponsors will use provided documents intended for fully-insured disability plans, which contain second-level claims review procedures and impose fiduciary-level review standards. However, self-funded short-term disability benefits may be “payroll practices” exempt from ERISA requirements. By using ERISA plan language to administer a non-ERISA benefit, a plan sponsor may subject itself to plan obligations that could otherwise have been avoided.
Plan sponsors can amend their plan disclosures to correct deficiencies.
The ultimate responsibility for accurate and up-to-date plan disclosures remains with the plan sponsor, and the plan sponsor may be liable for any errors or omissions. Plan disclosure failures can result in time-consuming and expensive penalties and litigation. Proactive legal review of plan documents and adoption of necessary plan amendments can help prevent such costs and ensure compliance in advance of a Department of Labor audit.
Isabella Lee and Tiffany Downs are attorneys at Ford & Harrison LLP, a labor and employment law firm with a national practice in all aspects of employee benefits, labor, and employment law. If you have any questions about your employee benefit plans, please contact the authors of this article at (404) 888-3800. Their biographies can also be accessed at www.fordharrison.com.
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. Bloomberg Finance L.P. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.
© 2012 Bloomberg Finance L.P. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of Bloomberg Finance L.P.