Supreme Court Ruling Shows Need to Tighten Up SPDs

Cigna case and others highlight value of ensuring accurate summary plan descriptions (SPDs)

By Stephen Miller, CEBS May 16, 2011

A May 16, 2011 ruling by the U.S. Supreme Court should serve as a reminder to employers, who must—under current federal law—communicate health, 401(k) and other benefit plans to employees in an accurate, understandable and timely fashion.

The case, Cigna Corp. v. Amara, highlights the risk that employers bear if employees can prove that inaccurate plan information provided by their employer resulted in action (or lack thereof) that caused them harm. At the heart of the case was the employees’ contention that Cigna failed to disclose fully and clearly in its summary plan description (SPD) a complicated change in its pension plan (in converting from a traditional defined benefit pension to a cash balance plan) which, if employees had understood it, might have spurred them to retire or take another job.

The Supreme Court ordered lower courts to take another look at a case that examines whether, due to violations of the Employee Retirement Income Security Act (ERISA), Cigna must recalculate pension benefits for thousands of its employees. The 8-0 decision held:

It is not difficult to imagine how the failure to provide proper summary information here, in violation of ERISA, injured employees even if they did not themselves act in reliance on the summaries. Thus, to obtain relief..., a plan participant or beneficiary must show that the violation caused injury, but need show only actual harm and causation, not detrimental reliance.

On the plus side for employers, the Supreme Court ruled that ERISA Section 502(a)(1)(B) per se does not authorize a court to alter the terms of a plan and enforce the terms of plan summaries as the terms of the plan itself, stating, “We conclude that the summary documents, important as they are, provide communication with beneficiaries about the plan, but that their statements do not themselves constitute the terms of the plan for purposes of Section 502(a)(1)(B).”

However, Supreme Court left the door open for suing employees to prevail under Section 502(a)(3) of ERISA, which provides equitable relief for violations of ERISA, in remanding the case back to the lower courts for reconsideration. (To learn more about the ruling in Cigna vs. Amara, see the SHRM Online article "Supreme Court: Relief Not Authorized for Misrepresentations in SPD.")

This wasn't the first time in recent years that the Surpeme Court has weighed the accuracy of employer-provided benefit descriptions. In a 2010 case, Conkright v. Frommert, Xerox employees sued in federal court on the basis that Xerox failed to inform them adequately of changes in pension plan calculations. Although a divided Supreme Court ruled in favor of Xerox, reversing an appellate court decision, no employer wants to be sued over faulty benefits communications.

Ensuring Accuracy

“These court cases are unfortunate because SPDs, when written and administrated correctly, can help to prevent conflict on both the part of the employer and employee,” said Eric Parmenter, vice president of consulting at HighRoads, a benefits communications consultancy.

“Employers need to keep a laser beam on SPDs and plan changes, especially as health care reform changes add further to the complexity of compensation packages,” he added. Parmenter recommended that employees:

Review SPDs carefully and comply with all required disclosures. Employers are obliged to provide employees with an SPD summary of their benefits under ERISA. If the employer does not follow the rules, they are liable for penalties up to $110 per day per plan member. If there have been changes to the provided benefits since the last time an SPD was issued, the employer may, instead, provide employees with a summary of material modifications (SMM).

In addition, defined benefit pension plans must provide personalized statements every three years or notify employees annually that statements are available on request. Defined contribution plans must provide employees with quarterly statements.

Communicate clearly any changes to the plan from the previous year. If a change has been made in how a benefit is calculated,be sure that employees understand the impact. Provide examples in the SMM or SPD.

Other SPD Best Practices

Employers need to step up their game in doing the best job possible in delivering accurate and timely SPDs, according to Kim Buckey, practice lead of SPD services for HighRoads.

The challenge, she said, is creating documents that satisfy the letter of ERISA and are user-friendly. Among her recommendations:

Avoid boilerplate content, legal and insurance jargon, preaching and static PDFs.

Promote the use of conversational language, examples, creative layout and multimedia.

SPDs can be managed electronically, Buckey noted, ensuring that information is communicated consistently, accurately and on a timely basis.

“Automation can ensure greater accuracy, engage employees with personalized, searchable communications that supports life events and reduce costs by facilitating electronic distribution (where appropriate)," she explained. "Some of the communication conflicts that make their way into court could be further avoided with best practices.”

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related Articles—SHRM:

Supreme Court: Relief Not Authorized for Misrepresentations in SPD, SHRM Online Legal Issues, May 2011

Disclosures: What are our responsibilities with respect to Summary Plan Descriptions?, SHRM Online Benefits Discipline, October 2010

Fiduciaries Can Avoid Becoming Defendants, SHRM Online Benefits Discipline, June 2010

Related Articles—External:

Employees Win New Benefit Protections, Wall Street Journal, May 2011

When Benefits Bite Back, Wall Street Journal, May 2011

Quick Links:

SHRM Online Benefits Discipline

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