Supreme Court Considers Effect of Inconsistencies Between ERISA Plan Terms and SPDs
The Employee Retirement Income Security Act of 1974 ("ERISA") was enacted
to protect … the interests of participants in employee benefit plans and their beneficiaries, by requiring the disclosure and reporting to participants and beneficiaries of financial and other information with respect thereto, by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the Federal courts.
29 U.S.C. § 1001(b).
ERISA represents a "‘careful balancing’ between ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans." Aetna Health Inc. v. Davila, 542 U.S. 200, 215 (2004) (citation omitted). To maintain that balance, a principal objective of ERISA is to provide for and promote nationally uniform plan administration.
As part of ERISA’s disclosure and reporting requirements, plan sponsors must communicate benefit plan provisions to plan participants and beneficiaries through a Summary Plan Description ("SPD").
SPDs, which are the primary vehicle for informing plan participants and beneficiaries of the benefit plans in which they participate, must be both "written in a manner calculated to be understood by the average plan participant" and "sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights and obligations under the plan." 29 U.S.C. § 1022(a).
ERISA and its implementing regulations contain detailed provisions specifying the information that must be included in an SPD, including "[c]ircumstances which may result in disqualification, ineligibility, or denial or loss of benefits." 29 U.S.C. § 1022(b); 29 C.F.R. § 2520.102-3.
Problems Caused by Conflicts Between Plan Terms and SPDs
Problems arise, however, when there is a conflict between the terms of the plan and the information provided in an SPD. In such instances, courts uniformly hold that favorable terms in an SPD override conflicting terms contained in plan documents.
Because plan participants and beneficiaries have only the SPD to consult when making important benefits-related decisions, the SPD is binding on the plan and its administrators. Importantly, conflicting terms in an SPD cannot be cured by disclaimer language referencing the plan. Otherwise, the purpose underlying the SPD requirement – that is, simplifying and explaining complex plan documents – would be meaningless.
ERISA allows plan participants and beneficiaries to bring civil actions to recover benefits under a plan or to enforce or clarify rights under a plan. 29 U.S.C. § 1132(a)(1). Although courts generally agree that SPDs control over conflicting plan language, the likelihood of recovery resulting from such a conflict has been jurisdiction driven. Circuits are split regarding whether and to what extent a participant or beneficiary may rely on the conflicting language of an SPD to establish a claim for benefits against a plan.
Various Standards Have Been Applied by Circuit Courts
The Seventh and Eleventh Circuits apply a demanding detrimental reliance standard, under which a plan participate or beneficiary must prove actual harm from reading the SPD and acting (or not acting) based on the information contained therein. See Health Cost Controls of Ill. v. Washington, 187 F.3d 703 (7th Cir. 1999); Branch v. G. Bernd Co., 955 F.2d 1574 (11th Cir. 1992).
On the other end of the spectrum, the Third, Fifth, and Sixth Circuits apply a no reliance standard, under which plan participants and beneficiaries are not required to show either reliance on or harm flowing from a deficient SPD. Entitlement to recovery is established based solely on the inadequacy of the SPD, regardless of whether the participant or beneficiary even read the SPD. See Burnstein v. Ret. Account Plan for Employees of Allegheny Health Educ. & Research Found., 334 F.3d 365 (3d Cir. 2003); Washington v. Murphy Oil USA Inc., 497 F.3d 453 (5th Cir. 2007); Flacche v. Sun Life Assurance Co. of Canada (U.S.), 958 F.2d 730 (6th Cir. 1992).
The remaining circuits apply standards that fall in between these extremes. The First, Fourth, Eighth, and Tenth Circuits apply a reliance or possible prejudice standard, under which the participant or beneficiary must show either significant reliance on or possible prejudice from a faulty SPD. See Govoni v. Bricklayers, Masons & Plasterers Int’l Union of Am., Local No. 5 Pension Fund, 732 F.2d 250 (1st Cir. 1984); Aiken v. Policy Mgmt. Sys. Corp., 13 F.3d 138 (4th Cir. 1993); Greeley v. Fairview Health Servs., 479 F.3d 612 (8th Cir. 2007); Chiles v. Ceridian Corp., 95 F.3d 1505 (10th Cir. 1996).
Finally, the Second Circuit applies a likely harm standard, under which prejudice is presumed in favor of the participant or beneficiary after an initial showing of likely harm resulting from the faulty SPD. The employer is then afforded an opportunity to rebut the presumption through evidence that the faulty SPD was in effect harmless error. See Burke v. Kodak Ret. Income Plan, 336 F.3d 103 (2d Cir. 2003).
Supreme Court Grants Certiorari
In light of these differing standards, and mindful of ERISA’s objective of uniform application, the Supreme Court has decided to weigh in on the proper standard to apply in situations where there are inconsistencies between the SPD and the underlying plan documents.
On June 28, 2010, the Supreme Court granted certiorari in CIGNA Corporation v. Amara, a class action from the Second Circuit with approximately 26,000 class members, in which the court of appeals summarily affirmed the district court’s decision applying the likely harm standard. 348 Fed.Appx. 627 (2d Cir. 2009), cert. granted, 130 U.S. 3500 (Mem) (2010).
CIGNA Corporation v. Amara rose out of CIGNA’s conversion of its defined benefit pension plan to a cash balance retirement plan. 534 F. Supp. 2d 288 (D. Conn. 2008). Following the conversion – despite the stated minimum benefit equal to the previously accrued benefits under the pension plan – some plan participants had opening balances that were less than their previously accrued benefits and, in many cases, no additional benefits were accrued for a significant amount of time. Id. at 303. This phenomenon, known as "wear away," was caused by both the method used to calculate the opening balances and interest rate fluctuations. Id.
At issue in the case, among other things, was whether the information provided by CIGNA to its employees in the SPD (and other materials) regarding the conversion and the cash balance plan satisfied the requirements under ERISA. Id. at 295. The SPD stated "that participants would never receive less than the minimum benefits," but did not mention wear away – which "was well known and understood by CIGNA at the time of CIGNA’s adoption of a cash balance plan." Id. at 304, 310.
The District Court's Ruling
The district court found that the information provided by CIGNA was inadequate "and in some instances, downright misleading." Id. at 296. Applying the likely harm standard, under which no showing of reliance is required and a rebuttable presumption of prejudice is applied, the court held that likely harm and prejudice resulted from the deficient SPD, despite the fact that full disclosure would not have altered the value of the converted benefits. Id. at 351, 354.
The court noted that the SPD provided by CIGNA "likely, and quite reasonably, lead participants to believe" that wear away would not occur in the transition to a cash balance plan and that the full benefits under the pension plan would be included in the opening account balances. Id. at 354.
The court concluded that "CIGNA’s successful efforts to conceal the full effects of the transition" deprived plaintiffs of the opportunity to take timely action in response, such as protesting at the time of implementation, leaving CIGNA for an employer with a more favorable retirement plan, or pursuing litigation. Id. at 354.
Is Showing of Likely Harm Sufficient?
In its petition for certiorari, CIGNA phrased the issue as "[w]hether a showing of ‘likely harm’ is sufficient to entitle participants in or beneficiaries of an ERISA plan to recover benefits based on an alleged inconsistency between the explanation of benefits in the Summary Plan Description or similar disclosures and the terms of the plan itself."
CIGNA argued that the likely harm standard effectively provides for strict liability for SPD deficiencies, allows for windfall recoveries based on SPD language neither read nor relied on, and is inconsistent with the balance that ERISA attempts to achieve between protection of plan participants and the promotion of plan formulation.
The opposing view is that overruling the likely harm standard would vitiate the statutory and regulatory requirements designed to adequately inform plan participants and beneficiaries of their rights and obligations, and create a disincentive for plan sponsors to provide clear, concise, and accurate disclosures.
This case provides the Supreme Court with an opportunity to resolve the split authority and achieve a uniform standard nationwide. As stated by the district court:
[T]he questions raised in this case are vitally important to both employers and employees (and their families). Given how potentially significant retirement plans and planning are to the great majority of Americans – employers and employees alike – this is one area where the answers should be clear, explicit, and definite.
534 F. Supp. 2d at 295.
The outcome of CIGNA Corporation v. Amara will have significant implications for the costs and liability associated with providing, maintaining, and amending employee benefit plans. The result will affect the future of litigation resulting from inconsistent or incomplete information provided in SPDs.
Requiring individualized reliance would limit the number and/or viability of such lawsuits (and greatly reduce the number of putative class members in the case of class action suits), while adoption of a less stringent standard – such as the Second Circuit’s likely harm standard – would have the opposite effect.
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