The Employee Retirement Income Security Act of 1974 (ERISA) requires employee benefit plans to provide a summary plan description (SPD) to participants and beneficiaries and also sets forth the minimum required information that must be disclosed in an SPD. The following 10 items are what we consider to be the most important issues to consider when drafting and amending an SPD that are not directly addressed in ERISA's regulations.
1. Firestone Language
SPDs, in addition to plan documents, should give the plan
administrator discretionary authority to interpret and administer,
in its sole discretion, the terms of the plan, and to make factual
determinations. If a plan grants a plan administrator discretionary
authority to determine eligibility for benefits, courts are
required to defer to the plan administrator's interpretation of
the plan unless the interpretation is arbitrary and capricious. In
the absence of a grant of discretion to the plan administrator, a
court may engage in de novo review and substitute its own view of
reasonableness for that of the plan administrator. 1 The importance of including
Firestone language in the plan document and SPD cannot be
overstated. While Firestone language is routinely included
in new plan documents and SPDs, older SPDs should be reviewed to
ensure it is included.
2. Exhaustion Requirements
ERISA's regulations require that SPDs provide a
description of the procedures that participants must follow to make
a claim and/or appeal for benefits under a plan. The description
should specify that the procedures be "exhausted" before
a participant can file a lawsuit against the plan. Exhaustion
requirements encourage a resolution without resorting to a costly
lawsuit and also ensure that the plan administrator's decision
is given deference if a lawsuit is filed.
Recently, the Second Circuit held in Kirkendall v.
Halliburton Inc. 2 that, despite the plan's
inclusion of an exhaustion requirement, a participant did not need
to exhaust the plan's claims procedures when filing a claim to
clarify a right to a future benefit because the exhaustion
language referred only to actions to recover benefits. One possible
way to avoid a similar problem is to make sure that the exhaustion
language references all three types of benefit claims available
under Section 502(a)(1)(B) of ERISA: (i) recovery of
benefits under the plan, (ii) enforcement of the participant's
rights under the terms of the plan, and (iii) clarification of the
participant's right to future benefits under the terms of the
plan.
2 Kirkendall v. Halliburton Inc., 707 F.3d 173, 54 EBC 2797 (2d Cir.
2013).
3. Forum Selection Clause
Generally, ERISA allows a lawsuit to be filed in any venue
where the plan is administered, where the breach took place, or
where the defendant resides or may be found. By allowing a
participant to select any of these venues, ERISA gives participants
substantial control over the venue of a lawsuit. In light of the
fact that the circuit courts have not reached uniform rulings on
many ERISA issues, the broad venue provision also provides an
opportunity for plaintiffs to forum shop.
Plan fiduciaries can regain control over the venue in which
suits are brought by including a clause in the plan document and
SPD that preselects a venue that is convenient for litigation (also
known as a forum selection clause). Courts generally will enforce
such clauses unless a plaintiff can prove that: (i) the forum
selection clause was the result of fraud, undue influence, or
overwhelming bargaining power; (ii) the selected forum was so
inconvenient that injustice will result or the party will be
deprived of its day in court; or (iii) enforcement of the clause
would contravene a strong public policy of the forum in which the
suit is brought, declared by statute or judicial decision. Courts
have declined to uphold such clauses due to inadequate notice of
the provision. Plans should therefore consider inclusion of the
forum selection clause in the SPD.
4. Modification of the ERISA Rights
Statement
The U.S. Department of Labor (DOL) provides model language for
use in SPDs that describes a participant's rights under ERISA,
including the right to file a lawsuit when a claim for benefits is
denied. While it is generally advisable to use the model language
created by the DOL verbatim, in some cases it may be appropriate to
modify it. One such instance is the model language that states a
participant "may file suit in a state or Federal court"
when a benefit claim is denied. At least one court held that the
use of this phrase permitted a participant to file a lawsuit
without exhausting the claims procedures. 3 Therefore, plan sponsors and
fiduciaries should consider modifying the model language to refer
to the plan's claims procedures and to require participants and
beneficiaries to exhaust the plan's claims procedures before
filing a lawsuit.
5. Time Limit for Filing a Lawsuit
ERISA does not provide a statute of limitations for benefit
claims. As a result, courts generally apply the most analogous
state law statute of limitations. The length of such statutes of
limitations varies (sometimes significantly) from state to state.
In order to avoid being subject to varying statutes of limitations,
plan sponsors and fiduciaries should consider including in their
plan documents and SPDs a limitation on the time that a participant
may file a lawsuit for benefits after exhausting the claims and
appeals procedures. Many courts have enforced these plan-imposed
limitations as long as they are published (e.g., in the SPD) and
reasonable. Courts have upheld time limits as short as 90 days,
although the lengthier the time limit, the more likely that a court
will be to uphold it.
6. Subrogation and Reimbursement
Language
ERISA regulations require SPDs to clearly identify any
circumstances that may result in recovery of benefits by the plan,
including the plan's subrogation and reimbursement rights. In
the employee benefit plan context, subrogation is the plan's
assumption of the legal rights of a plan participant for purposes
of recovering a loss from a third party. Reimbursement is the
recovery of payment from a plan participant who has recovered
amounts from a third party. It is particularly important for
self-funded health plans to include specific language regarding
subrogation and reimbursement to maximize the protection of the
plan's rights. If a plan has an insured benefit, the insurer,
and not the plan, will likely look for recovery under these
principles.
Plan sponsors and fiduciaries should consider drafting the
plan's subrogation and reimbursement rights: (i) as broadly as
possible, i.e., to cover all possible types of recovery and claims;
(ii) to require first dollar reimbursement from any recovery; and
(iii) to make clear that the "make-whole" and the
"common fund" doctrines do not apply. The
"make-whole" doctrine prevents a plan from claiming a
right of subrogation or reimbursement if the plan participant
recovers some, but not all, damages, and the "common
fund" doctrine requires a contribution to the attorney's
fees associated with collecting from the third party.
A careful review of a plan's subrogation and reimbursement
rights is in order in light of the U.S. Supreme Court's recent
decision in U.S. Airways v. McCutchen, 4 There, the Court found that the
common fund doctrine applied because the plan did not specify that
the doctrine did not apply, and thus, limited the plan's
reimbursement right.
4 U.S. Airways v.
McCutchen, 569 U.S. __, 133 S. Ct. 1537 (2013).
7. Incorporation of Securities Filings
Retirement plans that offer publicly traded employer stock as
an investment option under the plan must provide participants with
a prospectus, as required by the Securities Act of 1933. The
prospectus must include a summary of certain plan provisions. For
convenience purposes, many SPDs incorporate certain Securities and
Exchange Commission filings into the SPD/prospectus, and vice
versa. This practice, however, has recently come under
attack.
Several courts have concluded that a plan fiduciary that
incorporates by reference securities filings into a Form S-8 or
prospectus is not acting in a fiduciary capacity and, as a result,
cannot be liable for a breach of fiduciary duty associated with
misrepresentations in those filings simply because of the
incorporation. 5 The law is less clear, however, on
the viability of an ERISA fiduciary breach claim resulting from a
plan fiduciary's decision to incorporate by reference allegedly
false or misleading securities filings into an SPD. 6
5 See, e.g., Kirschbaum v.
Reliant Energy Inc., 526 F.3d 243, 257, 43 EBC 2281 (5th Cir. 2008); Lanfear v.
Home Depot, Inc., 679 F.3d 1267, 1283-84, 53 EBC 1261 (11th Cir. 2012).
6 Compare In re Wachovia Corp.
ERISA Litig., 2010 WL 3081359, at *16 (W.D.N.C. Aug. 6, 2010)
(dismissing fiduciary breach claim) with Dudenhoefer v. Fifth
Third Bancorp, 692 F.3d 410, 422-23, 53 EBC 2842 (6th Cir. 2012) (allowing
fiduciary breach claim to withstand motion to dismiss),
petition for cert. filed, 133 S. Ct. 1656 (Dec. 14,
2012).
In some jurisdictions, employers may be at risk of having to
defend fiduciary breach claims based on the incorporation by
reference of securities filings into an SPD. It is thus appropriate
to consider whether to continue using the SPD as the vehicle for
satisfying the prospectus requirements associated with the
plan's offering of the company stock fund as an investment
option. Plan sponsors should consider instead the feasibility of
separating its securities filings from plan communications.
8. SPD Disclaimer
In light of Cigna v. Amara, 7 there is no doubt that it is the
plan document that controls participants' rights to benefits
under the plan. Many SPDs contain language that alerts readers that
the SPD is only a summary of plan benefits, and that the underlying
plan document (or insurance contract) controls if there are any
inconsistencies between the SPD and the plan document. Plan
fiduciaries should continue this practice even after Amara to avoid
any misunderstanding on the participants' behalf about what
document controls in the event of a conflict in the documents, or
an omission in the SPD.
9. Allocation of Fees
ERISA does not mandate how fees and expenses associated with,
among other things, loans, investments, distributions, and
qualified domestic relations orders are allocated to participants
and beneficiaries. The regulations only require that SPDs include a
summary of any plan provisions that may result in a participant
fee. Therefore, plan sponsors and fiduciaries have considerable
discretion to determine how the fees are allocated. Plan sponsors
should decide on the allocation method and describe it in the plan
document as part of the plan design. This ensures that the decision
regarding the allocation method is a settlor, as opposed to a
fiduciary, function. If the plan documents are silent on the
allocation method, the plan fiduciaries would need to choose the
allocation, and their choice will be subject to fiduciary
standards. Any allocation of fees to participants set forth in the
plan document should also be described in the SPD.
10. Circular 230
"Circular 230" are regulations governing practice
before the Internal Revenue Service. The regulations contain
specific rules regarding the standards for written tax advice.
Recent changes to those rules have led to the use of a
"Circular 230 Disclaimer" which states that, to the
extent the communication contains federal tax advice, that advice
cannot be used to avoid federal tax penalties. While including such
a disclaimer is not common practice in SPDs, the ramifications for
violation of the Circular 230 regulations are so severe that plan
fiduciaries may want to consider with their tax professionals
whether it is appropriate to do so, or to take other steps to
ensure that the SPD cannot be construed as giving tax advice.
The View From Proskauer
The 10 tips identified above are derived largely from case law
developments on issues not resolved by the regulations.
Accordingly, in addition to including the information required by
the regulations, plan sponsors and fiduciaries should monitor case
law developments and consider amending their SPDs to take those
developments into account where appropriate.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.