Employers today offer their employees a wide variety of benefit plans. These plans are often set forth in a number of different documents: plans, summary plan descriptions, benefit summaries, evidence of coverage booklets, master contracts, and insurance policies. It is important for plan sponsors to understand how these various documents work together both from the standpoint of making sure the right benefits are being provided and also to protect the plan sponsor and plan fiduciaries in the event of a dispute. This understanding is important whether the arrangement is fully insured or self-funded.
Welfare benefit plans provide for “medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services.” See ERISA, Section 3(1). Some benefit arrangements such as payroll practices and certain voluntary insurance policies are excluded from the definition of a welfare plan. However, the same consistency considerations apply in determining whether the documents governing any benefit arrangement work as they are intended.
The following highlights document issues in every welfare plan that should be considered by the plan sponsor:
- Are there conflicts in the documents? While there is a split of authority in the courts, generally, if there is a conflict between the terms of a plan (or insurance policy) and a summary plan description (SPD), the terms of the SPD will govern in the event of a dispute. If the SPD is silent on a matter, courts will generally uphold the terms of the plan. However, in certain circumstances, the plan administrator may be equitably estopped from applying the terms of the SPD if it is inaccurate. The cases indicate that significant conditions to qualify for benefits should be set forth in the SPD and that the SPD should not be more “accurate” than the plan. If there are details in the plan not included in the SPD, it is helpful to include a provision that the SPD is a summary and the terms of the plan govern. Even if an employer uses a single document as a plan and SPD, that document should be reviewed to make clear how the document operates.
- Do your plans provide for a favorable, deferential standard of review? Generally, in reviewing a benefit claim, a court will not consider a benefit claim anew (de novo) if the plan provides the plan administrator with discretionary authority to interpret the terms and eligibility for benefits. Although no “magic words” are required, plan provisions clearly indicating the discretionary authority of the plan administrator can be helpful.
- Have you followed your plan’s procedures for amendments? ERISA, the federal law governing employee benefit plans, requires that every plan have a procedure for amending the plan and identifying the persons with authority to amend the plan. Although the Supreme Court has clarified that the “company” may reserve such a right, the right must be clearly stated in the plan. It is important to follow the plan’s amendment procedure when making any changes; although a plan is not required to have detailed amendment procedures, if it does, they must be followed. Because summaries may differ from the terms of the plan document, they should contain appropriate disclaimers and reservations of rights to change the terms. Although welfare plan benefits are generally not vested, it can be helpful to make clear that this is the case. If there is an ambiguity as to whether plan benefits (such as retiree medical benefits) are vested, the plan could be interpreted against the plan administrator.
- Does your health plan properly preserve rights of subrogation, reimbursement, offset, and recoupment of overpayments? Subrogation provisions essentially allow a plan to take over the rights of the participant or covered dependent with respect to the participant’s or covered dependent’s right of recovery from a third-party (for example, a tortfeasor who causes an accident in which the participant is injured). Reimbursement provisions give the plan a contractual right to recover from the participant or covered dependent benefits paid under the plan that the participant or covered dependent is entitled to receive from a third party (or an insurer or other benefit plan). Subrogation provisions in particular have been heavily litigated in recent years with the unfortunate result of conflicting rules governing the enforceability of such provisions in the different U.S. Circuit Courts of Appeal. However, in many cases, the problems of enforcing the plan’s subrogation and other rights can be addressed through properly drafting the plan. If plans intend to utilize subrogation or reimbursement provisions, the requirements should be clearly set forth. If plans intend to disavow certain doctrines such as the “make whole” doctrine, this should be stated unequivocally. Some plans specifically require a participant to file suit at his or her own expense to qualify for benefits. Other plans attempt to establish the priority of the plan to payment over attorneys’ fees or a settlement that is not allocated to medical expenses. Plan sponsors should also consider whether the plan should include offset provisions, provisions for recoupment of overpayments, and eligibility exclusions if the participant fails to comply with plan requirements.
- Does your plan clearly set forth time limits? Generally, a plan can establish a statute of limitations for filing a lawsuit if it is reasonable. Plans can also establish reasonable limitations on the time for filing a claim. However, these must be very clearly stated.
- Do your plan provisions cover the right people? After the Microsoft case several years ago, employers focused on whether their eligibility provisions properly excluded the people they intended to exclude. It is important that plans clearly define the eligible class of eligible employees and clearly exclude employees the employer intends to exclude (for example, leased employees, independent contractors, and temporary employees).
If you have any questions regarding your welfare benefit plans, please contact one of the attorneys on the Employee Benefits and Executive Compensation Team.