American Administration Services Company
About Summary Plan Descriptions
Summary of Material Modifications (SoMM)
Are you considering
a reduction in benefits?
Exceeding SoMM deadlines are vital surety to
avoid employer liability!
Use caution to avoid violations of ERISA’s
accelerated 60-day SoMM disclosure rules!
If in doubt as to whether the potential plan
change is a "significant reduction" in benefits, provide
notices to individuals for whom there is any reduction in benefit. The rules
state that a Section 204(h) notice will generally satisfy the requirement to
provide a Summary of Material Modifications (SoMM) regarding a plan
amendment; however providing the notice does not necessarily eliminate the
need to furnish SoMMs. In other words, the plan administrator may be required
to furnish a SoMM to any other participant or beneficiary covered under the
plan who was not required to receive a Section 204(h) notice but who
ordinarily would receive a SoMM because of changes to the plan.
Frequent SPD’s are
critical & key to legal protection
Hughes v. 3M Retiree Medical Plan, 8th Cir. Minnesota
Mining and Manufacturing's (3M) "Your Benefits" booklet promised retirees
"lifetime" medical benefits. However, former workers still are not legally
entitled because the booklet was not a SPD, ruled the federal US Court of
Appeals for the Eighth Circuit.
The US Court rejected the arguments made by Edward and
Dorothy Hughes that 3M should be held to promises made in the 1991 version of
3M's "Your Benefits" booklet. It referred to "lifetime" medical benefits. The
booklet was published every three years & Hughes claimed it should be
considered the legal SPD.
Courts normally consider the SPD as the final word, over
other benefit literature. Appeals judges said the "Your Benefits" booklet was
not an SPD. The controlling SPD was another retiree booklet about a Medicare
Supplement plan. The Medicare Supplement booklet had no language detailing
vesting requirements & warned that 3M might change the plan's provisions, the
3M’s created the "Your Benefits" booklet after they struck
a collective bargaining agreement with the Oil, Chemical and Atomic Workers
Union Local 6-75.
The lawsuit also alleged that the 3M effort to reduce
retiree health coverage was an ERISA violation, the courts rejected this claim
thanks to frequent and efficient distribution of employee SPDs.
Moral of the Story: Distribute
detailed, current SPDs to all employees often & live happily ever after!
Frequent SPD’s are STILL critical & key
to legal protection - Current Legal action: Plan Administrator was
Liable for Damages for Inadequate Delivery of SPD [Leyda v. AlliedSignal, Inc.,
2003 U.S. App. LEXIS 3728 (2d Cir. 2003)] For safety: distribute detailed
current SPDs to all employees - often
It is imperative to review your SPDs to ensure they contain
all of the information now required under DOL Regulation 2520.102-3 and they
must be written in plain language that is calculated to be understood by the
average plan participant (ERISA 102(a)). Exceeding SOMM deadlines are vital
surety to avoid employer liability! Use caution to avoid violations of ERISA’s
accelerated 60-day SOMM disclosure rule for group health plans
IRS Finalizes Rules On Notice Of Future
Benefit Reductions, rules are effective April 9, 2003
The IRS has issued final regulations on the ERISA mandate
that employers notify pension plan participants whenever a plan amendment
significantly reduces future benefit accruals. The content of the notice must
permit the recipient to determine the “magnitude of reduction.” The final
regulations are similar to the proposed rules issued in April 2002; however, the
final rules remove Treasury regulation Section 1.411(d)-6. Section 204(h)
requires plan administrators to provide notice to participants of a significant
reduction in future benefits. Code Section 4980F, added by the Economic Growth
and Tax Relief Reconciliation Act of 2001, imposes an excise tax for failure to
provide such notice. Overall, the final regulations retain the structure of the
proposed regulations, and include some expanded examples of notices. Proposed
regulations under Section 411(d)(6) are expected from Treasury and the IRS,
which will include general guidance on early retirement benefits and
2520.104a-1 - Filing with the Secretary of Labor.
2520.104a-1 Section Name: Filing with the Secretary of Labor.
(The information collection requirements contained in
subpart E were approved by the Office of Management and Budget under control
(a) General reporting requirements. Part
1 of title I of the Act requires that the administrator of an employee benefit
plan subject to the provisions of part 1 file with the Secretary of Labor
certain reports and additional documents. Each report filed shall accurately and
comprehensively detail the information required. Where a form is prescribed, the
reports shall be filed on that form. The Secretary may reject any incomplete
filing. Reports and documents shall be filed as specified in this part.
(b) Exemption for certain welfare plans.
See Secs. 2520.104-20, 2520.104-21, 2520.104-22, 2520.104-24, and 2520.104-25.
(c) Alternative method of compliance for
pension plans for certain selected employees. See Sec. 2520.104-23.
Section Number: 2520.104a-7 Section
Name: Summary of material modification. The administrator of an
employee benefit plan subject to the provisions of part 1 of title I of the
Act, and not otherwise exempt from the requirement to file and distribute a
summary plan description, shall file a summary description of modifications or
changes described in section 102(a)(1) of the Act with the Secretary no later
than the date on which the summary description is required to be disclosed to
participants and beneficiaries by Sec. 2520.104b-3.
The Department of Labor listed several modifications or
changes that would likely constitute a "reduction in covered services or
Eliminating benefits payable under the plan.
Reducing benefits payable under the plan, including a
reduction that occurs as a result of a change in formulas, methodologies or
schedules that serves as the basis for making benefit determinations.
Increasing deductibles, co-payments or other amounts to
be paid by a participant or beneficiary.
Reducing the service area covered by an HMO.
Establishing new conditions or requirements (e.g.,
pre-authorization requirements) for obtaining services or benefits under the
use caution with SPDs
Employer's Failure to Timely Notify
Employees Violated ERISA
[Russo v. B&B Catering, Inc., 2002 U.S.
Dist. LEXIS 4434 (N.D. III. 2002)] Over a three-year period, the employer in
this case provided employee medical coverage through group health policies
issued by three different insurers. The first policy was canceled when the
employer filed for bankruptcy. The second ended after a few months. The third
and last policy was in place for over a year. In the first few months, the
employer paid 100% of the premiums. Later, the covered employees paid the
premiums through payroll deductions. The employer sent premium payment checks
to the insurer. The court held that the employer violated ERISA and rejected
the employer's argument that ERISA no longer applied to the policy once it
became an employee-pay-all arrangement. The court reasoned that (1) the
employer initially established the arrangement (when it paid 100% of the
premium), which was enough under the ERISA plan definition (requiring that an
employer establish OR maintain a plan); (2) even after the employer stopped
paying premiums, its level of administrative responsibility was enough to make
ERISA applicable (it was responsible for providing employee claim forms,
accepting proof of loss forms and notifying employees of "continuation rights"
(presumably under COBRA); and (3) the employer made only one insurance policy
available. The court held that the employer was an ERISA fiduciary, at least
to the extent that it exercised discretion over the employee premium payroll
deductions, which the court recognized as ERISA plan assets. Then the court
found that the employer was responsible as plan fiduciary under ERISA Section
104(b)(1) for SMM (ERISA Section 104(b)(1) requires that a summary of material
modification (SMM) be provided within 60 days of the adoption of any "material
reduction in covered services or benefits" under a group health plan.)
regarding ERISA's accelerated 60-day SMM requirement for group health plans.
Note that the 60-day SMM requirement of ERISA Section 104(b)(1) applies to the
plan administrator (employer). 29 CFR 2520.104a-1 - Filing with the Secretary
of Labor. Section Number: 2520.104a-1 Section Name: Filing with the
Secretary of Labor.
Impact of including
unaltered model statement of ERISA rights in plan's SPD
[Prescott v. Little Six,
Inc., 2003 U.S. Dist. LEXIS 17484 (D. Minn. 2003)] This trial court
decision because it illustrates the important but unintended consequences that
can result from including the DOL's model statement of ERISA rights in a
plan's SPD. The case involved claims by individuals regarding various pension
and welfare plans maintained by an Indian Tribal Government entity. At
issue in this case was whether the entity had waived its tribal sovereign
immunity from lawsuits in federal court. In deciding that the tribal
entity had waived its immunity, the court relied in part on several plans'
SPDs, each of which contained language from the model statement of ERISA
rights prescribed by
As part of the statement of rights, the SPDs said that a plan participant "may
file suit in a federal court" if a benefit claim wasdenied. Holding that the
SPDs were legally operative documents, the court said that the references to
filing suit in federal court constituted a valid waiver of the tribal entity's
sovereign immunity. DOL regulations indicate that a plan's SPD must contain a
statement describing the ERISA rights of participants and beneficiaries. An
SPD containing the model language set out in applicable DOL regulations will
be deemed to comply with this requirement. As a consequence, most SPDs include
the model language almost verbatim. But ERISA plans should be careful to
omit information in the model statement of rights that does not apply
(e.g., references to pension plans or pension rights in welfare plan SPDs and
vice versa; inapplicable references to unions; references to COBRA if a plan
is not subject to COBRA). Plans should also rephrase the model statement to
fit the circumstances (e.g., a plan that is exempt from filing annual reports
on Form 5500 might modify the model statement's language on summary annual
reports (SARs) to note that a SAR must be provided only in a year in which the
plan has to file an annual report).
Many plan sponsors and administrators rely on
“disclaimer” language in their summary plan descriptions (“SPDs”) to guard
against any inaccuracies in the SPDs distributed to plan participants and their
beneficiaries. Generally, disclaimer language will provide that if there are
discrepancies between the terms of a plan’s SPD and the formal plan document,
the plan document will control.
Two recent court cases illustrate the importance
of providing accurate SPDs to plan participants and their beneficiaries,
regardless of whether the SPD includes disclaimer language. In light of these
cases, described more fully in this Update, a plan sponsor may wish to review
its summary plan descriptions to ensure accuracy and completeness.
Burke v. Kodak Ret. Income Plan, the
spouse had been married to a participant in Kodak’s pre-retirement Survivor
Income Benefits (“SIB”) Plan for less than one year at the time of the
participant’s death and did not qualify for spousal survivor benefits. Prior
to their marriage, lived together as domestic partners for a number of years.
Although the plan document and employee communications for the SIB Plan explained that the filing of an affidavit of domestic partnership
was a condition for the payment of benefits under the
SIB Plan, the Plan’s SPD did not include this requirement.
The Second Circuit noted that the circuit
courts are divided over whether a detrimental reliance standard or a prejudice
standard is necessary to recover plan benefits based upon a claim that the
plan’s SPD was somehow deficient (i.e., either because the terms of the SPD
conflict with the terms of the plan or the SPD omits a provision of the plan).
Under a detrimental reliance standard, a plan participant or beneficiary
generally must show that he or she read the SPD and that, but for the
inaccurate description, would have acted differently and not been harmed. The
Second Circuit adopted a prejudice standard for determining whether a court
may allow a recovery for benefits under a plan based on an inaccurate SPD.
Under this standard, a plan participant or beneficiary initially must show
that he or she was likely to have been harmed as a result of a deficient SPD.
If this initial showing is made, however, the employer may still prevail
through evidence that the deficiency was, in fact, only a harmless error.
Based on this case, the Second Circuit held that the surviving spouse was
prejudiced as a matter of law and, therefore, entitled to survivor benefits as
a domestic partner under the SIB Plan because the SPD did not mention the
affidavit requirement. Accordingly, the spouse was entitled to these benefits.
Burstein v. Ret. Account Plan for Employees of Allegheny Health Educ. and
Research Fund involved a claim for benefits based upon a conflict between the terms of
a plan’s SPD and the terms of the plan document. A pension plan SPD that
participant benefits would vest and become nonforfeitable upon plan
termination. In contrast, under the terms of the plan document the right to a
nonforfeitable benefit was limited to the funded amount of a participant’s
benefit at the time of termination, as permitted by statute. The SPD did
contain a statement that in the event of a conflict between the terms of the
plan document and the SPD, “the plan document always governs.” In
the Third Circuit Court of Appeals widened the divergence among the circuit
courts on this issue by holding that a plan participant who bases a claim for
benefits on a conflict between the terms of the plan document and its SPD need
not plead either detrimental reliance or prejudice to enforce the terms of the
SPD. Rather, the court found that claims for plan benefits essentially are
contractual in nature, and that in the event of a conflict between the
provisions of the plan and the SPD, the SPD will control. In the court’s
opinion, this result is necessary based on the requirement under ERISA that an
SPD be accurate and sufficiently comprehensive to reasonably apprise plan
participants of their rights and obligations under the plan, and based on the
fact that it is the SPD, and not the plan document, that is routinely provided
These cases challenge plan sponsors who
provide summary plan descriptions that are technically accurate, yet readily
understandable by the “average plan participant,” as required by ERISA.
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Pros and Cons of
electronic distribution of ERISA documents including SPDs
The DOL’s electronic disclosure regulations
allow for electronic distribution of a wide range of ERISA-required documents.
The regulations impose certain basic conditions for all electronic disclosures.
When these conditions are met, ERISA-required documents may be furnished
electronically to employees who have work-related computer access. Additional,
more burdensome requirements apply for electronic disclosures to individuals who
do not have work-related computer access. This group of individuals includes
non-employees (like COBRA qualified beneficiaries and covered spouses) but it
also includes employees who do not have work-related computer access. The
following paragraphs contain more details about these general rules.
- Electronic materials must be prepared and furnished in
accordance with otherwise applicable requirements (e.g., timing and format
requirements for SPDs).
- Each time an electronic document is furnished, a notice
(electronic or paper) must be provided to each recipient describing the
significance of the document.
- A paper version of the electronic document must be
available on request.
- The plan must use appropriate and necessary means to
ensure that the system for furnishing documents results in actual receipt of
the transmitted information (e.g., using return-receipt or notice of
undelivered e-mail features or conducting periodic reviews or surveys to
- The plan must take reasonable and appropriate steps to
safeguard the confidentiality of personal information related to an
individual’s accounts and benefits.
- They have the ability to access documents at any
location where they reasonably could be expected to perform employment duties
(this can include computer access at a home office); and
- Access to the employer’s electronic information system
is an integral part of their employment duties BUT for any
employee with access to your computers who does not use that system as an
integral part of their work (e.g., staff with building maintenance,
food service, copying or similar duties)
must receive paper copies of ERISA
When both the basic and certain additional
conditions are met, ERISA documents may be furnished electronically even to
individuals without work-related computer access. The additional conditions
include a requirement to obtain affirmative consent for electronic
disclosure—and before consent is obtained, a statement must be furnished
explaining how the electronic delivery system will work, including the types of
documents to be provided, procedures for withdrawing consent and updating
information (e.g., updating email addresses), and what hardware and software
will be needed. The need to furnish paper copies of the required pre-consent
statement and to keep track of a large number of individual consents (and
individual electronic delivery addresses) makes electronic disclosure to
non-employees (and to employees without work-related computer access) less
attractive for many employers. In addition, even some of the basic conditions
are more challenging for this group of recipients—for example, your company’s
internal security and confidentiality protections will not protect personal
information transmitted outside the system to non-employees.
There are probably additional unspecified issues to consider. Final regulations
permit a wide range of documents to be distributed electronically, including all
ERISA Title I disclosures including QDRO and QMCSO notices, COBRA notices, HIPAA
certificates of creditable coverage, documents that must be provided to
participants and beneficiaries after written request under ERISA Section 104(b),
pension plan investment information, individual pension benefit statements, and
information about pension plan loans. Even if you decide to try electronic
communications for employees and former employees, some types of notices (e.g.,
COBRA election notices) night not be well suited for electronic transmission.
If you have ALREADY distributed
SPDs to the participants in ANY of your ERISA welfare plans BUT later on an
employee makes a written request for copies of the SAME SPDs, you
should provide the additional copies (and charge him/her copying costs).
(to provide copies of plan documents) is intended to protect participants
who may have lost them;
ERISA does NOT protect the sponsor here. So just provide another SPD, the risk
is too high & if you don’tyou WILL expose your company to substantial civil
Two independent ERISA rules
affect repetitive distribution of plan SPDs:
ERISA Requires Automatic
SPDs for Covered Participants. The SPD for an ERISA welfare plan must, as
a general matter, be furnished automatically and without charge within 90 days
after a plan participant becomes covered by the plan. This rule requires your
company to provide SPDs automatically to plan participants (but not
beneficiaries) without any request. The term "participant" includes employees
or former employees who are eligible or may become eligible for benefits under
your plan or whose beneficiaries are eligible. The definition of participant
includes individuals who are eligible for one of your plans, even if not
actually enrolled--however, automatic SPDs are not required until a
participant becomes "covered" by a welfare plan. In the case of a plan
requiring enrollment, a participant does not become a "covered participant"
until enrolled. (Most employers provide SPDs to
eligible employees, regardless of enrollment status, even though it’s not
specifically required by ERISA.)
Certain Plan Documents
Must Be Provided on Written Request of a Participant or Beneficiary. A
plan administrator must provide copies of certain listed documents, including
the latest updated SPD, when a plan participant or beneficiary makes a written
request. The plan administrator may charge copy costs when providing requested
documents. The charge must be reasonable and cannot exceed the lesser of 25
cents per page or the plan's actual cost. No handling or postage costs may be
charged. If the requested documents are not provided within 30 days, the
participant or beneficiary may sue the plan administrator for penalties of up
to $110 for each day the response is late.
A participant who is not a
"covered participant" may nevertheless make a request for plan documents. A
plan beneficiary also has the right to request copies of plan documents.
Therefore, more people can request a copy of the SPD than are entitled to
receive a copy automatically.
The plan administrator may
charge copying costs when providing an SPD in response to a written request
but must provide automatic SPDs free of charge.
The time period for providing
requested documents--30 days--is shorter than the period for furnishing
automatic SPDs--90 days after a participant becomes covered. This sets up the
possibility of a request from a participant before the time that he or she
would be entitled to an automatic SPD. It is safer to avoid penalties &
provide the SPD earlier to a requesting participant.
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