Client Alert from the Labor and Employment Group - May 2011
Supreme Court Decision Underscores
Importance of Maintaining Plan Documents and
Summary Plan Descriptions for Employers
By Jeremy J. Sharp
The Supreme Court's recent decision in Cigna v. Amara sends an important message to employers about maintaining plan documents and summary plan descriptions (SPDs) for their benefit plans. In Amara, the Court issued an employee-friendly opinion resolving a split amongst federal judicial circuits regarding how to handle participant claims where ambiguities or conflicts are found in plan documents and SPDs. While the decision provides ample opportunities to get lost in the esoterica of ERISA equitable remedies and cash balance formulae, the important take-away for employers is to maintain and distribute consistent, accurate and up-to-date plan documents, SPDs and summaries of material modifications (SMMs).
In simplified terms, the Amara case involved Cigna Corp's 1998 conversion of its traditional defined benefit plan to a cash balance plan. Each participant's pension benefit under the defined benefit plan was converted to a retirement account balance under a formula. This resulted in the participant receiving the greater of two amounts (the original defined benefit amount or the cash balance benefit). As a consequence, some participants continued to earn credits under the cash balance portion, but their benefit did not increase because their original defined benefit remained greater (a concept known as "wear-away"). In essence, Cigna's failure to issue SPDs and SMMs adequately explaining the wear-away issue to participants (as well as certain other changes that arguably reduced benefits) resulted in a participant class action over the deficient documents.
The Court's decision clarified an issue that has divided U.S. Courts of Appeals - the appropriate standard to apply in requiring participants to show harm where the plan documents and SPDs are in conflict with one another - and this clarification favors participants by not requiring a showing of detrimental reliance in order to obtain equitable relief. While the academic debate that results from the Court's interpretation of ERISA Section 502(a)(3) in Amara is interesting enough, the important message to employers is that maintaining and distributing consistent, accurate and up-to-date plan documents and SPDs can insulate the company from liability in what is likely to be a growing area of class action litigation.
In light of the Supreme Court's decision in Amara, employers should review the plan documents and SPDs (including certificates of coverage, summaries of benefits and other such documents) for each employee benefit plan offered to ensure that they are up-to-date and consistent. A best practice in this area entails maintaining, solely for record-keeping purposes, separate copies of these documents for each plan on an annual basis so that they are readily available if needed in the future.
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