When ERISA Benefit Communications Become a Legal Problem

by Nicholas K. Ono and Arman Borghei

The Employee Retirement Income Security Act (ERISA) requires certain communications by a plan administrator to plan participants regarding administrative matters and benefits offered under a plan.  Documents and information concerning matters like fees, changes in a plan’s investments or benefits, and benefit denials may appear to be standard administrative matters, but these communications carry significant legal consequences if they are omitted or handled improperly.  Employers may run the risk of violating ERISA when these documents are not timely sent, or when they contain errors or set expectations that plans do not provide.  But what types of benefit communications does ERISA govern?

What Types of Employee Benefit Communications Are Governed by ERISA?

As explained by the U.S Department of Labor, ERISA requires plan administrators to communicate important information about plan administrative matters and benefits to participants.  This includes information about plan rules, financial information, and plan management.  These are typically communicated through disclosures and notices, but even informal correspondence like email or verbal assurances may be subject to ERISA’s requirements.  ERISA requires plan administrators to automatically and regularly provide certain information to plan participants, while other information must be provided upon request.  These requirements ensure that plan participants are receiving accurate and accessible information about their benefits.

Common areas of litigation risk regarding employee benefits communications include outdated summary plan descriptions, inconsistencies between informal human resources (HR) statements and plan documents, unclear exclusions or limitations, confusing benefit denial letters, inaccurate eligibility information, and failures to provide required documents.  A more comprehensive list of ERISA’s reporting and disclosure requirements, including what documents must be provided, to whom they must be provided, and when they must be distributed, is available on the Department of Labor’s website.

Summary Plan Descriptions

The summary plan description (SDP) is one of the documents required to be distributed to participants under ERISA.  An SDP is a summary of the plan provided to participants that includes information like the terms of the plan, who is eligible to join the plan, what benefits are provided, how the claims process works, and how benefits might be denied or terminated.  This document must automatically be provided by the plan administrator to participants when they enroll in a retirement or health benefit plan.  ERISA lays out the requirements for the contents of a summary plan description.  New plan participants must be provided with the SDP within 90 days of enrolling in a plan.

Employers and plan administrators may face ERISA liability when they provide SDPs that do not meet the content requirements set out by ERISA, fail to provide the SDP altogether, or fail to provide the SDP on time.  Another common circumstances in which liability arises is when plan participants are not notified about material changes to a plan.  Generally, participants must be informed about these changes within 210 days after the closing of the plan year in which the change was adopted, either through a revised SDP or in a different form of document called a summary of material modifications.

The Claims Process

Other important aspects of benefit communications are the claims process and benefit denial notices.  ERISA lays out the minimum requirements for benefit plan claim procedures.  Plans must maintain fair and transparent procedures for handling benefit claims and provide decisions in a timely manner, typically within 90 days, unless an extension is requested.  If a benefit claim is denied, the participant must be provided with a notice that clearly explains why the claim was denied, as well the process for filing an appeal.  The notice must also inform the participant that if their appeal is denied, they have the right to challenge the matter in court.  Participants must be given at least 60 days to appeal a denied benefits claim.  An additional notice stating the outcome of the appeal must also be provided.

A failure to meet these requirements or any of the others set forth by ERISA may carry legal consequences for an employer or plan administrator.  Insufficient communication like vague denial letters that do not clearly explain the grounds for denial or are difficult to understand, or the lack of a meaningful opportunity to appeal a denial commonly give rise to ERISA liability.

When What Someone Says Becomes a Legal Problem

The universe of benefit communications subject to ERISA is not limited to written documents.  Liability can sometimes arise from verbal or digital communication.  Plan administrators are often designated fiduciaries in plan documents are may also be considered fiduciaries since they exercise discretion and control over plan management.  As fiduciaries, plan administrators must act in the best interest of plan members and the plan.  Verbal misrepresentations or misleading statements can be considered a breach of these fiduciary duties and give rise to ERISA liability.

The U.S. Supreme Court has addressed this issue in the case, Varity Corp. v. Howe.  In Varity, the Supreme Court found a company in violation of ERISA when it misled employees about the security of their benefits during a corporate restructuring.  The Court held that the defendant was acting in a fiduciary capacity when it “significantly and deliberately” mislead plan participants about matters that affect their benefits and breached its duties through its misleading statements.  Although Varity involved statements that were obviously designed to mislead plan participants, any form of misleading communication or deliberate concealments regarding matters that impact plan benefits, including verbal communications, risks a breach of fiduciary duty and may give rise to ERISA liability depending upon the circumstances.  For example, false assurances by an HR director regarding plan coverage or a company concealing financial instability that is likely to harm employee benefits, may risk a breach of fiduciary duty claim.

How to Reduce Risk

Reducing ERISA liability risk in regards to benefit communications involves maintaining a level of transparency and honesty while avoiding shortcuts when it comes to notices and disclosures.  Keeping plan documents up to date, being transparent with employees, and maintaining a proper claims and appeals procedure are all liability risk reducing practices.  The Department of Labor and ERISA set out certain guidelines and requirements regarding proper communication and can help plan administrators better understand what they are required to disclose and when.  Following these guidelines and requirements can greatly reduce the risk of ERISA liability.  Proper communication may prevent potential ERISA-related issues before they arise and plan administrators and fiduciaries should review the relevant guidelines and requirements.

If you believe your employee benefit plan communications may not be meeting ERISA’s requirements or are an employer concerned about your plan’s compliance, contact Miller Shah LLP to schedule a consultation.  Our skilled attorneys have extensive knowledge and experience with ERISA matters and can help evaluate your concerns.