Johnson v. Ballad Health, 2022 WL 214488 (E.D. Tenn. 2022)
The employee in this case was automatically enrolled in an employer-paid long-term disability plan, which provided a benefit of 40% of earnings. She also opted for the employee-paid “buy-up” benefit, which was described in the plan as 60% of earnings. The employer’s SPD described the buy-up benefit as “additional coverage” of 60%, and the employee’s benefit confirmation statement described her coverage as “100% of salary.” When the employee became disabled, the insurer paid benefits at 60% of earnings, and the employee sued the insurer and her employer, claiming she was entitled to 100% of earnings.
The court ruled in favor of the insurer, concluding that under ERISA’s arbitrary and capricious standard, the insurer’s interpretation of the plan was reasonable even though the plan was “not a model of clarity” since it didn’t define “buy-up.” However, the court held that the employer breached its ERISA fiduciary duty to communicate accurately with participants about plan provisions because its SPD was unclear as to whether the 60% was in addition to the 40% of earnings, and the confirmation statement misled the employee into thinking her benefit would be 100% of earnings. According to the court, the employer’s SPD was not sufficiently accurate and comprehensive to reasonably apprise participants of their long-term disability benefit alternatives and was, therefore, misleading, regardless of whether the employer’s representations were made intentionally or negligently. The court ruled that the employer must pay the employee a benefit based on 100% of monthly earnings.
EBIA Comment: Courts have typically viewed an SPD as part of the plan documents required under ERISA and have been relatively protective of the right of participants and beneficiaries to receive adequate SPDs. Although the supremacy of SPDs was called into question by the U.S. Supreme Court’s Amara decision, which held that the terms of an SPD cannot be enforced as the terms of the plan (see our Checkpoint article), inadequate SPDs continue to present risks for employers as participants may pursue claims for breach of fiduciary duty and equitable relief (see, e.g., our Checkpoint article). It is important to make sure a plan’s SPD is clear and complete, keeping in mind ERISA fundamentals: SPDs must be accurate, comprehensive, and designed to be understood by participants. For more information, see EBIA’s ERISA Compliance manual at Sections XXIV.I (“Style and Format Requirements for SPDs and SMMs”), XXIV.L (“Conflicts Between SPD/SMM and Plan Document or Insurance Contract”), and XXVIII.F (“ERISA Fiduciary Duties and Participant Disclosure”). See also EBIA’s Self-Insured Health Plans manual at Section XXII.D (“Self-Insured Health Plan Participant Disclosure Mistakes”).
Contributing Editors: EBIA Staff.