Retiree-Only Plan May Include Lifetime Limit; Ruling Highlights Importance of SPD and SMM

On Sept. 8, 2017, the U.S. Court of Appeals for the Ninth Circuit ruled in King vs. Blue Cross and Blue Shield of Illinois; UPS of American, Inc.; UPS Health and Welfare Plan for Retired Employees, No. 15-55880, 2017 WL 3928339 (9th Cir. Sept. 8, 2017), that a retiree-only plan is not subject to the ACA’s prohibition on lifetime annual dollar limits. This was the previous interpretation, so the ruling does not indicate a change in case law. However, please note that the ruling would have been different if the plan included both active and retired participants. The same exclusion does not apply to those plans.

This case is particularly interesting because of its other findings. Once the court determined that the retiree-only health plan could indeed impose a lifetime limit, it then turned to the plaintiff’s two other claims. These claims were that the plan had violated ERISA’s disclosure requirements; and that her employer, United Parcel Service (UPS), and Blue Cross and Blue Shield of Illinois (BCBSI) breached their ERISA fiduciary duties.

As background, in 2012, Linda King incurred $949,755 in claims related to a back infection. She was informed by Blue Cross and Blue Shield of Illinois (BCBSI) that she had reached her plan’s $500,000 lifetime limit and that only $133,601 would be covered by the plan. BCBSI had first informed her that she had reached the limit in November 2012, and then changed that date to January 2013. Based on these facts, the court found that BCBSI indeed breached its fiduciary duty because it had made misrepresentations about the lifetime benefit maximum.

BCBSI argued that they were not an ERISA fiduciary of the client’s self-insured plan. This has long been a debate in the area of benefits compliance. A fiduciary is defined as one who exercises any discretionary authority or control over plan management or administration. The court found that the insurer was indeed a fiduciary because it has the authority to grant, deny and review any denied claims; and determines whether to pay claims.

In regards to the claims that the plan had violated ERISA’s disclosure requirements, the court examined the plan’s SPD and SMM very carefully. The 2006 SPD stated that the retiree plan had a $500,000 lifetime limit. Over the next six years, UPS issued 12 SMMs revising the SPD’s provisions. One of the SMMs issued in 2010 stated that the plan’s lifetime dollar limits were to be eliminated on Jan. 1, 2011. The problem is that the SPD included both the active employee plan and the retiree-only plan. The SMM was not clear as to which plan the amendment applied. Thus, the court ruled that the plan had violated ERISA’s disclosure requirement because it failed to provide sufficiently accurate and comprehensive information in a manner that reasonably apprised participants of their rights and benefits under the plan. The court also noted that UPS had failed to update the SPD in a timely manner. The SPD must be amended to include any and all SMMs every five years.

The court asked the plaintiff to specify what type of equitable remedy is sought. After that information is received, the case will be sent back to the lower district court to determine the appropriate remedy, which may include payment of some of the denied claims.

While the court ruled that ACA’s prohibition on lifetime limits does not apply to retiree-only plans and the court also ruled that the insurer was indeed an ERISA fiduciary, the main takeaway from this case for an employer plan sponsor is that they should be very careful in drafting their SMMs and SPDs. If the plan documents and communications had been clear as to the retiree-only plan’s lifetime limit, this case would not have had the decision it did. Therefore, employers should make sure that any plan design changes are clearly communicated and timely adopted into the SPD. Because of the complexities and importance of these legal documents, we always recommend that they be reviewed by outside counsel.

King vs. Blue Cross and Blue Shield of Illinois; UPS of American, Inc.; UPS Health and Welfare Plan for Retired Employees »