Ninth Circuit: An SPD and Trust Agreement Together a Plan Make

Practical Law Legal Update w-009-6011 (Approx. 4 pages)

Ninth Circuit: An SPD and Trust Agreement Together a Plan Make

by Practical Law Employee Benefits & Executive Compensation

Background

The plaintiff in this case, a covered dependent under a self-funded multi-employer health plan, was injured in a car accident and received nearly $150,000 in plan benefits to treat her injuries. The dependent later received a $100,000 recovery from a third party involved in the accident, but declined the plan's subsequent request for reimbursement.

The health plan was established under a trust agreement and the plan's board had adopted a summary plan description (SPD) that addressed eligibility rules, benefits offered, and other provisions (see SPD Compliance Chart for ERISA Plans). The SPD also included a reimbursement provision under which:

Benefits were not payable in a third-party liability claim unless the participant or dependent agreed to reimburse the plan, following receipt of a third-party recovery, for benefits previously paid by the plan.
The amount of benefits paid could be deducted from future benefits payable to a participant or dependent if reimbursement was requested but not received by the plan.

(See Standard Clause, SPD Language, Subrogation and Reimbursement.)

The plan invoked the SPD's reimbursement provision in attempting to recoup the dependent's recovery from other benefits payable to the participant and related individuals.

The participant, dependent, and other family-members sued the plan in federal district court for declaratory relief, injunctive relief, and recovery of benefits. The plan counterclaimed for equitable relief under ERISA, seeking an equitable lien or a constructive trust to recoup the dependent's $100,000 recovery, but these counterclaims were dismissed for reasons involving the dependent's Chapter 7 bankruptcy and other grounds (29 U.S.C. § 1132(a)(3); see Practice Note, ERISA Litigation: Causes of Action Under ERISA Section 502 and ERISA Litigation Toolkit).

Ruling in favor of the participant and dependents on the remaining claim, the district court concluded that the plan's reimbursement provision was not legally enforceable under ERISA because it was found only in the SPD and not in any document that constituted an ERISA plan. As a result, the district court:

Enjoined the plan from enforcing the reimbursement provision.
Directed the plan to reimburse the participant for approximately $1,900 in benefits it had already recouped.

Outcome on Appeal

On appeal, a three-member panel of the Ninth Circuit concluded that the district court erred in determining that the SPD was not part of the plan. The Ninth Circuit acknowledged that although the plan's trust agreement satisfied most of ERISA's requirements for a written plan document (29 U.S.C. § 1102(b)), it failed to specify the basis on which payments would be made to and from the plan. Instead, the trust agreement instructed that this provision would be specified in writing by a board resolution. In the Ninth Circuit's view, the board carried out the trust's directive by adopting the SPD, which detailed the basis for payments. The Ninth Circuit therefore concluded that the ERISA plan consisted of two documents: the trust agreement and the SPD. The court cited several SPD provisions reflecting the board's "clear design" to have the trust agreement and SPD together constitute the ERISA plan – including an SPD provision stating that the SPD constituted both the plan document and the SPD.

Distinguishing the Supreme Court's Amara Decision

The Ninth Circuit reasoned that its conclusion was not contrary to CIGNA Corp. v. Amara, in which the Supreme Court held that an SPD's terms, which were more favorable to participants than the terms of the written instrument, could not be enforced as the terms of the plan itself (563 U.S. 421 (2011); see Article, Expert Q&A on the Impact of CIGNA Corp. v. Amara). The court noted that Amara addressed only circumstances where:

Both a governing plan document and an SPD existed.
The plan administrator attempted to enforce the SPD's terms over those of the plan document.

However, Amara did not address a situation like this one where a plan administrator sought to enforce the SPD as the only formal plan document. As a result, the Ninth Circuit reasoned, an SPD may constitute a formal plan document (consistent with Amara) if it does not add to or contradict the terms of existing plan documents. In this case, the Ninth Circuit concluded:

The SPD was part of the plan itself and there was no conflict between the SPD and the trust agreement.
This arrangement was not prohibited under Amara.

(For discussion of another recent appellate court decision addressing Amara's scope, see Legal Update, Fifth Circuit: SPD Was Enforceable Despite Referencing a Nonexistent Plan Document.)

The Ninth Circuit vacated the district court's judgment and remanded the case for further proceedings.

Practical Impact

Although it is not uncommon, especially in the self-funded health plan context, for a single document to function as both an SPD and plan document, this case illustrates some of the pitfalls of that approach. The SPD in this case (though purporting, by its terms, to serve as both the SPD and plan document) fell short in satisfying ERISA's requirements for a plan document. Only by coupling the SPD with the plan's trust agreement was the Ninth Circuit able to conclude that an ERISA plan existed. To avoid having its plan documentation reviewed by a federal court in expensive and prolonged litigation (this dispute is headed back to the district court for further proceedings), a plan sponsor should ensure that an SPD intended to function as both plan and SPD in fact satisfies the substantive requirements for both documents under ERISA and its implementing regulations.

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