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Ninth Circuit: Plan SMM Addressing ACA Changes Violated ERISA
Practical Law Legal Update w-010-2757 (Approx. 5 pages)
Ninth Circuit: Plan SMM Addressing ACA Changes Violated ERISA
by Practical Law Employee Benefits & Executive Compensation
| Published on 12 Sep 2017 • USA (National/Federal) |
In King v. Blue Cross & Blue Shield of Illinois, the US Court of Appeals for the Ninth Circuit addressed the scope of the Affordable Care Act's (ACA's) limit on lifetime benefits and held that a plan's summary of material modifications (SMM) violated statutory and regulatory disclosure requirements under the Employee Retirement Income Security Act (ERISA).
The US Court of Appeals for the Ninth Circuit has held that ERISA, as amended by the Affordable Care Act (ACA), does not prohibit lifetime benefit maximums for certain retiree-only plans (King v. Blue Cross & Blue Shield of Ill., (9th Cir. Sept. 8, 2017)). The court also held that an SMM document used to communicate these changes violated ERISA's statutory and regulatory requirements.
Background
The participant in this case became a covered dependent in the employer-sponsored retiree health plan at issue when her husband retired from the employer in March 2011, roughly a year after the ACA was enacted (see Practice Note, Affordable Care Act (ACA) Overview and Affordable Care Act (ACA) Toolkit). The employer, which was the ERISA plan administrator and plan sponsor for the retiree plan, also sponsored a health plan for active employees. A summary plan description (SPD) for the retiree health plan consisted of a 96-page SPD from 2006 and a series of summaries of material modifications (SMMs) addressing plan amendments adopted after 2006 (12 of which covered the time between May 2006 and December 2012) (see Summary Plan Description (SPD) Toolkit).
In late 2012, the participant sustained an infection that required back surgery. Although she requested and received precertification for the procedure, the plan's claims administrator later informed the participant—via an explanation of benefits (EOB)—that the majority of the medical expenses would not be covered because the participant had reached the retiree plan's lifetime benefit maximum (see Practice Note, Lifetime Limits, Annual Limits and Essential Health Benefits Under the ACA). The EOB indicated that the participant could owe more than $575,000, in addition to the cost of care for more recent months.
The participant sued the employer, plan and its claims administrator under ERISA for benefits and breach of fiduciary duty. A district court concluded in part that the:
- Plan's claims administrator did not abuse its discretion by interpreting the retiree plan to include a lifetime benefit maximum.
- ACA did not amend ERISA to prohibit lifetime benefit limits for retiree-only plans.
SMMs issued in 2010 for the active and retiree health plans reflected plan amendments that were required under the ACA and effective January 1, 2011.
The district court concluded that the ACA did not amend ERISA to prohibit lifetime benefit caps for retiree-only plans, but did not address the participant's argument that the 2010 SMM violated ERISA's disclosure requirements. The participant timely appealed.
Outcome
On appeal, the Ninth Circuit agreed with the district court that the ACA does not ban lifetime benefit maximums for retiree-only plans. However, the Ninth Circuit reversed and remanded on the issue of whether the plan's SMM satisfied ERISA.
Lifetime Dollar Limit Under the ACA
The Ninth Circuit held that ERISA, as amended by the ACA, does not prohibit lifetime benefit limits in certain retiree-only health plans. The court reasoned that although the ACA incorporated into ERISA a ban on lifetime limits (as added to the Public Health Service Act (PHSA)), that ban was subject to an existing exception under ERISA for certain retiree-only plans (29 U.S.C. § 1191a). According to the Ninth Circuit, the parties did not dispute that the retiree plan in this litigation was subject to the ERISA exception.
SMM Failures
The Ninth Circuit also held that the plan's 2010 SMM amending its SPD failed to satisfy ERISA's disclosure requirements because the document was not written in a manner calculated to be understood by the average plan participant (29 U.S.C. § 1022; see SPD Compliance Chart for ERISA Plans). The court observed that the employer had not issued a single amended SPD or cumulative SMMs, but had issued a series of summaries (totalling 25 pages) that needed to be read in conjunction with the 2006 SPD for an individual to determine available benefits. Moreover, the court observed that the SMMs were not organized using a comprehensive table of contents that would have allowed participants to:
- Verify which specific SPD terms had been amended by the various SMMs.
- Confirm that any particular SPD provision had not been modified.
The court also noted that the SPD provisions did not cross-reference the SMMs, and the SMMs did not consistently cross-reference the 2006 SPD. The court added that the plan's 2010 SMM involving ACA changes did not cross-reference the retiree plan's lifetime benefit limit.
The court added that participants would need to detect subtle shifts in font type and size involving headings within the 2010 SMM to understand the document's meaning consistent with the interpretation favored by the employer and its claims administrator (that is, that the 2010 SMM did not eliminate the retiree plan's lifetime benefit maximum). Moreover, the extent to which the SMM's provisions related to changes under the ACA was unclear from the SMM language (particularly because the provision governing elimination of lifetime maximum benefits did not expressly reference the ACA).
The court therefore concluded that the disputed 2010 SMM obscured whether its provision regarding elimination of lifetime maximum benefits applied to the retiree plan. As a result, the court held that the 2006 SPD, as amended by the 2010 SMM, violated ERISA's statutory and regulatory disclosure requirements.
In a related claim, the Ninth Circuit concluded that the district court erred by ruling in favor of the plan's claims administrator regarding the participant's claim that the administrator breached ERISA's fiduciary duties in communicating the plan amendments.
Because it had ruled in favor of the plan and administrator, the district court did not address the appropriate remedy. The Ninth Circuit therefore remanded the case to the district court to determine the appropriate remedy (after the participant clarified the relief sought, including, if applicable, the specific equitable remedy) (see Practice Note, ERISA Litigation: Causes of Action Under ERISA Section 502 and ERISA Litigation Toolkit).
Practical Impact
This case caught our eye because the SMM at issue, replicated in full in an appendix to the opinion, looks relatively standard by way of format and includes stylistic conventions that are not uncommon for an SMM. The general ambiguity regarding the scope of the eliminated lifetime maximum benefits and resulting litigation could have been avoided—in the court's view—using some fairly straightforward drafting techniques. First, the plan could have issued separate SMMs for its active and retiree plans, clearly labelled as such at the top of the respective SMMs. Also, major headings within the SMM could have been denoted using a font size that contrasted more noticeably from underlying subheadings. Finally, smaller subheadings could have been placed immediately next to major headings (without intervening text), to more clearly reflect the SMM's overall organization.