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ACA Does Not Prohibit Lifetime Benefit Caps for Retiree-Only Benefit Plans

On Behalf of | Sep 21, 2017 |

The Ninth Circuit Court of Appeals, in King v. Blue Cross and Blue Shield of Illinois, has ruled that the ACA does not prohibit lifetime benefit maximums for retiree-only plans. However, the court also determined that the lifetime benefit maximum contained in an employer’s retiree benefit plan did not apply because the Summary of Material Modifications used (by the employer) to communicate the lifetime benefit maximum to plan participants did not meet ERISA’s requirements.

Facts. The plaintiff in King, became a participant in the employer’s retiree-only plan one year after the ACA was enacted. The plan’s benefits were outlined in a 2006 Summary Plan Description that included more than a dozen SMMs that disclosed certain subsequent changes made to the plan, including a 2010 SMM that disclosed the plan’s lifetime limit on benefits.

In 2012, a retiree plan participant required a major surgery for which she received initial approval from the insurer. After undergoing the treatment, however, the insurer denied her claim for benefits because she had exceeded the plan’s $500,000 lifetime limit. In response, the participant sued the insurer and employer, claiming breach of contract and breach of ERISA fiduciary duties by the defendants. One of the participant’s claims was that the 2010 SMM used to disclose the lifetime limit did not reasonably explain the modification to the average plan participant and, therefore, violated ERISA’s requirements.

At trial, the district court granted summary judgment to the employer on the basis that the ACA did not amend ERISA to prohibit lifetime benefit maximums for retiree-only plans. In turn, the participant timely appealed to the Ninth Circuit.

Ninth Circuit. The Ninth Circuit ruled that ERISA, as amended by the ACA, does not prohibit lifetime benefit limits for retiree-only plans because of a specific exception to the general rule for certain retiree-only plans.

The Ninth Circuit, however, agreed with the participant’s claim that the 2010 SMM used to disclose the plan’s lifetime benefit limit violated ERISA’s disclosure requirements. In particular, the court found that the format of the plan’s SMMs required a plan participant to read the entire SPD and all 25 pages of subsequent SMMs to determine the current language for each benefit provision. The court also noted that the 2010 SMM required participants to notice subtle changes in font type, headings and spacing between sections to detect what changes had been made by the ACA’s enactment.

In light of the deficiencies of the 2010 SMM, the Ninth Circuit determined that the district court was wrong to dismiss the participant’s breach of fiduciary duty claim, which requires plan administrators to convey accurate information. Accordingly, the court remanded the matter back to the district court for further review in accordance with its determination.

Employer Takeaway. Although one or two changes to an SPD may be disclosed to participants through an SMM, after a series of changes, in order to properly communicate with plan participants, employers should consider a consolidated SMM with all plan changes or, better still, a revised SPD that provides participants with up-to-date information about their benefit plan.