Guest Article

(From the March 17, 2003 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks within the article have been added by BenefitsLink.)

Second Circuit Case Reminds Plan Administrators of Obligations with Respect to Distributing SPDs

A plan administrator's procedures for distributing summary plan descriptions (SPDs) to participants must "be reasonably calculated to achieve actual distribution," according to the Second Circuit Court of Appeals. Leyda v. AlliedSignal, Inc., 2003 U.S. App. LEXIS 3728 (2nd Cir. 2003). Beyond simply restating the relevant standard from the ERISA regulations, the court's opinion applies the standard to a plan administrator's efforts to distribute SPDs to new employees and thus helps define what administrators need to do to satisfy this obligation.

This case is particularly timely because many plan administrators are preparing to send out SPDs or summaries of material modifications (SMMs) in order to comply with the updated SPD content requirements, which are now effective for most plans. If you have questions or need more information about these updated reports, please contact your Deloitte advisor.

Case Background

AlliedSignal hired Mr. Leyda after it purchased his previous employer's (Textron) assets. Like other former Textron employees, AlliedSignal invited Mr. Leyda to attend a meeting about the company's benefits. The company advertised these meetings by sending notices to each employee, and by posting notices on bulletin boards and video monitors.

The company distributed SPDs, enrollment forms, and beneficiary designation forms to meeting participants, and left additional copies of these materials for employees that did not attend. It also asked supervisors to track employees on sick leave, traveling, or on extended leave for the day assigned to that department's meeting, so it could send the same materials to those employees' homes or worksites. (However, AlliedSignal did not take attendance at these meetings.) Finally, the company mailed these materials to employees that notified the human resources department of a scheduling conflict.

Mr. Leyda did not attend any of these meetings, apparently because he was too busy. He never asked the human resources department for the meeting materials, and his supervisor did not identify him as being on sick leave, traveling, or on extended leave when the meetings were held. As a result, Mr. Leyda never received the SPDs and other materials AlliedSignal distributed during these meetings.

Because Mr. Leyda did not attend a meeting and did not receive an SPD, he did not learn about the differences between Textron's and AlliedSignal's life insurance benefits. At Textron, his coverage amount was $120,000 (3 times his annual salary). AlliedSignal provided him no-cost life insurance coverage of 1-1/2 times his annual salary, and gave him the option to purchase additional coverage.

Leyda assumed AlliedSignal automatically provided him $120,000 worth of coverage, same as Textron. He opted to buy an additional $40,000 of coverage, thinking his total coverage amount was $160,000 instead of $100,000. He turned down other opportunities to buy additional life insurance based on this assumption.

Mr. Leyda died, and his widow collected $100,000 in life insurance proceeds. Because she expected to receive $160,000, she sued AlliedSignal (in its capacity as plan administrator) for failing to provide Mr. Leyda an SPD as ERISA requires.

Relevant Law

In general, ERISA section 104(b) requires all ERISA plans to provide SPDs to participants within 90 days after they first become plan participants. It also requires plans to issue SMMs to participants within 210 days after the end of any year in which changes to the plan occur, and to issue updated SPDs every 5 years if there are changes to the plan during that period.

According to ERISA regulations [section 2520.104b01(b)], plan administrators must "use measures reasonably calculated to ensure actual receipt" of these documents by participants. Furthermore, the documents "must be sent by a method or methods of delivery likely to result in full distribution."

Court's Analysis

The court of appeals affirmed a district court's decision that AlliedSignal did not do enough to satisfy its obligations under these provisions, and its decision to award Mrs. Leyda $62,250 in damages. The court also agreed with the district court's decision to not award Mrs. Leyda attorney's fees.

According to the court, AlliedSignal was wrong to assume the only employees not attending the meetings would be those on trips, sick leave, or extended leave. Even though Mr. Leyda did not fall into any of these categories, the court pointed out AlliedSignal would have known he did not attend if someone had taken attendance at these meetings. But no one did, and Mr. Leyda never received his SPD.

The court also pointed out AlliedSignal could have avoided this problem if it required employees to affirmatively enroll in its benefit plans and certify that they have received all plan documents at that time. Of course, most companies use automatic enrollment because it helps employees, so it is ironic that the court would suggest they might discontinue the practice as a way to satisfy their SPD distribution obligations.

The information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances. If you have questions or need additional information about this article and you do not have a Deloitte advisor, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Human Capital Advisory Services, Deloitte LLP, 555 12th Street NW, Suite 500, Washington, DC 20004-1207. Copyright 2003, Deloitte.