Guest Article

(From the October 27, 2003 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Beware the Hidden Dangers of Model Forms

The Department of Labor's Employee Benefits Security Administration (EBSA) has posted a proposed model general notice of COBRA continuation coverage rights and a proposed model COBRA continuation coverage election notice to its Web site. Group health plan administrators can use these proposed model notices to satisfy their COBRA notice obligations until final model notices are available. But, as a recent case illustrates, trouble looms for plan administrators that use these and other model forms without making any necessary changes to the forms to ensure they are consistent with the plan sponsor's circumstances and the plan's terms. Prescott v. Little Six, Inc., 2003 U.S. Dist. LEXIS 17484 (D. Minn. 2003).

The Prescott Case

The issue in Prescott was whether participants in employee benefit plans sponsored by a tribal entity could sue in federal court to enforce their rights under ERISA. As a general rule, individuals cannot sue tribal entities in federal court because federal law grants tribal entities sovereign immunity. But tribal entities can voluntarily waive this protection. In this case, the summary plan descriptions (SPDs) for 3 of the tribal entity's employee benefit plans-- the Life Insurance Plan, the Separation Pay Plan, and the Supplemental Retirement Plan-- included language indicating an intention to waive sovereign immunity.

Specifically, the SPDs included the following statements:

1. "If you request materials from the Plan and do not receive them within 30 days, you may file suit in a federal court."

2. "If you have a claim for benefits which is denied or ignored, in whole or in part, you may file suit in a state or federal court."

3. "If it should happen that plan fiduciaries misuse the Plan's money or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor or you may file suit in a federal court."

Of course, these statements were taken straight from the SPD content regulation's model statement of ERISA rights. (The DOL's SPD content regulation requires all ERISA plan SPD's to include a statement of ERISA rights. See Labor Reg. Sec. 2520.102-3(t).) The tribal entity simply failed to edit the statements out of the version it included in these SPDs. Nonetheless, the court concluded the tribal entity had waived its sovereign immunity with respect to these plans because the phrase "you may file suit in a federal court" is "clear, unequivocal, and it has legal effect."

Why Should Plan Sponsors Care About This Case?

The sovereign immunity concept generally applies only to government entities, so inadvertently waiving sovereign immunity is not a concern for private employers. And government plans generally are not subject to ERISA, so they do not have to issue SPDs. But the Prescott case is about much more than sovereign immunity and the model statement of ERISA rights. In fact, any employee benefit plan sponsor or administrator that uses model forms or model language should view this case as a reminder of the dangers of simply "cutting and pasting."

The proposed model COBRA notices are a good example. The DOL included the model notices in the proposed COBRA notice regulations it issued earlier this year. These notices are specifically designed for use by single-employer group health plans, so multiemployer plans that want to use them must modify them accordingly. But the proposed model COBRA election notice also includes provisions that are not relevant to all plans. Specifically, the proposed model COBRA election notice includes a section relating to alternative coverage and conversion rights. Some, but by no means all, group health plans give COBRA-eligible beneficiaries the option to elect extended coverage (usually at no cost) as an alternative to COBRA, and/or the option to convert their group health benefits to an individual policy. Those plans that do offer these options should be sure to modify these provisions to make them consistent with the plan's terms, and those that do not should be sure to delete these provisions from any COBRA election notice they send to participants.

Why? Because a court may force a plan sponsor to honor the provisions of the COBRA election notice even if they are not consistent with the plan's terms. For example, the proposed model COBRA election notice indicates COBRA-eligible beneficiaries can elect to receive 6 months of extended health coverage at no cost in lieu of COBRA coverage. If a plan does not offer alternative coverage, or if it offers a less generous alternative coverage option, it still may have to honor the 6 month offer if it appears in the COBRA election notice.

If you have questions or need additional information, please contact your Deloitte advisor.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have questions or need additional information about this article, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094). Copyright 2003, Deloitte.