Do What You Say You Are Going to Do

Employers Paying the Cost for Not Following Plan Documents

Employers Paying the Cost for Not Following Plan Documents.

The Department of Labor recently filed a lawsuit against Macy’s department store (Acosta v. Macy’s, Inc., S.D. Ohio, No. 1:17-cv-00541, complaint filed 8/16/17). The lawsuit has received some attention among benefits professionals; but this attention has focused on one aspect of the DOL complaint – claims that the tobacco surcharge imposed under the Macy’s health plan did not meet the legal requirements for such programs (by not offering reasonable alternatives for certain participants).

But another aspect of this complaint is also noteworthy – that Macy’s violated ERISA’s fiduciary standards by changing the payment methodology for calculating out-of-network claims without appropriately modifying the Macy’s plan document. This aspect of the complaint, although overlooked in the media, may be more significant than the claim regarding the smokers’ surcharge.

The essence of the claim is simple: Macy’s (based on the recommendations of its third-party administrators) changed the method used to calculate out-of-network claims (from usual-and-customary to an amount based on Medicare reimbursement rates) but did not change the relevant plan documents to reflect this change. This creates an ERISA fiduciary breach – failure to administer a plan in accordance with the terms of the plan documents. Of course, the complaint represents the DOL’s version of the facts and the allegations in a complaint cannot always be taken at face value. But some facts alleged by the DOL stand out:

•      Macy’s identified the SPD as one of the governing plan documents;
•      The SPD specified that out-of-network claims would be paid based on the “usual and customary” charges;
•      Macy’s and the TPA’s changed to a payment based on Medicare reimbursement schedules; and
•      The SPD was not changed for three years after the payment methodology used by one of the TPAs changed.

The allegations in the Macy’s case bring to mind another case: Erwood v. Life Ins. Company of North America, decided earlier this year. Erwood involved a plan administrator who failed to follow the terms of a life insurance plan in administering conversion benefits for a terminally ill employee. In the Erwood case the insurance lapsed, the employee died, and the employer was held liable for the value of the lapsed coverage ($750,000).

Both of these cases highlight how easy it is for plan administrators to overlook the fundamental ERISA responsibility of ensuring that plan administration syncs up with the plan documentation. And, both of these cases highlight how easily that failure can come back to bite you.

At some level, this error is understandable: plan documents can be long and complicated, administrative practices are handed down from one administrator to another, and busy administrators may not get around to documenting changes made by vendors. But, although understandable, this error is not justifiable. Following the plan document is a core requirement under ERISA and these cases should serve as a reminder of the importance of this requirement.