Be Careful What You Promise
Kenneth A. Mason, Saturday, March 01, 2008 | Filed under: Fiduciary Duties, Fringe Benefits, Participant Communications
A major insurer learned, to its chagrin, that it doesn’t pay to include soothing words in a summary plan description (“SPD”) unless those words are actually acted upon. The result in Rosenberg v. CNA Financial Corp. was potential liability for nearly $5 million in severance benefits that were clearly not payable under the terms of the plan.
In anticipation of selling its life insurance unit to Swiss Re, CNA formally amended its ERISA Severance Pay Plan to exclude from eligibility for benefits those agents who were selling policies on behalf of that unit. Though this amendment was formally adopted seven months before the sale, the issue presented to a federal district court in Chicago was whether CNA had provided sufficient notice of the amendment to the affected agents.
FACTUAL BACKGROUND
CNA maintained a combined SPD for several of its benefit plans. This SPD reserved CNA’s right to amend or terminate the plans, but also stated that “you will be notified of any material changes to these plans within a reasonable amount of time.”
The chronology of relevant events was as follows. CNA amended the Plan in August of 2003, effective as of September 1, 2003. On that effective date, the amended Plan document was posted on CNA’s intranet – though with no effort made to highlight the change, and with no notice given to the agents that the Plan had been amended.
During a February 5, 2004, conference call with the affected agents, a senior vice president of the life insurance unit advised the agents that their employment would be terminated in 60 days and that they would not be receiving severance benefits, due to a Plan amendment. On March 31, 2004, a formal summary of material modifications (“SMM”) was posted on CNA’s intranet, and also mailed via overnight delivery to the agents’ home addresses. The agents were then terminated from CNA’s employ on April 5, 2004.
THE COURT ’S ANALYSIS
The parties agreed that CNA had timely complied with ERISA’s SMM requirement. CNA argued that this was sufficient. The court agreed with the agents, however, that the SPD’s promise of notice “within a reasonable time” after any amendment imposed an additional notification obligation on CNA.
The court then proceeded to consider whether any of CNA’s efforts satisfied this obligation. The court found all of them to be lacking, for the following reasons:
• The original intranet posting did not highlight the change, and the agents were not even advised to review the amended Plan language.
• Although the conference call may have provided actual notice of this change, the notice was not provided in writing.
• The SMM mailed to the agents five days before their termination of employment was not timely, because it gave them no opportunity to make alternative arrangements.
The court noted that, although a plan sponsor’s violation of ERISA’s disclosure obligations ordinarily does not result in substantive liability for benefits, there is an exception to this rule when a sponsor acts in bad faith, actively conceals a benefit plan, or otherwise prejudices employees by inducing them to rely on a faulty SPD. The court suggested that – if these agents could prove their factual allegations at trial – this might be an appropriate situation in which to apply this exception. If so, the agents could recover the severance benefits they would have received if not for the Plan amendment.
The lesson to be drawn from this decision is clear: Be careful what you promise by way of participant notification. If you decide to promise more extensive or more timely notice than ERISA requires – perhaps to soften the impact of a clause reserving the right to amend or terminate a plan – carry through on that promise. Any failure to do so could be an invitation to expensive litigation, if not additional liability for benefits.