THE FIDUCIARY CORNER: Failure to Distribute SPD Makes Sponsor Liable For Benefit
Gregory L. Ash, Tuesday, August 01, 2006 | Filed under: ERISA Litigation, Fiduciary Duties
Long-standing ERISA regulations require plan administrators to distribute summary plan descriptions (“SPDs”) to individuals within 90 days after they become plan participants. Sponsors generally provide SPDs in an enrollment packet during a new employee’s first days of employment. The failure to distribute SPDs can lead to statutory penalties against the administrator and, as one employer recently discovered, liability for benefits the sponsor otherwise would not have had to pay.
In Haynes v. K-VA-T Food Stores, Inc. (W.D. Va. July 13, 2006), the court went out of its way to fashion an “equitable” remedy, ordering K-VA-T Food Stores to pay $34,000 in life insurance benefits to the spouse of a deceased participant. When the participant retired after a long career with the sponsor, she failed to convert her employer-sponsored group term life coverage to an individual policy, as was her right. Her husband submitted a claim for life insurance benefits after she died, but was told by the insurer that his wife’s coverage had lapsed because she hadn’t applied for a conversion policy. The husband sued K-VA-T, the designated plan administrator, claiming that it had breached its fiduciary duties by failing to provide an SPD for the benefit. The husband argued that an SPD would have alerted his wife to the need to convert the policy.
The court agreed with the husband, ordering K-VA-T – not the insurer – to pay the amount of the death benefit that would have been available if the participant had converted the group policy coverage to individual coverage. Although the statutory justification for the court’s remedy was somewhat strained and may not stand up to challenge on appeal, this case serves as a reminder that failure to distribute SPDs in a timely fashion can make a plan sponsor liable for benefits it never expected to have to pay.