In these tough economic times, employers have been cutting employees.  But in doing so, some employers as plan sponsors are forgetting to make sure terminated employees are provided with all appropriate notices and documentation to deal with their benefit plans.

Of course we have the COBRA notice obligations, and this may include COBRA notices and continuation rights under FSAs, dental or vision plans.  But what about retirement plans?  A recent case out of the Fifth Circuit serves as a reminder that failing to satisfy the obligation to provide information to participants can be very costly.

In Kujanek v. Houston Poly Bag, a terminated employee alleged that he was not provided with sufficient information about how to roll-over his 401(k) account balance.  He claimed a loss of almost $184,000 because of the delay.  First there was a debate about whether the employee had requested information from the plan.  Under ERISA 104(b), a plan administrator has to provide certain information to the participant upon request.  But it also appears that the plan forgot the requirements of IRC 402(f) that requires a plan administrator of an employer plan to provide a participant, who is about to receive an eligible rollover distribution from the plan, with a written explanation of the rollover and other tax treatment of the distribution.  There was no indication that the plan had provided this notice at the time of his eligibility for distribution.

While not at issue in this case, group life insurance policies can also have a notice obligation.  Many states require that group life insurance policies provide conversion rights when an employee terminates.  While ERISA generally preempts state law relating to benefit plans, insurance laws (like those governing life insurance policies) are saved from preemption.  There have been multiple cases involving the failure of an administrator of a life insurance plan to provide conversion notices.  Often times the insurance regulations leave that obligation entirely to the policyholder (meaning the employer in most instances).  So failing to give notice of that conversion option would be an ERISA breach and state law may make it the sole responsibility of the plan sponsors to provide the notice.

So when terminating employees, it is good practice to have a notice or form checklist related to all the benefit plans the employee previously participated in and make sure that on their way out the door, they have all the required notices.