Recently, the United States Court of Appeals for the Fifth Circuit held that when the terms of the Summary Plan Description (“SPD”) and the Plan document conflict, the courts in the Fifth Circuit will treat the SPD as the controlling document. Further, the employee will not have to prove that he/she relied on the SPD in order to prevail on a claim for benefits. Noting a split in the various circuits, the Fifth Circuit limited its decision to those situations in which the SPD unequivocally grants the employee with a vested right to benefits.

In this case involving a retirement plan, the district court found that the definition of disability in the SPD that was provided to the employee was different from the definition of disability in the Plan document. The SPD only required five years of vested service to be eligible for disability benefits, but the Plan document required ten years of vested service. In finding that the SPD was the controlling document, the district court explained that 1) an SPD is a requirement of an ERISA plan, 2) it is a shorter, simplified version of the Plan itself, and 3) when efforts at simplification produce situations in which the terms of the Plan conflict with the SPD, the terms of the SPD will control. The Fifth Circuit agreed with the district court’s analysis.

Further, the Fifth Circuit agreed that an employee does not need to prove that he/she relied on the conflicting terms of the SPD in order to prevail on a claim for benefits. Citing a Third Circuit case based on contract law principles and its own previous decision that held that ERISA claims are contractual in nature, the Fifth Circuit noted that ambiguity in the SPD must be resolved in favor of the employee and made binding on the drafter. The Fifth Circuit clarified that its decision is limited to those situations in which the SPD unequivocally grants the employee with a vested right to benefits.

As noted in the opinion, federal courts in the Seventh Circuit (Illinois, Wisconsin, and Indiana) and the Eleventh Circuit (Alabama, Florida, and Georgia) require a showing of reliance on the SPD. In contrast, federal courts in the other circuits take a different approach. Some Circuits (1) do not require a showing of reliance, (2) do not require a showing of reliance but do require a showing of a likelihood of prejudice, an assertion which the employer may then rebut through evidence that the SPD was, in effect, a harmless error, (3) require a showing of reliance or prejudice, and (4) require a showing of reliance or prejudice, but only if the SPD was “faulty.”

According to Frank Del Barto, a member of the Firm’s Employment and Labor Group, this recent decision and the noted split of authority among the various federal circuits is important for ERISA retirement and welfare plan sponsors for two reasons. First, it reminds us that although many SPDs contain a disclaimer that the Plan Document will control if the terms of the SPD conflict with the Plan document, this decision suggests that this disclaimer is not going to be enforced all the Circuits. Because of this split in the Circuits, it is critical that the SPD accurately reflect the terms of the Plan Document.

Second, it reinforces the need for a correctly drafted SPD. In this situation, the SPD’s definition of disability was different from the Plan document’s definition. One way to avoid “conflicting terms” is to draft a “wrap-SPD” that wraps around the insurance certificate or plan booklet provided by the insurance company without changing its terms. The “wrap-SPD” is a separate document that contains the additional and required SPD provisions noted in the Department of Labor Regulations and ERISA law. Together, the wrap document and the insurance certificate or plan booklet constitute a valid SPD. By using a wrap-SPD, a plan sponsor avoids inadvertently changing the terms of the Plan through interpretation or drafting error. Should a plan sponsor choose to draft its own SPD or seek the help of a consultant, extra care should be taken to avoid changing the terms of the Plan.