Appeals Court: SPD Trumps Plan Language

July 7, 2003 ( - Another federal appeals court joined with its judicial brethren in finding that an employee benefit plan's summary plan description (SPD) trumps the plan's language in case the two conflict.

>Ruling in a case involving a Pennsylvania health-care company, the US 3 rd Circuit Court of Appeals said that cash balance pension plan participants could continue with their lawsuit alleging that their benefits were fully vested when the plan was formally terminated, Washington-based legal publisher BNA reported. In deciding that SPDs control when in conflict with an ERISA plan, the appeals court joined nine other federal appeals courts.

>The terminated plan, now in the control of federal pension insurer Pension Benefit Guaranty Corporation (PBGC), indicated that termination would not result in immediate vesting. However, the plan’s SPD stated that benefits would become fully vested when the plan is ended.

“Today, we join with the other Courts of Appeals that have considered this issue, and hold that, where a summary plan description conflicts with the plan language, it is the summary plan description that will control. We are satisfied that this holding, as we have stated it, is faithful to Congressional intent,” Circuit Judge Leonard Garth said in writing for the three-judge appellate panel. “The SPD is the document to which the lay employee is likely to refer in obtaining information about the plan and in making decisions affected by the terms of the plan.”

The appeals court also found that PBGC, as the plan’s guarantor, was not responsible for guaranteeing or insuring plan benefits that became vested solely as a result of the partial plan termination.

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>The Allegheny Health Education and Research Foundation operated hospitals, physician practices, and a medical school in Pennsylvania until it filed for bankruptcy in July 1998. At that point, the company’s cash balance pension plan was partially terminated and PBGC took over as statutory trustee.

A group of five employees who had worked for the company and participated in the plan for less than five years sued the company, its directors, its former plan administrator, and the PBGC, alleging that because the plan had partially terminated, they were entitled to benefits, even though the plan stated that benefits were not vested until an employee worked for the company for at least five years.

According to the appeals court, the plan documents provided that an employee would become vested and entitled to benefits after completing five years of service with the company. The plan also provided that if the plan partially terminated, “the rights of all affected participants accrued to the date of such … partial termination shall become nonforfeitable [i.e., vested] … to the extent funded as of such date.” The SPD, however, stated, “If the plan is terminated you will automatically become vested in your account, regardless of how many years of service you earned.”

>In May 2002, a federal judge in the US District Court for the Eastern District of Pennsylvania found that under the plan’s terms, the former employees were not entitled to benefits because they had worked less than five years and had not acquired a vested right to benefits. The district court rejected the participants’ assertion that because the SPD and plan documents conflicted, the SPD’s terms controlled, making them eligible for benefits.

The district court also found that PBGC was not required to pay benefits to the plaintiff participants because they were not vested at the time the plan was partially terminated. Likewise, the district court found that the plan’s sponsor did not breach its ERISA fiduciary duties by allegedly misleading the employees into believing that if the plan terminated before they were fully vested, they would still receive benefits.

>Reversing a portion of the district court’s decision, the appeals court found that, although the plan and SPD conflicted, the SPD controlled and thus the employees could continue in their claim seeking plan benefits pursuant to the SPD. The appeals court went on to uphold the lower court’s conclusion that PBGC, in its role as the plan’s guarantor, had no obligation to pay the employees benefits.

>The case is Burstein v. Retirement Account Plan for Employees of Allegheny Health Education and Research Foundation, 3d Cir., No. 02-2666, 7/2/03.