Employment Law & Employee Benefits

An Unpleasant Surprise: The Turn-key Package from the HMO that Isn’t

September 2003

Donald R. Saxon for HR Advisor: Legal and Practical Guidance

This is an abridged version of the full article published in HR Advisor.

The Perception

The scene is typical. The employer has comparison-shopped, contracted with an HMO or health insurance carrier (“Plan Provider”) whose representatives show up on enrollment day with comprehensive packets of enrollment forms, documentation and certificates of insurance for the employer and the employees. The Plan Provider also agrees to administer claims for benefits. It is part of the “turn-key” health coverage package. Similar packages are sold for other employee welfare benefit plans such as disability insurance and life insurance. The employer pays the premium and the Plan Provider takes care of everything else. After all, that is why you buy insurance.

The Reality

It ain’t necessarily so. That was the decision in Sunderland v. First Reliance Standard Life Insurance Company. Sunderland ruled that employers have significant responsibilities under fully-insured welfare benefit plans; the failure to meet those responsibilities can result in thousands of dollars of penalties and potential personal liability exposure to participant/beneficiary claimants. Sunderland involved a fully-indemnified disability insurance policy wherein an employee became disabled and began receiving disability benefits. The carrier subsequently denied further benefits. The employee requested a copy of the summary plan description (“SPD”) which was never provided by either the carrier or the employer.

Mrs. Sunderland sued the employer and the carrier, lodging a number of ERISA-related causes of action, demanding damages plus costs and attorney’s fees. The employer cross-complained against the carrier, contending that the carrier who provided the product was responsible for providing all necessary documentation, including the SPD. The carrier responded that it was the employer’s responsibility, as Plan Administrator, to provide the SPD.

The court held that it was the employer’s rather than the carrier’s responsibility to provide a summary plan description. If the employer did not have an SPD, it was required to create one that met the ERISA statutory/regulatory requirements and distribute it to all participants and beneficiaries. The court imposed several thousand dollars in fines for the employer’s failure to provide an SPD and ordered the carrier to provide Mrs. Sunderland with a completed SPD within 20 days of the court decision. Moreover, although the employer thought it had purchased a turn-key package, the carrier was not liable for breach of contract. The contract did not require the carrier to provide a summary plan description.

The lesson of Sunderland is clear: Even though a Plan Provider delivers what appears to be a complete health care package, if anything is missing it is the employer’s fault. The duty of the employer as Plan Administrator is non-delegable. The employer can provide some protection through contractual arrangements with the Plan Provider. However, Plan Providers may be reluctant to enter such a contract. Indeed, most medical Plan Providers will not provide an SPD.


Instead of viewing the SPD obligation as a liability, we recommend that it be used offensively to reduce potential liability exposure of the employer/Plan Administrator in several areas. This is accomplished by providing an SPD that is as comprehensive as possible, meeting all employer notice and disclosure responsibilities and ensuring distribution through the annual open enrollment process and when employees first become eligible for coverage. Through distribution of a comprehensive SPD to all participants and maintaining a list of those persons to whom SPDs were distributed, the employer can satisfy statutory/regulatory obligations for SPD distribution and comply with numerous statutory regulatory notice and disclosure requirements.

Although there is no requirement that mandated notices be contained in an SPD, the SPD is the best place for inclusion. In addition to the provisions required by the statute and regulations, the SPD should include (i) compliance with HIPAA privacy rules, including the designation of the privacy officer and publication of the privacy policy; (ii) discussion of HIPAA portability rules including discussion of pre-existing conditions, credit for previous coverage and the certificate process; (iii) notice regarding HIPAA minimum maternity stay requirements; (iv) required notices under Women’s Health Care and Cancer Rights legislation; (v) notifications of rights of employees and obligations of employer’s under the Family Medical Leave Act; (vi) notice regarding the Pregnancy Discrimination Act; (vii) discussion of rights under Americans with Disability Act as applied to health care plan issues; (viii) notice regarding Age Discrimination Employee Act as applied to employee welfare benefit plans; (ix) rights of employees under the Uniform Services Employment and Reemployment Rights Act of 1994; and (x) COBRA notifications.

The SPD should also indicate that the employer has the right to terminate the Welfare Benefit Plan at anytime and, as Plan Administrator, has absolute discretionary authority to determine eligibility for benefits, plan terms and administrative adjudication of claims under the plan. If the employer reserves those rights in the plan, then, in the event of litigation, the standard of judicial review is “abuse of discretion”. If the SPD or plan does not reserve that authority to the Plan Administrator, then the court, upon review applies a de novo standard. It is very difficult for an employee to prove abuse of discretion in the administration of an employee welfare benefit plan.

It is recommended that employers/plan sponsors contact their Plan Providers and inquire as to whether an ERISA compliant SPD can be provided. If the Plan Provider is unable or unwilling to do so, the employer should arrange for preparation.

*Donald R. Saxon is admitted in New Hampshire, California, and Nevada.

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