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Don’t Be Tempted to Be Flexible (At Least With Plan Terms)

Posted in Court Cases, Plan Administration, Retirement Plans, Welfare Plans

Frequently I am asked about the possibility of giving "something extra" to employees because of a long work history or because of special circumstances and the employer wants to do something special for them.  Unfortunately, they sometimes look to the benefit plan and that might mean bending the benefit plan a little or giving some extra benefit beyond what the plan provides.  This can be in the form of modifying eligibility or providing extra payments.  But the problem with that can be that changing plan terms for special treatment of a particular participant can create a variety of issues that frustrate good plan administration.

A recent decision out of the third circuit considered a case where an employer left an employee on their health plan during leave even though she was not eligible for coverage.  The plan paid a large amount of money in benefits for this person and then sought reimbursement from a stop-loss carrier.  The court determined that the stop-loss carrier was not liable for the reimbursement claim because the benefits were outside of what was required by the plan.  While not addressed by the court, it would stand to reason that since the plan should not have paid, paying those claims in the first place would be a breach of fiduciary duty.  And what if someone else came along and wanted the same dispensation?

A recent fourth circuit decision relating to severance plans looked at a claim for discrimination made by a former employee alleging that male employees were given extra severance as opposed to female employees.  While the crux of the decision related to whether Title VII applies to severance from employment, the facts plead suggest that some male employees were in fact given something beyond what the plan called for generally.  Similarly, I recently read a seventh circuit case that dealt with a claim by a former employee complaining that he was not offered the same continuation of health coverage that other employees received as part of their severance, which was provided coverage outside of normal COBRA continuation.  He claimed he was the victim of discrimination as well.

The point is that the plan has terms and the terms have to be followed.  Even if your plan is self-funded, you have to treat all participants equally under the terms of the plan.  Once you start giving special benefits to individual participants, you invite claims by any participant who does not get the "extras."  Being flexible in eligibility or benefits invites claims that the plan is being administered in an "arbitrary and capricious" fashion, which is something all plan sponsors should want to avoid.  So being nice can prove to be problematic.  Don’t be flexible in applying plan terms because, when it comes to plan administration, bending the rules is the same as breaking them.