A Stitch in Time Saves Nine: Amending a Misleading Summary Plan Description

The Courts of Appeals for the Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth and Tenth Circuits have held that where a summary plan description ("SPD") conflicts with the terms of an employee benefit plan, the summary plan description may control. In Hooven v. Exxon Mobil Corporation, 2006 WL 2988116 (3d Cir. 2006), however, the Court of Appeals for the Third Circuit clarified that employers can avoid this unintended liability by distributing a corrected SPD before the rights vest or accrue or the employee relies to his or her detriment on the mistaken SPD.

In Hooven, the employer modified its severance plan to provide that no severance would be paid to certain employees if their business unit were sold and the acquiring entity offered them comparable employment. Unfortunately, as is sometimes the case with employee welfare plans, the SPD did not precisely match the plan document, since it failed to notify the employees of this change.               

Fortunately, the employer discovered the omission before the sale was completed and issued a corrected SPD notifying the employees of this limit on their right to receive severance benefits. Although the employees sued, claiming that the employer was bound by the original, misleading SPD that was in effect when the sale was announced, the court disagreed. The court reasoned that to rely on a misleading SPD to obtain benefits, the benefit must vest or accrue before the employer corrects the misleading SPD. Here, the benefits did not vest until the employees were terminated, and by then, the misleading SPD had been corrected.

The Hooven case illustrates the dangers of an inconsistency between the plan document and the SPD — the employees may be able to rely on the SPD to secure unintended benefits. At the same time, the Hooven case gives employers a window of opportunity to avoid liability by correcting any disparity between the plan and the SPD and notifying the employees of the same before the benefits vest or accrue. Accordingly, the lesson to be learned from Hooven is that employers should carefully review all of their plan documents, SPDs and handbooks to ensure that they consistently define the employees who are eligible for benefits, when the benefits will vest and when the benefits will be forfeited.