Mohalley v. Kendall Health Care Products Co., Inc.

Citations: 903 F. Supp. 1530; 1995 U.S. Dist. LEXIS 14974; 1995 WL 603277Docket: 5:94-cv-00307

Court: District Court, M.D. Georgia; October 11, 1995; Federal District Court

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Motions for partial summary judgment on liability were filed by plaintiff Madeleine Mohalley, while defendant The Kendall Health Care Products Company, Inc. sought summary judgment. The court, led by District Judge Owens, reviewed the case, which centered on agreed-upon facts. In November 1985, Kendall acquired McGaw Laboratories, and Mohalley retired from Kendall's predecessor on July 28, 1986. Her retirement benefits included a lump-sum payment of approximately $34,375.22 from American Hospital Supply Corporation and about $800.00 from Kendall.

Kendall's Retiree Health Care Plan included a Medicare Supplement Plan for retirees over 65 who had completed specific employment criteria. Mohalley qualified for this Plan and began paying the required premiums, initially around $4.30 monthly. However, on September 1, 1989, Kendall revised its Retiree Health Care Plan, implementing a two-tier premium schedule aimed at providing more support for hourly retirees' medical premiums, while increasing costs for early retirees to compensate for the higher expenses associated with their early retirement before Medicare eligibility.

Adjustment calculations are applied to determine pension benefits for early retirees. Hourly retirees receive specific premium rates for the Early Retiree Medicare Life Care Supplement Plan, with the following monthly premiums: $43.50 for retirees and $11.25 for each dependent. Salaried retirees, including McGaw hourly and RCI retirees, have higher premiums: $65.25 for retirees and $33.75 for dependents. A notification from J. Dale Sherratt on May 23, 1989, announced a premium increase starting September 1, 1989, but the plaintiff was not informed of new retiree classifications that established two premium schedules. Consequently, the plaintiff, classified as salaried for the Medicare Supplement Plan despite being an hourly McGaw employee, paid escalating premiums from October 1989 through 1995, significantly higher than those for hourly employees.

On November 21, 1990, the plaintiff received a letter incorrectly stating her premium should be $14.50 per month, which was later corrected to $43.50. Following this confusion, the plaintiff sought clarification regarding the classifications of retirees and the associated premium amounts. In a letter dated March 23, 1993, she requested detailed documentation concerning the decision-making process for retiree classifications. On April 23, 1993, the Benefits Administrator confirmed that all McGaw employees were considered salaried for benefits purposes, which was advantageous for disability and pension plans. The plaintiff's counsel continued to request documentation supporting this classification, and on October 28, 1993, it was reiterated that all employees, regardless of their accounting classification, received pension benefits based on salary.

Ms. Mohalley, as a Kendall-McGaw employee, received a salary-based pension, which entitles her to more favorable retiree medical premiums compared to employees with flat dollar pension benefits. Enclosed with Ms. Lynch's communication was a 1989 authorization form signed by Mohalley, confirming her understanding of the medical coverage rates and potential future changes. Following the initiation of litigation on August 2, 1994, Mohalley’s counsel sought clarification regarding her employment status change from hourly to salaried, leading to the submission of relevant documentation by Kendall's general counsel. By May 10, 1995, the parties had filed a stipulation of facts, and both sides moved for summary judgment on June 25, 1995. The court will resolve the case based on stipulated facts, without disputed material facts. 

The discussion section outlines the Employee Retirement Income Security Act (ERISA) of 1974, designed to protect employees from deficiencies in private pension systems, mandating minimum standards for vesting, funding, and disclosures. ERISA applies to any employee benefit plan maintained by employers engaged in commerce, defining 'welfare plans' as those providing a variety of benefits, including medical care. The parties agreed that Kendall's Medicare Supplement Plan qualifies as a welfare plan under ERISA, which imposes reporting and disclosure requirements but not the vesting and funding mandates applicable to pension plans. Furthermore, ERISA stipulates that every employee benefit plan must be documented in a written instrument to clarify rights and obligations for participants.

29 U.S.C. § 1022(a)(1) mandates that a Summary Plan Description (SPD) be provided to participants and beneficiaries, detailing their rights and obligations under the plan. The SPD must be clear and comprehensive, as per 29 C.F.R. § 2520.102-2(a), and must include specific information such as the plan's administration details, eligibility requirements, financing sources, claim procedures, and available remedies. Kendall's SPD, titled 'Lifecare Medicare Supplement Plan,' consists of a 24-page booklet with a table of contents, summarizing the Medicare Supplement Plan's benefits and operations. It emphasizes that the SPD serves as a summary of the plan provisions and states that the formal Plan document prevails in case of discrepancies. However, Kendall admits that no formal Plan document exists to elaborate on the SPD's content, meaning the SPD effectively serves as both the Plan document and the SPD. Despite this failure to provide separate documents, Kendall remains obligated to administer the Medicare Supplement Plan in compliance with ERISA standards. The SPD also notes that premium contributions will be deducted from pension checks, with alternative payment options available if necessary.

Kendall anticipates continuing the Medical Supplement Plan but reserves the right to change or discontinue it for all participants. The summary plan description (SPD) lacks essential information, such as a premium schedule detailing retirees' contributions and an explanation of how premium amounts are determined. Consequently, retirees are not adequately informed of their rights and obligations under the Plan, violating ERISA's Section 1022(a)(1). The SPD's reference to participant classes is misleading, as no such classes existed at the time of the plaintiff's retirement. Additionally, Kendall's amendments to the Plan regarding premium classifications were not formally adopted in writing, as required by ERISA, and were instead noted in informal correspondence. This failure to provide a formal, complete, and written amendment process renders the changes ineffective. The legal precedent established in Smith v. National Credit Union Administration Board reinforces that any modification or amendment to an ERISA plan must be formally documented to be enforceable.

Kendall contends that the Supreme Court's decision in Curtiss-Wright Corporation v. Schoonejongen exempts it from the requirements outlined in Smith regarding ERISA plan amendments. However, this claim is unconvincing. The Curtiss-Wright ruling clarified that the language in an ERISA plan allowing a company to amend the plan suffices to meet the requirements of 29 U.S.C. 1102(b)(3) for both the procedure and authority to amend. The Court determined that corporate law principles are adequate for identifying those with amendment authority and that a unilateral company decision is sufficient for amending the plan, not requiring third-party approval.

The current case does not dispute Kendall's authority to amend its Medicare Supplement Plan following proper procedures under ERISA and corporate law. Instead, the focus is on whether Kendall's proposed amendment to the Summary Plan Description (SPD)/Plan was properly adopted. According to Smith, amendments to an ERISA plan must be in "formal, complete and written form." Kendall's assertion that amendments were effective based on premium notices and internal communications fails to meet this standard. The purported amendment effective September 1, 1989, was not formally adopted, as required by Smith, and was not reflected in any written documentation at the time of the plan's adoption.

The establishment of a two-tiered classification and premium contribution system for retirees constitutes a material modification to the Plan, which must be formally adopted and communicated to participants. Consequently, Kendall's implementation of this two-tiered schedule for premium contributions is invalid. Plaintiff Mohalley is therefore entitled to a refund of excess premiums paid since September 1, 1989, and to continued coverage at the 'hourly' employee rate until all ERISA amendment and notification requirements are satisfied.

Under 29 U.S.C. 1024(b)(1), plan administrators are required to provide participants and beneficiaries with a summary plan description and any modifications within specified timeframes: 90 days after an individual becomes a participant or beneficiary, or 120 days after the plan becomes subject to the statute. Additionally, any modifications must be communicated within 210 days after the end of the plan year in which the change occurs. Kendall failed to notify the plaintiff of a modification that established two classes of retirees, violating these obligations, and did not fulfill a subsequent request for information. According to 29 U.S.C. 1024(b)(4), upon written request, administrators must furnish the latest plan documents, which Kendall did not do until after litigation commenced. The plaintiff learned of the classification change only through billing discrepancies related to insurance premiums. Kendall's assertion that it only needed to inform the plaintiff of premium amounts was rejected by the Court, which noted that the classification of retirees was critical information that should have been disclosed. The failure to do so constituted a violation of ERISA. Statutory penalties for such failures are outlined in 29 U.S.C. 1132(c), allowing courts to impose fines up to $100 per day for non-compliance with information requests. A plaintiff must initiate a lawsuit under 29 U.S.C. 1132(a)(1)(A) to seek relief for these violations, and the court may assess whether the lack of information prejudiced the plaintiff in its decision-making.

Monetary loss is not necessary for civil penalties under ERISA, as established in Curry v. Contract Fabricators, where penalties are punitive rather than compensatory. The court must assess whether Kendall intentionally withheld information about a two-tiered premium schedule or was merely negligent, as well as whether Kendall believed that notifying the plaintiff of revised premium schedules met statutory obligations. The court preliminarily finds that a statutory penalty is warranted, with the amount to be determined later.

Substantive relief may be awarded under certain conditions despite procedural violations of ERISA, particularly if the employer's actions are deemed arbitrary and in bad faith. In Harris v. Pullman Standard, the company was found to have denied employees severance pay contrary to policy terms, justifying substantive relief. The Fifth Circuit allows amendments to welfare benefit plans without personal notice unless there is evidence of concealment, reliance, or prejudice. In this case, Kendall's amendment was ruled invalid due to improper adoption, entitling the plaintiff to a refund of excess premiums. However, the court cannot yet determine if the plaintiff's higher premiums justify a substantive remedy of reclassification as an hourly employee, given Kendall's argument that the classification benefits McGaw hourly employees.

The classification of hourly employees as salaried for welfare benefits purposes appears arbitrary. However, the record does not clarify whether this classification, which results in higher insurance premiums, is justifiable due to enhanced pension benefits received by McGaw employees. There is a potential solution to the confusion through a different designation for those employees who pay higher premiums. The court will withhold a decision on the plaintiff's entitlement to substantive relief until counsel arguments are heard regarding the validity of Kendall's classification scheme. The plaintiff's motion for partial summary judgment on liability is granted, while the defendant's motion for summary judgment is denied. The determination of appropriate statutory and substantive remedies for the plaintiff will be addressed later. Additionally, both welfare and pension plans are included under 'employee benefit plan' definitions as per 29 U.S.C. 1002(3), with specific definitions for pension plans outlined in 29 U.S.C. 1002(2)(A). The SPD details specific financial limits on various medical services.