UPS can apply lifetime limits to its retiree health plans

United Parcel Service of America, Inc. (UPS) can impose lifetime limits on benefits through its retiree health plan, according to a recent decision from the United States District Court for the Southern District of California, because ERISA contains an exception for certain coverage mandates for retiree-only plans. The court also pointed out that agency guidance has indicated that exceptions for retiree-only plans are still in effect. The case is King v. Blue Cross and Blue Shield of Illinois.

Background. When Gary King retired from UPS, his wife, Linda King, became a participant in and beneficiary of the UPS retiree health plan. According to the plan’s summary plan description (SPD), the plan had a $500,000 lifetime maximum benefit limit. Prior to King’s retirement, the retiree plan issued a Summary of Material Modifications (SMM) containing changes to both the UPS health and welfare plans applicable to active employees, and to the retiree health plan.

Ambiguity in documentation. The plan documentation for the SMM advised retirees that certain provisions did not apply to them, and then addressed the plan’s theory of the Patient Protection and Affordable Care Act’s (ACA’s) applicability to various retiree benefits in those same sections. For example, the SMM stated that UPS was of the opinion that the plan was grandfathered under the ACA but also stated that the ACA’s prohibition on lifetime limits of essential health benefits applies to grandfathered plans. However, this last statement was under a heading in a different font, marked with an asterisk, which the documentation elsewhere provided meant that it was not applicable to retirees or to their covered dependents. Farther down on the page of the SMM was a bolded heading, “Elimination of Lifetime Maximum Benefits” along with the statement that “Lifetime dollar limits on aggregate benefits will be eliminated from your Plan effective January 1, 2011.”

Surgery costs exceed benefit limit. In November 2012, Linda King incurred over $900,000 in surgical and rehabilitative expenses, for which she received pre-approval from Blue Cross and Blue Shield of Illinois (Blue Cross), which had been retained by UPS to perform administrative services for the plan. In February 2013, she received an Explanation of Benefits (EOB) from Blue Cross explaining that just over $133,000 of her claims had been approved for coverage, and that she still owed her medical providers $578,551.34, because her maximum benefit under the plan had been met.

Linda King filed suit against UPS and Blue Cross in district court for declaratory relief, breach of contract, breach of fiduciary duty and status as a grandfathered health plan under the ACA, and also exhausted her administrative remedies with the plan. Both UPS and Blue Cross filed motions for summary judgment. Linda King died in December 2014, and Gary King was substituted as plaintiff.

King had argued that the plan’s continuing lifetime maximum benefit violated the ACA. Under the ACA, self-funded plans, such as the UPS plan, do not have to cover so-called “essential health benefits,” but, if they do, they may not impose any annual lifetime dollar maximums on those benefits. There are 10 categories of essential health benefits, including ambulatory patient services, hospitalization, rehabilitative and habilitative services and devices, and laboratory services.

The court conceded that the plan documentation may have been ambiguous, but held that, because UPS was the plan administrator and had been granted discretionary authority through the plan documentation to interpret plan terms, UPS was the entity that was entitled to resolve that ambiguity.

Retiree plan exception. The court further stated that ERISA contains a “retiree plan exception,” at ERISA Sec. 732, which pre-dates the ACA, and which generally exempts employer plans covering only retirees (plans with less than two participants that are current employees) from the coverage mandates of the Public Health Services Act (PHSA). King had argued that, because Part A of Title XXVII of the PHSA, as amended by the ACA, bans all lifetime limits, it conflicts with ERISA, with still excludes retiree-only plans from those limits, and, therefore, the ACA’s lifetime limit ban should apply.

The court, however, agreed with UPS, and held that it had not been shown that there was any specific intent on the part of Congress to repeal ERISA’s retiree plan exception by implication when it enacted the ACA. The court also pointed out that the IRS, EBSA, and the HHS had stated in the preamble to interim regulations on the ACA’s impact on group health plans, that the exceptions contained in ERISA Sec. 732 for certain retiree-only health plans “remain in effect.”

The court then ruled that, because the plan had a lifetime limit, UPS had not breached its fiduciary duty by imposing that limit. It also ruled that Blue Cross, as a third party administrator, was not an ERISA fiduciary because it merely processed claims for the plan. The court granted UPS’s and Blue Cross’s motions for summary judgment on all counts.

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