The U.S. Supreme Court does not often issue decisions interpreting the Employee Retirement Income Security Act (ERISA), so when the Justices speak, the issues are significant. The Court recently issued a long-awaited decision on the remedies available to participants whose plan communications fail to inform them of significant restrictions on benefits.
The full implications of CIGNA CORP. v. Amara will not be clear until it has been interpreted in subsequent decisions. However, the fact that both plan sponsors and plaintiffs' counsel have called the decision a victory suggests that while CIGNA may have won the immediate battle, careless fiduciaries may have lost the war. A new menu of remedies for misrepresentations to participants appears to be available without having to show in all cases that participants relied on those communications.
CIGNA CORP. v. Amara was a class action challenge by plan participants in a cash balance conversion. In such a conversion, a traditional defined benefit plan is converted to a quasi-defined contribution plan in which benefits are expressed as a notional account balance. Pre-conversion benefits are required to be preserved. As a result of the conversion, plaintiffs' benefits were frozen for a time following conversion, because their pre-conversion benefits were treated as a minimum benefit and exceeded their new accruals under the plan. Plaintiffs claimed that they had been told in plan communications that they would continue to earn benefits and sued for additional benefits they claimed had been promised.
Participants convinced both a district court and the Court of Appeals for the Second Circuit that CIGNA should be responsible for paying the greater benefits promised to participants, because their Summary Plan Descriptions (SPDs) and the required explanations given to participants in pension plans when their future accrued benefits are to be reduced had deliberately misled participants about the level of their benefits and failed to explain the minimum benefit rule. Plaintiffs reasonably expected to receive the sum of their pre-conversion and post-conversion benefits, and the lower courts rewrote, or "reformed" the plan to provide them without requiring a specific showing of individual harm caused by the misrepresentation, called detrimental reliance. A reasonable assumption of "likely harm" was found to be sufficient.
The Supreme Court overturned the lower court decision, but it remanded the case, and in doing so, laid out a blueprint for how the district court could nonetheless award the benefits to which participants thought they were entitled under the equitable relief provisions of ERISA. The Supreme Court also ruled that detrimental reliance (such as declining a job offer in order to keep benefits described in the SPD) was not required for all of the forms of relief available. The CIGNA decision therefore has important implications for fiduciaries seeking to avoid future litigation as well as for ERISA litigators.
The Court ruled on the following significant questions:
1. Are SPDs (the required basic disclosure documents under ERISA) part of the terms of every plan?
Although it is common for SPDs to contain disclaimers that the plan will govern, in the case of any conflict between the SPD and the plan text, most courts have refused to enforce the disclaimers where the SPD conflicts with the plan document. The Obama administration urged the Court to rule that plans were bound by the SPDs, as terms of the plan, which would have made disclaimers unenforceable, but the Court clearly found that the SPD was intended to be only a summary and was not part of the documents establishing the plan.
2. Is a suit to reform (rewrite) the plan to include benefits promised by the SPD a suit to recover benefits provided by the terms of the plan (under ERISA 502(a)(1))?
The answer to this was clearly no. The lower courts had erred in relying on this provision to award benefits to the CIGNA plaintiffs.
3. Does this mean that plaintiffs had no remedy?
The Court spelled out the basis on which promised benefits could have been awarded by the district court under a provision of ERISA, 502(a)(3), providing for equitable remedies. This was a surprise to many practitioners, since the Court had previously ruled in Mertens v. Hewitt Associates (508 U.S. 248 (1993)) that monetary damages were not available in a suit against a non-fiduciary under Section 502(a)(3), and the plaintiffs as well as the district court below had assumed along with other courts and many in the ERISA litigation bar that it was not available.
4. What equitable remedies did the Court find under 502(a)(3)? Do they require detrimental reliance?
The court explained that reformation of a plan document was permitted under Section 502(a)(3), as were suits for promissory estoppel and fiduciary surcharge, which is an award of monetary compensation for a loss caused by a fiduciary breach. Estoppel actions required detrimental reliance, but the others could require only a showing of "actual harm," which the Court said might be loss of a right protected under ERISA. Had the district court relied on 502(a)(3) to reform the plan, the Court would presumably have affirmed the decision. Since detrimental reliance is not required in all 502(a)(3) lawsuits, it will not be necessary to show that all members of a class actually read and relied on the SPD, which could be an impossible standard to meet in ERISA class action litigation.
5. What does this mean for plan administrators and sponsors?
Courts will not reform plan documents automatically to award any greater benefits that appear to be promised by the SPD. Although the court did not discuss disclaimers or whether the CIGNA notices had them, it appears that disclaimers will be enforceable in typical circumstances. However, the wise fiduciary will review all plan communications carefully and will not risk being found to have deliberately misled participants about benefits, triggering plan reformation without a requirement of detrimental reliance.
6. Best Practices after CIGNA CORP. v. Amara
The decision provides useful guidance for fiduciaries seeking to reduce their litigation risk. Summary Plan Descriptions and other required notices are often drafted by outside service providers, such as insurance companies, recordkeepers and consultants. All too often, these communications are distributed by busy fiduciaries without substantive review, even if they contain an alert to have them reviewed by legal counsel because they must satisfy detailed legal requirements. Some best practices to help avoid litigation over promised benefits are:
- Avoid using your required communications as plan marketing tools. If your goal is to encourage employees to participate and to prevent them from complaining about changes, you are likely to lose track of legal requirements to disclose benefit limits and restrictions.
- Always subject communications to a review to make sure that they satisfy all applicable legal requirements before distributing them.
- If participants are being told about elections, provide adequate information so they can make informed decisions, including any applicable fees that may apply.
- Consider "test driving" your communications. Have them reviewed by a test group of participants to determine how much they understand.
- Don't rely solely on disclaimers even if you include them in your documents. It is best practice to review the plan and the SPD to ensure that there are no conflicts.
If CIGNA CORP. v. Amara leads to increased litigation, as some predict, and a lawsuit is commenced, you and your plan will be in a better defensive position if these practices have been followed.
Carol Buckmann has practised in the employee benefits field for over 25 years, advising clients on all aspects of employee benefits and retirement plans, including questions relating to 401(k), defined benefit and employee stock ownership plans, welfare plans, fiduciary responsibility, prohibited transactions and plan asset issues arising in investment fund formation. Sandra Cohen leads the U.S. compensation and benefits team, advising Canadian and U.S. corporations on executive compensation and employee benefits matters.
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