Mistakes happen. Even in the best-run plans, occasional errors
in estimating and calculating benefits are inevitable and sometimes
they are caught only years after payments commenced. Fiduciaries
are required to follow plan terms, so improper payments are
typically cut off. Plans may also seek to recoup past overpayments
once the mistake is discovered.
In the Mistaken Fiduciary, I described a situation in
which Gabriel, a retiree who had never qualified for benefits at
all, sued a plan to prevent it from cutting off his benefits. His
suit claimed fiduciary breach and sought to estop the plan from
applying its terms to him. The retiree also sought other forms of
relief for fiduciary breach.
Gabriel lost his estoppel claim at the district court level, and
this result was subsequently affirmed by the
U.S. Court of Appeals for the Ninth Circuit. The Ninth Circuit
decision clearly states that estoppel is not available where
relief, as in Gabriel's case, would contradict the written plan
provisions. However, we have just had another decision in Michigan in which a
retiree named Paul successfully sued to estop a plan from
correcting pension overpayments. Why did Paul succeed and should
plan fiduciaries be worried about this decision?
When is a Fiduciary Estopped from Correcting Overpayments?
It seems to require special circumstances, including harm to the
retiree from relying on the incorrect calculation, and not just an
When is a Mistake Equivalent to Fraud?
In Paul, the plaintiff began work as a temporary employee and
switched from union to non-union positions at the company. He and
his wife met with company representatives prior to his retirement
and received a pension calculation statement which overstated his
benefit service. The retiree was told that the Company reserved the
right to correct errors and that he would be notified if final
benefit calculations changed the pension amount. The retiree asked
the company representative several times to confirm that the
service shown on the statement was correct, and was assured that it
was. Notice of the error was not sent until two and one half years
after retirement, when it was discovered by the sponsor on
The court found that Paul was not just the victim of an honest
mistake, but that the Company representatives's gross
negligence in not investigating the answer to Paul's questions
amounted to constructive fraud. Paul claimed that he would not have
retired when he did had he known the correct amount of his pension.
The court further found that Paul was unaware of the mistake, since
he could not calculate his own benefit. The bottom line was that
Paul could not be required to repay past overpayments and the plan
was estopped from reducing his future payments.
What Can Plans Still Do?
Despite the fact that they didn't help the plan's case
against Paul, use of clear disclaimers is still a good practice.
Regular self-audits should still permit plan sponsors to correct
typical honest mistakes. And this whole lawsuit could have been
avoided if the elements of Paul's calculation had been
carefully checked when he asked about his service.
Sometimes fiduciaries raise the concern that they are stuck
between "a rock and a hard place" if they don't
recoup overpayments, because in addition to worrying about
equitable remedies such as estoppel, they may have caused a plan
qualification error by not following plan terms. There may also be
some relief for this concern: the IRS has just
"clarified" its position on correcting defined benefit
plan overpayments to permit more leeway. It appears that pension
plan sponsors will not always have to request a return of
overpayments if they are willing to make up the loss to the
IRS has requested comments on what else it should do about
correcting overpayments. The U.S. Supreme Court has also accepted a
case to determine whether overpayments of disability benefits need
to be tracked in order to be recoverable. That future decision may
impact other ERISA plans as well. The law in this area is still in
flux, so fiduciaries should stay tuned for further
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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