Converting to cash balance plans can be tricky

June 6, 2011
By Mark D. DeBofsky

DeBofsky is a name partner of Daley, DeBofsky & Bryant. He handles civil and appellate litigation involving employee benefits, disability insurance and other insurance claims and coverage . He can be reached at mdebofsky@ddbchicago.com.

Pension plans in the United States have undergone a dramatic transformation over the past 30 years. The traditional defined-benefit plan which offers an annuity for a stated amount based on salary and years of service has been virtually eliminated and replaced by defined-contribution plans, popularly known as the "401(k) plan," where the employee contributes a fixed percentage of wages into a retirement plan and, in some cases, the employer matches some or all of the contribution. Somewhere in between the defined benefit and the defined contribution plan is a hybrid known as a cash balance plan, which involves annual contributions from an employer at a defined amount, the value of which is increased by compound interest.

Many employers that offered defined-contribution plans in the past have converted those plans to cash balance plans and a case recently decided by the U.S. Supreme Court, CIGNA Corporation v. Amara, No. 09-804, 2011 U.S.LEXIS 3540 (May 16, 2011), involved a dispute that arose when, in 1998, insurance giant CIGNA Corp. converted its defined-benefit pension plan to a cash balance plan but provided its employees with defective information about how the conversion would affect pension benefits that had already accrued for many long-term CIGNA employees.

Those employees complained that their benefits and retirement decisions were adversely affected by the erroneous information. While those who already earned retirement benefits were informed their initial contribution would be enhanced by the conversion, in fact, many lost certain advantages relating to benefits payable if they retired early as well as other financial harm.

Consequently, a class of about 25,000 CIGNA retirees filed suit seeking damages which ultimately reached the Supreme Court. The court, in a decision authored by Justice Stephen G. Breyer, began its discussion of the merits by expressing harsh criticism of the district court's reformation of the plan to conform to the representations CIGNA had made to its employees. The court pointed out the "statutory language speaks of ' enforc[ing] ' the 'terms of the plan,' not of changing them. 29 U.S.C. § 1132(a)(1)(B) (emphasis added). Although a court is empowered to interpret ambiguous or incomplete plan language, the court found no basis to permit a court to alter the terms of a plan as written. The court also rejected an argument made by the solicitor general that the information contained in the summary plan description could constitute plan terms even if the plan says otherwise.

Nonetheless, the court found an alternative ground for relief, § 502(a)(3), which allows an aggrieved beneficiary or plan participant to seek " other appropriate equitable relief " to redress violations of (here relevant) parts of Employee Retirement Income Security Act (ERISA) 'or the terms of the plan." 29 U.S.C. § 1132(a)(3) (emphasis added). Three earlier Supreme Court rulings had limited the meaning of the phrase " 'appropriate equitable relief" to "those categories of relief' "that, traditionally speaking (i.e., prior to the merger of law and equity) " 'were typically available in equity.' " Cf. Sereboff v. Mid Atlantic Medical Services, Inc. , 547 U.S. 356, 361 (2006) (emphasis added); also see, Great-West Life & Annuity Ins. Co. v. Knudson , 534 U.S. 204 (2002) and Mertens v. Hewitt Associates , 508 U.S. 248 (1993). However, those cases were distinguished since this case involved a suit by a beneficiary against a plan fiduciary. The court deemed such an action comparable to a suit by a beneficiary against a trustee, which was found to make a "critical difference." Thus, although the relief sought here was not injunctive in nature, the court found it comparable to three other traditional equitable remedies.

First, the court pointed out the power to reform contracts "is a traditional power of an equity court, not a court of law, and was used to prevent fraud." (citations omitted). Second, the remedy sought resembled estoppel, a traditional equitable remedy which "operates to place the person entitled to its benefit in the same position he would have been in had the representations been true." (citations omitted). Third, although the remedy ordered by the lower court required the plan administrator to pay money owed under the plan as reformed and money is quintessentially a legal, not an equitable remedy, the court recognized that equity has historically had the power to grant monetary relief from a trustee under the doctrine known as "surcharge."

The court then turned to the question of whether the plaintiffs needed to show detrimental reliance in order to obtain relief and rejected CIGNA's argument that such a showing is a necessity. However, the court did require that plaintiffs prove actual harm occurring either as a result of detrimental reliance or "from the loss of a right protected by ERISA or its trust-law antecedents." Thus, in order to obtain relief by surcharge for violations of ERISA requirements, "a plan participant or beneficiary must show that the violation injured him or her. But to do so, he or she need only show harm and causation." Because the lower courts had not considered these principles, though, the judgment for the plaintiffs was vacated and remanded.

Although there were no dissents, there was a concurring opinion authored by Justice Antonin G. Scalia, the author of both Mertens and Great-West . Although he concurred with the court's holding that the lower court improperly reformed the benefit plan, Scalia disagreed with the approach taken by the majority which he deemed dictum since the issue of the scope of the §502(a)(3) remedy was not briefed or argued by the parties. Scalia remarked that court went too far since the issue of whether "plan members misled by an SPD will … normally be compensated is not in doubt." Moreover, the concurrence stated the court should simply have remanded, explaining that if the district court had engaged in "an incorrect reading of Mertens , the 2nd Circuit can correct its error and if the 2nd Circuit does not do so this court can grant certiorari." The concurrence did agree, though, that equitable estoppel and surcharge were more appropriate remedies than reformation in this instance.

This case marks a dramatic change in ERISA remedies and answers the critics of Mertens and Great-West, principally professor John Langbein of the Yale Law School, the author of "The Supreme Court Flunks Trusts," 1990 Supreme Court Review 207, and "What ERISA Means by 'Equitable': The Supreme Court's Trial of Error in Russell, Mertens, and Great-West," 103 Colum. L. Rev. 1317 (2003). As Langbein predicted, contrary to Scalia's belief expressed in the concurrence that misrepresentations will "normally be compensated," that has not proven at all to have been true, as illustrated by rulings such as Callery v. United States Life Ins. Co. in the City of New York, 392 F.3d 401 (10th Cir. 2004) and Amschwand v. Spherion Corp., 505 F.3d 342 (5th Cir. 2007), where life insurance benefits lost on account of employer misrepresentations were found unrecoverable on the ground that such relief was monetary and did not constitute "appropriate equitable relief" as defined by the Supreme Court. Although Supreme Court review was sought in both cases and the solicitor general strongly urged the court to hear Amschwand, presenting the same arguments that carried the day in Amara, certiorari was denied in both cases.

What still remains to be fleshed out, though, is the scope of ERISA's fiduciary duty with respect to communications with plan participants. According to ERISA §404(a)(29 U.S.C. §1104(a)), a fiduciary must act "for the exclusive purpose of (i) providing benefits to participants and their beneficiaries" and to act "with the care, skill, prudence and diligence under the circumstances then prevailing. … " According to Eddy v. Colonial Life Ins. Co. of America , 919 F.2d 747, 751 (D.C. Cir. 1990), a case involving miscommunications regarding health insurance conversion rights, the duty to inform, which emanates from those obligations, places the fiduciary "under a duty to communicate … all material facts in connection with the transaction which the trustee knows or should know." (citing Restatement Second of Trusts § 173, comment d (1959). Similarly, Krohn v. Huron Memorial Hospital, 173 F.3d 542 (6th Cir.1999)found an employer breached ERISA's fiduciary duties when it withheld information regarding the plaintiff's eligibility to receive disability benefits. Krohn found: "[A] fiduciary breaches its duties by materially misleading plan participants, regardless of whether the fiduciary's statements or omissions were made negligently or intentionally." 173 F.3d at 547 (citing Berlin v. Michigan Bell Tel.Co., 858 F.2d 1154, 1163-4 (6th Cir. 1988)).

However, it remains an open question as to whether all misrepresentations are remediable and Krohn does not represent the law in all circuits. The 7th Circuit recently issued a ruling discussing the dichotomy between fiduciary breach cases that have required intentional or deliberate conduct and those that do not. In Kenseth v. Dean Health Plan, Inc., 610 F.3d 452 (7th Cir. 2010), the plaintiff was found to have raised a genuine issue as to whether a health plan had breached its fiduciary duty in misrepresenting the availability of coverage for surgery to remedy a complication of a gastric bypass operation that had occurred years earlier. In finding an actionable misrepresentation, the court determined that while intentional misrepresentations would always be contrary to an ERISA plan administrator's fiduciary duties, "when the plan documents are clear and the fiduciary has exercised appropriate oversight over what its agents advise plan participants and beneficiaries as to their rights under those documents, the fiduciary will not be held liable simply because a ministerial, nonfiduciary agent has given incomplete or mistaken advice to an insured." 610 F.3d at 472. Nonetheless, when a plan administrator "suppl[ies] participants and beneficiaries with plan documents that are silent or ambiguous on a recurring topic, the fiduciary exposes itself to liability for the mistakes that plan representatives might make in answering questions on that subject … This is especially true when the fiduciary has not taken appropriate steps to make sure that ministerial employees will provide an insured with the complete and accurate information that is missing from the plan documents themselves." Id. (citations omitted). Finding that Kenseth's situation fell within the latter category, the court found she had established a basis for pursuing a claim for breach of fiduciary duty. The Kenseth ruling left uncertainty, though, as to whether there was a remedy available even if a breach of fiduciary duty was firmly established and remanded that question for the district court to sort out. Amara appears to support a remedy based on both proof of actual harm as well as detrimental reliance since Kenseth underwent the surgery after being assured it was covered by her health plan. Thus, a glaring hole in ERISA, the existence of rights without a remedy for employer misrepresentations resulting in harm, has now been plugged.