- Supreme Court Addresses Remedies for Faulty SPDs
- May 31, 2011 | Author: James C. Bruinsma
- Law Firm: Miller Johnson - Grand Rapids Office
In a potentially significant opinion, the U.S. Supreme Court addressed a participant's potential remedies if an employer provides a summary plan description (SPD) which contains incorrect or misleading information. The court's opinion in CIGNA Corp. v. Amara contained both "good news" and "bad news" for employers:
The "good news" is that an SPD is not part of the plan document. As a result, a court may not "reform" the plan document under Section 502(a)(1)(B) of ERISA to be consistent with the SPD.
The "bad news" is that the court stated, in commentary that was not necessary to decide the case, that various types of equitable relief under Section 502(a)(3) of ERISA may be available to participants who can show actual harm resulting from the mistakes in the SPD.
The ruling was 8-0, but two justices objected to the "commentary" part of the holding.
Background Regarding the Case
CIGNA converted its traditional pension plan to a cash balance plan in 1998. As part of this process, each participant's benefit was changed to an opening "cash balance" as of January 1, 1998. The revised plan provided that a participant's benefits would be the greater of:
The participant's benefit as of January 1, 1998 under the prior benefit formula, or
The participant's benefit under the cash balance plan.
CIGNA's SPD and other communications to the participants, however, were misleading. The participants were told that their benefits would be the sum of:
The participant's benefit as of January 1, 1998, plus
The benefit earned by the participant after January 1, 1998.
A class action lawsuit was filed on behalf of the participants. The District Court ruled in their favor. It held that CIGNA's plan should be reformed to be consistent with the statements made in the SPD. The court based its ruling on Section 502(a)(1)(B) of ERISA which permits a court to enforce the terms of the plan. The District Court also stated that proof of "likely harm" was enough to allow participants to recover benefits based upon the misleading SPDs.
The Second Circuit Court of Appeals affirmed the District Court's holding.
Supreme Court's Holding
The Supreme Court vacated the District Court's holding. It stated that the SPD is not part of the plan document. Therefore, statements in the SPD cannot be enforced by a court under Section 502(a)(1)(B) of ERISA as terms of the plan. Section 502(a)(1)(B) of ERISA can only be used to enforce the terms of a plan, not to change those terms based upon a document that is not part of the plan.
But the Supreme Court did not leave the participants without a potential remedy. The "commentary" part of the opinion stated that relief may be available under Section 502(a)(3) of ERISA. This provision allows a participant "to obtain other appropriate equitable relief" for ERISA violations or to enforce the terms of the plan. It discussed a series of potential equitable remedies:
A "contract" can be reformed to prevent fraud or mistakes. Therefore, reformation is a potential remedy under Section 502(a)(3) of ERISA.
The doctrine of "equitable estoppel" was historically an equitable remedy. Therefore, it also is a potential remedy under Section 502(a)(3) of ERISA.
A court is permitted to award monetary damages (called a "surcharge") for a trustee’s breach of duty. Because the plan administrator's role is analogous to a trustee, this remedy is also available under Section 502(a)(3) of ERISA.
The Supreme Court then returned the case to the District Court to determine the appropriate remedies under Section 502(a)(3) of ERISA. In doing so, it rejected the "likely harm" standard used by the District Court in its prior decision. The Supreme Court stated that ERISA does not contain a particular standard of "harm." The necessary proof of harm would be based upon the equitable theory under which the participants requested recovery. Further, for the participants to recover, the Supreme Court stated that the participants must show actual harm to the preponderance of the evidence.
The Supreme Court's holding that the SPD is not part of the plan document is beneficial to plan sponsors. There previously were lower court opinions which held that provisions in an SPD were binding upon the plan sponsor, even if inconsistent with the plan document. Under the Supreme Court's opinion, the participants will be required to prove they are entitled to "reformation" relief under Section 502(a)(3) of ERISA. This may be more difficult than the prior participant-friendly rule used by lower courts.
On the other hand, this is the first time the Supreme Court suggested that monetary damages could be available under Section 502(a)(3) of ERISA. This is likely to result in more claims under Section 502(a)(3). We anticipate more litigation regarding the new scope of equitable relief under Section 502(a)(3) of ERISA.
With this new form of relief available, plan sponsors must continue to be careful to ensure that SPDs and other employee communications are consistent with plan documents.