Supreme Court Underscores Importance of Accuracy in Communications to Plan Participants
In its May 16, 2011 decision in CIGNA Corp. v. Amara, the Supreme Court provided a detailed guide as to what remedies may be available to participants for violations of ERISA committed by plan fiduciaries. Although seemingly a victory for CIGNA because the Court reversed the lower courts' award of additional benefits on technical grounds, it remanded the case to the district court with instructions on how to determine what relief should be granted under the section of ERISA that allows courts to fashion equitable remedies.
Cheiron Observation: Although this is a case regarding a pension plan, the holding is applicable to all plans subject to ERISA.
The case grew out of CIGNA's conversion to a cash balance plan. The information in the summary plan description (SPD) was somewhat different than the actual terms of the new plan, and led employees to believe they would not have lower benefits. However, the cash balance formula would, in fact, produce lower benefits in some instances. The participants asserted, and the district court agreed, that CIGNA had breached its notice obligations and misled participants as to the effect of the conversion on their benefits. The participants sued under ERISA section 502(a)(1)(B), which allows suits to recover benefits owed by a plan. The district court ordered that the cash balance plan be reformed to reflect CIGNA's promise so that the reformed plan formula would be the benefit accrued to the date of conversion plus the additional amount accumulated under the cash balance formula, less the initial deposit. Its decision was affirmed by the appeals court.
Supreme Court Decision
The Supreme Court reversed the decision in the first part of its opinion, finding that a suit for benefits could only be brought under the actual terms of a plan in effect and not based upon the terms of the SPD. Furthermore, the Court said that the district court had no authority to reform the plan under ERISA section 502(a)(1)(B).
The Supreme Court went on (some would say went out of its way) to explore the remedies available under ERISA section 502(a)(3), which allows a court to grant equitable relief for violations of ERISA. The Court first noted that the types of remedies fashioned by the district court were the traditional remedies for breach of trust, and stated that fiduciaries are akin to trustees. Specifically, the Court said that:
- Reformation of the plan was available to enforce CIGNA's misrepresentation that no employees would suffer a reduction in their benefits,
- The district court could provide relief using the estoppel doctrine, if it found that the participants had relied to their detriment on CIGNA's statements,
- The district court could impose a surcharge on the fiduciary (CIGNA) for violating its duties under ERISA if it found that the violations harmed the participants, and
- The participants did not need to show that they took any particular action in reliance on CIGNA's misrepresentations.
This case demonstrates the importance of fully disclosing the potential negative effects of any change in plan benefits. It also tells employers and plan fiduciaries that they must be careful not to provide questionable assurances to employees about the changes. Thus, for example, when preparing the required notice of an amendment to a plan's benefit formula that could reduce future accruals, early retirement supplements or optional forms of benefits, plan administrators should explain, using examples, both the positive, if any, and negative effects of the new formula.
Cheiron Observation: The explanation of any plan changes should be reviewed by plan counsel and consultants to make sure that there are no misstatements or omissions of negative effects. Also, SPD changes should be reviewed to make sure that there are no misstatements of the effect of plan changes.
Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Therefore, we do not provide legal or tax advice or services.