A number of lower federal courts over the years have adopted the view of the US Department of Labor that, under ERISA, statements appearing in a summary plan description (SPD) that describe benefits more generous than those actually provided under the formal plan document are nevertheless binding on the company sponsor of the program. The US Supreme Court surprised many by its recent ruling in CIGNA Corp. v. Amara that statements appearing in SPD's and other employee communications cannot override the written terms of an employee benefit plan. But the Court also suggested that equitable remedies may still be available under ERISA to enforce benefits promised under employee communications to deny a fiduciary's unjust enrichment.
Prior to 1998, the CIGNA insurance company sponsored and maintained a defined benefit pension plan for eligible participants, providing a retirement annuity benefit equal to about 60% of final pay for long term, 30 year career employees. Under the CIGNA pension plan, for example, an employee with 30 years of service, and earning $160,000 a year upon retirement at age 65, would receive an annual annuity of $96,000 per year until death.
In late 1997, however, CIGNA distributed to employees a newsletter announcing the replacement of the defined benefit pension plan with a new defined contribution cash account balance plan, to be effective January 1, 1998. Under this substitute defined contribution plan, CIGNA would annually contribute between 3% and 8.5% of an employee's compensation to an individual cash account under the plan, depending on the employee's age and service with the company. This funded account would then earn interest equal to the return on 5-year treasury bills, plus 0.25%. On retirement, the employee would receive the accumulated cash amount in his or her account payable in the form of a lump sum payment, or an annuity benefit for whatever the lump sum could purchase.
The CIGNA newsletter also stated that the substitute cash balance plan would "significantly enhance" the employees' retirement program, would be an "overall improvement in … retirement benefits", and would provide "the same benefit security" with "steadier benefit growth." The newsletter then concluded that "one advantage the company will not get from the retirement program changes is cost savings."
In fact, the new cash balance plan represented an annual savings to the employer of $10 million over the old defined benefit pension plan. A significant number of long term employees received a substantially reduced pension benefit on retirement, in some cases resulting from a fall in interest rates, the risk of which had been shifted from the employer to the employees.
Subsequently, a number of employees filed a class action under ERISA against CIGNA, challenging its conversion of the original defined benefit pension plan to the substitute defined contribution cash balance plan.
The trial court in the case, the United States District Court for Connecticut, found that the employer's description of the new cash balance plan to be not only materially incomplete and inaccurate, but that the company had intentionally misled its employees. The judicial relief ordered by the trial court was to require CIGNA to reform the retirement program so that employees would receive not just the greater of the benefit between the old and the new plans, but rather that they receive all their benefits accrued under the old pension plan, plus the amount of benefits earned under the new plan.
Both sides cross-appealed the District Court's order to the Second Circuit Court of Appeals, which summarily affirmed the trial court's decision. The parties then appealed to the United States Supreme Court, which agreed to hear the case.
After hearing argument, the Supreme Court issued its opinion, holding that ERISA did not give the District Court authority to change the terms of CIGNA's pension plan to conform to the disclosures and representations contained in its summary plan description and other employee communications concerning the plan. In reaching its conclusion, the Supreme Court focused on ERISA's distinction between the employer's role as the "plan sponsor" - who establishes the pension plan and lays down its terms and conditions, and the employer's responsibilities as the "plan administrator" - the fiduciary who manages the plan according to it written terms, and provides participants with a summary plan description. Under ERISA, the SPD is required to explain the plan in non-technical language calculated to be understood by the average employee participant. This however does not suggest that the information provided under the SPD about the plan should be made part of the plan. Othererwise, the Court observed:
"To make the language of a plan summary legally binding could well lead plan administrators to sacrifice simplicity and comprehensibility in order to describe plan terms in the language of lawyers."
To the relief of employer plan sponsors - and their lawyers - the Court concluded that:
"The summary documents, important as they are, provide communication with beneficiaries about the plan, but … their statements do not themselves constitute, the terms of the plan."
Even so, this legal victory for employers in their role as plan sponsors did not get them completely off the hook as fiduciaries when acting in their capacity as plan administrators.
On further analysis, the Court reasoned that since an employer as plan administrator is a fiduciary, it is subject to trust law, and any fiduciary breaches in that capacity subject to equitable remedies by courts exercising their equitable power to prevent unjust enrichment.
After basically providing the trial court with a road map for holding CIGNA to what it had promised employees - "namely, that the new plan would not take from its employees benefits already accrued" - the Supreme Court sent the case back down to the District Court for further action in accordance with the higher court's rulings.
Two members of the Supreme Court, Justices Scalia and Thomas, agreed that an SPD is separate from the pension plan, and that defects of the SPD cannot operate to revise the terms of the plan. But the two justices would have stopped right there, concluding: "Nothing else needs to be said to dispose of this case." Justice Scalia then went on to issue an extraordinary warning to the trial court below concerning the Supreme Court's opinion, written by Justice Breyer:
"The Court's discussion of the [equitable] relief available … is purely dicta, binding upon neither us nor the District Court. The District Court need not read any of it - and, indeed, if it takes our suggestions to heart, we may very well reverse."
The issue of whether the terms of an SPD can alter the terms of an employee benefit plan is now settled. They cannot. But there remain unresolved issues on the scope of the equitable powers of the federal courts under ERISA to force employers to deliver on their promises to employees made outside the formal terms of a benefit plan.
Stay tuned for further developments.
In the meantime, employer plan sponsors are well advised to take great care that summary plan descriptions, and all employee communications, are consistent with and promise no more than what is provided under the terms of their employee benefit plans. It should be remembered that ERISA applies not just to pension plans, but also to medical, health, and other employee welfare benefit plans. The Supreme Court's suggested avenue of equitable relief would apply to those benefit plans as well.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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