WHAT HAPPENED CIGNA had a traditional defined benefit pension plan - PDF document

VOL. 24, NO. 3 AUTUMN 2011 B ENEFITS L AW JOURNAL From the Editor Imagine a World of Perfect Disclosure Supreme Court Unsuccessfully Searches for a Remedy in Amara v. CIGNA rom the beginning of ERISA, the courts have struggled to supply F a suitable remedy for a disclosure violation. The law requires employers to give participants a simple, understandable description of their plan benefits and to notify them of any changes in those benefits. However, ERISA is silent as to what should be done when, inevitably, disclosure mistakes are made. Amara v. CIGNA (No. 09- 804, 5/16/11; 563 U.S. ___ (2011)) highlights the difficulty of balanc- ing the two competing interests in such situations. On one side are the plan participants, who may have been harmed by misleading, incomplete, or incorrect information provided by the company. At the same time, an overly protective judicial approach actually can harm participants by discouraging litigation-weary employers from trying to distill ERISA plan complexities into reasonably plain English or, far worse, from even offering meaningful benefit programs. In CIGNA , the District Court clearly understood what is at stake. However, it came up with a faulty solution, holding that CIGNA’s “misleading” communications caused participants “likely harm” that should be remedied by the Court amending the plan document to award the benefits CIGNA purportedly promised to give its employ- ees. The Supreme Court correctly remanded the lower Court’s deci- sion, holding that plan summaries and the like do not trump the actual plan documents. But in his majority opinion, Justice Breyer added an unhelpful and misguided stream-of-conscience discussion of equitable remedies that the lower court could consider on remand. Forgoing a chance to add clarity and balance for courts searching for

From the Editor a reasonable approach to disclosure errors, CIGNA instead adds some quotable dicta that may help some actual and would-be victims of bad disclosure, but it also is likely to harm many more workers by making it more expensive and difficult for employers to offer top- shelf benefit programs. WHAT HAPPENED CIGNA had a traditional defined benefit pension plan with a gen- erous formula, including subsidized early retirement benefits, that favored long-service and older employees. When CIGNA decided to join the ranks of employers struggling to maintain their defined benefit plans, it could have frozen or terminated the plan; instead, however, it switched to a cash balance formula. Under the new plan structure, each participant’s annual pension was frozen and then reconfigured as a starting account balance that would grow with annual interest credits and additional amounts contributed by CIGNA for each year of future employment. CIGNA’s cash balance conversion used the “wear-away” approach, meaning that if the participant’s frozen traditional pension benefit was more valuable than his or her cash balance benefit, he or she would be paid the traditional benefit and get nothing from the cash balance account. Depending on the participant’s age, years of service and salary, and the plan’s particulars, the frozen benefit might end up more valuable than the cash balance benefit even after several years of additional participation; in other words, participants initially might not earn any additional benefits under the new program. Some CIGNA pension plan participants were adversely affected by this wear-away approach because first, the traditional pension included subsidized early retirement benefits that were excluded in figuring the starting cash balance and, second, because the cash balance program (but not the traditional plan) paid full benefits if a participant died before retirement and thus imposed a preretirement mortality charge. Regardless of whether the wear-away approach is the best way to design a plan conversion, the CIGNA plan was fully compliant. Before the cash balance redesign was even completed, CIGNA informed employees of the changes. Beginning with a polished con- sultant-crafted announcement, participants received a series of let- ters, kits, summary of material modifications (SMMs), summary plan descriptions (SPDs), and ERISA Section 204(h) notices of the change in formulas. Some participants cried foul and eventually began a class action attempting to restore the old formula. THE DISTRICT COURT HAS ITS SAY In what is now well-settled law, the Connecticut District Court ruled in February 2008 that CIGNA’s actions in switching to a cash BENEFITS LAW JOURNAL 2 VOL. 24, NO. 3, AUTUMN 2011

From the Editor balance approach were perfectly legal under ERISA, the Internal Revenue Code, and age discrimination rules. [599 F. Supp. 2d 192 (Conn. 2008)] However, the Court found that CIGNA’s employee notices “failed to properly explain the wear-away” and deliber- ately “misled” participants to avoid an “employee backlash likely to result from a thorough discussion” of the changes. In a second opinion in June 2008, the District Court found that participants had been “likely harmed” by CIGNA’s faulty and misleading disclosures. It ruled the appropriate remedy was for the Court to modify the plan’s terms to eliminate the wear-away that CIGNA failed to prop- erly disclose. [534 F. Supp. 2d 288 (Conn. 2008)] In other words, the lower court ruled that employees were entitled to their frozen pension plus the new cash balance benefits, instead of the better of the two benefits. Interestingly, the District Court believed that the only available remedy in this case was to rewrite the plan document and allow participants to sue under ERISA Section 502(a)(1) to recover their benefits, per the plan terms as amended by the Court. The District Court read the Supreme Court’s opinions ( Variety v. Howe ; Sereboff v. Mid Atlantic ; Great-West v. Knudson ; and Mertins v. Hewitt ) interpreting the limits of “appropriate equitable relief” under ERISA Section 502(3) as preventing an award of additional benefits beyond what the plan calls for as improper monetary relief. The District Court’s two opinions were rubber-stamped by the Second Circuit per curium , which surprisingly didn’t choose to weigh-in on this important issue. The District Court’s decisions were disturbing for two reasons. First, it held that mistaken plan summaries can, in effect, have the conse- quence of rewriting the plan document if the summary gives partici- pants a better deal than the actual plan. Second, the District Court determined that it could rewrite the plan document if it appeared that participants were likely harmed by the misleading disclosure, without any proof of actual harm. THE SUPREME COURT COUNTERS Justice Breyer’s opinion made quick work of the District Court’s view that the likely harm caused by CIGNA’s disclosure violations gave the Court license to rewrite the terms of the plan. The eight Justices (Justice Sotomayor did not participate) unanimously agreed that ERISA Section 502(a)(1)(B) allows participants to sue to enforce the terms of a plan, but that ERISA does not authorize a court to change the terms of a plan document. Thus, a participant cannot sue to enforce the terms of a plan summary. The Supreme Court correctly recognized that if summaries could be enforced as plan documents, the summaries would be written in complete legalese, as if they were BENEFITS LAW JOURNAL 3 VOL. 24, NO. 3, AUTUMN 2011