On November 30, 2010, the United States Supreme Court held oral argument in this matter to establish the proper standard to measure harm to plan participants for violations of ERISA arising from inconsistencies between a Summary Plan Description ("SPD") and the actual benefit plan.
The plaintiffs are current and former CIGNA employees who fell into a particular class of retirement benefit plan participants. CIGNA originally had a traditional defined benefits plan that provided each employee with an annuity payable annually throughout the employee's life. The annuity was based on a certain percentage of the employee's salary multiplied by the employee's years of employment. Effective January 1, 1998, CIGNA changed the plan to a "cash balance" plan, which allocated the employee's retirement in a hypothetical account that accrued benefits in credit form. For employees hired before December 31, 1997, the cash balance plan (termed "Part B") was used.
Part B gave the employees an opening account based on the value of their accrued benefits under the traditional defined plan ("Part A"). Under Part B, employees would receive the greater benefit between a "minimum benefit" (an annuity based on a Part A accrued benefit), and a Part B accrued benefit. Employees participating in Plan B were not informed that the formula used to calculate Part B's opening balance led to periods when the Part B accrued benefit was less than the employee's "minimum benefit," resulting in a "wear-away" where an employee continued to receive credits under Part B, but his or her retirement account balance did not increase beyond the "minimum benefit" earned as of December 31, 1997.
CIGNA informed its employees about the transition to Part B. A 1997 newsletter represented that Part B would significantly enhance employees' retirement program. CIGNA's revised SPD (issued in October 1998) did not inform the employees of the "wear-away" issue, but it did represent that employees would never receive less than the minimum benefit. The plaintiffs are those employees who first participated in CIGNA's Part A and later converted to Part B (Amara is the class representative).
The district court found that CIGNA made misleading statements that caused employees to reasonably believe they would immediately begin accruing benefits under Part B. Under ERISA, a change in a plan must be accompanied by a revised SPD that outlines the changes for employees in an easily understood manner. Although CIGNA released a revised SPD that described part of the changes, it did not mention a "wear-away" period. The district court held that this failure created an inconsistency in violation of ERISA standards. In finding for the plaintiffs, the Connecticut District Court employed a "likely harm" standard to determine whether the inconsistency between the SPD and the actual plan terms harmed the employees. The Second Circuit Court of Appeals affirmed. The Supreme Court granted certiorari to determine the proper standard of injury for an employee seeking to recover against an employer that issued an SPD inconsistent with the actual plan terms.
Amara argued relief is available if there is an objective material conflict between the SPD and the actual plan (i.e., even if a participant must show possible prejudice or likely harm, the standard is an objective one of prejudice or likely harm as viewed from a reasonable participant viewpoint). Several amicus briefs were filed supporting the "likely harm" standard, including that of the United States ("likely harm" standard furthers ERISA's purpose of ensuring that participants receive the benefits for which they contract), the National Employment Lawyers Association ("detrimental reliance" standard will make it nearly impossible for participants to receive relief and would discourage large class action suits), and the American Association of Retired Persons ("detrimental reliance" standard would unfairly allocate burden of proof on plan participants).
CIGNA argued that a plan participant must "detrimentally rely" on the SPD to qualify for relief on account of such inconsistencies. Otherwise, claims CIGNA, a "likely harm" standard will allow relief to participants who neither read the SPD nor relied on its terms. CIGNA further argued that a "likely harm" standard is essentially a strict liability standard because employers can rarely show "harmless error" to rebut the "likely harm" standard (i.e., it is difficult to show that a plaintiff was not injured by the inconsistent standard). From a broader policy perspective, CIGNA also argued that a "likely harm" standard would threaten a plan's financial stability, cause benefit reductions, and increase litigation costs, thereby discouraging employers from creating plans in the first instance.
The Supreme Court will likely issue its decision in 2011. The Court's decision on a plan participant's standard of injury should help define the level of detail and accuracy that an employer must include in its SPD. The decision will also likely shape the litigation strategies of both employers and employees under benefit plans, and affect the attractiveness of class action suits to putative class plaintiffs.
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This is an analysis of a pending decision that is not final.
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