SPD V. Plan Document: Who Wins?
Conflicts between a benefit plan Summary Plan Description and a plan document are an ever-present concern for plan sponsors. An aggrieved participant who relies on SPD language will often pursue a claim for benefits even though he/she is not entitled to the benefit under the plain terms of the plan document. This problem is illustrated by a recent 6th Circuit Court of Appeals decision, Pearce v. Chrysler Group LLC Pension Plan, No. 17-1431 (6th Cir. June 20, 2018).
In 2008, Mr. Pearce was 60 years old and had 33 years of service with Chrysler. He declined a buyout offer and Chrysler terminated his employment. Based on Chrysler’s pension plan SPD, Mr. Pearce believed that he was entitled to a “30-and-out” early retirement supplement under the pension plan. The SPD stated: “[y]ou do not need to be actively employed at retirement to be eligible for a supplement. However, you must retire and begin receiving pension benefits within five years of your last day of work for the Company in order to receive any supplements for which you are eligible.” In contrast, the plan document clearly stated that a terminated participant was not entitled to an early retirement supplement, even if he/she otherwise qualified for it on the termination date.
Chrysler denied Mr. Pearce’s claim for an early retirement supplement. After losing his administrative appeal, he filed a lawsuit.
In this decision, the 6th Circuit considered whether Mr. Pearce was entitled to equitable relief under ERISA Section 502(a)(3). The Court denied his claim for equitable estoppel, but remanded the case to the district court to determine whether reformation of the plan was an appropriate form of equitable relief.
Reformation is “the judicial reforming or re-writing of a document, such as a contract, to make that document reflect the true agreement of the parties.” Reformation would be appropriate, based on Mr. Pearce’s mistaken belief that he was entitled to the “30-and-out” benefit, if he can prove that Chrysler committed fraud or engaged in inequitable conduct. No intent to deceive is necessary; rather, in equity, fraud is generally an act by one in a position of trust or confidence by which it obtains an undue advantage.
As further guidance for the district court when the case is heard on remand, the 6th Circuit explained that equitable fraud can be found in ERISA cases where there is:
(1) an information asymmetry, such that the defendant is the only one who knows the true facts and the plaintiff cannot ascertain the true facts; (2) the defendant misrepresents the benefits to which the plaintiff is entitled; and (3) the plaintiff investigated her benefits and drew a reasonable conclusion about them on the basis of the defendant’s misrepresentation, even when the documents the plaintiff relied upon contained a disclaimer that the plan would govern in the event of a conflict. Deschamps v. Bridgestone Americas, Inc. Salaried Emps. Ret. Plan, 840 F.3d 267, 274-75 (6th Cir. 2016).
What does this decision mean for plan sponsors?
DOL regulations, require an SPD to clearly identify “circumstances which may result in disqualification, ineligibility, or denial, loss, forfeiture, suspension, offset, recovery, or recovery […] of any benefits that a participant or beneficiary might otherwise reasonably expect the plan to provide on the basis of the description of benefits” in the SPD. DOL Reg. §2520.102-3(l). This lawsuit might have been avoided if the SPD had clear language tracking the plan language, which did not allow a terminated participant to receive an early retirement supplement.
An SPD should always be reviewed side-by-side with the plan document to make sure that the SPD language is consistent with the plan document and that no important limitations or restrictions on benefits are omitted. Although commonly included, a statement in the SPD that the plan document will govern in the event of a conflict by itself is not always a winning argument. It is critical that an SPD should be subject to a rigorous review every time it is issued, even if the document only reflects a minor modification. This is a situation where an ounce of prevention can definitely prevent a pound of cure.