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By decision dated December 20, 2012, a federal District Court has ordered CIGNA Corporation to pay increased benefits to participants in a retirement plan even though those benefits are not described in the plan. While its financial impact is not yet known, the decision affects approximately 25,000 employees covered under the plan.
In 1998, CIGNA Corporation changed the format of its pension plan. Previously, its defined benefit plan provided a pension annuity to retirees, calculated based on compensation and length of service. The new format, a cash balance plan, would provide participants an account balance rather than an annuity based on a formula, to be funded by annual defined contribution "credits". As part of the transition, a participant's existing pension entitlement was translated into a present-day account value, based on an actuarial calculation. The mechanics of that calculation would cause some participants to experience a delay in benefiting from the new retirement format, perhaps for a period of years. While some employers making this type of transition offer adjustments to mitigate the effect on participants, CIGNA did not do so.
CIGNA sent notices and revised SPDs to all participants about its plan change. The information touted the improvements of this new plan format, but did not address the delay in those improvements that some participants would experience. Participant Janice Amara filed a class action suit against CIGNA, on behalf of herself and 25,000 other participants, stating that CIGNA's information was misleading. The notice, said Amara, did not explain that the transition calculation would cause some participants to delay benefitting from the new plan format. As a result of this failing, Amara stated that the participants were harmed.
In 2008, the Connecticut federal District Court found that CIGNA's notice misled employees into believing that they would immediately begin accruing benefits under the new format. The District Court determined that CIGNA's revised Summary Plan Description (SPD) was tantamount to a plan amendment and ordered that CIGNA provide the expanded benefits described in the SPD to all participants. This decision was affirmed by the Second Circuit Appeals Court, and CIGNA appealed to the U.S. Supreme Court.
In its May 2011 decision in CIGNA Corp. v. Amara, 563 U.S. ____, the Supreme Court held that a plan's SPD does not in itself "constitute the terms of the plan." The Court vacated the District Court's attempt to amend the CIGNA plan to conform with the more favorable benefits described in the SPD. This part of the decision was good news for employers that sponsor retirement plans.
However, the Court opined that other remedies might be available to plan participants if a court determined that a plan's fiduciary has acted badly. Those remedies included "reformation," which would allow the court to essentially amend the plan to correct for an employer's bad behavior of misleading employees. The Court remanded the case to the District Court to determine if reformation or other remedies were appropriate in the CIGNA case.
On remand (Amara v. CIGNA Corp.), the District Court held that reformation would be appropriate. The court determined that CIGNA had acted fraudulently when it intentionally issued notices that avoided mentioning that some plan participants would experience a delay in benefiting from the new plan design. The court determined that CIGNA's false representations had misled participants about their benefit entitlements. These elements – CIGNA'S fraud and participants' mistake - open the door to the application of reformation as a remedy.
The court ordered CIGNA to reform the plan so that all participants would begin to benefit from the new format without delay. This reformation will cause CIGNA to pay additional amounts to participants who would otherwise have waited before benefiting. However, the court has delayed implementation by staying its order, so that the parties may pursue an appeal. It is entirely likely that this case will have a second visit with the Supreme Court before it is finally resolved.
On initial reading, the terms of this "reformation" sound strikingly similar to the 2008 ruling: rewrite the plan terms as to benefits. In fact, the result is, practically speaking, the same. By saying that an SPD cannot amend the plan, but to then reform the plan to conform to an SPD that misrepresents the actual plan, appears to many to be a distinction without a true difference and a substantial weakening of ERISA protections. Whether this is what was truly intended may not be known until the CIGNA case, or other similar case, is before the Supreme Court on appeal.
Above all else, the CIGNA case reinforces a basic tenet: employers must be honest and accurate when communicating about plan benefits and changes to those benefits, regardless of whether the benefits are being expanded or reduced. While the employer may choose to emphasize the positive aspects of a change in plan benefits, it should not omit or mischaracterize information regarding other plan amendments.
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