BNA Pension and Benefits Blog

Hard cases really do make bad law. 

Every now and then an estoppel case pops up under ERISA, and the law is twisted and mangled to make it fit.   See, e.g., Livick v. The Gillette Co., U.S. App. Lexis 8261, 43 E.B.C. 2025 (1st Cir. 2008) (dictum), citing Hooven v. Exxon Mobil Corp., 465 F.3d 566, 578 (3d Cir. 2006); Mello v. Sara Lee Corp., 431 F.3d 440, 444 (5th Cir. 2005); Devlin v. Empire Blue Cross & Blue Shield, 274 F.3d 76, 85-86 (2d Cir.2001); Sprague v. General Motors Corp., 133 F.3d 388, 403 & n.13 (6th Cir. 1998) (en banc); Greany v. W. Farm Bureau Life Ins. Co., 973 F.2d 812, 821 (9th Cir. 1992); Kane v. Aetna Life Ins., 893 F.2d 1283, 1285 (11th Cir. 1990). 

Behold: the good old fashioned set of estoppel requirements is hauled out, and plaintiffs are told that, to prevail, they must show (at least) a misrepresentation of fact made expecting the other person to rely, and then  reasonable and detrimental reliance.  It is a state law doctrine and should be routinely preempted by ERISA unless it is somehow incorporated into ERISA under § 502.

Why not incorporate it into federal employee benefits law?  How shall I reject thee? – let me count the ways.  First, it is basically a contract doctrine, and a benefit plan is not inherently a contract in the first place.  You don’t need offer, acceptance, consideration, mutuality and so forth.  All you need is a plan. You don’t need reliance.  You don’t need to show that the participant even knew the plan existed, much less relied upon it.   Why not?  Because you would end up with people similarly situatated bu getting different benefits depending solely upon their awareness and understanding of the plan, which is exactly the wrong result under an employee benefits law.  Instead, one looks to the plan, the whole plan, and nothing but the plan.  And the plan that must be in writing.  (Described in an SPD that must be in writing). 

What about ambiguity?  Can’t you use estoppel to resolve an ambiguity in the plan?  Well, not estoppel, but parole evidence.  Note the difference: Parole evidence doesn’t require adverse reliance.  And if the parole evidence resolves the ambiguity, then the ambiguity is resolved for all beneficiaries, not just those who relied (or even knew about) the parole.

Are you persuaded?  Well, there are judges in almost every circuit who have heard these arguments, acknowledge them, and then wring their hands and think they are doing justice by knocking holes in the structure of ERISA.  Hard cases.  (Sigh).

In a matter of a few days, here are some headlines from the Pension & Benefits Reporter: "Report Says Health Costs Hurt U.S. Firms, Advocates End of Employer Financing System"; "CRS Says Price Transparency May Drive Down Costs"; "Reform Efforts Should Combine Options in Public, Private Sector, Health Group Says"; "Democrats Pounce on GAO Study Finding Taxpayers with HSAs Have Higher Incomes"; "Measure of Family Medical Spending Has Lowest Increase in Past Five Years" and the list goes on and on.

What I haven't seen for example, is a study of how the system will make the hardest decisions about health care: who gets care and who doesn't, especially at the beginning and ending of life, where a large portion of our health care dollars are spent?

In other systems, much of the care we hold so dear is not available to the very young or the very old and sometimes in the middle.  Some European cultures take a much more practical view of the end of life and focus more on dying in comfort rather than fighting a very costly, but losing battle using the most sophisticated (and usually expensive) methods to prolong life.

If a nationalized system is so much better, why is it that U.S. hospitals along the Canadian border have so many Canadians getting heart surgery for example?  Or why is there a three or four month wait in some areas of Canada to have a hernia repaired, when not emergency status?  I can imagine the response of a U.S. parent if he/she were told her/his son could not participate in school athletics because of a hernia and there would be a three month wait to have the repair done on an elective basis.  I have 4 married children living with their own children abroad and all of them are provided by their employers' medical care insurance that allows them to opt out of the national system, because they demand more access to specialists and quicker care than is available in the local system.  I have a close friend who is a physician who complains that people come into his office having decided they have a certain condition and demand a pill which they have seen advertised on TV.  There may be a less expensive alternative but if they don't get what they saw on TV they will go to some other physician down the road who will give it to them.  While these examples are anecdotal and by no means scientific, they do represent the reality that I live in.

Most of us remember well the public outcry when the HMOs and PPOs were first introduced and they had strong mechanisms to regulate access to health care.  State laws were passed to assure access to certain types of care and plaintiffs lawyers had a heyday.  State laws are filled with provisions that guarantee access to certain providers and types of care, at least some which add unnecessarily to the cost of health care.

I believe that without a mechanism to control what care is available and to whom and at what time, costs will continue to be a problem.  We have more technology than we can afford.  In national health care systems care is rationed by either long waits or guidelines that restrict access.  There is no political will in America to suggest that we really can't afford to give everyone everything they want when they want it.  As a result, no one asks the hard question, who is going to decide what care and when?

I have come to realize that "As time marches on" -- so do the errors in our client's retirement plans. So, with "spring cleaning" in the air, I decided to clean out the garage of plan errors and list, in no particular order, some of the errors that have occurred over the past year. The type of error might not be new -- but the resulting consequences clearly explain the often used phrase -- "No Good Deed Goes Unpunished."

I encourage you to do your own self-cleaning and feel free to add to my list. Here are 5 of my favorites for the year. As I continue to clean I will post more and I encourage you to do the same:

1.  A. Error: Distributions of large single-sum amounts to retirees that were never eligible to participate (and therefore never accrued a benefit) under the defined benefit plan.

B. Correction: Rather than try to amend the plan retroactively to include the affected group (that was valued at 25 million), we opted to take the IRS approved approach – ask for the money back. Well, 20 claims later and potential lawsuits pending we find ourselves looking at the TPA who, on its own accord, made the distributions in error.

2.  A. Error: Failure to make payments on individual plan loans.

B. Correction: Following the IRS guidance, repayment was requested in the manner outlined in EPCRS. I am always amazed to find that no matter how long the "loan payment holiday" was – in this case – up to 3 years, affected participants are still surprised that they owe the money on the original loan. In the future the client is giving serious consideration to putting on the loan document "THIS IS NOT A GIFT."

3.  A. Error: Improper vesting applied – some people were credited with too much vesting service – others had too little credited.

B. Correction: Adjust years of service according to the actual years of employment with 1000 hours or more. Sounds easy – try it some time – I dare you. With new payroll software and the ability to do manual overrides; adjusted service dates; adjusted DOH; adjusted DOT; customized coding; etc. – it's next to impossible to replicate employee's exact tenure at a large company. In my practice – the more sophisticated the payroll process, the harder it is to recreate the past.

We have opted to use assumptions (our way of applying rough justice) and have the issue pending with the IRS for approval in the VCP.

4.  A. Error: Improper deferral based on wrong definition of compensation was used.

B. Correction: Adjust prior deferrals based on the correct use of compensation. Again – not rocket science. In fact, this error is noted by IRS as the most recurring in their VCP program. The issue that I have found to be the most difficult is when a large client has so many pay codes and the language in the plan document (defining pensionable earnings) is so vague – that nobody really knows what type of compensation is eligible and what is not. Frankly, this begs the question – how does the employer know that the wrong definition of compensation was used in the first place? When I presented that to the employer – the response I got was – "You know it when you see it!" It's time – once again – for the litigators.

5.  A. Error: Improper application of the benefits formula under a defined benefit plan. Resulted in participants receiving excess benefits.

B. Correction: We decided to cure the error in 2 stages. First we asked for the excess to be returned. If it is returned we decided to gross-up the employee outside of the plan from corporate assets. If it is not returned we contributed the excess amount into the plan's trust. Second, we discovered that the error occurred based on the actuarial firm's independent interpretation of the benefit formula. It was shocking to the client that the actuary, on his own, decided to interpret the formula in such a manner that was inconsistent with the plain meaning of the written plan document. Needless to say, the actuarial firm paid for the correction, including the filing fee and attorneys' fees. It's good to have a signed, updated vendor agreement.