The Mistaken Fiduciary: Can You Correct Overpayments to U.S. Retirees?

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Even the best run pension plans occasionally pay retirees the wrong amount due to errors in employee classification, or calculating participant service or compensation. Correcting underpayments is easy enough – though it is important to remember that interest is required –but what happens after a pension plan discovers an error after paying the retiree too much or even a benefit to which a retiree was never entitled?

The United States Court of Appeals for the Ninth Circuit recently confronted this issue when a retiree, who was found never to have had enough qualifying service to have vested in his pension, sought to enjoin the plan from cutting off his payments. In Gabriel v. Alas. Electrical Workers’ Plan, the retiree claimed that he would never have stopped working if he had known he had not qualified for a pension. He sought equitable relief under the U.S. Supreme Court’s CIGNA v. Amara decision, finding that participants could obtain traditional equitable relief for certain violations by plan fiduciaries.

The Ninth Circuit rejected the retiree’s claims under each of the three forms of equitable relief discussed by the Supreme Court in its decision.

  • The court rejected the retiree’s estoppel claim that the plan couldn’t discontinue what it had been doing because it found that there could be no estoppel based on oral statements when the plan language was clear. To recognize such claims might jeopardize the actuarial soundness of a plan and the benefits of legitimate participants. The court noted that the retiree was also ineligible to rely on estoppel, because he was aware that he had failed to qualify for the pension.
  • The court refused to reform the plan to require it to provide the pension, because there was no mistake in the plan document.
  • A surcharge was denied, because there was no loss to the trust to be reimbursed by the continuing payments and the trustees were not unjustly enriched.

In effect, the court rejected the retiree’s efforts to use CIGNA v. Amara in an action that was not to the benefit of the trust.

While the court upheld the plan’s suspension of the unearned pension, it did not comment on whether the plan had an obligation to recover the improper payments it had previously made. The plan had apparently dropped its lawsuit to recover those payments, but was that appropriate?

The IRS correction procedures in the voluntary correction program in Rev. Proc. 2013-12 require a plan sponsor seeking a compliance statement to demand repayment plus interest when overpayments have been made. However, they also indicate that if the participant does not make the repayment, the plan sponsor must make up the difference to place the plan in the same position as if the overpayment had not been made. It does not appear that the IRS requires that the plan sue the participant to recover.

An Ounce of Prevention.

There are a number of decisions in which participants attempted unsuccessfully to keep overpayments that had been communicated in erroneous benefit statements. See, e.g., Stark v. Mars Inc., 879 F. Supp. 2d 752 (S.D. Ohio 2012, affd by the Sixth Circuit Court of Appeals).

These cases underscore the importance of using warning language stating that the amount shown on the benefit statement is only an estimate, and that the final amount of a pension must be determined by the plan’s actuaries. But by the time a participant applies for a pension, as the participant in this case did, every plan needs to do a final careful check of eligibility and every element relevant to the pension calculation to avoid this type of litigation and the need to make retroactive corrections. The plan might also want to notify new retirees that it still retains the right to correct mistakes. Playing catch-up later could lead to expensive legal action even if the plan fiduciaries win.

 

Topics:  Overpayment, Pensions, Retirement, Retirement Plan

Published In: Civil Procedure Updates, Civil Remedies Updates, Finance & Banking Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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