Guest Article

(From the August 2, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Plan Administrators May Be Estopped from Correcting Pension Benefit Calculations

The Sixth Circuit has joined a growing number of U.S. circuit courts which, in certain circumstances, will prevent an ERISA pension plan administrator from correcting an inaccurate benefit calculation. Where the inaccurate benefit is represented in writing and extraordinary circumstances exist in which the equities strongly favor the participant, the Sixth Circuit now recognizes equitable estoppel by which a plan administrator can be prevented from correcting a previously calculated benefit amount notwithstanding the terms of the plan.

Sympathetic Facts

In Bloemker v. _________, the participant worked as a laborer and was a member of the local union. By January 2005, he had participated in his company's pension plan for nearly thirty years. That month he received his annual statement of benefits from the plan that estimated his monthly benefit to be approximately $2,666.69. Seeking to retire, he contacted the third-party administrator for a formal calculation of his pension benefits. In response, the administrator provided a letter stating that, if he elected to retire on April 1, 2005, he would be eligible for monthly, single-life annuity payments of approximately $2,564.00. Further into the process of applying for retirement benefits, the participant received an election form certified by the third-party administrator stating that, if benefits were elected in the form of a joint and survivor annuity with the spouse, the participant would receive $2,339.47 per month, and after his death his spouse would receive $1,169.75 per month.

The participant elected the joint and survivor annuity and received the promised monthly benefit payments until September 2006, when he was notified by the administrator that an error had occurred in his benefit calculation. Instead of $2,339.47, he was actually entitled to only $1,829.71 per month. Beginning January 2007 his monthly benefit payment was reduced to the corrected amount. Since the participant had been overpaid $509.78 per month for 22 months, the plan requested he establish an arrangement to repay those amounts.

After exhausting his administrative remedies (i.e. the plan's claims procedure), the participant sued in Federal district court claiming, among other legal theories, that equitable estoppel prevented the plan from changing the amount of the benefit it had promised to pay him. The participant alleged that the plan and administrator made material misrepresentations, upon which the participant reasonably relied to his detriment and, therefore, under the theory, the plan was estopped as a matter of equity from changing the promised benefit amount. The district court refused to recognize the claim, reasoning that prior Sixth Circuit precedent held that equitable estoppel could only be applied in welfare plan cases.

Sixth Circuit Breaks Precedent

The Sixth Circuit Court of Appeals acknowledged its longstanding concern with recognizing equitable estoppel in pension benefit cases. Allowing such claims would enable the terms of the plan to be altered by dealings between plan officials and individual participants, to the detriment of the rights and legitimate expectation of others (e.g., the plan sponsor and potentially other participants). However, the court decided to break with this precedent, concluding that such reasons were not sufficient to defeat claims of estoppel where representations of pension benefits were made in writing and extraordinary circumstances are demonstrated. Citing similar holdings in the Second, Third, Fifth, Seventh and Ninth Circuits, the Sixth Circuit court held that a participant can invoke equitable estoppel notwithstanding the unambiguous terms of a pension plan. It held that the traditional requirements must be satisfied, including proof that the plan engaged in intentional deception or such gross negligence that it amounts to constructive fraud - and, the representation must be in writing, the plan formula must not allow for individuals to calculate the benefits themselves, and extraordinary circumstances must exist under which the equities strongly favor the participant. The case was remanded back to the district court for further proceedings consistent with the court's opinion.

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