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Amara v. CIGNA Corp.

2010-11 preview of the U.S. Supreme Court

348 Fed. Appx. 627 (2nd Cir. 2009), cert. granted, 78 U.S.L.W. 3762 (June 28, 2010) (No. 09-804)

Can ERISA (Employee Retirement Income Security Act) plan participants recover upon a showing of "likely harm" when there is an inconsistency or conflict between the summary plan description and the terms of the plan itself?

In Amara, the court will address the question of whether a showing of "likely harm" is sufficient for a participant in an ERISA plan to recover when there is an inconsistency between the terms of the summary plan description (SPD) and the terms of the plan as expressed in the master plan document.

Under ERISA, an employee benefits plan is required to provide participants with a SPD and summary of material modifications (SMM) that are "sufficiently accurate and comprehensive." 29 U.S.C. §1022(a). Both the SPD and SMM must "be written in a manner calculated to be understood by the average plan participant." 29 U.S.C. §1022(a).

Plaintiffs-respondents are current and former employees who participated in CIGNA's defined benefit plan and cash balance plan. The plaintiffs allege that CIGNA failed to comply with ERISA's statutory and regulatory notice requirements by deliberately concealing "wear away" periods of benefit accruals.[1]  While the SPD did not mention a "wear away" period, the SMM gave the impression that employees would continue to accrue new benefits without "wear away." The cash balance plan documents provided that participants would receive benefits as the greater of A (the benefit amount under the traditional defined benefit plan) or B (the amount in the cash balance account). For many participants, the balance of their cash balance account was significantly less than their defined benefit amount. As a result, for many employees there were years when they worked without accruing any new benefits. At issue in this case is CIGNA's violation of ERISA's notice and disclosure requirements and whether the participants are entitled to the benefits as described in the SPD and SMM, rather than the undisclosed benefits described by the plan.

 The District Court granted judgment for the plaintiffs, finding that CIGNA had known the "wear away" periods would occur, had a duty to inform participants of "wear away" periods and had provided participants with materially misleading statements about the occurrence of "wear away" periods. The court found that CIGNA intentionally misrepresented the terms of the plan and violated ERISA's SPD and SMM requirements in order to avoid employee backlash over the new cash balance plan. In reaching its decision, the court rejected CIGNA's argument that the plaintiffs were required to show individualized detrimental reliance on the terms in the SPD in order to recover, finding that CIGNA was trying to shift the burden of proof impermissibly. Instead, the court allowed the plaintiffs to recover based upon the conflict between the SPD and plan because they had shown that they had experienced "likely harm." The court found that CIGNA's purposeful concealment of the full details of the new benefit plan prevented employees from taking action in response. Because all of the plaintiffs had received the same information and the same terms were applied to their benefits, the court held that they were all equally entitled to relief. The district court granted participants relief by adding the amount earned under the old plan (A), plus any amounts earned under the cash balance plan (B); this is known as the A+B approach and is consistent with the Pension Protection Act, which was enacted after CIGNA amended its plan. The Second Circuit summarily affirmed the District Court's decision, adopting the lower court's reasoning and findings.

The Circuit Courts of Appeals are split on the appropriate burden of proof plan participants must meet when there is a conflict between the SPD and master plan document. Standards have ranged from requiring no showing of reliance or harm (the easiest) to requiring detrimental reliance (the hardest). The Second Circuit is the only circuit to adopt the "likely harm" standard. The "likely harm" standard allows for a presumption of prejudice if a plan participant can show they were likely to have been harmed as a result of the inconsistencies between the SPD and plan document. The burden of proof then shifts to the employer to rebut the presumption of prejudice with evidence that the inconsistency was only a harmless error. CIGNA argues that the employees should be held to a detrimental reliance standard, which would require each individual plaintiff to show that he or she read the SPD or SMM and that, but for their reliance on the terms in those documents, they would have acted differently.

 AARP will file an amicus brief urging the Supreme Court to find that the "likely harm" standard is the most consistent with ERISA's objectives. AARP will argue that the "likely harm" standard is the most workable given the way people actually read and use their SPDs. A detrimental reliance standard ignores the difficulty for participants in an employee benefit plan to recall years after the fact, what documents they read and how they acted in response to those documents. This approach also ignores workplace communication regarding benefits. A detrimental reliance standard decreases the likelihood of consistent recovery based upon SPD violations because it is a subjective test that requires individualized determinations by the court.

The outcome of this case is important because it will determine the burden of proof necessary to recover under an SPD disclosure violation claim. By urging the affirmance of the Second Circuit's decision, AARP seeks to ensure that participants can obtain the benefits outlined in their SPD and that plans produce accurate plan documents. A reliance requirement undercuts the certainty of both retirement and health benefits, diminishing the protection ERISA offers to employees. The "likely harm" requirement gives employees a better chance of recovering the benefits promised to them in their SPD, while also preventing windfalls from harmless errors, thus striking an equitable balance between the plan sponsor and the plan participants.

[1] When a traditional plan formula is changed to a cash balance plan formula, the benefit earned under the old formula may exceed the amount determined to be the benefit under the cash balance plan formula. "Wear away" is when a participant does not earn any additional benefits until the benefit under the cash balance plan formula exceeds the benefit earned under the old formula.

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