In Young v. Verizon’s Bell Atlantic Cash Balance Plan, 2010 U.S. App. LEXIS 16483 (7th Cir., 8/10/10), the plaintiff claimed the benefit of a hugely expensive “scrivener’s error.” The plan, a cash balance plan converted from a traditional defined benefit plan, set up opening balances for participants equal to the lump sum actuarial equivalents of their accrued benefits multiplied by a “transition factor” based on age and length of service (designed to compensate for the fact that the new benefit formula was less generous for older workers).
Like many plan documents, this one was verbose and went through many drafts before reaching final form. At one point, an in-house lawyer tried to make the opening balance provision more readable by relocating the phrase “multiplied by the appropriate transition factor described in Table I.” Unfortunately, he didn’t strike it from its original place. Read literally, the opening balance was now the prior plan benefit times the transition factor, with the product multiplied by the transition factor again. Squaring the multiplier naturally had a dramatic impact on the result ($1.67 billion in the aggregate, by the court’s estimate), but not until a year later, after the plan had been adopted, did anyone notice the error. The plan was then amended in an attempt to correct it. In the meantime, all communications with participants and benefit calculations used the transition multiplier only once.
The plaintiff retired before the corrective amendment and received a lump sum cashout of her benefit. Seven years later, she learned about the exact plan language and brought a claim for the additional benefit that would result from the double multiplication. The plan turned her down, so she sued.
A district court magistrate agreed with the plaintiff that disregarding the literal plan language would be “arbitrary and capricious.” He then turned around and agreed with the defendant that the double multiplier was unmistakably a scrivener’s error, whose application would be unreasonable. As a solution, he granted the plan’s counterclaim for equitable reformation of the document to excise the mistake. The 7th Circuit’s decision affirms that ERISA’s requirement that plans be administered in accordance with their written documents does not bar this remedy.
Not every court has taken the same view. Last year, in Cross v. Bragg (7/24/09), an unpublished opinion that was not discussed in Young, the 4th Circuit refused to allow a plan to correct a very similar error in the wording of its benefit formula. In that case, as in Young, the erroneous formula had never been included in the summary plan description or other communications, and benefit calculations had consistently used the intended formula. Other cases have been vague or ambiguous regarding the conditions under which reformation might be allowed. However, the case that the court regarded as most nearly on point was Int'l Union v. Murata Erie N. Am., Inc., 980 F.2d 889 (3d Cir. 1992), which allowed an employer to present evidence that the omission from its pension plan of a clause permitting it to recover surplus assets on plan termination was a scrivener's error and thereby allowed equitable reformation of the plan to avoid a "windfall" to the participants.
Assuming that the 7th Circuit’s view prevails, it must not be read too broadly. An employer that wishes to correct its plan documents must show by “clear and convincing evidence” that different provisions were intended, that the intended provisions have been consistently applied, and that nothing to the contrary has been conveyed to participants. Only bad drafting can be reformed, not bad decisions.
The court’s decision also confirms that corrections can be made without bringing formal legal action, unless and until there is a likelihood of a dispute with a participant over the terms of the plan. In the case at hand, the employer became aware of the error, and amended the plan, in 1998. It was not, however, required to go to court at that time. Seeking reformation when an actual plaintiff brought a lawsuit was sufficient.
As a further complication, the IRS regards adherence to the literal language of plan documents as essential to plan qualification and insists that amendments to correct a plan’s language to conform to its operation may be adopted only with IRS consent through the Employee Plans Compliance Resolution System (EPCRS). It gives consent only grudgingly (though it did approve the amendment in Cross v. Bragg). While there is no basis in the Internal Revenue Code or the regulations for elevating conformity to plan documents to the level of a qualification requirement, it is hardly prudent to invite a quarrel with the IRS. Therefore, the use of EPCRS to make any but the most trivial correction is advisable. IRS approval does not, however, as Cross v. Bragg demonstrates, offer protection against lawsuits by participants.