The Problem of Limited Remedies under ERISA

The Problem of Limited Remedies under ERISA

Yesterday two cases under ERISA showcased the limited remedies available to participants and beneficiaries of employee benefit plans.  Regardless of their reliance on the benefits, employees often have an uphill battle to gain the benefits, and they are not entitled to anything extra, other than attorney’s fees, if they win.

ERISA is the law that governs pension and other employee benefits.  It requires internal administrative appeals to be used before an employee or a beneficiary goes to court.  The appeals are decided by company personnel, or by outside administrators hired by the company, so they seldom favor the employees.

In the first case, heads they win; tails she loses.  The Fourth Circuit just turned down an appeal by a mother suing for the proceeds of her daughter’s life insurance policy.  The mother had taken out a life insurance policy on her daughter, as a dependent child.  After her daughter was murdered, she put in a claim for benefits under the policy.  The insurance company denied the benefits, on the basis that a child could be covered only up until the age of 19, or 24 if enrolled full-time in school.  The child was 25 at the time of her death.  (Debbie McCravy v. Metropolitan Life Ins. Co.)

The court ordered the return of the premiums paid for the life insurance only.  It cited other circuit courts also refusing to award the face value of a life insurance policy, but only the return of wrongfully withheld premiums.

When the insurance company is caught overcharging for insurance that it will not honor, it just repay the premiums.  When it is not caught, it gets to keep them.  There are no consumer protection-type remedies to influence the companies to catch the overpayments: when the rules say someone is ineligible for insurance, the companies should not keep the money and should notify the employee.

But yesterday the Supreme Court issued an opinion in another case under ERISA, arising out of CIGNA’s alteration of its pension plan.  Like many companies, CIGNA became alarmed at the cost of its promises to pay certain benefits to retirees, based on their years of service and last salary.  Many of these defined benefit plans were constructed on assumptions of high rates of interest on pension funds, and sometimes just plain “irrational exuberance.”  To save itself from having to pay for these benefits, CIGNA changed the plan to a cash balance equal to what each employee had already earned, and additional annual contributions.  It basically changed the plan to an IRA, and seeded each person’s fund based on how long the employee had been with the company.

The employees objected to the new plan, and claimed that CIGNA had not given proper notice of the change in benefits.  The description of the plan touted it as employee-friendly, an enhancement, and not a cost saver for the company.  None of these statements was true.  The trial court ordered CIGNA to pay benefits under a plan as reformed by the court.

The Supreme Court sent the case back for another look, based on a complex discussion of the history of trust law principles and how it relates to the statute.  The upshot is that the District Court may still impose a revised pension plan, but based on different authority.  And unlike the Fourth Circuit’s take, the issue of notice is key to the holding.

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