2nd Circuit Agrees with Reformation of CIGNA Cash Balance Plan

The 2nd U.S. Circuit Court of Appeals has agreed with a district court’s reformation of CIGNA Corporation’s cash balance pension plan, and decided the court had discretion to reform the plan.

The appellate court noted that in the Supreme Court’s review of an earlier decision in the case, the high court agreed that courts usually treat Employee Retirement Income Security Act (ERISA) plans as trusts. But, when considering whether reformation is a remedy under ERISA, the high court exclusively referred to principles of contract law, not trust law.

The 2nd Circuit said that focus is consistent with rules governing the restatement of trusts, which hold that trust reformation is dictated by principles of contract law where consideration is involved in the creation of a trust. Under contract law, when one party causes another to agree to a contract by using fraud or intentional misrepresentation, a court may reform that contract to reflect the terms as represented to the defrauded party.

“To hold otherwise would produce the unreasonable result that a pension plan could only be reformed when the employer is mistaken about its attributes, but not when employees are deceived,” the appellate court wrote in its opinion.   

The long-running case stems from CIGNA’s conversion in 1998 from a traditional defined benefit pension plan to a cash balance pension plan. Under the new plan, participants were guaranteed to receive at least the value of their already-accrued benefits from the traditional plan if the value of their cash balance account at retirement amounted to less than the value of traditional plan benefits. In communications to employees, CIGNA said the initial account balance of the cash balance plan represented the full value of benefits accrued in the traditional plan for each participant.

However, the initial account balance was actually lower since the conversion of traditional plan benefits to the cash balance plan included an adjustment for the provision that an employee’s beneficiaries were guaranteed to receive the employee’s benefit whether or not the employee died before retirement. Also, the accounts of employees in the cash balance plan were subject to a formula affected by interest rates, which could result in an experience called “wear away,” with which it was possible for an employee to work years after the plan conversion date before benefits in the cash balance plan equaled benefits accrued in the traditional plan.

In its first decision, the district court ruled there was no wrongdoing on CIGNA’s part in its calculation of benefits when it moved from the traditional plan (what the court calls Part A) to the cash balance plan (Part B), but it found CIGNA liable for inadequate disclosures relating to the conversion. The court applied the 2nd Circuit’s “likely harm” standard, a “presumption of prejudice in favor of the plan participant after an initial showing that he was likely to have been harmed,” and ordered “A + B” relief, whereby the CIGNA plan would provide class members with “all accrued Part A benefits in the form those benefits were available under Part A, plus all accrued Part B benefits in the form those benefits are available under Part B.”  The court made its decision pursuant to relief provided under ERISA Section 502(a)(1)(B). 

The case was appealed to the 2nd Circuit, which affirmed the district court’s decision, and that led to a petition to the Supreme Court to hear the case. The high court said in its opinion that Section 502—which speaks of “enforcing” the plan’s terms, not changing them—does not suggest that it authorizes a court to alter those terms where the change seems less like the simple enforcement of a contract as written and more like an equitable remedy. However, the Supreme Court remanded the case back to the district court for consideration of whether reformation of the plan was a remedy pursuant to ERISA Section 502(a)(3). The district court reached the same conclusions in its second decision as in the first. The case was again appealed to the 2nd Circuit. 

In its latest opinion, the appellate court agreed with the lower court finding that CIGNA engaged in fraud or similarly inequitable conduct. CIGNA’s deficient notice led to its employees’ misunderstanding of the content of the contract, and CIGNA did not take steps to correct its mistake. 

On this appeal, the plaintiffs in the case disagreed with the provision of A + B benefits, saying some employees that earlier terminated employment would not benefit or be made worse off by that calculation. CIGNA used this to argue that its disclosures were accurate with respect to those participants, so there was no fraud. But, the court said that even if some employees who already terminated received a benefit under Part B as large as under the A + B remedy, CIGNA’s statements to those employees were still deceptive because they concealed the possibility of wear away of their accounts had they remained employed, and misled them about the conversion of their accrued benefits into the Part B plan. “Regardless of how benefits actually accrued, at the time of conversion, their Part B benefits were at risk of wear away due to fluctuating future interest rates,” the court wrote. 

CIGNA argued that misleading representations made in the plan’s summary plan description (SPD) are inconsistent with contract law allowing reformation of terms of a plan due to fraud or misrepresentation because the SPD does not constitute terms of the plan. The 2nd Circuit noted that the district court did not read CIGNA’s communications about the plan to be terms of the plan but as evidence of fraud and evidence of what CIGNA’s employees understood the transition from Part A to Part B to entail. The appellate court also agreed with the district court that, in this case, reforming the CIGNA plan based on CIGNA’s misleading representations does not impermissibly grant plan administrators the power to set plan terms.