Verizon Allowed to Fix Plan Drafting Mistake

Admitting it was creating “tension” with the plan documents rule in federal benefits law, a federal appellate court has allowed an employer to correct a drafting error that could have cost its cash balance plan $1.6 billion in unanticipated benefits. 

Opening its decision in Young v. Verizon’s Bell Atlantic Cash Balance Plan by quoting a 2010 U.S. Supreme Court decision that “People make mistakes. Even administrators of ERISA plans,” the 7th U.S. Circuit Court of Appeals, upheld a lower court ruling allowing Verizon Communications Inc. to fix the drafting error (see Verizon Escapes $1.6B Pension Liability).

Circuit Judge John Daniel Tinder, in writing for the appellate panel, asserted that courts should deal with a case involving a so-called “scrivener’s error” the same way judges now handle disputes over ambiguous plan document language – by “look(ing) beyond the plan document to extrinsic evidence to determine the parties’ understanding of the plan.”

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“ERISA’s (Employee Retirement Income Security Act) rules for written plans are strictly enforced, but they are not so strict as to prevent equitable reformation of a plan that is shown, by clear and convincing evidence, to contain a scrivener’s error that is inconsistent with participants’ expected benefits,” Tinder wrote. “…Drafting mistakes in ERISA plans may take many forms; some involve language that is ambiguous on its face while others, like the mistake here, involve language that is not intrinsically ambiguous but still misstates participants’ benefits. It would not further the purposes of ERISA to allow courts to correct one type of mistake but not the other.”

Tinder said the panel was promulgating a standard for presenting evidence in future drafting effort cases that it said should ease some of the tension with ERISA’s rule that plan document language should govern plan operations.

“Only those who can marshal clear and convincing evidence that plan language is contrary to the parties’ expectations will have a viable claim,” Tinder explained. “This standard of proof is rigorous, requiring evidence that is clear, precise, convincing and of the most satisfactory character that a mistake has occurred and that the mistake does not reflect the intent of the parties. The evidence also must be objective and not dependent on the credibility of testimony (oral or written) of an interested party.”

Tinder declared: “These high standards of proof should deter an employer from seeking to reform plan language simply because it has proven unfavorable.”

 

(Cont...)

A Multiplication Error  

According to the court, plaintiff Cynthia N. Young’s 2005 suit argued that, during the conversion, the plan should have twice multiplied the cashout value of each employee's stake in the old defined benefit plan by a variable "transition factor" that was based on age and years of service. The official who drafted the document setting out the conversion terms said the plan only intended a single multiplication.

If the court ruled that Verizon had to implement the mistaken double multiplication, the lower court judge indicated, members of the class bringing the suit along with Young would have enjoyed a $1.67 billion windfall including $400,000. Young.   More than 5,780 participants would receive unanticipated increases in their opening pension balances of $100,000 or more, the lower court said.

In the appellate ruling, Tinder expressed surprise at the circumstances leading to the plan drafting mistake. “Bell Atlantic charged a single in-house attorney, Barry Peters, with revising a critical provision of a multi-billion dollar pension plan, apparently without critical review by another ERISA expert,” he wrote. “It is baffling that a major corporation would not invest greater resources to ensure accuracy in the drafting of such an important document.”

The 7th Circuit ruling is available. here

 

Majority of ESOP Sponsors Offer another Retirement Plan

Approximately 90% of ESOP Association members surveyed reported having retirement savings plans in addition to the ESOP (employee stock ownership plan) including 401(k) plans, pension plans, stock purchase plans, and stock options. 

The survey by the ESOP Association and the Employee Ownership Foundation found 23% of respondents said the ESOP was created to provide an additional employee benefit, and another 21% stated the attraction of the employee ownership concept as the reason. Eighty-four percent of respondents agreed that the ESOP improved motivation and productivity.   

The survey also found 78% of companies advertise the fact that they are employee owned through Web sites, in company literature, and in marketing campaigns, according to a press release.  

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In 2010, the average age of the ESOP was reported to be 15 years as opposed to prior surveys in which the ESOPs reporting were much younger.  In addition, the average account balance has risen dramatically to $195,222.65.  

The top reason for establishing an ESOP has not changed over the last decade, with 50% of the respondents reporting that their ESOPs were created as part of an exit strategy, or a buyout from current owners.   

The figure for the amount of stock held by the ESOP has increased dramatically to 78% in 2010, up 10% over the 2005 survey data, and up 12% compared to the 2000 data.  The number of currently leveraged ESOPs has decreased with 52% of companies reporting that they are not currently leveraged and have paid off ESOP debt.  This reflects the increasing age of the ESOP as most ESOP loans are a 7-12 year term, the press release said.   

The survey is conducted every five years and 460 members participated in 2010. A publication detailing all 45 questions and responses will be available for purchase by members and non-members in the fall of 2010. 

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