A recent Ninth Circuit decision, Gabriel v. Alaska Elec. Pension Fund, offers useful insight for deciding how to fix a pension overpayment.

Virtually every employer that administers a pension plan has experienced (or will experience) discovering a calculation error after incorrect payments have been made for several years–resulting in thousands of dollars of overpayments.  Fixing these overpayments is often difficult.  On the one hand, plan fiduciaries have an obligation to stop overpayments and restore losses from excess payments.  IRS guidance instructs plan administrators to recover overpayments from the affected participants.  On the other hand, participants who have received overpayments inevitably claim that they have relied on the incorrect benefit and that correcting the error would result in undue harm to them.  The affected participants often recognize that an incorrect benefit cannot be paid by the plan, but they argue that the cost of the correction should be borne by the administrator who made the error, rather than by the affected participant.

Since the Supreme Court’s 2011 decision in Cigna Corp. v. Amara (and even before that decision), many participants who received overpayments have alleged that an equitable remedy like “reformation,” “equitable estoppel,” or “surcharge” entitles them to keep overpayments.

The Gabriel case involved overpayments that were made under a multiemployer pension plan.  The plan sought to correct its error and recover overpayments, and the participant challenged the plan’s efforts.  The participant alleged that the overpayments had been caused by a breach of fiduciary duty for which the appropriate remedy was to allow the participant to keep the overpayments.

In support of his request, the participant invoked three equitable doctrines:  (1) reformation, (2) equitable estoppel, and (3) surcharge.  In a split decision, the Ninth Circuit rejected the participant’s request.  We want to share three reactions to the Ninth Circuit’s decision:

1.  Where is the line between an innocent mistake and a breach of fiduciary duty?  In Gabriel, it was undisputed that the participant was not entitled to the benefit he was receiving from the plan.  To keep the overpayments, the participant therefore had to show both that (a) the overpayments resulted from a breach of fiduciary duty and (b) keeping the overpayments was “appropriate equitable relief” for the breach.

The Supreme Court and many lower courts have recognized that even the best administrators sometimes make mistakes: the mere fact that a mistake was made does not necessarily mean that a fiduciary duty has been breached.  The Ninth Circuit, however, skipped the question of whether a fiduciary duty had been breached.  Instead, the Ninth Circuit assumed a breach of fiduciary duty and went straight to the remedies question: whether the participant had an equitable right to keep his overpayment.

2.  Reformation and equitable estoppel are not appropriate remedies for an administrative error.  Equitable doctrines can be frustrating, because the requirements for relief under an equitable doctrine vary by court and by case, without reliable consistency.  But the Ninth Circuit’s opinion reflects a consensus that reformation and equitable estoppel are probably not appropriate for an administrative error.

• Reformation involves “reforming” the terms of a plan to correct a mistake of fact or law.  In this case, the participant argued that his pension plan should be reformed to provide the benefits that he had been receiving.  Consistent with other courts, the Ninth Circuit held that reformation is appropriate only if there is an error in the plan’s terms that resulted from a mistake regarding facts or law.  For example, if the plan had imposed a vesting condition that violated ERISA, an appropriate remedy might have been to reform the plan to conform to the legal requirements for vesting.  That remedy was not appropriate here, because the plan’s provisions were unambiguous and complied with applicable law.

• Equitable estoppel can require a fiduciary to provide a benefit that it had previously promised, but only in extraordinary circumstances – for example, where a plan fiduciary has led a participant to believe, to his or her detriment, that an ambiguous plan provision would be interpreted one way but later imposed a different interpretation.  Participants who receive overpayments often invoke equitable estoppel to support their right to keep the overpayments, with mixed success.  In this case, the Ninth Circuit held that equitable estoppel was not available because the terms of the plan were unambiguous.

3.  The law on “surcharge” is still being developed.  The Supreme Court’s Amara decision was noteworthy because it called into question a decades-old understanding that equitable relief generally did not include money damages.  The majority opinion in Amara referred to the equitable doctrine of surcharge, under which a fiduciary may be “surcharged” to remedy a harm caused by the fiduciary’s breach.  Since Amara, three federal courts of appeal have held that surcharge can be applied to award money damages to a participant for breach of fiduciary duty.  All three cases involved participants who had detrimentally relied on incorrect information from their plans:

• McCravy v. Metro. Life Ins. Co. (4th Cir. 2012) involved a participant who had paid premiums for a life insurance benefit covering his dependent daughter–only to find out after his daughter died that she was not eligible.  Because it was too late to procure other coverage, the Fourth Circuit held that simply returning the premium payments was not a sufficient remedy; so the court required payment of the life insurance benefit.

• Gearlds v. Entergy Servs., Inc. (5th Cir. 2013) involved an employee who retired and irrevocably waived coverage under his wife’s medical plan after being told that he would be eligible for retiree medical benefits from his employer–only to find out five years later that he should not have received retiree medical benefits from his employer.  The Fifth Circuit did not reach the question of whether providing incorrect eligibility information was a breach of fiduciary duty; the court skipped to the remedy question and held that if there was a breach, monetary relief would be available.

• Kenseth v. Dean Health Plan, Inc. (7th Cir. 2013) involved a participant who underwent surgery after being told by his medical plan’s customer service line that the surgery would be covered–only to find out later that the surgery was not covered.  Again, the Seventh Circuit did not decide whether providing incorrect information was a breach of fiduciary duty; the court skipped to the remedy question and held that if there was a breach, monetary relief would be available.

In Gabriel, the Ninth Circuit’s majority noted that it was not bound by decisions of other circuits and went through a detailed analysis of the surcharge remedy.  The majority concluded that surcharge is available only if the fiduciary breach has caused a loss to the plan’s trust or unjust profit to the breaching fiduciary.  A dissenting judge disagreed, saying that surcharge should be available for any breach of fiduciary duty.

The Ninth Circuit’s decision and lack of consensus illustrate the uncertainty that exists with regard to the equitable remedies available when a mistake is made.  We expect to see more cases in this area.  The outcome of each case will be difficult to predict, but this much is clear: plan administrators can reduce their downside risk by reviewing administrative procedures to ensure that plans are administered in accordance with their terms and that communications to participants are accurate.