Court Ruling Serves as Warning for Employer Retirement Plans

The Third Circuit Court of Appeals sided with former employees last week in a high-stakes retirement plan case. Cottillion v. United Ref. Co. (3d Cir. 2015).

At issue was the calculation of an early retirement benefit for deferred vested participants (DVPs). DVPs are plan participants who leave a company before retirement age, but are nonetheless entitled to a benefit upon reaching age 60. United Refinery Company (the plan sponsor) reinterpreted the plan document and concluded that they had been overpaying this group of retirees. To correct the error, the company reduced benefit payments and sought reimbursement from the retirees affected. The retirees sued as a class, claiming United Refinery Company had violated the anti-cutback rule of the Employee Retirement Income Security Act (ERISA). This rule prohibits plans from reducing a person’s earned benefit amount. The District Court ruled in favor of the retirees.

On appeal, the court determined that the company’s interpretation of the plan was an ERISA violation under the anti-cutback rules. Last week, the court ordered the company’s retirement plan to pay the original higher benefit amount and to reimburse those who were cut back. It differs from precedents set in several other federal circuits with regard to how much courts must defer to plan sponsor decisions. Here, the court sidestepped the question of deferring to plan sponsors and simply stated that the company’s interpretation found “no support in the text of the plan . . . .” This is an unusual ERISA decision that may well be appealed to the U.S. Supreme Court.

This visible case serves as a warning for employers to review all plan documents and practices to ensure they are consistent. It is surprisingly common to find conflicts, and it is the employer’s responsibility to identify and correct conflicts and discrepancies before employees file suit.