In Young v. Verizon’s Bell Atlantic Cash Balance Plan, Nos. 09-3872 & 09-3965 (7th Circuit 2010), the cash balance pension plan maintained by Verizon Communications, Inc (“Verizon”) contained a drafting error, resulting from what the Court termed “a single honest mistake”, which if enforced literally would give Verizon pensioners substantially greater benefits than they expected. The Court concluded that ERISA’s rules-including the written plan requirement- are not so strict as to deny an employer equitable relief from the type of “scrivener’s error” that occurred here, and affirmed the district court’s judgment granting Verizon equitable reformation of its plan to correct the scrivener’s error.
In this case, Verizon had converted a traditional defined benefit plan to its cash balance pension plan. As part of this conversion, participants’ benefits under the defined benefit plan were converted to initial account balances. To make this conversion, certain “transition factors,” consisting of a series of multipliers that increased with an employee’s age and years of service, were used. However, in drafting the amendments pertaining to the conversion, an in-house counsel accidentally used language under which, when determining the amount of a participant’s initial account balance, the plan was required to multiply by two the product of (1) the cashout value of each participant’s benefit in the old defined benefit plan and (2) the applicable transition factor. The language should have provided for no multiplication of this product.
The issue in this case was whether Verizon’s claim for equitable reformation of its cash balance pension plan, in order to correct the scrivener’s error (or any other drafting mistake), is the type of equitable relief authorized by section 502(a)(3) of ERISA. The Court concluded that section 502(a)(3) authorizes equitable reformation of a plan that-as here- is shown, by clear and convincing evidence, to contain a scrivener’s error that does not reflect participants’ reasonable expectations of benefits. It said that, in each case, a court must look beyond the plan document to extrinsic evidence to determine the parties’ understanding of the plan. Thus, in this case, the reformation of the plan to correct the error must be allowed.
Some Thoughts: According to the district court, if not corrected, the scrivener’s error would have caused the plan to pay an additional $1.67 billion in benefits. Even so, the Court’s ruling puts a serious dent in ERISA’s written document rule, since it allows a court to look outside the plan to determine participants’ expectations. It remains to be seen where courts will go with this.
Also, the Court may have bailed out Verizon here, but shouldn’t Verizon have had outside ERISA counsel review the conversion amendments with so much at stake?