Sixth Circuit Expands Use of Estoppel Against Pension Plans

July 2010Newsletters For Your Benefit

In May, the U.S. Court of Appeals for the Sixth Circuit held that a pension plan participant can invoke equitable estoppel in certain circumstances where the participant has received incorrect information about his benefits from those responsible for administering the plan. Equitable estoppel is the legal principle that protects one party that relied on another party's misrepresentations. In so ruling, the court joins the Second, Third, Fifth and Ninth Circuits in permitting the use of estoppel in the pension context. As a result, pension plan sponsors and administrators may find it more difficult to enforce the terms of the plan as written in instances where participants have received conflicting advice from plan officials.

The case is Bloemker v. Laborers' Local 265 Pension Plan. In 2005, after participating in the plan for nearly 28 years, the plaintiff contacted the plan office to discuss early retirement. In response, the plan sent him an application form that certified he was entitled to receive the retirement benefits described in the application materials.

The plaintiff decided to retire early on the basis of the written advice received from the plan. He completed the application form and began receiving benefits in the amount certified by the plan. Approximately 18 months later, the plan informed him that it had conducted an audit and discovered an error in the software used to compute benefits. The plaintiff's pension benefit had been calculated incorrectly. The plan reduced the plaintiff's monthly benefit and sought repayment of the excess amounts he had received. After exhausting his administrative remedies, the participant filed suit against the plan, its board of trustees and its third-party administrator. The court upheld the dismissal of the plaintiff's contract and breach of fiduciary claims but held that he could proceed with his equitable estoppel claim.

The court held that a pension plan participant can invoke promissory estoppel if he can show:

  1. Intended deception or gross negligence on the part of the plan;
  2. A written representation from the plan;
  3. Plan provisions that, although not ambiguous, do not allow for individual calculation of benefits; and
  4. Extraordinary circumstances in which the balance of equities strongly favors the application of equitable estoppel.

While the court had previously recognized equitable estoppel as an appropriate remedy in the context of welfare benefit claims, it had been reluctant to do so with claims for pension benefits. This reluctance stemmed from a concern for the actuarial integrity of pension plans and a concern that altering the terms of a plan based on transactions between officers of the plan and individual participants might prejudice the rights and legitimate expectations of other plan participants to retirement income. After considering recent decisions from other circuits, however, the court concluded these policy concerns are outweighed in situations where the representation at issue was made in writing and where the plaintiff can demonstrate extraordinary circumstances. The ruling will permit some pension plan participants to prevail on estoppel claims even where it will result in the participant receiving benefits in an amount contrary to the unambiguous terms of the plan documents.

The court did not elaborate on what will be required to prove all of these elements, but it did find the plaintiff had alleged facts in his complaint that, if true, would enable him to prevail and compel the plan to continue paying him the amount stated by the plan when he retired. There will be few, if any, situations in which plan sponsors and administrators are found to have deliberately misled a participant.

Accordingly, participants will need to show gross negligence to meet the first element of an estoppel claim. In this instance, the plaintiff alleged that the plan officials were aware of the correct facts and intended that he rely on their misrepresentation.

Similarly, it is unclear in what circumstances a court will find the written terms of a plan do not allow for individual calculation of benefits. The plaintiff in this case alleged that, given the complexity of the actuarial formulas on which his pension was based, it would have been "impossible" for him to calculate the benefit himself.

Following the lead of other federal appellate courts, the Sixth Circuit stated that in addition to satisfying the usual elements for an estoppel claim, a plaintiff must also show exceptional circumstances. It is not enough that a plaintiff reasonably relied on a written misrepresentation and suffered detriment as a result. A plaintiff seeking to invoke estoppel against a pension plan must show something more – a balancing of the equities that strongly favors the plaintiff. This requirement will give the courts some flexibility as they develop standards for the application of estoppel in the pension context. The court found the case before it presented exceptional circumstances, perhaps because the benefit calculation at issue had been certified by the plan's third-party administrator or because the participant had left the workforce and retired in reliance on the misrepresentation.

There appears to be a distinct trend away from the traditional rule that prevented pension plan participants from relying on misrepresentations about their benefits. Only the Fourth Circuit has expressly ruled that estoppel cannot be used against pension plans. Given the increasing receptiveness of the federal courts toward estoppel claims, plans may find it more difficult to disregard misrepresentations made to plan participants and especially difficult to reduce a retiree's monthly pension benefit once it is in pay status. Plan sponsors and administrators seeking to avoid estoppel claims should step up their efforts to prevent the errors that lead to such claims, by testing the software and other procedures used to compute benefits and by taking steps to protect the integrity and accuracy of the data relied upon in computing benefits.

For more information, please contact Brian D. Sullivan at 973.994.7525 or [email protected].