by Seth Safra and Jonathan Goldberg
A recent appellate court decision, Cottillion v. United Refining Co. et al. (3d Cir. Mar. 18, 2015), is a good reminder of the high cost that a drafting error can have for a plan’s sponsor. Although courts have recognized a “scrivener’s error” doctrine, the bar for establishing a scrivener’s error is high and the outcome can be unpredictable. The Cottillion case illustrates that the sponsor’s intent will not always win the day–even where the outcome does not make sense economically.
The Cottillion case involved a traditional defined benefit pension plan. The benefit under the plan was expressed as an annuity starting at age 65 (the plan’s “normal retirement age”). As is often the case, the plan allowed participants to start receiving benefits before age 65, subject to a reduction to reflect the fact that if payments start early, the participant will receive more payments than if the participant had waited until age 65. The plan had two categories of early pension, “early retirement” and “deferred vested”:
- Early retirement. To qualify for early retirement, a participant had to work for the company past age 59½ or 60 (depending on the circumstances). If a participant satisfied the requirement, he or she could receive an unreduced pension starting at age 62, and a slightly reduced pension starting at age 60: if payment started at age 61, the monthly payment would be reduced by 6.7%, and if payment started at age 60, the monthly payment would be reduced by 12.3%.
- Deferred vested. The deferred vested pension was available to anyone who terminated employment before age 60, provided that the employee had five years of service.
This structure is fairly typical for a traditional defined benefit pension plan. Typically, the early retirement pension is larger than the deferred vested pension–a reward for longer service. For example, an unreduced pension starting at age 62 typically is not available for a participant who did not qualify for early retirement.
But there was one problem in this case: the plan language did not specify the reduction for deferred vested pensions. Read literally, the plan provided for a reduction if you started an immediate benefit after working until age 60, but no reduction if you left before age 59.
The employer addressed the problem around 2002, adding a clarifying sentence that said a deferred vested pension starting before age 65 would be “actuarially reduced to reflect the earlier starting date thereof.” The actuarial reduction would result in deferred vested pensions being smaller than early retirement pensions–consistent with the employer’s presumed intent. Unfortunately for the employer, however, the plan had been paying deferred vested pensions without any actuarial reduction.
The employer tried to address this problem by adjusting benefit payments to reflect an actuarial reduction, and the employer tried to recover overpayments from participants. Affected participants sued, claiming that the 2002 clarification was a prohibited “cut back” of benefits. A federal district court and court of appeals agreed with the participants–allowing them to keep their unreduced pensions, even though the amount they were receiving was larger than the amount the plan would have provided if they had worked until age 60 and qualified for early retirement.
The obvious lesson from this case is that careful drafting matters. The court did not directly address the scrivener’s error doctrine (supported by cases like Young v. Verizon Bell Atlantic Cash Balance Plan), probably because benefits had been paid in accordance with the erroneous plan terms. The scrivener’s error doctrine still applies, but courts will invoke it only when there is clear evidence of the plan sponsor’s intent and that intent is consistent with participants’ reasonable expectations of benefits.
In this case, an ounce of prevention undoubtedly would have been worth a pound of cure.