No employee benefit plan is immune from mistakes. Those mistakes
can take the form of errors embedded in plan documents. Thus,
employers and administrators occasionally encounter difficult and
costly problems when a mistake in a plan document promises an
unintended benefit to plan participants.
Mistaken plan provisions are often referred to as
"scrivener's errors." Such errors can occur when
"extra" plan language is written into a document
accidentally, or when necessary plan language is inadvertently
omitted from the plan. In either case, the result can be a costly,
unintended consequence which can be enforced under ERISA. That law,
after all, requires the plan to be administered according to its
terms.
The Internal Revenue Service (IRS) has a defect correction program
that may be an option to bring a retirement plan into compliance
with tax law requirements to preserve its "qualified
plan" status, or to bring a non-qualified plan of deferred
compensation into compliance with special non-qualified plan
rules.
The Department of Labor also administers a fiduciary correction
program which may or may not provide a solution.
These agency programs may provide a cure for uncomfortable
situations when they arise. But some problems are not necessarily
resolved with these agency programs. In fact, recent court rulings
have stated that IRS procedures may resolve tax compliance issues,
but not the plan's obligations to participants. Under
traditional legal principles, courts have stated, it is necessary
to obtain judicial approval in a request for "equitable
reformation." This is an unattractive option. It is
potentially costly, and court proceedings are generally a matter of
public record.
To take an actual example, one employer's pension plan was
changed to include a new benefit formula which called for greater
plan benefits. The new formula was in the plan for several years,
but lower benefits continued to be calculated under the old
formula. When the error came to light, the plan administrator
concluded the new formula was a mistake. The participants sued for
more benefits under the new formula, and the final result was
greater payouts by the plan.
Given the potentially costly problems that can arise with
documentary mistakes, what steps should an employer or plan
administrator consider when a scrivener's error is encountered?
First, examine the problem with a small team of key people, the
smallest group reasonably feasible. Second, suspend communications
concerning the error with anyone outside of the team until a sound
game plan is formulated. Third, confer with an employee benefits
attorney to consider the issues and options and help set the game
plan. Fourth, implement the game plan with care and with an eye out
for the various parties who might take a position adverse to the
plan or its fiduciaries.
As long as the courts consider themselves to be the exclusive
source for equitable reformation and correction of scrivener's
errors, those mistakes will require caution in plan administration,
with no guarantees for an easy solution.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
