Magazine article Personnel Journal

Don't Make Benefits Promises Your Company Can't Keep

Magazine article Personnel Journal

Don't Make Benefits Promises Your Company Can't Keep

Article excerpt

The Varity Supreme Court case ruling implies that if a company acting as a plan fiduciary misleads workers about benefits under ERISA, employees can sue for individual relief. There can be even bigger implications.

It all started with a deception. The Supreme Court case Varity v. Howe was brought by employees of Massey Combines, a subsidiary created specifically as a repository for money-losing divisions and debts of Massey-Ferguson Inc., another Varity subsidiary. In convincing employees to transfer to the new company, Varity leaders mentioned nothing of Massey Combines' $46 million negative net worth and lack of solvency. Instead the Varity managers promised employees the new company had a "bright future" and that employees' benefits would be secure. When Massey Combines failed just two years later, 1,500 of its workers and 4,000 retirees were left without health coverage.

The Supreme Court ruled that these workers could sue for individual relief. The decision underscores the importance of truthful benefits communication and brings to light several implications, such as the importance of knowing when you're communicating as an employer only and when you're communicating as a plan administrator. Neal Schelberg, a partner at the international law firm Proskauer Rose Goetz & Mendelsohn LLP, illuminates the court's thought process and advises about benefits communications post-Varity, including an unaddressed problem spot.

Can you begin with the basics of the Vary v. Howe case?

The question the Supreme Court had to address was, "Were Varity representatives acting as a plan administrator when they communicated with the employees?" Varity [representatives] argued they weren't acting as a fiduciary. They said they were acting as the employer. But under ERISA [the Employee Retirement Income Security Act], there's [a situation] we call the two-hat dilemma. What we mean by that is an employer that sponsors a plan acts in two capacities: as the plan sponsorthe employer-and as the plan administrator. If the employer is acting as the plan sponsor, the case [history] is clearit can act in its own self-interest, because it has fiduciary responsibility to the shareholders to act in its own self-interest. Only when the employer acts as the plan administrator does it take on fiduciary responsibility under ERISA.

What if the employer acts as the plan administrator?

If the employer acts as the plan administrator, it takes on the ERISA requirements and must act in a prudent way-not act in the corporate interest, but solely in the interest of plan participants. The question the court had to address was: "Was Varity acting as a plan administrator, that is, assuming fiduciary responsibility, when it had that special meeting and deceived employees into transferring employment?"

How did Varity represent its case?

Varity argued that when it made representations to its employees, it was acting as the employer because it was talking about business conditions-its bright financial future-and it didn't owe a duty of loyalty to the plan participants. So what did the court decide?

The court said no, [Varity wasn't acting as the employer.] It held that: "Conveying information about the likely future of plan benefits, thereby permitting beneficiaries to make an informed choice about continued participation in the plan, and making intentional representations about the future of benefits," in the context of the company's "bright financial future" constitute a fiduciary function of plan administration.

What's important about that quote?

Its essence is: When an employer makes business statements about the future of the company, ordinarily those kinds of statements taken in a vacuum are the kinds of things [employers] say to shareholders, to creditors, to employees. There are no fiduciary duties attached there. But when you make those statements in the context of information relating to plan benefits and plan coverage, then the statements take on a different cast and at that point in time are statements relating to plan administration-therefore there are fiduciary duties attached. …

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