The Employee Retirement Income Security Act (ERISA) requires, among other things, that employers provide adequate benefit booklets, inform employees of plan modifications and provide employees with complete and correct plan information. Given the complexity of benefit plans and the downsizing of many human resource staffs, this is a tall order. In July, the U.S. Court of Appeals for the Second Circuit in New York issued an opinion in a case that shows what might happen if a company fails to fulfill its obligation to inform.

Carol Becker participated in her company's Retirement Income Plan. On January 1, 1989, she became eligible for early retirement under the plan's "55/10" rule, which allows employees at age 55 with at least ten years of service to retire before the age of 65. Prior to 1990, the plan paid retirement benefits only in annuity form. On April 19, 1990, the company announced that as of September 1, 1990, retiring employees could elect to receive benefits in one lump sum.

The company sent estimates of retirement benefits to all eligible employees. The amount that each employee was entitled to receive, both as an annuity and as a lump sum, was included. In September and October the company held presentations on retirement benefits for all eligible employees.

Suffering from cancer, Becker took short-term disability leave on April 20, 1990. It became apparent that she would not return to work before her leave expired, so she met with a benefits counselor to discuss whether she should retire or take long-term disability status.

The counselor explained that the monthly benefit under long-term disability would be larger than the monthly retirement benefit to which she was then entitled, and that her retirement benefit would grow if she deferred retirement. She said, "There may be some point at which the retirement income may be higher than what you receive on disability, so that would be an appropriate time for you to switch from disability to retirement.

The counselor never mentioned the lump sum option and Becker did not tell the counselor that she was terminally ill. The counselor referred to decisions and benefits that would arise several years in the future. At one point, Becker asked, "If I take long-term, can I take retirement any time I feel like it?" The counselor replied, "Right." Becker postponed her retirement and took long-term disability. The paperwork compared the benefits available in the disability and retirement packages but did not mention the lump sum option.

In late October, after her condition worsened, Becker decided to retire and asked about the lump sum option. She was told she would not receive her lump sum if she died before the effective date of her retirement. Becker asked that her retirement be retroactive to October 1, 1991. She was told the plan did not permit this, but the representative agreed to expedite her papers and to make her retirement effective November 1, 1991.

Carol Becker died October 29, 1991. Her husband was ineligible to receive her lump sum payment, which would have been about $212,620. Instead, he received benefits available to spouses of vested plan participants who die before retiring. These payments equal 20% to 30% of what an annuity would have paid-$103.42 per month.

Mr. Becker and his wife's estate sued the company claiming that it had issued an inadequate benefit booklet, failed to issue a statement of material modification describing the lump sum option and failed to provide complete and correct information on plan options.

The U.S. district court granted the company summary judgement-holding that although the booklet did not state that the lump sum would not be paid if the participant dies before a certain date, the court decided the booklet sufficiently apprised plan participants that an employee who dies before the effective date of his or her retirement will not receive vested pension benefits. The court also stated that the benefits counselor was not obligated to inquire about Becker's health or to provide advice based on what she knew about her condition.

The Second Circuit disagreed, finding that the booklet and the advice were misleading. The court recognized that plan booklets need not "anticipate every possible idiosyncratic contingency that might affect a particular participant's or beneficiary's status," but that a company has not only a duty not to misinform, but also "a duty upon inquiry to convey to a lay beneficiary . . . correct and complete material information about his status and options." Stating that the possibility of death in the period between the election of retirement and the effective date of retirement is not such a remote or "idiosyncratic" contingency, the court found it unnecessary to pass on the booklet alone, since the counselor exacerbated the lack of clarity inherent in the booklet by giving advice that may have led Becker to believe that she could retire at any time, effective immediately or retroactive to the first of the month.

by John T. Leahy, J.D., LL.M., who practices labor and employment law on behalf of management in New York and Massachusetts, can be contacted at 413/238-0223 or at lawquest@valinet.com