Reporting Penalties -- Notice Deficiency Must be Egregious

A recent growing trend in fiduciary liability claims is the demand for penalties for a Plan's purported failure to provide notices of benefit changes.  ERISA Section 204(h) requires the administrator of a defined benefit plan to provide advance notice of a plan amendment that reduces future benefit accruals, or reduces early retirement benefits on a prospective basis.  Failure to provide the Section 204(h) notices can result in the imposition of a $100 per participant penalty tax for each day until the failure is corrected.  In addition, an "egregious" failure to provide the notice can result in the amendment being nullified, so that the benefits eliminated by the amendment are restored. 

In Jensen v. Solvay Chemicals, Inc., No. 11-8092 (July 2, 2013), the Tenth Circuit Court of Appeals recently affirmed a district court's determination that employees were not entitled to any relief for their employer's violation of ERISA Section 204(h) notice requirements because the employees had failed to establish that the notice deficiency was "egregious."  The Court also held that the employees could not maintain a claim for promissory estoppel under ERISA Section 502(a)(3) because they could not demonstrate that they were influenced by the notice's deficiency.   Solvay dealt only with whether the failure was egregious, and not with the potential implication of the $100 per day penalty tax. 


Solvay converted its defined benefit plan into a cash balance plan and sent a notice to all participants. The lower court ruled that the company properly described all of the benefit changes, but the appellate court held that the company failed to properly describe the elimination of early retirement subsidies, and remanded the case for the lower court to determine whether and what relief was warranted for this single violation.  Following a bench trial, the district court concluded that no relief was warranted because the employees had not proved that the notice failure was "egregious" under ERISA.  ERISA Section 204(h)(6)(B)(i), 29 U.S.C. section 1054(h)(6)(B)(i), provides in part that a company's Section 204(h) notice failure is "egregious" if the failure was "within [its] control" and was "intentional," or if the failure was "within [its] control" and the company failed "to promptly provide the required notice or information after [it] discov[ed] an unintentional failure to meet the requirements of" Section 204(h). 

On appeal, the Tenth Circuit upheld the district court's conclusion that the company wanted to make all required disclosures and the omission about early retirement benefits "was accidental, no more than an oversight in the process of drafting a complex statutorily mandated notice." 

The employees alternatively filed an "Amara" claim under Section 502(a)(3) claim for promissory estoppel.  The court determined that the employees were not able to recover under a promissory estoppel theory because they were admittedly not influenced by the deficient notice in that they were well aware that they were losing certain benefits under the new plan.  In other words, the plaintiff participants could not recover because they did not detrimentally rely on the omission in the company's notice [i.e., no one retired early expecting benefits, only to discover that the plan had been changed].

Fid Guru's Take:  Solvay is useful precedent to combat the growing trend of plaintiff lawyers filing claims based on alleged disclosure violations.  This case demonstrates that inadvertent mistakes -- accidentally leaving out even some material information -- will not justify recovery under ERISA, at least not nullifying the benefit change.  The Court unfortunately did not address whether plaintiffs met the standard for $100/day penalties.  It would have been interesting whether participants can recover penalties even when a notice, albeit with a deficiency, was sent out.  In any event, this case demonstrates how important it is to ensure that your plan has fiduciary liability insurance coverage for reporting penalties under 502(c) and coverage for Amara-type equitable relief -- not all policies provide these coverages.