A recent case out of Illinois with similar facts suggests that the plan can be equitably reformed. The Seventh Circuit ruled that Verizon could reform its pension plan so that pensioners would not receive greater benefits than expected. But the court set a high bar for reformation — clear and convincing evidence must show that the plan contains a “scrivener’s error” and does not reflect participants’ reasonable expectations of benefits.

The Seventh Circuit had never considered whether §502(a)(3) authorizes equitable reformation of an ERISA plan due to a scrivener’s error, but concluded that the section allows court reformation of an ERISA plan to avoid an unfair result, such as increasing employee benefits contrary to the expectations of the plan terms. However, such a claim for equitable relief is subject to the traditional equitable defenses at common law.

In Verizon’s case, the employee raised the defense of good faith and fair dealing, under which a party may be precluded from reforming a mistake caused by its own “gross” negligence. But while Verizon’s failure to prevent the drafting mistake was “profound” negligence, the court found that this institutional failure did not show a lack of good faith. Verizon never misinterpreted its intended meaning of the cash balance plan, and made great efforts to accurately communicate how participants’ benefits would be calculated. Similarly, the court rejected an unclean hands defense, under which equitable relief is denied if it would give the plaintiff a wrongful gain. Although Verizon made a mistake, it did not attempt to deceive plan participants regarding their benefit rights under the intended meaning of the plan.

Source: Young v Verizon’s Bell Atlantic Cash Balance Plan, (7thCir 2010) 160 LC ¶10,299.