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Former Employees Can Sue Retirement Plans

The U.S. Court of Appeals for the 7th Circuit decided a case that preserves the right of former employees, including retirees, to sue their retirement plans even if they have already taken full distributions from the plan. The case is Harzewski v. Guidant Corporation [PDF].

The court found that if former employees have cashed out their benefits, but believe the plan administrator's unlawful actions caused an unnecessary reduction in the account's value, they have a legal right to sue the plan for the amount of benefits they lost due to these allegedly illegal acts.

In this case, the plaintiff alleged that the employer (who was also acting as plan administrator) allowed plan participants to invest their contributions in company stock. At the same time, the company was hiding negative information about a key company product which caused the stock to have an inflated price.

The company urged the U.S. Court of Appeals for the 7th Circuit to dismiss the lawsuit, claiming that the law only allows a "participant" to sue plans, and that former employees who have received full payments from their plans do not meet the legal definition of participant. The law describes a participant as an employee or former employee who is "or may become eligible to receive" a benefit of any type from the plan.

In its ruling, the court rejected the company's narrow reading of the law pointing out that ERISA, the federal law governing pensions, defines "participant" to include former employees who have cashed out their plan benefits if they are seeking to recover amounts that should have been in the account when they received distributions from the plan.

This ruling affects only employees in Indiana, Illinois and Wisconsin.

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