Supreme Court Expands Scope of Deferential Review of ERISA Plan Administrators’ Determinations
The U.S. Supreme Court’s recent ruling in Conkright v. Frommert, [1] highlights the importance of ensuring that an ERISA plan’s documents explicitly grant discretionary authority to the plan administrator to interpret the plan and resolve ambiguities. The ruling affirms that a court will not second guess an administrator armed with such authority even in a case where the administrator has previously made a mistake.
Background
In ERISA cases the standard employed by a court reviewing a decision by a plan administrator (i.e., the amount of deference afforded to the plan administrator’s decision) is many times the decisive factor in the outcome of the case.
The U.S. Supreme Court in its seminal ruling, Firestone Tire & Rubber Co. v. Bruch,[2] established that there are essentially two available standards of judicial review with respect to determinations by ERISA plan administrators:
(i) Abuse of Discretion (i.e. no second guessing by the court). Under this standard, a court generally will defer to the administrator’s determination (even if the court would have made a different one) unless the determination is found to be arbitrary and capricious; and
(ii) De Novo (i.e. second guessing permitted). When applying this standard the court looks at the decision, on its own, without any particular deference to the plan administrator’s prior decision.
The Firestone Court held that if the plan document grants the plan administrator discretionary authority to interpret the terms of the plan, the administrator’s decisions are entitled to the deferential abuse of discretion standard of review. In the absence of such express discretionary authority, however, the administrator’s interpretation of a plan is subject to de novo judicial review.
In 2008, the Supreme Court reinforced this ruling in Metropolitan Life Ins. Co. v. Glenn[3], responding to a split among the circuits on the impact of conflicts of interest with respect to the standard of review in ERISA plan matters. In particular, the inherent conflict of interest that exists when the plan administrator (which may be the employer sponsoring the plan or an insurance company) who is responsible for deciding whether a participant in the plan is entitled to a benefit payment is then obligated to make the payment.
The Supreme Court held that while a conflict is a factor for courts to weigh in determining whether an administrator’s determination was arbitrary and capricious, it does not alter the abuse of discretion standard of review that ordinarily applies if discretion is properly provided to the administrator under the plan’s governing instrument. Thus, the conflict of interest might be more relevant, for example, when there is a history of biased claims administration or less relevant if the administrator has taken active steps to reduce potential biases and to promote accuracy. However, importantly, the abuse of discretion standard of review remains intact regardless.
Conkright
With its recent Conkright decision (by a five-to-three majority), the Supreme Court augmented its decisions in Firestone and Glenn by ruling that a plan administrator’s decision otherwise entitled to deference under Firestone (e.g., where plan documents grant the administrator discretionary authority) continues to enjoy judicial deference even if the administrator had previously made an erroneous interpretation of the same plan provision, provided the plan administrator did not act in bad faith or dishonestly in making either the first or subsequent interpretations.
The conflict underlying Conkright revolved around a group of Xerox employees who left the company in the 1980s and received lump-sum distributions of retirement benefits but then were subsequently rehired by Xerox. The Xerox plan provided that when a prior distribution had been paid to an employee, to avoid paying “double” benefits to that employee, any subsequent distribution to that employee is to be offset by the prior distribution. Notably, the plan documents granted the administrator broad discretionary authority to interpret the plan and resolve ambiguities. The plan administrator devised a method that offset the employees’ current benefits by the amount of their previous lump-sum distributions plus a “phantom” amount equal to the earnings that could have been earned on those distributions.
The Xerox employees sued in District Court challenging the method used to calculate the offsetting of their current benefits to reflect prior distributions. The District Court granted summary judgment for the plan, applying a deferential standard of review. On appeal, the Second Circuit reversed, finding that the plan administrator’s interpretation violated ERISA as two technical ERISA rules protecting accrued benefits were violated by the approach and thus were clearly erroneous.
On remand, the plan administrator proposed a new interpretation of the plan that also took into account the time value of the money the employees had previously received by converting those funds into an annuity. However, because of the administrator’s previous error on the subject, the District Court did not apply a deferential standard of review and rejected the newly proposed interpretation. Instead the Court adopted the interpretation that only took into account the amount of the prior distributions and not any possible earnings. On appeal, the Second Circuit affirmed, holding that the District Court was not obligated to give deference to the mere opinion of a plan administrator where the administrator had previously construed the same terms and the court found such a construction to violate ERISA.
Upon appeal from the Second Circuit, the Supreme Court rejected the Second Circuit’s holding and ruled that if a plan administrator’s decision is entitled to deference by virtue of the plan’s documents, then such deferential standard is still to be applied notwithstanding the fact that the administrator had erroneously interpreted the plan on a previous occasion and the administrator offered the new interpretation in the context of subsequent judicial proceedings and not a benefit determination.
Adopting a classic baseball adage, the Supreme Court refused to adopt the approach of “one-strike-and-you’re-out”. Rather, citing Firestone and Glenn, the Supreme Court concluded that a single honest mistake in plan interpretation does not justify stripping the administrator of deference for subsequent related interpretations. The Supreme Court pointed out that ERISA’s guiding principles require courts to afford ERISA plan administrators a broad standard of deference where plan documents grant them discretionary authority. The Court noted that, under Firestone, there was no suggestion that the deferential standard of review could be subject to ad hoc exceptions. Moreover, the Court observed that if in Glenn it had refused to create an exception that would strip a plan administrator of deference in the face of the systemic conflict of interest, it is difficult to see why a single honest mistake would require a different result. This approach protects ERISA’s goals of efficiency, predictability, and uniformity which is necessary to maintain a balance that ensures fair and prompt enforcement of plan rights while encouraging employers to create benefit plans.
Although the Supreme Court rejected the Second Circuit’s “one-strike-and-you’re-out” approach, it is important to remember that the Supreme Court also cautioned that an administrator can jeopardize this deferential standard by acting in bad faith or by making multiple erroneous interpretations, even if issued in good faith. More important, plan sponsors should keep their eye on the ball and make sure their ERISA plan documents (including Summary Plan Descriptions) incorporate an expansive grant of discretionary authority to the appropriate fiduciary or plan administrator.
Louis Barr chairs the Employee Benefits & Executive Compensation Practice at Schwell Wimpfheimer & Associates. Louis advises public, private and tax-exempt entities with respect to the full range of issues in establishing and operating employee benefit programs (including qualified and non-qualified deferred compensation plans, welfare benefit arrangements, severance agreements and equity compensation incentive plans) and counsels fiduciaries with regard to the investment and management of plan assets. He can be reached at lbarr@swalegal.com or 646 328 0783.
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[1] 559 U.S. ____, 130 S. Ct. 1640 (2010).
[3] 554 U.S.105, 128 S. Ct. 2343 (2008).
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