Employer’s Guide to Self-Insuring Health Benefits, Thompson Publishing Group

Employers and other plan administrators are due greater deference in their benefits plan decisions than some lower courts have allowed, the U.S. Supreme Court ruled after admonishing two lower courts for failing to follow the High Court’s prior decisions establishing ERISA law on plan administration.

The High Court also admonished the current administration as well as courts for attempting to introduce more complex, inefficient and costly requirements in plan decision-making, and for encouraging court interference in those plan decisions.

Indirectly, the Supreme Court opinion puts in stark contrast to ERISA’s principles of uniformity and efficiency in plan administration the Patient Protection and Affordable Care Act’s (PPACA) complex and less artful crafting of plan administration requirements, which undermine uniformity and efficiency — thus implicating much more costly reform requirements.

“A single honest mistake” does not justify stripping a plan administrator of deference for subsequent related interpretations of the plan, the U.S. Supreme Court said as it overturned a lower court ruling that would have stripped the plan of the more favorable abuse-of discretion standard of review. The High Court’s reversal thereby preserves the administrator’s broad authority to interpret benefit plan terms.

“People make mistakes. Even administrators of ERISA plans,” Chief Justice John Roberts wrote in the Court’s 5-3 opinion in Conkright v. Frommert, 2010 WL 1558979 (April 1, 2010), which allows ERISA plan administrators to retain deferential review even after an erroneous interpretation of the plan.

Deference was restored because the plan was acting in good faith, its miscalculations were honest, the errors were isolated, and a “one-strike-you’re-out” approach was unreasonable, the Court held. Also, deference is necessary because if courts can toughen the standard of review mid-process, litigation becomes more labyrinthine and frequent, and plan administration becomes more complicated.

On the other hand, Roberts wrote, patterns of erroneous plan interpretations — even in good faith — are still grounds for forfeiting deference.

Although the case involved pension benefits, the High Court’s affirmation of the plan’s right to reserve deferential review is important to ERISA health plans. The case helps depict the circumstances under which courts may strip discretionary authority and when authority can be defended.

The Facts of the Case

The dispute was about whether Xerox Corp. improperly calculated employee retirement benefits. Xerox employees had left the company and been rehired. When they left Xerox, they got lump-sum distributions of accrued pension benefits. After they were rehired, the plan subtracted those distributions from future benefits.

The Xerox plan required the administrator to offset the employee’s final benefits by an amount “attributable” to any prior lump-sum distribution.

To that end, the plan administrator used a “phantom account” method (which calculated the hypothetical amount the employee’s investment would have reached had it remained in the plan) to calculate the amount offset from new benefits. The employees sued, arguing that the plan’s method over-deducted from their current benefits, and violated ERISA. The employees further argued that the plan and the summary plan description (SPD) did not provide for the use of that method.

Lower Courts Strip Discretion

The U.S. District Court for the Western District of New York granted summary judgment for the Xerox plan administrator, holding that the use of the phantom account method was not improper and the employees had adequate notice of that method’s use.

But the 2nd U.S. Circuit Court of Appeals overturned that decision (Conkright v. Frommert, 535 F.3d 111 (2nd Cir., July 24, 2008)), concluding that the phantom account method constituted a retroactive cut-back of benefits in violation of ERISA. The circuit court also determined that the plan and its administrator had impermissibly amended the plan to include that mechanism, and remanded the case to the district court.

On remand, the plan proposed a new interpretation to calculate the employee offsets. The district court refused to accord any deference to that interpretation and adopted the employees’ approach (with a smaller offset). And on appeal, the 2nd Circuit upheld the district court’s decision not to apply a deferential standard and rebuffed challenges to the district court’s decision on the merits.

The plan brought the case to the Supreme Court, which held that the district court should have used the deferential standard of review.

Supreme Court Decision

The Xerox employees (backed by a U.S. government amicus brief) claimed that deference is less important once a plan administrator’s interpretation has been found to be unreasonable. The Supreme Court rejected that, holding that deference is important because it makes it easier for administrators to govern plans, and encourages employers to sponsor ERISA plans. It looked at two important cases for precedent. A plan administrator with discretionary authority to interpret a plan is entitled to deference in exercising that discretion, the Supreme Court held in Firestone Tire & Rubber Co. v. Bruch, 489 S. Ct. 101 (1989). The High Court in that ruling stated that under trust law the

instrument creating the trust influences the standard of review. If the trust instrument reserves deference, then “the trustee’s interpretation will not be disturbed if reasonable.”

Building on that decision, the Court later held in Metropolitan Life Ins. Co. v. Glenn, 128 S. Ct. 2343 (2008), that when plan terms grant discretionary authority to the plan administrator, courts will review challenges to such decisions under a deferential standard of review, even when the administrator is operating under a systemic conflict of interest.

The Supreme Court criticized the 2nd Circuit for its holding that a court does not need to apply a deferential standard because an administrator had in the past interpreted the plan in a way that violated ERISA.

“We reject this one-strike-and-you’re-out approach,” Chief Justice Roberts wrote, adding that such an approach has no basis in Firestone’s precedent, “which set out a broad standard of deference without any suggestion that the standard was susceptible to ad hoc exceptions.”

Tags:

This entry was posted by Adam V. Russo on Friday, August 27th, 2010 at 2:53 pm and is filed under 2nd, ERISA, MetLife v. Glenn, PPACA, Summary Plan Description, Supreme Court. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.