United States: Supreme Court Affirms That Plan Administrators' Interpretations of a Plan Document Must Receive Deference

The U.S. Supreme Court's recent Conkright v. Frommert decision is an important confirmation of a plan administrator's authority to interpret the terms of a benefit plan and serves as a reminder for plan sponsors to review the terms of their benefit plans to ensure that they contain sufficient discretionary language.

In Conkright v. Frommert, the Supreme Court of the United States addressed a new twist on a long standing issue under the Employee Retirement Income Security Act of 1974, as amended (ERISA): How much deference is due a plan administrator when interpreting the terms of an employee benefit plan? The Court strongly affirmed its view that providing deference to a plan administrator's interpretation supports ERISA's guiding principles. The decision shows the importance of involving the plan administrator in all aspects of plan interpretation, both inside and outside the context of a claims review process.

Background

In 1989, the Supreme Court decided the case of Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), in which the Court concluded that an ERISA plan administrator's decisions will be reviewed under a de novo standard, unless the ERISA plan document confers discretion on that administrator to determine eligibility for benefits and construe the terms of the plan. If the plan document grants the administrator such authority, a much less exacting arbitrary and capricious standard of review generally applies. Since Firestone, other Supreme Court decisions have addressed issues related to the proper deference to be afforded a plan administrator under ERISA, but Conkright presented a novel question: what deference, if any, should a district court afford a plan administrator's interpretation of plan terms when the plan administrator's previous interpretation of those plan terms violated ERISA and the district court is instructed to fashion a remedy for that violation?

The plaintiffs in Conkright included more than 100 employees of Xerox Corporation (Xerox) who left Xerox in the 1980s, and were subsequently rehired. When the employees initially left, each received a lump-sum distribution of retirement benefits earned to that point. Upon rehire, the employees began to again earn retirement benefits under the Xerox retirement plan. Under the terms of the plan, the highest result of three alternative calculation methods determined an employee's retirement benefit. So that rehired employees who had previously received a lump sum distribution did not receive a windfall, the plan included (and had always included) provisions by which future retirement benefits would be offset to account for prior distributions.

Xerox significantly redesigned its retirement plan in 1989. Although the 1989 redesign and restatement contained some provisions addressing the non-duplication of benefits, it omitted important specifics, including how the hypothetical increased value of a rehired employee's prior distribution would be factored into the calculation of that same employee's future benefits. Despite this omission from the plan's language, the Xerox plan administrator applied the hypothetical increased value to the plaintiffs (by way of a "phantom account offset"), which significantly reduced the former employees' present benefits.

After the rehired employees filed suit, the district court applied a deferential standard of review to the plan administrator's interpretation and granted summary judgment in its and the plan's favor. On appeal, the U.S. Court of Appeals for the Second Circuit vacated and remanded the case to the district court, holding that the phantom account offset method was not properly added to the Xerox retirement plan until 1998, and that the rehired employees had not been properly notified that the phantom account offset would be used. The Second Circuit then instructed the district court to craft a remedy that should employ "equitable principles" to arrive at an "appropriate pre-amendment calculation" of the retirement benefits actually owing to affected employees rehired prior to 1998.

On remand, the plan administrator presented a new interpretation of the plan that, like the phantom account offset, accounted for the time value of the retirement benefits previously distributed, but did not calculate the present value of the past distribution based on matters that occurred after the distribution was made. The administrator also argued that its interpretation should be granted deference by the district court. The district court refused to give deference to the plan administrator's interpretation and concluded that the appropriate remedy was a lump-sum payment to the rehired employees equaling the difference between the amount of benefits received in the prior distribution and the amount of the recalculated retirement benefit.

The Xerox retirement plan and plan administrators appealed, challenging the appropriateness of the district court's remedy as well as the failure to grant deference to the administrator's interpretation of the plan's terms. On appeal, the Second Circuit affirmed the district court's remedy and its decision not to grant deference to the plan administrator's interpretation of the plan's terms. The Second Circuit concluded that there was no reason for a district court to defer to a plan administrator where the administrator had previously interpreted the same plan terms and the previous interpretation was found to violate ERISA. On review, the Supreme Court reversed the Second Circuit and reaffirmed the discretion that is owed to plan administrators when interpreting plan terms.

Supreme Court's Decision

Writing for a 5-3 majority (Justice Sotomayor did not participate in the decision), Chief Justice Roberts concluded that the state of trust law did not provide a clear answer to the question before the Court, but stated that ERISA's "guiding principles" did. Drawing on its prior decisions in Firestone and Metropolitan Life Insurance Company v. Glenn, the Court reiterated that where the plan document gives the plan administrator discretion to interpret its terms, the administrator's interpretation should be given deference by the courts. The majority specifically disagreed with the Second Circuit's creation of an exception to a deferential standard of review where the plan administrator has previously construed the plan's terms and that first interpretation was found to have violated ERISA. The Court found that deference to a plan administrator helps protect the "careful balancing between ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans." The Court determined that deference promotes efficiency and predictability by encouraging resolution of benefit-related disputes internally and by allowing an experienced plan administrator to decide interpretive issues as opposed to an unacquainted judge sitting de novo. The Court also found that deference further supports the interest of uniformity by avoiding a multitude of interpretations of the same plan terms by judges sitting in different jurisdictions across the country. In sum, the Court held that the Second Circuit was wrong to find that the district court could refuse deference to the plan administrator's interpretation of the plan's terms for the mere reason that the Court of Appeals had previously found a related interpretation by the administrator unacceptable.

Joined by Justices Stevens and Ginsburg, Justice Breyer issued a dissenting opinion, in which he disagreed with the majority's conclusion that trust law did not resolve the issue before the Court. The dissent stated that when a trustee abuses its discretion, the law of trusts "grants courts the authority either to defer anew to the trustee's discretion or to craft a remedy." Thus, the dissent concluded that the district court on remand was under no obligation to defer to the plan administrator's second interpretation of the Xerox plan terms. The dissent also took issue with the majority's "one free honest mistake" rule, suggesting that this rule would incentivize the drafting of ambiguous plan provisions and allow plan administrators to make their first interpretation of a plan provision as employer-friendly as possible.

Impact on Plan Administrators

The Conkright decision is an important confirmation of a plan administrator's authority to interpret the terms of a benefit plan. Arguably, Conkright goes further than simply confirming a plan administrator's discretionary authority as already announced in prior decisions of the Supreme Court. The Court's broad pronouncement that providing deference to plan administrator interpretation supports ERISA's "guiding principles," even after an erroneous interpretation of the same or similar plan terms, should serve to further solidify the correctness of an arbitrary and capricious standard of review where the plan terms grant an administrator the power to interpret a plan's terms. In addition, the Court's decision suggests that a plan administrator's interpretation of a plan's terms should be granted deference even if it is offered outside of the claims review process. The Conkright decision should also be an important reminder for plan sponsors to review the present terms of their benefit plans to ensure that they contain sufficient discretionary language to permit a deferential standard of review if a plan administrator's interpretation of ambiguous or vague plan terms is challenged and reviewed by a court.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions