The Supreme Court Strongly Endorses Deference to ERISA Administrators

Posted by marykeating on April 22, 2010 under Employment benefit issues | Be the First to Comment

“People make mistakes.”  Says the Chief Justice of the Supreme Court.  He’s not talking about himself, but about ERISA plan administrators.

The case of Conkright v. Frommer sees Chief Justice Roberts singing the praises of employee benefit plans that give deference to their administrators to interpret plan provisions, coverage, and other issues.  In this case, a pension plan administrator had made a calculation of pension benefits that the court found unreasonable.  In their return to court, the pension plan participants objected to the replacement calculation.  They urged the trial court to deny discretion to the plan administrator’s new calculation method, and to itself determine the appropriate level of benefits.  The trial court agreed, and determined a method of calculating benefits as proposed by the pension beneficiaries.

The Supreme Court overturned the decision, faulting the trial court for not granting discretion to the administrator. In doing so, it expressed with approval the “efficiency” of granting the administrator discretion, since it prevents different courts from having a role, which could lead to different decisions.  The opinion omits any benefit to the participants by having impartial courts determining their entitlement to benefits, many of which are paid for by the employees.  Under the Court’s majority opinion, the administrator must commit multiple breaches of trust before the court can step in and take away its discretion.  In any event, one free mistake is now the rule.

This approach tilts the scale too heavily in favor of the benefit plan trustee.  In the pension situation, the trustee ideally attempts to pay out all beneficiaries at the levels promised by the plan, investing the funds prudently yet profitably so that retirement funds are available.   In this ideal situation, there are no winners or losers, everyone gets what they should get.

Contrast another common ERISA case subject: the long-term disability plan.  In those cases, the employer, with or without employee contribution, pays premiums for a long-term disability policy.  Under the policy, an employee is entitled to obtain benefits if she becomes totally disabled.  As with all insurance products, the insurance company underwriting the policy is hoping that premiums will outweigh the benefits paid.  In many cases, the insurance company is also the administrator of the plan, invested with discretion to decide if someone is disabled, or otherwise qualifies for the benefits.  Is there any surprise that long-term disability benefits are frequently denied?

Justice Breyer, who delivered the majority opinion in 2008′s Metropolitan Life Ins. Co. v. Glenn, dissented.