In a sue first, ask questions later world, it’s never been more important for 401k advisors and their plan sponsor clients to carefully consider and thoroughly understand the language used in employee benefit plans.
Under ERISA, benefit plan administrators, managers or those who control plan assets have a fiduciary duty to plan participants. One of those fiduciary duties includes following the terms of the plan documents. This includes how the plan determines eligibility for benefits and makes factual determinations of eligibility. When a plan beneficiary believes the plan sponsor violated their fiduciary duty, the beneficiary may be able to file a lawsuit against the fiduciary.
In an ERISA lawsuit, the court may review the plan sponsors determination of benefits. The standard of review depends, in part, on the plan documents. According to the Supreme Court decision in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), a court can review a dispute over benefits using a de novo standard or a deferential standard.
The deferential standard looks at whether the plan’s decision was “arbitrary, capricious or an abuse of discretion.” The court reviews ERISA claims de novo, “unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan.” This is sometimes known as the “Firestone exception.”
A recent federal appeals court decision has vacated the lower court’s decision and remanded the case back to the court. The decision found the district court had used the wrong standard of review and the ambiguous terms of the plan should have been reviewed using the deferential arbitrary and capricious standard.
According to the decision, the district court found that a retirement plan which underpaid retirees was unambiguous in the retiree’s favor. The district court applied basic and equitable contract law standards to the agreement instead of the arbitrary and capricious review for construing ERISA plan terms. Using contract law, the court construed the ambiguous terms in favor of the retirees and against the plan sponsor.
On appeal, the court determined the retirement plan granted the plan administrator “the power and discretion . . . to construe all terms, provisions, conditions and limitations of the Plan,” and “to determine all questions arising out of or in connection with the provisions of the Plan or its administration in any and all cases . . . .” Norton Plan § 6.06(b)(2)–(3). The appeals court found this language clearly invoked the Firestone deference.
Employee benefit plan language is important to both plan beneficiaries and plan sponsors. As the federal court stated in the above case, “It is simply not our job to rescue parties from the unintended consequences of complexity, sloppy drafting or bad negotiating. The time to close loopholes is in the offices of transactional lawyers, not in the courts 14 years later.”
Corey F. Schechter, Esq., partner with Butterfield Schechter LLP, specializes in Employee Benefits Law, Employee Stock Ownership Plans, Pension, Profit Sharing and 401k Plans, ERISA Litigation, ERISA Fiduciary Liability, Business Law and Qualified Domestic Relations Orders (QDROs).