McKay Hochman Company, Inc.

On April 21, 2010 the U.S. Supreme Court reversed the opinion of the Second Circuit U.S Court of Appeals, ruling 5-3 that deference should have been given to a plan administrator when dealing with a dispute over a calculation of pension benefits (Conkright v. Frommert, No. 08-810). Justice Sotomayor did not participate in this case since she had been a member of the Second Circuit at the time the case was decided by that court. The decision reinforces the opinion of the Supreme Court that courts should defer to ERISA plan administrators that have discretionary authority to interpret plan provisions. The case also affirms that a “single honest mistake” by a plan’s administrator will not permit a court to deprive a plan administrator of their ability to make future interpretations of the plan.

The case involved Xerox Corporation’s ERISA-covered pension plan (the Plan), current and former plan administrators, and a group of more than 100 Xerox employees and retirees. These workers left Xerox Corp. in the 1980s, received lump-sum distributions from the plan, and were later rehired. Upon rehire these workers began to accrue additional pension plan benefits. A dispute developed due to the method used by the Plan in reducing future retirement benefits by the amount of the workers’ past distributions. The plan’s administrator used a “phantom account method” to take into consideration the hypothetical growth the distributed amounts would have earned had the money remained in the pension plan. Applying an earnings rate to the distributions caused an additional reduction of future retirement benefits. The workers filed a lawsuit in federal court under ERISA to challenge the use of this method.

Initially, the U.S. District Court for the Western District of New York ruled in favor of the Plan, applying a deferential standard of review to the plan’s administrator. On appeal, the 2nd U.S. Circuit Court of Appeals ruled the administrator’s interpretation of the plan for calculating the hypothetical growth was unreasonable. The circuit court remanded the case back to the district court to correct the plan error. After hearing a new proposed calculation method by the plan’s administrator and a recommendation by the workers to not adjust the prior distributed amounts for any earnings, the district court sided with the workers’ approach. The circuit court affirmed the decision, finding the district court correctly denied applying deference because the administrator previously abused its discretionary interpretation of the plan.

In rejecting the decision of the circuit court, Chief Justice John Roberts cited prior cases (Firestone Tire & Rubber Co. v. Bruch, Metropolitan Life Ins. Co. v. Glenn), which support deference to an administrator who has discretionary authority. The outcome of this case is a positive one for plan sponsors and administrators. Although future interpretations of a plan provision by an administrator may, and surely will, be challenged, this decision reinforces the administrator’s ability to develop an alternative remedy, even when their initial approach is rejected. While this clearly supports the powers of a discretionary plan administrator’s interpretation, it also appears to limit how far plan participants can go in disputing these decisions.

To learn more, call 973-492-1880 or e-mail info@mhco.com.