The U.S. Supreme Court has agreed to review the decision of the Second Circuit Court of Appeals in Frommert v. Conkright, 535 F.3d 111 (2d Cir. 2008). At issue is the degree of deference courts should accord the decision of the administrator of a plan subject to ERISA that is made outside the context of an administrative claim for benefits. The Supreme Court will also consider what standard an appellate court should use in reviewing a lower court’s interpretation of an ERISA plan’s terms.
The case will be argued during the Supreme Court’s upcoming October term.
The plaintiffs in Frommert were former Xerox Corporation employees who were participants in a Xerox pension plan. They had previously terminated their employment with Xerox and received lump-sum distributions of their accrued pension benefits. Some time later, Xerox rehired the plaintiffs. They rejoined the plan and were credited with all their prior years of service to Xerox. Their employment was later terminated again.
The Xerox pension plan provided that when a prior distribution of benefits had been made to a participant, any subsequent distribution had to be offset by the accrued benefit attributable to the prior distribution. The plan administrator was granted broad discretionary authority to interpret the plan and resolve ambiguities. The plan administrator calculated plaintiffs’ benefits following the second termination of their employment using an offset formula based on a “phantom account” to reflect their prior pension distributions. The plaintiffs objected, and ultimately filed suit against the plan and the current and former plan administrators.
The district court upheld the plan administrator’s calculations and the plaintiffs appealed. The Second Circuit reversed, holding that: (1) the phantom account formula was a “retroactive cut-back” of benefits, contrary to Section 204(g) of ERISA; and (2) employees were not given proper notice of the phantom account formula in early versions of the summary plan description. The Second Circuit directed the lower court to determine the plaintiffs’ benefits without using the phantom account.
On remand to the district court, the plan administrator asserted that in order to avoid paying duplicate benefits to the plaintiffs, the pension plan should be interpreted to require that the benefits payable to each plaintiff following his or her second termination be offset by the present-day economic value (the actuarial equivalent) of the prior distribution. The district court disagreed, and held that the offset should be based on only the actual amount of each prior distribution, without regard to the time value of money dating back to the time of such distribution. This time, the defendants appealed and the Second Circuit affirmed, ruling that: (1) the district court did not need to defer to the plan administrator’s interpretation of the pension plan; and (2) the district court had “discretion” to fashion a remedy based on the lower court’s own interpretation of the plan. The Supreme Court will review this second decision of the Second Circuit.
Deference to Plan Administrator
The first issue that the Supreme Court will consider in Frommert is whether a court is obligated to defer to a plan administrator’s reasonable interpretation of plan terms if the administrator arrived at its interpretation outside the context of an administrative claim for benefits.
In Metropolitan Life Ins. Co. v. Glenn, 123 S. Ct. 2343 (2008), the Supreme Court reiterated its holding in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), that courts should review a denial of plan benefits under a de novo standard, giving no deference to the plan administrator’s decision, unless plan documents grant the administrator discretionary authority. In Frommert, the Second Circuit held that the district court had no obligation to defer to what it characterized as the mere “opinion” of the Xerox plan administrator. Thus, the court of appeals effectively carved out an exception to Firestone (i.e., no deference is to be accorded to a plan administrator’s interpretation of plan provisions when made outside the course of an administrative benefit determination).
In contrast to the Second Circuit’s approach in Frommert, the Ninth Circuit upheld the method for calculating rehired Xerox employees’ pension benefits that the Xerox plan administrator sought to use in Frommert. (See Miller v. Xerox Corp. Retirement Income Guarantee Plan, 464 F.3d 871 (9th Cir. 2006)). Frommert, therefore, illustrates how depriving plan administrators of the benefits of Firestone deference exposes them to the risk of conflicting benefit plan interpretations.
Proper Standard for Appellate Review in Calculating Plan Benefits
The Supreme Court will also consider whether the Second Circuit erred in holding that a district court has “allowable discretion” to adopt any “reasonable” interpretation of the terms of an ERISA plan when plan interpretation is at issue. Ordinarily, appellate review of a lower court’s interpretation of a written instrument is de novo (i.e., without any deference to the lower court). The court of appeals in Frommert reviewed the district court’s interpretation of the Xerox pension plan only to determine whether the district court exceeded its allowable discretion in crafting its chosen remedy. The Supreme Court must determine whether the circumstances in Frommert justify an exception to the ordinary rule of de novo appellate review.
We will report on the Supreme Court’s decision in Frommert after it is issued. In the meantime, if you have any questions, please contact the authors or any member of the McGuireWoods Employee Benefits or Labor & Employment teams.