It is Always Good to Follow the Plan’s Claims Procedure in Denying a Claim – Part 2
Some months ago I blogged about an Eighth Circuit Court of Appeals decision involving high ranking executives participating in a company’s long term incentive plan where the executives won their suit under the plan, at least in part, because the employer had not properly followed the plan’s claims procedure. By not properly following those procedures, the employer’s decision under the plan was not reviewed under the favorable abuse of discretion standard, but rather was reviewed “de novo,” resulting in a win for the executives.
A recent case from the United States District Court for the Western District of New York is similar. This case involved retired participants who were cashed out of their benefits in a lump sum when the employer was acquired. The plan was funded through a trust that had millions of dollars in excess assets after the retirees had been paid. The parties disagreed about how the benefits should be valued and the employer did not do a good job of providing the participants with information about how the lump sum was calculated. The plan document contained a definition of “participant,” as well as a definition of “retired participant.” The executives argued that the provision allowing the cashout applied only to participants and not to retired participants, such as them.
The plan document stated that the plan would be administered by the vice president of human resources or by such other employees as the “committee” may from time to time designate. The “committee” was defined as the “Committee on Management of the Board of Directors.” The plan gave that committee the authority and discretion to interpret the plan and to the make the determinations deemed necessary or desirable for the administration of the plan.
Unfortunately for the employer, the decision relating to the cashout of participants and retired participants was not made by the committee. Because the employer was in the process of being acquired there was no formal committee at the time that the decision was made. The employer appointed a new committee to review the initial decision but the court concluded that since the initial decision had not been made by that committee, the decision and its review were not entitled to deference. The court then reviewed the language of the plan and the arguments of the parties and concluded that the retired participants should not have had their benefits cashed out on the change in control. Instead, benefits should have continued to be paid from the trust in the manner in which they had previously been paid.
As with the other decision, the lesson is the same: Read the claims procedure of the applicable plan and follow those procedures in deciding claims. Had the initial decision been made by the committee based on a reasoned discussion of possible plan interpretations, the court’s decision might have been different. The employer will now owe increased benefits and attorney’s fees.
Contact Benefits Notes for more information.