Many years ago the Supreme Court decided that qualified retirement plans that gave their fiduciaries discretion to determine plan benefits were entitled to have their decisions, reviewed by a court under a generous “abuse of discretion” standard. Although that standard may be limited in situations in which the plan administrator has a conflict of interest because the administrator is also the entity funding the benefit, nevertheless, the discretionary standard of review can be important. In many cases, the standard of review is the deciding factor in a case. Under an abuse of discretion standard, the decision does not need to be the correct decision or the decision that the court itself would have made in the first instance. Instead, it needs to be only a reasonable decision. http://media.ca1.uscourts.gov/pdf.opinions/14-2059P-01A.pdf

The Supreme Court case involved a qualified retirement plan and was based on trust law. Top hat plans, those nonqualified plans that apply to a select group of management or highly compensated employees, are exempt from many ERISA standards, including fiduciary standards. However, they are required to include a claims procedure.

A recent First Circuit Court of Appeals decision held that the abuse of discretion standard would apply to a top hat plan that incorporated the standard into its plan documents. The case involved a severance plan with the court reviewing whether the former executive had voluntarily retired or had been involuntarily dismissed. The standard of review was important. The plan gave discretion to the company to decide the claim and the court upheld the company’s decision that the executive had voluntarily retired and therefore was not entitled to severance benefits under the plan.

Employers wishing to take advantage of the favorable standard of review should make sure that their top hat plans include a claims procedure that gives them discretion to decide benefits.