The Supreme Court’s recent decision in Conkright v Fommert, No 08-810 (April 21, 2010), should provide ERISA plan sponsors and administrators with some peace of mind—given the Court’s finding that making “a single honest mistake” will not strip them of the right to have their plan interpretations reviewed with deference by the courts.

The case arose out of a dispute over how to calculate retirement benefits for employees who had received lump sum distributions from their pension accounts. The Plan administrators used a “phantom account” calculation, which took into consideration the value of the lump sum distribution had it been left in the Plan account and offset that amount from the pension benefits currently owed to the employees. The District Court upheld the Plan’s action, but the Second Circuit reversed, holding the Plan administrator’s approach was not entitled to deference because the phantom account approach violated ERISA’s notice requirements.

On remand to the district court, the Plan sponsors proposed a new benefit calculation that did not use the phantom account offset, but adjusted for the time value of the money received by the plaintiffs in their lump sum distributions. The district court rejected this approach and the Second Circuit affirmed, holding that the Plan administrator’s second interpretation was not entitled to deference, because its previous interpretation had been reversed as unreasonable. The Supreme Court agreed to review whether the district court could substitute its judgment for that of the Plan administrators in deciding the proper method of calculating plaintiffs’ benefits.

In a 5-3 decision (Justice Sotomayor did not take part in the decision), the Supreme Court reversed the courts’ refusal to defer to the Plan administrator’s interpretation. The Court first reaffirmed its holding in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), that plan administrators are entitled to deferential review of their decisions so long as the governing plan documents grant them discretion to interpret the plan.

The Court noted that the issue presented – whether deference was owed after an administrator’s prior decision was rejected as unreasonable – is not governed by the text of ERISA and that trust law principles cut in both directions. As a result, the Court considered whether the Second Circuit’s “one strike and you’re out” approach furthered ERISA’s purposes and concluded that it did not. In support of this conclusion, the Court noted that ERISA is not just designed to protect the rights of plan participants, but also to “induce employers to offer benefits by assuring a predictable set of liabilities, under uniform standards of primary conduct and a uniform regime of ultimate remedial orders and awards when a violation has occurred.” The Court found that the Second Circuit’s approach was inconsistent with promoting this latter purpose.

The Court also identified three core ERISA principles that would be undermined if the Second Circuit’s decision was allowed to stand: efficiency, predictability and uniformity. With respect to efficiency, the Court found that deferring to plan administrator’s decisions encourages the resolution of benefit disputes through less costly and time-consuming administrative procedures, rather than the extended litigation that might flow from the Second Circuit’s approach. The Court also noted that its decision would promote predictability, because plan sponsors should be able to rely on a plan administrator’s expertise rather than “worry[ing] about the unexpected and inaccurate plan interpretations that might result from de novo judicial review.”

Finally, the Court noted that uniformity in plan benefit decisions would be undermined by the Second Circuit’s decision, characterizing Firestone deference as necessary “to avoid a patchwork of different interpretations” where, as in this case, the plan covers employees in different jurisdictions.

While this decision certainly provides more certainty for plan administrators, the Court did not foreclose the possibility that circumstances might arise where it was no longer appropriate to defer to a plan administrator’s interpretation of a plan provision. In response to concerns raised by plaintiffs that the Court’s ruling would encourage administrators to make unreasonable benefit determinations, the Court stated that “[t]here is no reason to think that deference would be required in the extreme circumstances that respondents foresee.” For example, a plan administrator would not be entitled to deference if it failed to act “honestly and fairly” or if a court found that the administrator was “too incompetent to exercise his discretion fairly.”

In conclusion, while plan administrators must act fairly and in good faith in construing plan provisions and making plan benefit determinations, the Supreme Court’s decision reemphasizes the deference courts should continue to apply, even if it concludes an inadvertent mistake may have occurred.