The U.S. Supreme Court’s recent Conkright v. Frommert decision is an important confirmation of a plan administrator’s authority to interpret the terms of a benefit plan and serves as a reminder for plan sponsors to review the terms of their benefit plans to ensure that they contain sufficient discretionary language.

In Conkright v. Frommert, the Supreme Court of the United States addressed a new twist on a long standing issue under the Employee Retirement Income Security Act of 1974, as amended (ERISA): How much deference is due a plan administrator when interpreting the terms of an employee benefit plan? The Court strongly affirmed its view that providing deference to a plan administrator’s interpretation supports ERISA’s guiding principles. The decision shows the importance of involving the plan administrator in all aspects of plan interpretation, both inside and outside the context of a claims review process.

Background

In 1989, the Supreme Court decided the case of Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), in which the Court concluded that an ERISA plan administrator’s decisions will be reviewed under a de novo standard, unless the ERISA plan document confers discretion on that administrator to determine eligibility for benefits and construe the terms of the plan. If the plan document grants the administrator such authority, a much less exacting arbitrary and capricious standard of review generally applies. Since Firestone, other Supreme Court decisions have addressed issues related to the proper deference to be afforded a plan administrator under ERISA, but Conkright presented a novel question: what deference, if any, should a district court afford a plan administrator’s interpretation of plan terms when the plan administrator’s previous interpretation of those plan terms violated ERISA and the district court is instructed to fashion a remedy for that violation?

The plaintiffs in Conkright included more than 100 employees of Xerox Corporation (Xerox) who left Xerox in the 1980s, and were subsequently rehired. When the employees initially left, each received a lump-sum distribution of retirement benefits earned to that point. Upon rehire, the employees began to again earn retirement benefits under the Xerox retirement plan. Under the terms of the plan, the highest result of three alternative calculation methods determined an employee’s retirement benefit. So that rehired employees who had previously received a lump sum distribution did not receive a windfall, the plan included (and had always included) provisions by which future retirement benefits would be offset to account for prior distributions.

Xerox significantly redesigned its retirement plan in 1989. Although the 1989 redesign and restatement contained some provisions addressing the non-duplication of benefits, it omitted important specifics, including how the hypothetical increased value of a rehired employee’s prior distribution would be factored into the calculation of that same employee’s future benefits. Despite this omission from the plan’s language, the Xerox plan administrator applied the hypothetical increased value to the plaintiffs (by way of a “phantom account offset”), which significantly reduced the former employees’ present benefits.

After the rehired employees filed suit, the district court applied a deferential standard of review to the plan administrator’s interpretation and granted summary judgment in its and the plan’s favor. On appeal, the U.S. Court of Appeals for the Second Circuit vacated and remanded the case to the district court, holding that the phantom account offset method was not properly added to the Xerox retirement plan until 1998, and that the rehired employees had not been properly notified that the phantom account offset would be used. The Second Circuit then instructed the district court to craft a remedy that should employ “equitable principles” to arrive at an “appropriate pre-amendment calculation” of the retirement benefits actually owing to affected employees rehired prior to 1998.

On remand, the plan administrator presented a new interpretation of the plan that, like the phantom account offset, accounted for the time value of the retirement benefits previously distributed, but did not calculate the present value of the past distribution based on matters that occurred after the distribution was made. The administrator also argued that its interpretation should be granted deference by the district court. The district court refused to give deference to the plan administrator’s interpretation and concluded that the appropriate remedy was a lump-sum payment to the rehired employees equaling the difference between the amount of benefits received in the prior distribution and the amount of the recalculated retirement benefit.

The Xerox retirement plan and plan administrators appealed, challenging the appropriateness of the district court’s remedy as well as the failure to grant deference to the administrator’s interpretation of the plan’s terms. On appeal, the Second Circuit affirmed the district court’s remedy and its decision not to grant deference to the plan administrator’s interpretation of the plan’s terms. The Second Circuit concluded that there was no reason for a district court to defer to a plan administrator where the administrator had previously interpreted the same plan terms and the previous interpretation was found to violate ERISA. On review, the Supreme Court reversed the Second Circuit and reaffirmed the discretion that is owed to plan administrators when interpreting plan terms.

Supreme Court’s Decision

Writing for a 5-3 majority (Justice Sotomayor did not participate in the decision), Chief Justice Roberts concluded that the state of trust law did not provide a clear answer to the question before the Court, but stated that ERISA’s “guiding principles” did. Drawing on its prior decisions in Firestone and Metropolitan Life Insurance Company v. Glenn, the Court reiterated that where the plan document gives the plan administrator discretion to interpret its terms, the administrator’s interpretation should be given deference by the courts. The majority specifically disagreed with the Second Circuit’s creation of an exception to a deferential standard of review where the plan administrator has previously construed the plan’s terms and that first interpretation was found to have violated ERISA. The Court found that deference to a plan administrator helps protect the “careful balancing between ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans.” The Court determined that deference promotes efficiency and predictability by encouraging resolution of benefit-related disputes internally and by allowing an experienced plan administrator to decide interpretive issues as opposed to an unacquainted judge sitting de novo. The Court also found that deference further supports the interest of uniformity by avoiding a multitude of interpretations of the same plan terms by judges sitting in different jurisdictions across the country. In sum, the Court held that the Second Circuit was wrong to find that the district court could refuse deference to the plan administrator’s interpretation of the plan’s terms for the mere reason that the Court of Appeals had previously found a related interpretation by the administrator unacceptable.

Joined by Justices Stevens and Ginsburg, Justice Breyer issued a dissenting opinion, in which he disagreed with the majority’s conclusion that trust law did not resolve the issue before the Court. The dissent stated that when a trustee abuses its discretion, the law of trusts “grants courts the authority either to defer anew to the trustee’s discretion or to craft a remedy.” Thus, the dissent concluded that the district court on remand was under no obligation to defer to the plan administrator’s second interpretation of the Xerox plan terms. The dissent also took issue with the majority’s “one free honest mistake” rule, suggesting that this rule would incentivize the drafting of ambiguous plan provisions and allow plan administrators to make their first interpretation of a plan provision as employer-friendly as possible.

Impact on Plan Administrators

The Conkright decision is an important confirmation of a plan administrator’s authority to interpret the terms of a benefit plan. Arguably, Conkright goes further than simply confirming a plan administrator’s discretionary authority as already announced in prior decisions of the Supreme Court. The Court’s broad pronouncement that providing deference to plan administrator interpretation supports ERISA’s “guiding principles,” even after an erroneous interpretation of the same or similar plan terms, should serve to further solidify the correctness of an arbitrary and capricious standard of review where the plan terms grant an administrator the power to interpret a plan’s terms. In addition, the Court’s decision suggests that a plan administrator’s interpretation of a plan’s terms should be granted deference even if it is offered outside of the claims review process. The Conkright decision should also be an important reminder for plan sponsors to review the present terms of their benefit plans to ensure that they contain sufficient discretionary language to permit a deferential standard of review if a plan administrator’s interpretation of ambiguous or vague plan terms is challenged and reviewed by a court.