HIGHLIGHTS:

  • The U.S. Court of Appeals for the Eighth Circuit has affirmed a U.S. District Court's application of deferential standard to the review of an employee stock ownership plan (ESOP) administrator's decision based on broad discretionary authority in the plan document.
  • The Eighth Circuit rejected the claimant's argument that state law should control the result, holding that the plan administrator is not bound by state law under the Employee Retirement Income Security Act of 1974 (ERISA) pre-emption clause.

The recent case of Wengert v. Rajendran, 886 F.3d 725 (8th Cir. 2018) involves unusual facts that presented the plan administrator (the Plan Administrator) of the Major Plastics Inc. Employee Stock Ownership Plan (the Plan) with a claim for benefits by the widow of a deceased Plan participant. Susan Wengert, the Widow, was married to Timothy McConnell (the Participant), but the Participant had filed for divorce.

On Friday, Sept. 12, 2014, the Participant requested a lump-sum distribution of his entire account balance in the Plan to his trust. The Plan Administrator wired the funds from the Plan that same day. The Participant died two days later on Sunday, Sept. 14. The Participant's trust did not receive the funds until Monday, Sept. 15. At the time of his death, the Participant was still married.

The Widow submitted a claim for benefits with the Plan Administrator, claiming that she was entitled to the Plan benefits because she was still married to the Participant when he died and thus was the presumed beneficiary of the deceased Participant's accounts. This claim was based on the argument that the Friday wire transfer was irrelevant because the Participant's trust did not receive the funds until after the Participant's death.

The Plan Administrator denied her claim, interpreting the Plan and concluding that the Participant had no accrued benefit in the Plan when he died. Because he had no accrued benefit under the Plan, the Widow could not be a beneficiary under the Plan and had no basis to make a claim for benefits under the Plan. The Plan Administrator further stated that, for Plan purposes, the issue was when the funds were transferred out of the Plan, not when the funds were received by the Participant's trust. Thus, at the point of transfer of the Participant's Plan account balance on Friday, Sept. 12, the Plan had satisfied its obligation to the Participant and the funds were no longer held by the Plan.

District Courts Grants Summary Judgment Against Widow

The Widow subsequently sued the Plan Administrator, the deceased Participant's personal representative and his trust in the U.S. District Court for the District of Nebraska, claiming that her claim for benefits had been wrongfully denied. The district court granted summary judgment against the Widow, concluding that the Plan document provided the Plan Administrator broad discretionary authority to determine eligibility for benefits and, under well-settled case law, applied a deferential abuse of discretion standard of review to the Plan Administrator's denial of the Widow's claim for benefits. She then appealed to the U.S. Court of Appeals for the Eighth Circuit.

Eighth Circuit Affirms

On appeal, the Widow argued that the Plan Administrator's decision was contrary to Nebraska law, which provides that a funds transfer is completed by the receipt of a payment by the transferee's bank for the benefit of the transferee. The Widow further asserted that the remedy sought is not under the Employee Retirement Income Security Act of 1974 (ERISA) and the abuse of discretion standard was irrelevant.

The Eighth Circuit rejected this argument and affirmed the district court decision, pointing out that the Widow's amended complaint was a claim for benefits under ERISA. The Court held that the Plan Administrator is not bound by Nebraska law because of the pre-emption provisions of ERISA. Because the Plan Administrator had broad discretionary authority to determine the eligibility to receive the Participant's Plan benefits, had reasonably explained its interpretation of the Plan and relied on substantial evidence in denying the Widow's claim, the Court held that the Plan Administrator's denial met the abuse of discretion standard of review.

For more information on this decision or specific considerations for your qualified retirement plan, contact the authors or another member of Holland & Knight's ESOP Group or Employee Benefits and Executive Compensation Group.