Although ERISA does not mandate that courts apply a specific standard of review when looking at a plan administrator’s decision to deny benefits, the Supreme Court has previously held that where a plan administrator is granted the discretion to interpret the terms of a plan, a court must generally defer to the plan administrator's decision unless such decision was arbitrary. In Conkright v. Frommert et al., the U.S. Supreme Court held that this deferential standard of review will apply even to a plan administrator's second attempt to interpret the same plan terms.
This case involved Xerox employees who left the company in the 1980’s, received a lump-sum distribution of pension plan benefits that they had earned under the company’s plan up to that point, and were later rehired. Upon rehire, the Xerox employees sued the pension plan and its administrators under ERISA because they disagreed with the accounting method the plan administrator used to calculate the offset of their current benefits by the benefits they had already received.
The Second Circuit agreed with the affected participants that the plan administrator's interpretation of the pension offset calculation for rehired employees under the plan was unreasonable. Accordingly, on remand, the plan administrator proposed a new approach to the District Court. The District Court declined to give deference to the plan administrator’s new interpretation, finding that the second interpretation was also unreasonable, and the Second Circuit affirmed. In doing so, the Second Circuit crafted an exception to the Supreme Court precedent that an ERISA plan administrator is entitled to deference in exercising its discretionary authority to interpret a plan.
The Supreme Court rejected the Second Circuit’s “one strike and you're out” approach that a court need not give a plan administrator deference after it finds that the plan administrator’s previous interpretations violate ERISA. The Supreme Court found no basis for this holding in the existing precedent, terms of the plan, principles of trust law or purposes of ERISA to promote efficiency, predictability and uniformity. The Court found that the plan administrator’s initial interpretation was no more than a single honest mistake that did not warrant stripping the plan administrator of deference for decisions related to interpretations of a plan. Chief Justice John Roberts, writing for the majority, perhaps summed it up best in the first sentence of the Court's opinion — “People make mistakes.”
Q&B Key: This reinforcement of the deferential standard of review and extension of this principle to decisions made outside of the claims procedure is good news for plan administrators. This decision also provides a reminder that employers should periodically review their plan documents and summary plan descriptions to ensure that they contain language that delegates to plan fiduciaries the discretion to interpret the plan. Without that type of language, a plan administrator's decision is much more susceptible to being overturned by a court.