Numerous Fortune 500 companies around the country have recently seen a barrage of cases alleging that notices required under the Consolidated Omnibus Budget Reconciliation Act (COBRA) fail to provide all information required by COBRA. Class action cases filed against high-visibility defendants in Georgia, Michigan, Florida, and elsewhere allege the companies violated federal law when they sent purportedly inaccurate, threatening, or confusing notices of former employees’ rights to elect to continue medical-insurance coverage after their employment ended.

Under COBRA, election notices must contain information including a mailing address for payments, the identity of the plan administrator, an explanation of how to enroll, and a physical form to elect coverage. The U.S. Department of Labor (DOL) provides a model COBRA notice template, updated in 2020, which contains these items. Yet few companies use DOL’s model COBRA notice, for several reasons. First, most companies contract with third-party vendors, who design and provide their own notices to covered persons experiencing a qualifying event, such as job separation. Second, these vendors often omit the plan administrator’s name to avoid confusion, because the payments must be mailed to the third-party vendor. Third, many items specified in the DOL model notice are often unknown (and therefore omitted) at the time notice is given. The resulting litigation is directed at the employer or plan sponsor as the defendant, but not the vendor whose election notice is challenged.

Employers have long had difficulty adhering to COBRA’s technical requirements, which have become even more onerous over the past two years. In addition to revising model COBRA notices in 2020, the DOL and Internal Revenue Service (IRS) also extended many deadlines relating to COBRA; DOL and IRS provided additional guidance following the enactment of the American Rescue Plan Act of 2021.

New COBRA litigation was already surging before these changes went into effect, and the increased complexity added by these new developments have added fuel to the fire. Purely technical violations of COBRA’s notice provisions not resulting in actual harm to the plaintiffs, when brought as a class action, can nevertheless expose defendants to staggering potential damages because of statutory penalties that accrue per person per day, as well as the potential for an award of attorneys’ fees.

In sum, COBRA provides many avenues to sue companies – many of whom do not even issue their own COBRA notices – for technical violations of its quickly multiplying requirements. These cases, filed as class actions, can present the risk of protracted litigation, even where the underlying claims lack merit. Accordingly, many defendant companies opt for class settlements ranging from just over $100,000 to just under $1,000,000, oftentimes at the outset of litigation before any discovery has even been conducted. Even less surprising is that more and more plaintiff-side firms are entering this field, eyeing the potential to take home one-third of a large common fund settlement shortly after filing a complaint.

The Employee Retirement Income Security Act of 1974 (“ERISA”) aims to balance the dual policies of (1) ensuring fair and prompt enforcement of rights under employee benefit plans, and (2) encouraging the creation of such plans. To strike this balance, ERISA pairs comprehensive rules regarding fiduciary responsibility with federal causes of action that allow plan participants and beneficiaries to recover benefits due, enforce ERISA’s mandates, obtain injunctive relief, and, where applicable, obtain attorney’s fees. At the same time, to protect employers and plan sponsors from operating under a patchwork of potentially conflicting state and local regulations, ERISA promotes uniformity in benefits administration by preempting “any and all state laws insofar as they may now or hereafter relate to” any ERISA benefit plan. 29 U.S.C. § 1144(a).

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On April 15, 2022, participants in the U.A. Plumbers & Steamfitters Local 22 Pension Fund filed a petition for panel and en banc rehearing of the Second Circuit’s ruling in favor of the pension plan’s decision to retroactively require plan participants to choose between either ceasing their post-retirement employment or foregoing early retirement benefits. See Metzgar v. U.A. Plumbers & Steamfitters Local No. 22 Pension Fund, No. 20-3791, 2022 U.S. App. LEXIS 5466 (2d Cir. Mar. 2, 2022), and our previous article on that decision.

In 2013, certain plan participants brought suit against the pension fund itself, the Board of Trustees, and the plan administrator, in her individual capacity, alleging that the plan’s reinterpretation of the conditions of “retirement” breached ERISA fiduciary duties to plan participants and unlawfully denied benefits. The plaintiffs also argued that having to choose between continued employment and receiving their pensions violated ERISA’s anti-cutback provision in that the reinterpretation of the plan subsequently decreased their amount of accrued benefits.

In March 2019, Magistrate Judge Leslie G. Foschio from the Western District of New York recommended granting summary judgment to defendants, focusing on the plan’s discretionary authority provision and finding that the plan’s reinterpretation was based on a reasonable belief that the provision violated IRS rules. Judge John Sinatra adopted that recommendation and granted summary judgment in October 2020. The Second Circuit affirmed.

In their petition for rehearing, plaintiff-petitioners argued that the Second Circuit ruling deviated from established precedent that precluded plan reinterpretations from decreasing previously awarded benefits. In particular, petitioners cited to the U.S. Supreme Court’s 2004 decision in Central Laborers’ Pension Fund v. Heinz, 541 U.S. 739 (2004), where the Supreme Court ruled that a plan could not be amended to “undercut” a plan participant’s reliance on the value of his or her pension rights and promised benefits. Petitioners also highlighted the Second Circuit’s 2006 decision in Frommert v. Conkright, 433 F.3d 254 (2d Cir. 2006) (referred to as “Frommert I”), which considered whether a pension plan violated ERISA’s anti-cutback rule by applying a phantom account formula to calculate the hypothetical growth that rehired employees’ past distributions would have experienced in order to reduce their present benefits, where the phantom account provisions had appeared in previous plan documents but had been omitted from a subsequently restated plan document. Petitioners argued that, in rejecting the plan’s claim that the provisions were always part of the plan as an unreasonable exercise of discretion and an anti-cutback violation, the Second Circuit had focused on the “centrality of ERISA’s object of protecting employees’ justified expectations of receiving the benefits their employers promise them.”

Petitioners also argued that the fund’s reinterpretation of the conditions of retirement for participants applied “discretionary[] [and] subjective” conditions on a participant’s ability to receive benefits, which violated ERISA regulations. Petitioners distinguished that while the fund did have discretion to determine whether participants had satisfied objective conditions required to receive a benefit, it could not subjectively decide what those conditions are.

In contrast, appellees argued that the anti-cutback provision is not even at issue as courts have held that plan participants cannot accrue illegal benefits.

Petitioners’ panel rehearing request is currently pending.

 

A New York district court recently dismissed, without prejudice, a 401(k) plan participant’s putative class action complaint alleging breaches of fiduciary duty. The plaintiff alleged that the plan fiduciary-defendants breached their duties of prudence and loyalty by failing to properly monitor the plan’s costs. Cunningham v. USI Ins. Servs., LLC, 2022 U.S. Dist. LEXIS 54392 (S.D.N.Y. Mar. 25, 2022).

First, the plaintiff alleged that the defendants allowed the 401(k) plan to pay recordkeeping fees that were nearly three times what an alleged prudent and loyal fiduciary would have paid for similar services. The plaintiff alleged that the fees were paid directly from the plan participants’ accounts, and indirectly paid through revenue sharing with the recordkeeper. The court rejected that claim, finding that the plaintiff failed to allege how she calculated the plan’s direct and indirect fees, and how the sum of those fees was excessive in relation to the specific services provided to the plan as compared to alleged “comparable plans.” Although the plaintiff provided a table of alleged “comparable plans” and their recordkeeping fees, the defendants pointed to the publicly available Form 5500s, which demonstrated that the alleged “comparable plans” offered different services than that of the plan in this case.  As such, the court held that the plaintiff failed to allege sufficient facts to allow for inferences that the “comparable plans” offered the same “basket of services.”

Second, the plaintiff alleged that the defendants breached their duty of loyalty by employing their own subsidiary as the plan’s recordkeeper and allowing the plan to pay the recordkeeper “multiples of the reasonable per-participant amount for the Plan’s [recordkeeping] fees.” The court held that the plaintiff’s duty of loyalty claim was intrinsically dependent on her dismissed breach of prudence claim and therefore dismissed the breach of duty of loyalty claim.

Lastly, like the breach of duty of loyalty claim, the court found the failure to monitor claim depended on the breach of prudence claim. Because a claim for breach of the duty to monitor requires an antecedent breach to be viable and the plaintiff failed to plead a viable breach of prudence or breach of loyalty claim,  the court dismissed the failure to monitor claim as well.

This decision is one of the first following the Supreme Court’s recent opinion addressing the pleading standards in these fee cases. As there have been more than 170 similar class action suits filed around the country in the last few years, this decision may provide a roadmap on how district courts can address complaints alleging breaches of fiduciary duty which fail to explicitly provide the formula used to calculate the alleged imprudent recordkeeping fees.

 

ERISA makes clear that it governs “any plan, fund, or program … established … by an employer … for the purpose of providing [health benefits] for its participants.” 29 U.S.C. § 1002(1). Although most employee benefit plans that provide benefits to employees are governed by ERISA, some arrangements are not. The Northern District of Illinois’ recent decision in Till v. National General Accident & Health Insurance Co., No. 21-1256 (N.D. Ill. Mar. 8, 2022), provides some guidance into what kinds of arrangements may not constitute an ERISA plan.

The plaintiff in Till visited a hospital for medical treatment, and the following day, purchased a health insurance policy issued by the defendant. The policy was purchased through an association and provided coverage only to the plaintiff. The day after purchasing the policy, the plaintiff returned to the hospital and was treated for a pulmonary embolism. The defendant denied coverage, citing the policy’s pre-existing condition exclusion. The plaintiff then filed suit, claiming the denial violated ERISA. According to the plaintiff, the policy qualified as an ERISA plan because he bought it through an association of employers.

The defendant moved to dismiss, arguing the policy was not governed by ERISA. The court agreed, finding that ERISA governs plans arising from employment relationships, and that one cannot have an employment relationship with oneself. In other words, ERISA’s definitions of employer and employee contemplate separate parties. Here, the plaintiff had not alleged that his business had any employees, and the policy provided coverage only to plaintiff as an individual.

In addition, the court found that the plaintiff had not plausibly alleged that the association through which he had purchased his policy satisfied ERISA’s definition of an “association of employers.” The court stated that, under the relevant regulation, for an association to fit within the definition, it must be established by a group of employers to provide benefits to employees, have at least one substantial business purpose unrelated to the provision of benefits, have employer members that control the plan, and meet the various documentation requirements for plans established by the Department of Labor. The court found that plaintiff did not plausibly allege that the association met these requirements because the plaintiff alleged no facts about the association. For this additional reason, the policy was not governed by ERISA and the case was dismissed.

It’s no secret that the statutory deck under ERISA is stacked heavily in favor of multiemployer pension plans (MEPPs) and against employers contributing to (or withdrawing from) Taft-Hartley trust funds. For example, an employer who receives a demand to pay its alleged allocable share of a multiemployer pension plan’s unfunded vested benefits (Withdrawal Liability) will generally only have 90 days to properly respond or be forever barred from raising any defenses except payment in full. The deadlines for initiating arbitration are even trickier. An employer must initiate arbitration on the earlier of: (1) 60 days after the date the plan responds to the employer’s request for a review; or (2) 180 days after the employer’s request for review. An unwary employer may miss the arbitration deadline by simply expecting the MEPP to respond to the request for review, which it has no obligation to do.

Even more alarming to some employers is that if certain interim withdrawal liability payments (as calculated by the MEPP) are not timely made, the otherwise applicable 20-year payment schedule can be accelerated and the full amount (as alleged by the Fund) can be enforced in federal district court by the Trustees for the MEPP. This is true even before the merits of the underlying liability have been arbitrated (and assuming no deadlines were missed). This harsh result, sometimes called “pay-now, dispute later,” is an extraordinary remedy that allows the Funds to, at times, avoid due process.

The federal courts have further expanded the reach of these MEPPs. The Ninth Circuit lowered the bar for MEPPs seeking to enforce Withdrawal Liability against successors. Resilient Floor Covering Pension Trust Fund Bd. of Trs. v. Michael’s Floor Covering, Inc., 801 F.3d 1079, 1090-91 (9th Cir. 2015) (citing NLRB v. Jeffries Lithograph Co., 752 F.2d 459, 463 (9th Cir. 1985)). The Seventh Circuit appears even more willing to allow MEPPs to enforce a predecessor’s Withdrawal Liability against successors by focusing on the intent and motives of the asset purchaser. See our article on Indiana Elec. Workers Pension Benefit Fund v. ManWeb Servs., 884 F.3d 770 (7th Cir.  2018).

However, on a seemingly rare occasion, reasonableness and fairness prevail in favor of the employer and against the MEPP. In a recent decision by the Eastern District of Washington, the employer was able to overcome successor allegations by the International Painters and Allied Trades Industry Pension Fund (IUPAT Fund). D9 Contrs., Inc. v. Int’l Painters & Allied Trades Indus. Pension Fund, 2022 U.S. Dist. LEXIS 37072 (E.D. Wash. Mar. 2, 2022). In that case, the IUPAT Fund sought to enforce Withdrawal Liability alleged to be owed by Division 9 Contractors, Inc. (Division 9) against a similarly named employer, D9 Contractors, Inc. (D9). D9 filed the action in federal court, seeking a declaration that it did not owe any Withdrawal Liability to the IUPAT Fund, despite never initiating arbitration and never making an interim payment. Under the applicable legal standard, the court focused on continuity of operations between D9 and Division 9. Both entities shared some employees, and both relied on the same equipment and methods of production. However, in the end, the court held that based on all the applicable factors, the IUPAT Fund failed to connect the dots between Division 9 and D9. The Court also discussed a procedural issue, but in the end the case was decided on the merits and in favor of the employer. Phew!

D9 is like a terrible surprise party that turned out ok in the end. The necessity of the employer’s declaratory action, although ultimately successful, is a chilling reminder that all correspondence from MEPPs should be taken seriously, especially demands for Withdrawal Liability. The failure to strictly adhere to statutory deadlines can be, and often is, catastrophic.

Savvy employers would be well-served by treating Withdrawal Liability like any other potential liability that could threaten the solvency of the company (and all trades and businesses under common control with the withdrawing employer). With the proper counsel, Withdrawal Liability can be managed, and most unwanted surprises avoided. Deal counsel is similarly well-served by seeking our counsel with due diligence and in negotiating asset/stock purchase agreements when either seller or buyer ever contributed to a MEPP. Withdrawal Liability can be a huge scary number but attempting to merely white-knuckle it may deliver your company or your M&A deal a fatal, yet avoidable, blow.

In Metzgar v. U.A. Plumbers & Steamfitters Local No. 22 Pension Fund, 2022 U.S. App. LEXIS 5466 (2d Cir. Mar. 2, 2022), the Second Circuit in a summary order affirmed the district court’s decision granting summary judgment in favor of plan trustees regarding the trustees’ reinterpretation of what “retire” means under the terms of the pension plan.

Plaintiffs were participants in the U.A. Plumbers & Steamfitters Local 22 Pension Fund (the “Fund”), a defined benefit multi-employer pension plan governed by an Agreement and Declaration of Trust (the “Trust”). The Fund provided benefits to participants according to a Restated Plan of Benefits (the “Plan”). The Plan set the normal retirement age at 65, but it also provided a “Special Early Retirement” option to employees after their 55th birthday whose combined age and years of service equaled 85 or more. The Trust gave the trustees full discretionary authority to interpret the Plan.

Until fall 2011, the Plan operated with the understanding that participants did not have to stop working for a covered employer to receive special early retirement pension payments; they only had to stop working in a disqualifying employment position. This allowed participants to continue working in non-disqualifying employment (such as in a managerial position or as a project manager) while receiving pension benefits through the Plan.

In fall 2011, the Plan trustees reviewed the Plan and determined they had to change their interpretation of the term “retire” under the Plan because allowing participants who were not fully retired – i.e., those who had not severed their employment with their employers – to receive pension payments was putting the Fund in jeopardy of losing its tax-exempt status. The Plan trustees informed Plaintiffs that they could either cease their now disqualifying employment and continue to receive pension payments, or they could elect to continue their disqualifying employment resulting in the suspension of their pension payments.

Plaintiffs brought suit against the Fund, its Board of Trustees, and its Plan Administrator alleging: 1) this change violated ERISA’s anti-cutback rule; 2) the change was a wrongful denial of benefits in violation of ERISA § 502(a)(1)(B); and 3) Defendants breached their fiduciary duty to Plaintiffs.

The Second Circuit agreed with the district court that Defendants did not violate ERISA’s anti-cutback rule. In doing so, the appellate court reasoned that Defendants’ reinterpretation of “retire” did not constitute an “amendment” of the plan because its actual terms had not changed. In addition, under Defendants’ reinterpretation, Plaintiffs were never entitled to the accrued benefit they claimed to have lost.

The Second Circuit also affirmed the district court’s conclusion that Defendants’ decision to require Plaintiffs either to stop working or to stop receiving pension benefits was not arbitrary and capricious because it was based on a reasonable interpretation of the Plan. The Second Circuit noted this interpretation was based on the trustees’ reasonable conclusion this change was required to maintain the Plan’s tax-exempt status. The Second Circuit further explained that Plaintiffs failed to demonstrate how Defendants’ decision “to correct what they reasonably thought was an erroneous interpretation of the Plan in order to protect its tax-exempt status demonstrated a failure to exercise ‘care, skill, prudence, and diligence.’”

 

On March 4, 2022, the District Court for the District of Massachusetts dismissed, pursuant to Fed. R. Civ. P. 56, ERISA claims brought by a former employee who retired early at the age of 62 and receives retirement benefits in the form of a joint and survivor annuity. Belknap v. Partners Healthcare Sys., No. 19-11437-FDS, 2022 U.S. Dist. LEXIS 38381 (D. Mass. Mar. 4, 2022).

Plaintiff asserted that defendants violated ERISA by using allegedly unreasonable, outdated actuarial assumptions to determine the value of his joint and survivor annuity, resulting in a lower monthly payment. Pursuant to ERISA, a joint and survivor annuity paid in early retirement must be the “actuarial equivalent” of a single-life annuity paid beginning at the normal retirement age, which in this case was age 65 under defendants’ benefits plan. In sum, plaintiff alleged that his actual age-62 joint and survivor annuity was not actuarially equivalent to the single-life annuity that he would have received had he retired at age 65.

After two rounds of dispositive motions and amendments to the complaint, the parties engaged in a period of expert discovery followed by defendants moving for a third time to dismiss plaintiff’s claims. The court found that plaintiff sufficiently alleged that a favorable decision would result in an increase in his benefits and denied defendants’ 12(b)(1) motion on those grounds. Because both parties submitted expert evidence regarding the meaning of “actuarial equivalence,” the court converted defendants’ 12(b)(6) motion into one for summary judgment.

The court summarized the central issue concerning “actuarial equivalence” as one that required statutory interpretation to determine whether ERISA imposes a reasonableness requirement for “actuarial equivalence” in this context. The court concluded ERISA does not. First, in analyzing the meaning of “actuarial equivalent” under 29 U.S.C. § 1054(c)(3), the court rejected adding a reasonableness requirement, noting that the statute does not, on its face, define “actuarial equivalence” or require “reasonable” actuarial assumptions. The court concluded this omission was significant because elsewhere ERISA does so, such as by providing mortality assumptions and interest rates to convert annuities to lump sum payments.

Second, after considering regulations and case law, the court did not read them as requiring actuarial equivalence calculations based on reasonable assumptions. The court noted that the regulations related to lump sum benefits or to amendments of plans, neither of which applied here. The court determined that many of the cases relied on by plaintiff related to lump sum benefits, or they did not have persuasive reasoning for adding a reasonableness requirement to the statutory text.

Third, the court analyzed how “actuarial equivalence” is treated by actuaries in practice when they calculate the benefits to be paid to see whether it was a term of art in the field. The court found it is the undisputed industry practice to refer to the plan documents to determine the actuarial assumptions to use. Indeed, plaintiff’s own experts conceded this. In this case, defendants’ plan was the only relevant place where “actuarial equivalence” was defined, and the parties agreed that defendants followed the terms of the plan.

Finally, the court concluded this was not an absurd construction of ERISA, noting that retirement plans are “not generally required to provide protection against various forms of economic or social change.” For instance, nothing in ERISA imposes cost-of-living adjustments, even though over time inflation can significantly erode the value of pension benefits. The court also had noted earlier that there may be limitations on the actuarial factors a plan can use when it is adopted or amended.

In Newsom v. Reliance Standard Life Insurance Company, 2022 U.S. App. LEXIS 4505 (5th Cir. Feb. 18, 2022), the United States Court of Appeals for the Fifth Circuit clarified the difference between an eligibility determination and a disability determination for disability benefits.

James Newsom worked as a software architect for Lereta. He had a series of health problems dating back to 1999. By September 2017, his health had deteriorated to a point where he was unable to work a 40-hour week. Lereta reduced Newsom’s schedule to a 32-hour week, which was still considered full-time. By October 2017, Lereta placed Newsom on a part-time status. By January 2018, Newsom was unable to work.

Newsom submitted a claim for short-term disability (STD) and long-term disability (LTD) benefits. Newsom noted that he was first unable to work because of his disability in January 2018. Lereta indicated that Newsom had worked four days per week for seven hours per day before he was unable to work.

With regard to STD benefits, Reliance Standard Life Insurance Company denied Newsom’s claim on the basis that Newsom was not a full-time active employee in January 2018 and that, therefore, he did not qualify for STD benefit coverage. With regard to LTD benefits, Reliance determined that Newsom’s date of disability was in January 2018 and that Newsom had not worked full-time in the weeks prior to that date. Therefore, Reliance determined that Newsom was ineligible for LTD benefits.

Newsom appealed. With regard to STD benefits, Reliance reversed its decision and agreed to pay Newsom STD benefits for the STD benefit period. With regard to LTD benefits, Reliance affirmed its decision that Newsom was ineligible for LTD benefits.

Ultimately, Newsom filed suit, challenging Reliance’s denial of LTD benefits under 29 U.S.C. § 1132(a)(1)(B) of ERISA. At a trial upon submission of documentary evidence, the district court ruled for Newsom, concluding that Reliance erroneously denied Newsom LTD benefits. The district court agreed with Newsom that “regular work week” essentially meant “normal, ordinary, standard work week” or “scheduled work week,” and disagreed with Reliance’s view that the “actual hours worked” was determinative. The district court also found that Newsom was disabled as of October 2017, and that Newsom was entitled to more than $194,000 in LTD benefits.

Reliance appealed, arguing that the district court: (1) erred in its interpretation of “regular work week” under the LTD policy; (2) erred in finding October 2017 as Newsom’s date of disability; and (3) should have remanded the claim back to Reliance for an analysis of whether Newsom was disabled.

The Fifth Circuit quickly rejected Reliance’s first and second arguments. As to its third argument, Reliance argued that—because it denied Newsom’s claim on eligibility grounds—it never had a chance to determine whether Newsom was actually disabled for purposes of the LTD policy. Reliance argued that the district court should have remanded the claim to Reliance to develop a full factual record and to make a decision—for the first time—concerning whether to award benefits, and, if awarded, in what amount. On the other hand, Newsom argued that remand to Reliance would amount to an “impermissible ‘second bite at the denial apple.’”

The Fifth Circuit agreed with Reliance, explaining that Reliance had made only an eligibility determination, not a disability determination—two determinations that are “in fact distinct.” The Fifth Circuit explained that once Reliance determined Newsom was not eligible for LTD benefits, Reliance stopped its decision-making process. Accordingly, once the district court determined that Newsom was in fact eligible for benefits and determined the date on which Newsom’s eligibility began, the district court similarly should have stopped its decision-making process and remanded the case to Reliance to make the separate disability determination.

In a decision illustrating the importance of a deferential standard of review in an ERISA plan document, the Second Circuit affirmed the dismissal of severance claims by a disabled employee, concluding that the complaint pled facts showing that the denial of benefits was reasonable. Soto v. Disney Severance Pay Plan, No. 20-4081 (2d Cir. Feb. 16, 2022).

Plaintiff suffered several serious medical issues before her employment was terminated by Disney.  Although she received disability benefits, Disney refused to pay her severance benefits under its ERISA-governed severance plan (Plan).  Following two levels of internal claim review and denial, she filed suit against Disney, the Plan, and the Plan administrator. The district court dismissed her claims because she admitted that she had not received the requisite notice of eligibility from the Plan and had therefore “pled herself out of court.” On appeal, the Second Circuit affirmed the dismissal but on different grounds. The Second Circuit addressed the issue of whether the denial of severance benefits to Soto was improper, concluding that it was not.

District Court Dismisses for Lack of Notice

Plaintiff’s benefit entitlement hinged on whether she had experienced a “Layoff,” defined by the Plan as an “involuntary termination of employment . . . except for reasons of poor performance or misconduct.” The Plan administrator determined (and the Plan’s review committee agreed) that plaintiff’s “inability to return to work on account of her disabling illness” was not a “Layoff.”  Because plaintiff never received notice of benefit entitlement (an independent requirement for eligibility), however, the district court dismissed plaintiff’s claims without reaching the merits.

The Second Circuit Tackles the Merits

Acknowledging plaintiff’s theory that the eligibility notice was improperly withheld, the Second Circuit found that the propriety of the administrator’s interpretation of “Layoff” was central to plaintiff’s claims. The court therefore undertook a review of this interpretation.

Because the Plan granted the administrator discretionary authority to interpret Plan terms, the arbitrary and capricious standard governed the Second Circuit’s review. Under this standard of review, the administrator’s interpretation was afforded deference; it could be overturned only if without reason, unsupported by substantial evidence or erroneous as a matter of law.

The Second Circuit found it ambiguous whether plaintiff’s disability-based termination was an “involuntary termination of employment” (an undefined phrase) as needed for a “Layoff.” Although the dictionary definition of “involuntary” (“not done . . . by choice”) suggests a broad interpretation, the court concluded that a narrower interpretation (such as that of the administrator) was also reasonable.

The Second Circuit’s decision ultimately turned on a Plan term instructing the administrator to interpret the Plan in conformance with Internal Revenue Code Section 409A. Citing a regulation under 409A requiring that an employee be “willing and able to continue performing services” in order to be involuntarily terminated, the Second Circuit concluded that the Plan administrator reasonably interpreted “Layoff” to exclude a termination based on disability and affirmed the dismissal below.

Justice Sullivan, dissenting, stated that the Plan’s definition of “Layoff” unambiguously included terminations due to disability and characterized the majority’s analysis as “strained” and defying “both logic and common sense.”

Takeaways

Soto is instructive in several instances. It illustrates the importance of precise plan drafting, which seemingly could have avoided this prolonged controversy. The case also highlights the importance of securing arbitrary and capricious review. The deference afforded the administrator was likely determinative under the ERISA equivalent of baseball’s “tie goes to the runner.”