In passing the Employee Retirement Security Act of 1974 (“ERISA”), Congress sought to make it as easy and economical as possible for employers to provide benefits to their workers; for example, pensions, health insurance, life insurance and long-term disability (LTD) insurance. However, because many of the statutes that govern benefit plans are so complicated, and since the regulations issued by the U.S. Department of Labor frequently are so convoluted, one must wonder if that goal will ever be realized. A new decision by the Ninth Circuit may bring a bit more clarity to ERISA waters, but it also likely will make it more complex and costly for employers to offer LTD benefits to employees.
In Prichard v. Metropolitan Life Ins. Co., Ninth Circuit Case No. 12-17355, an employer outlined the LTD benefits it offered to employees in a document called a Summary Plan Description (“SPD”). So far so good, as this is a widespread practice. In so doing, the employer did not create a separate document known as a plan instrument. Instead, the employer treated the SPD as the plan instrument – which also is a generally permissible and somewhat common practice. As one would expect, the employer also obtained an insurance certificate from the carrier who would administer claims and provide benefit payments to eligible disabled employees.
The problem arose when the administrator decided to terminate an employee’s LTD benefits due to insufficient medical evidence of a continuing disability. Not surprisingly, the employee filed a lawsuit in federal court. When such claims get that far, the outcome often depends upon the lens that the court uses to review the benefit decision.
If the plan gives the administrator who decides the claim “discretionary authority to determine eligibility for benefits,” the federal court has less room to second-guess the eligibility determination. However, if the plan does not give such discretion to the administrator, the federal court has more latitude to substitute its own judgment and rule that the employee was eligible for the benefits. In this case, the SPD purported to give the administrator such discretion – but the insurance certificate did not.
The trial court applied the more restrictive lens, which resulted in a ruling that the administrator appropriately terminated the benefits. On appeal, the Ninth Circuit treated the insurance certificate, rather than the SPD, as the plan instrument. Since the insurance certificate did not expressly confer discretion to the plan administrator, the appellate court ruled that the trial court should have applied the other lens – the one that allows for more room to invalidate a benefits determination.
It remains to be seen if the trial court’s use of that less-confining lens will produce a different outcome on remand, but the odds of finding eligibility for benefits are greater when that lens is used. The lesson to be learned here is that having the SPD serve as the plan instrument may not always go as planned. Employers who offer such benefits to employees and who use the SPD as the plan instrument should consult with legal counsel to see if any plan documents need to be revised to avoid the prospect of litigation that may otherwise be avoidable.