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Client Alert: Recent and Upcoming Cases Concerning Employee Benefit Plans


Two Supreme Court cases and several lower court decisions have recently been issued that affect employee benefit plans:

Claim Administrators’ Conflict of Interest Does Not Necessarily Invalidate a Benefit Claim Denial:
In Metropolitan Life Insurance Co. v. Glenn, the Supreme Court clarified that if a plan administrator operates under a conflict of interest in determining benefit claims, the conflict must be taken into account in determining whether the administrator has abused its discretion, but will not, by itself, cause a benefit denial to be set aside. In Glenn, MetLife both determined and funded claims for benefits under a long-term disability plan, and thereby had a financial incentive to deny benefits. The Court held that MetLife’s self-interest in denying the claim was one of several factors that must be taken into account in determining whether it abused its discretion in denying the claim. Other factors, in addition to the conflict of interest, such as MetLife’s failure to acknowledge medical expert opinions contrary to its determination (including the Social Security Administration’s finding of total disability) ultimately led the Court to conclude that MetLife had abused its discretion. The weight that is given to a conflict of interest relative to other factors will depend on the facts and circumstances of each case. For example, a conflict of interest will be more significant if the administrator has a history of biased claims decisions and less significant if the administrator has taken steps to reduce any potential bias by insulating itself from those interested in the administrator’s finances. Employers should identify any financial conflicts of interest and ensure that any claims administrator that has a conflict of interest has an objective claims determination process in place with checks and balances to penalize inaccurate decision-making (even if it is against the administrator’s interest).

Using Pension Status to Determine Benefits Eligibility Does Not Violate ADEA Unless Used as a Proxy for Age:
In Kentucky Retirement Systems v. EEOC, the Supreme Court concluded that an older employee who receives different treatment under a pension plan solely based on pension status (e.g., eligibility for a normal retirement benefit) will not violate the Age Discrimination Employment in Act of 1967 (“ADEA”) unless the employee proves that age “actually motivated” the less favorable treatment. Kentucky’s retirement plan calculates disability benefits by imputing additional service credit for the number of years by which the participant’s termination date precedes the date he would have become eligible for normal retirement benefits. Although older workers may be credited with less or no additional service under Kentucky’s plan, the Court held that the disability rules were not actually motivated by or a proxy for age because the disparity had a clear non-age-related purpose—to treat disabled workers as though they had become disabled after becoming eligible for normal retirement benefits.

Providing Erroneous Pension Estimate Is Not a Breach of Fiduciary Duty:
In Livick v. The Gillette Co. Retirement Plan, the U.S. Court of Appeals for the First Circuit held that there was no breach of fiduciary duty when an employee provided a plan participant with an incorrect pension benefit estimate. The court ruled that the employee was performing a purely ministerial function, rather than undertaking a fiduciary duty, when it provided the participant with the erroneous estimate. The court also held that the plan fiduciaries did not breach their fiduciary duties by failing to train the employee to adequately perform ministerial tasks, and noted that the plan fiduciaries fulfilled their duty to adequately inform the participant, through plan documents and other communications, of the benefit to which he was entitled under the plan.

Second and Ninth Circuits Join Third, Sixth, and Seventh Circuits in Holding that Cash Balance Plans are Not Age Discriminatory:
The U.S. Court of Appeals for the Second Circuit in Hirt v. The Equitable Retirement Plan for Employers, Managers and Agents and Breyerton v. Verizon Communications Inc., and the U.S. Court of Appeals for the Ninth Circuit in Hurlic v. So. Calif. Gas Co., have joined the Third, Sixth, and Seventh Circuits in holding that cash balance plans do not violate federal age discrimination laws. All of the Circuit Courts of Appeal that have ruled on this issue have determined that a cash balance plans that allow benefits to grow using a compound interest methodology are not age discriminatory.
Successor Liability to ERISA Debts: In Schilling v. Interim Healthcare of the Upper Ohio Valley, Inc., a U.S. District Court in Ohio affirmed prior case precedent that a successor company is responsible for the ERISA debts of a predecessor if, at the time the successor purchases assets from the predecessor, (1) the successor has knowledge of the ERISA debt, (2) the predecessor is not able to extinguish the debt, and (3) the successor will continue the predecessor’s business operations without interruption or substantial change. In Schilling, the court found a successor company liable for over $340,000 in unpaid medical claims under a predecessor’s self-insured health plan when the president and sole shareholder of the successor purchased the assets of the predecessor company after being notified of the outstanding claims and of the predecessor’s inability to pay them. This case is a reminder that parties to corporate transactions should disclose and carefully consider potential ERISA debts of a seller so that those debts can be taken into consideration in negotiating the purchase price.

Some upcoming court decisions that employee benefits experts are closely watching include the following:
Does a Plan Administrator Have to Honor a Waiver to Pension Benefits Provided under a Divorce Decree? The Supreme Court has agreed to decide whether ERISA requires a plan administrator to recognize an ex-spouse’s waiver under a divorce decree to a participant’s pension benefits. In Kennedy v. DuPont Plan Administrator, William Kennedy, a participant in the Dupont Savings and Investment Plan, designated his then wife as the sole beneficiary of his benefit under the plan. Years later, Kennedy and his wife divorced and his wife waived her right to receive any benefits under the plan in the divorce decree. However, Kennedy died without replacing his ex-wife as the designated beneficiary under the plan. DuPont paid the participant’s benefit to his ex-spouse after concluding that neither ERISA, nor the terms of the plan, permit it to recognize any waiver of rights to the participant’s benefit that is not made through a qualified domestic relations order. Arguing that ERISA does not preclude an ex-wife from waiving her right to a pension benefit under federal common law, the Kennedy estate filed suit to recover the benefit. Reversing the lower court, the U.S. Court of Appeals for the Fifth Circuit agreed with DuPont’s conclusion, and the Kennedy estate requested that the Supreme Court review the Fifth Circuit’s decision. The Supreme Court’s decision will resolve a split among the Circuit Courts of Appeal and state supreme courts on this issue; and if the Supreme Court affirms the Fifth Circuit’s holding, will clarify that plan administrators can disregard waivers to ERISA retirement benefits that appear in divorce decrees.
Questionable Rollover Practices by Third-Party Plan Administrators May Result in Fiduciary Breach: A claim for equitable relief is pending before a U.S. district court in Iowa in Young v. Principal Financial Group, Inc. by former participants in 401(k) plans who allege that the plans’ third-party administrator, Principal, encouraged the participants to roll amounts from their 401(k) plans into Principal’s high-cost IRA products. Around the time that the former participants retired, they received letters from Principal directing them to call a 1-800 number to discuss their benefit distribution options. The counselors to whom the participants spoke, however, were sales representatives who received rewards for selling for Principal’s proprietary products and allegedly pushed the participants into rolling their money into an expensive IRA that ultimately resulted in the participants paying more in fees and earning less that if they had left their money in the plans. If the participants can show that Principal breached its fiduciary duty to the plan because its counselors were not acting for the exclusive benefit of plan participants and engaged in prohibited transactions by soliciting rollovers that would enrich Principal, the retirees could force Principal to disgorge any profits generated from the rollovers and transfer the money back to the plans. Although the claim is still in the early stages of litigation, it serves as a reminder that plan sponsors have a fiduciary duty to monitor third-party providers, and including their rollover practices.

The lawyers on LeClairRyan's Compensation & Benefits Team advise and represent employers on employee benefits and executive compensation matters. We deal regularly with the Internal Revenue Service (IRS), Department of Labor (DOL), Pension Benefit Guaranty Corporation (PBGC), and assist clients in obtaining private letter rulings, determination letters, exemptions, and informal guidance from these agencies. Our Compensation & Benefits practice covers all types of benefit arrangements, including retirement and welfare plans, fringe benefits, equity and incentive compensation, and executive compensation programs.