When a literal reading can be overridden
Chicago Daily Law Bulletin
October 19, 2009
by MARK D. DEBOFSKY
The arbitrary and capricious standard of review gives employers such broad discretion to interpret benefit plan provisions that a literal reading of the plan can be overridden according to Wallace v. Johnson & Johnson, 2009 U.S.App.LEXIS 22529 (1st U.S. Circuit Court of Appeals, Oct. 14). Wallace, who spent 14 years as a manager with Johnson & Johnson, sought short-term disability benefits after suffering a manic/mixed bipolar episode in 2001. Although she tried to return to work, by mutual agreement with her supervisor, she was placed into a non-management sales position to reduce stress and minimize work-related travel. Although the paperwork for the new assignment was completed, she was unable to begin the new job assignment due to a relapse. Wallace then reapplied for short-term disability benefits; and when those benefits were exhausted, she began receiving long-term disability in 2003. Her benefits were paid at a rate equal to 60 percent of Wallace's 2001 annual salary and commissions. Two years later, though, the claims administrator determined that Wallace had been overpaid, asserting that commissions should not have been included in the benefit calculation because Wallace never worked as a non-management employee; and management employees received disability benefits based solely on salary without consideration of commissions. Wallace unsuccessfully appealed the revised determination, and then filed suit. The district court upheld Johnson & Johnson's determination based on its deferential authority to interpret the plan. The court of appeals affirmed.
The first issue addressed was whether the determination was made by a fiduciary that was properly clothed with discretionary authority. The plaintiff argued that the ultimate decision maker, Johnson & Johnson Corporate Benefits, did not properly receive a delegation of discretionary authority from the named fiduciary the Pension Committee. The ERISA statute clearly permits delegation in accordance with 29 U.S.C. section 1105(c)(1), but Wallace's challenge was that the plan, while permitting delegation, never established a procedure to allow for delegation as mandated by 29 U.S.C. section 1102(b)(2), which requires that a benefit plan "shall ... describe any procedure under the plan for the allocation of responsibilities for the operation and administration of the plan (including any procedure described in [section 1105(c)(1)]). The court ruled the plaintiff was reading the term "procedure" too "rigidly," finding the authority to delegate is essentially synonymous with a procedure for delegation, and explaining:
"For delegation, it is hard to divine what Congress could have wanted any plan to contain beyond a grant of authority to delegate, together with any limitations that might exist on any such grant or the method of making it. Beyond that, we do not see why more would be expected than that the delegating fiduciary comply with any general formalities provided in the plan or under corporate or trust law. Here, the delegation did specify what authority was being delegated and to whom, and Wallace does not claim that the delegation instrument in this case was deficient in generally apposite formalities."
Thus, the court accepted Corporate Benefits' discretionary authority, explaining the benefit decision "must be upheld if there is any reasonable basis for it." Morales-Alejandro v. Med. Card Sys. Inc., 486 F.3d 693, 698 (1st Cir. 2007). Although the presence of a conflict of interest could make the deference less generous pursuant to Metro. Life Ins.Co. v. Glenn,128 S.Ct. 2343 (2008), the court found no conflict existed here because the plan at issue was funded solely by employee contributions.
Turning to the merits, the court acknowledged that "[r]ead literally, the language is consistent with Wallace's position"; however, the court further pointed out that such a reading would provide "an unintended windfall for Wallace and a shortfall in her contributions to the Plan to the detriment of other Plan participants." Corporate Benefits had read includable commissions to mean only those commissions earned while the employee worked in a non-management sales position; and the court agreed with that interpretation, finding that Johnson & Johnson's the failure to collect contributions for commissions Wallace earned while in a managerial position would create a windfall for her and affect the actuarial soundness of the plan if benefits included a percentage of the commissions. Nor would it remedy the situation if Wallace were to pay the commissions now, based on the following finding made by the court:
"In a disability scheme like this one, contributions are small in relation to benefits because most of the contributors never become disabled. To give participants an option to increase (modestly) their past contributions for a given year, in exchange for (much larger) benefits indefinitely after a participant becomes disabled is a recipe for long-term plan insolvency."
Wallace further maintained that acceptance of Johnson & Johnson's reasoning was unfair to her because Corporate Benefits kept altering its reasoning, thus violating ERISA's rule against plan fiduciaries' offering post hoc rationalizations for claim determinations. The court rejected that argument, though, finding that while the most complete explanation was made in Corporate Benefits' final ruling, despite that explanation being "more elaborate, it is not inconsistent with what was said earlier."
The standard of review is often outcome determinative in ERISA litigation; and it appears to have been material to the outcome here as well. Otherwise, under principles of contra proferentem, a rule of contractual interpretation that construes ambiguities in contracts against the drafter, Wallace would have won this case. The ERISA law permits plan fiduciaries possessing discretionary authority to choose a plan interpretation in favor of denying benefits even if a literal or more plausible reading of relevant plan language could produce the opposite result. Indeed, the broad discretion afforded under ERISA even trumps the strong fiduciary policy set forth in 29 U.S.C. § 1104(a)(1) mandating that plan fiduciaries act exclusively on behalf of plan participants and their beneficiaries for the reason offered in this opinion - an interpretation of the plan that maintains the financial soundness of the benefit program in order to benefit all participants is paramount to a reading that would benefit only a single participant. All of this could easily have been avoided here, though, had the plan explicitly limited the benefit payment only as to components of salary as to which contributions to the plan had been paid.
However, since that was not the case, the court here adhered to one of ERISA's paramount policies requiring the maintenance of plans' actuarial soundness. Although Wallace was officially a non-managerial employee at the time her claim arose, she never worked in that capacity and should have been assessed as a managerial employee in much the same manner as how occupational disability is evaluated when an employee is temporarily working at a position with job accommodations made due to disability. In such situations, courts have held that in assessing whether an employee is disabled from performing their regular occupation, disability should be assessed from the perspective of the employee's ability to work at the usual occupation and not the modified occupation. See, e.g., Peterson v. Continental Casualty Corp.,77 F.Supp.2d 420 (S.D.N.Y. 1999); rev'd in part 282 F.3d 112 (2d Cir. 2002). Particularly since a literal reading of the plan in this instance would have undoubtedly created a windfall for Wallace, there was a sound rationale for the 1st Circuit to have deferred in this case to Corporate Benefits' discretionary authority.