A recent ruling from the 9th U.S. Circuit Court of Appeals illustrates just how critical the Employee Retirement Income Security Act (ERISA) standard of review is to the outcome of a case. In Day v. AT&T Disability Income Plan, 2012 U.S.App.LEXIS 13558 (9th Cir. July 3, 2012), the court addressed whether it would be permissible for a disability plan administrator to offset retirement benefits withdrawn from the employer’s plan and immediately transferred into a rollover individual retirement account (IRA). On account of a deferential standard of review, the court found the plan administrator’s interpretation permitting the offset was reasonable. However, just a few years ago, the same issue was raised in a case adjudicated under ERISA’s de novo standard of review. In Blankenship v. Liberty Life Assurance Co. of Boston, 486 F.3d 620 (9th Cir. 2007), the 9th Circuit found the insurer could not justifiably interpret its plan to permit an offset of retirement funds placed in a rollover IRA account.
In Day, the court accepted the plan administrator’s argument that receipt of retirement funds was established by David Day’s ability to exercise control over the money and invest it as he saw fit and that he could control the timing and amount of disbursement of the funds as well. The 9th Circuit explained it could only overturn a plan interpretation if it “conflicts with the plain language of the plan” or “relies on clearly erroneous findings of fact.” Taft v. Equitable Life Assurance Soc’y. 9 F.3d 1469, 1472-73 (9th Cir. 1994)(citation omitted). Under those standards, the court deemed the plan administrator’s interpretation reasonable, citing a dictionary definition of “receive” as meaning “take into possession or control.” (citing Blankenship, 486 F.3d at 624-25; see American Heritage Dictionary 1467 (5th ed.) (defining “receive” as “to take or acquire (something given or offered)”). The court further acknowledged that although a beneficiary may not have possession of money deposited into a rollover account, the beneficiary would have control over the assets, thus, under the definition supplied, the court found it was “not unreasonable to say that he has received these benefits.” *12 (emphasis in original).
Day’s principal argument was that Blankenship was controlling. However, the 9th Circuit held that Blankenship was distinguishable since it was decided under the de novo standard of review, which applies the doctrine of contra proferentem, a principle of contract interpretation that construes ambiguities against the drafter. The court found that doctrine inapplicable under a deferential standard of review, though.
Despite the 9th Circuit’s conclusion, Blankenship deserves further attention regardless of the review standard. The underpinning of that ruling would have received more consideration had this matter arisen in the 4th Circuit. That circuit lists eight factors that need to be considered in assessing the reasonableness of an ERISA administrator’s plan interpretation:
1. the language of the plan; 2. the purposes and goals of the plan; 3. the adequacy of the materials considered to make the decision and the degree to which they support it; 4. whether the fiduciary’s interpretation was consistent with other provisions in the plan and with earlier interpretations of the plan; 5. whether the decision-making process was reasoned and principled; 6. whether the decision was consistent with the procedural and substantive requirements of ERISA; 7. any external standard relevant to the exercise of discretion; and 8. the fiduciary’s motives and any conflict of interest it may have.
Booth v. Wal-Mart Stores, Inc. Associates Health & Welfare Plan.201 F.3d 335, 342-343 (4th Cir. 2000). Several of those factors suggest an abuse of discretion occurred here. Although Day expressed concern about “double-dipping” that occurs when an employee simultaneously receives both disability and retirement benefits, Day retained the pension funds in the rollover account. As California attorney Glenn Kantor noted in commenting about this ruling, “Retirement benefits are to be used when your income has stopped after age 65. Disability benefits are to be used to replace your income during your working years. This interpretation results in the employee funding their own long-term disability, and then having no funds left when they retire!” The purpose of the disability plan is diminished when benefits are reduced by rolled-over retirement benefits.
There is also an important external standard ignored by the plan administrator’s determination – the Internal Revenue Code. Blankenship relied heavily on the code as support for its conclusion that the plaintiff did not “receive” the money rolled over, explaining that a disbursal of tax-sheltered retirement benefits is taxable only when it is “actually distributed” to the employee. 486 F.3d at 626 n.3 (citing 26 U.S.C. Sections 401(a)(31)(A), 402(e)(6), 408(a)). Although the insurer tried to argue the irrelevance of the code, the court thought otherwise and found the tax laws created an external standard against which the insurer’s interpretation could be evaluated. Finally, the Blankenship opinion points out:
“Liberty Life acknowledged at oral argument before this court that if Blankenship had elected upon retirement to defer distribution of his funds by leaving them in his KPMG account, he would not have ‘received’ the funds under the terms of the disability plan. There is no significant difference, however, between Blankenship electing to keep the funds in KPMG’s care through deferred distribution and electing to transfer the funds to the Vanguard IRA.”
486 F.3d at 627. The Blankenship ruling then concludes: “Because Blankenship had the same type of possession (and control) of the funds once transferred into the Vanguard account that he would have had were the funds left with KPMG, he did not ‘receive’ these funds for the purposes of offset under the disability plan.” Those conclusions should apply irrespective of the standard of review applied by a court since they raise doubts as to whether AT&T’s interpretation was reasoned or principled.”