Two recent district court rulings ,Day v. AT&T Disability Income Plan, 2010 U.S.Dist.LEXIS 61477 (N.D.Cal. June 8, 2010) and Riley v. Sun Life and Health Assur.Co., 2010 U.S.Dist.LEXIS 61881 (D.Neb. June 18, 2010), starkly illustrate how the standard of review in ERISA cases can dramatically impact the application of offsets against benefits payable. In both cases, the court applied a deferential standard of review and rejected consideration of the plan administrators’ conflict of interest. In Day, the plan had a provision allowing an offset against disability benefits for pension benefits. The SPD explained:
The plan provides you with an LTD benefit & reduced by benefits you may receive from other sources of disability income, such as & pension benefits you may receive from any SBC Company pension plan. & If you are eligible and apply for pension benefits . . . your pension benefit, to the extent paid to you, will be subtracted from your LTD payments. (If you elect a cashout, the equivalent monthly amount will be calculated and used as the factor for integration with LTD payments.)
InRiley, the issue was whether disability benefits paid by the Veterans Administration could be offset against long-term disability benefits. There, the policy provided for an offset of any amount of disability or retirement benefits under:
a) The United States Social Security Act to which;
i) you are entitled; and
ii) your dependents may be entitled because of your disability or retirement;
b) the Railroad Retirement Act;
c) any other similar act or law provided in any jurisdiction.
In Day, the plaintiff David Day, chose to rollover his entire accrued pension to an IRA account with Charles Schwab, but never drew funds from that account. In Riley, the plaintiff James Riley, became disabled from his employment in 2005 due to multiple sclerosis; three years later, Sun Life applied the offset provision to claim an entitlement to offset VA benefits that Riley was receiving in connection with his military service well before he had begun working in the private sector and was insured by Sun Life. In both cases, the offsets were permitted.
In Day, although the pension monies were placed into a rollover IRA account, AT&T’s third-party administrator, Sedgwick, claimed that the funds were “received” by Day and therefore offset table. The court agreed and was particularly struck by the provision in the SPD relating to a “cashout.” The court found the explanation provided by Sedgwick was a reasonable interpretation of the plan and permitted the offset. Because the term “receives” was not defined in the plan, the court held it was within the plan administrator’s discretionary authority to interpret the plan in a way that deemed a rollover receipt of the pension benefits. Although the court acknowledged the term “receives” could be considered ambiguous, it held the rule of contra proferentem, which construes ambiguities in favor of the insured, was trumped by the plan’s discretionary authority. Finally, the court rejected an argument based on the Age Discrimination in Employment Act, which states:
It shall not be a violation & solely because an employer provides a bona fide employee benefit plan or plans under which long-term disability benefits received by an individual are reduced by any pension benefits & (A) paid to the individual that the individual voluntarily elects to receive; or (B) for which an individual who has attained the later of age 62 or normal retirement age is eligible. 29 U.S.C. § 623(1)(3).
Because the rollover was voluntary and Day was not required to rollover his accrued pension funds, the court found no violation of the ADEA.
In Riley, the court likewise found it was within the insurer’s discretionary authority to interpret the policy’s offset provision to encompass VA benefits, even though such benefits are not specified by name, unlike Social Security disability benefits, which are explicitly enumerated. The court relied heavily on a 5th Circuit ruling, High v. E-Systems, Inc., 459 F.3d 573 (5th Cir. 2006), which similarly held that VA benefits are offset table even though such benefits are not specified. Although Williams v. Group Long Term Disability Insurance & Reliance Standard Life Ins., No. 07C6022, 2008 WL 2788615 (N.D. Ill. July 17, 2008) held that VA benefits are “different than and independent of benefits under a group disability plan, retirement benefits or workers compensation benefits” and should not be used to offset disability benefits under the Plan, the court chose not to follow that ruling.
Because the court found the VA benefits compensated Riley for the same risk of loss covered by the plan, i.e., an inability to work, the court found the insurer’s interpretation reasonable. Because Riley failed to provide evidence as to whether his VA benefits were due to a service-connected injury or illness unrelated to multiple sclerosis, the court assumed a relationship between the basis for the VA benefits and the claimed disability under the Sun Life policy since the “administrative record” was now closed and no further proof would be permitted. Thus, the court permitted Sun Life to offset the VA benefits.
The results in both cases appear manifestly unfair. The 9th Circuit explicitly held that when an employee rolls over their retirement monies into an IRA, those funds are not received – Blankenship v. Liberty Life Assur.Co. of Boston, 486 F.3d 620 (9th Cir. 2007). Although Day distinguished Blankenship on the ground that it was adjudicated under the de novo standard of review, that distinction appears to be without a difference given the 9th Circuit’s discussion of the tax laws which permit rollovers of retirement funds into IRA accounts without incurring taxation (26 U.S.C. § 402(a)). The court added that the Internal Revenue Code was “clearly relevant” to the issue and guided the court’s determination that unless the funds were actually distributed there was no “receipt” of the retirement monies. The court further pointed out that while it applied the doctrine of contra proferentem, “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 IR & help 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.” 486 F.3d at 627.
The same result was reached in Neiheisel v. AK Steel Corp., 2008 U.S.Dist.LEXIS 5907 (S.D.Ohio 1/17/2008), which utilized a deferential standard of review but nonetheless concluded that it was an abuse of discretion to deem a rollover “receipt” of retirement funds. Applying a dictionary definition, the court explained, “From the standpoint of the ordinary person, a plan participant does not ‘receive’ funds that are directly rolled over to a qualified IRA account.” 2008 U.S.Dist.LEXIS 5907 *10. Thus, because there was no “double-dipping” in Day’s situation, the avoidance of which is the purpose behind offsets in disability income plans, there should have been no offset.
As to Riley, it would have been a matter of simple draftsmanship to expressly list VA benefits under the categories of monies that coordinate with long term disability benefits had that been the intent when the policy was issued, but Sun Life failed to do so. As pointed out in In re Unisys Corp. Long-Term Disability Plan ERISA Litig., 97 F3d 710, 715-16 (3d Cir. 1996), “It is a simple task of draftsmanship to specify which offsets are applicable in any particular plan.” Id. at 715. Since the policy did not specify that VA benefits could be offset, the insurer should not have been allowed to expand its rights under the guise of “discretionary authority.”
From a broader perspective, though, two recent 7th Circuit rulings offer further guidance on the scope of deferential authority in situations such as these. In Call v. Ameritech, 475 F.3d 816, 822 (7th Cir. 2007), a dispute over interpretation of a pension plan where the court sided with the pensioners, the court explained that deference does not permit the terms of a benefit plan to be rewritten. Call made it clear that deference may be “overridden [ ] by the lack of any reasoned basis for that interpretation.” Id. The court added that deference may be related to ambiguity; and when guides to meaning line up on one side of the case, as they do here, an adjudicator who decides the case the other way is likely to be acting unreasonably. Just as unambiguous terms of a statute leave no room for the agency that administers the statute to exercise interpretive discretion, Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 125 S. Ct. 2688, 2700, 162 L. Ed. 2d 820 (2005), so unambiguous terms of a pension plan leave no room for the exercise of interpretive discretion by the plan’s administrator, or at least not enough to carry the day for the administrator in this case.
An administrator’s discretionary authority also failed to carry the day for plaintiffs in Bandak v. Eli Lilly & Co. Ret. Plan, 587 F.3d 798 (7th Cir. 2009), where the court ruled the entitlement to deference “is diminished by indications that the conflict of interest inherent when benefits determinations are made by a plan funded by the employer has infected the administrator’s consideration of the application for benefits.”
In both Day and Riley, the insurers advanced blatantly self-serving interpretations intended to diminish benefit payouts and increase revenues not just as to the particular plaintiffs, but in a manner that would impact similarly situated claimants. In Day, the interpretation was not just self-serving, but contrary to established precedent and the tax laws, while in Riley, the interpretation could easily have been written into the plan had it been intended rather than stretching the meaning of an ambiguous provision. The entire paternalistic purpose of ERISA was thwarted by these rulings, which, in the guise of giving deference to deferential authority, allowed plan administrators’ oppressive behavior to render the promised benefits illusory.
I represented the plaintiff in the Williams case cited in this article.
This article was initially published in the Chicago Daily Law Bulletin.