Employee Benefit Plan Review – From the Courts

California Federal District Court Determines “Document in Force”

As an employee of NetApp, the plaintiff participated in the company’s long-term disability (LTD) plan, an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA). NetApp was both the plan sponsor and plan administrator. The plaintiff’s job title with NetApp was Human Resources Manager, although her job description described her position as an “Individual Contributor.” The plaintiff last worked for NetApp on April 29, 2015, due to pain, fatigue, and cognitive impairment. Under the plan, NetApp had the right to amend the plan at any time without consent of the participants and had discretionary authority to interpret the plan and to determine eligibility for plan benefits.

The plan provided LTD coverage to two classes of employees. In 2015, the plan defined Class 1 employees as the “CEO, President, Vice President, Corporate Officers, Directors, Managers, and Engineers.” Class 2 employees included everyone else. To qualify for LTD benefits under the 2015 plan, a Class 1 employee needed to show that “as a result of an Injury or Sickness, [the employee] is unable to perform with reasonable continuity the Substantial and Material Acts necessary to pursue [the employee’s] Own Occupation in the usual and customary way.” After receiving the first 24 months of LTD benefits, a Class 2 employee needed to show that “as a result of sickness or injury the Covered Person is not able to engage with reasonable continuity in any occupation in which [the Covered Person] could reasonably be expected to perform satisfactorily in light of [the Covered Person’s] age, education, training, experience, station in life, and physical and mental capacity.” The definition of disability remained own occupation for Class 1 employees beyond 24 months.

On September 14, 2015, the claim administrator denied the plaintiff’s claim on the ground that she was not disabled from performing her own occupation. Although the determination letter did not expressly state whether the claim administrator considered the plaintiff to be a Class 1 or Class 2 employee, the letter quoted from the Class 2 definition of disability.

On March 10, 2016, the plaintiff appealed the determination on the grounds that she was disabled from performing her own occupation and that she was not a Class 2 employee. The claim administrator notified the plaintiff that it needed additional time to complete its appeal review; thus, it had until June 8, 2016 to issue its determination on the plaintiff’s appeal. The claim administrator did not render a timely decision and the plaintiff filed suit on June 10, 2016.

On June 14, 2016, the claim administrator sent a letter reversing its determination with respect to the plaintiff’s claim for benefits but did not address her appeal regarding her status as a Class 2 employee. The claim administrator paid the plaintiff the past due LTD benefits.

Effective January 1, 2017, NetApp amended the plan and changed the definition of Class 1 employee as follows: “All Employees with a Job Level Code of ‘CEO,’ ‘President,’ ’Vice President,’ ‘Corporate Officer,’ any Job Level Code that includes the term ‘Director,’ ‘People Manager,’ and certain ‘Engineers.’” The plan also added the following language:

The determination of whether an employee is categorized as Class 1 or Class 2 is made solely at the discretion of the Plan Sponsor based on the Job Level Code. It is not made based on the employee’s job title, and not every employee with a job title including the words “Director,” “Manager,” or “Engineer,” for example, will be a Class 1 Employee. Only those with the corresponding Job Level Codes may fall into Class 1 or Class 2. “Job Level Code” is defined as the job level codes assigned internally by the Plan Sponsor. The Job Level Code is independent of and supersedes the job title.
The parties did not dispute that the plaintiff was not a Class 1 employee under the 2017 plan.

The plaintiff filed suit under ERISA in the U.S. District Court for the Northern District of California. Given the claim administrator’s decision to reverse its earlier determination and approve the plaintiff’s claim for LTD benefits, the remaining issue in the case was the plaintiff’s classification as either a Class 1 or Class 2 employee. The parties filed cross motions for judgment under Federal Rule of Civil Procedure 52. After a bench trial, the court ruled in the plaintiff’s favor.

The court first considered the appropriate standard of review.  Even though the plan granted discretionary authority to the plan administrator to interpret the plan and to determine eligibility for benefits and even though the abuse of discretion standard typically applied when a plan granted discretion, because such grants of authority were “void and unenforceable” under California’s ban of such discretionary clauses, the court applied the de novo standard of review. The parties agreed de novo review applied.

Unlike abuse of discretion review, under de novo review, courts grant no deference to an administrator’s determination. Courts in the Ninth Circuit typically limit their review to the administrative record compiled by the claim administrator in determining whether the plaintiff satisfied his or her burden of proving entitlement to benefits.

Ultimately, the case turned on whether the 2015 plan or the 2017 plan was the applicable plan document. The court recognized that Ninth Circuit precedent held the applicable plan document was the document in effect when the plaintiff’s cause of action accrued, i.e., when the plaintiff had the right to file suit and obtain relief. The Ninth Circuit has held this moment occurred when benefits actually were denied or when the plaintiff had reason to know that benefits were denied. Typically, this was when an administrator issued its final benefit determination. But when an administrator failed to do so timely, as in this case, a plaintiff had the right to bring suit immediately. Thus, the applicable plan document was the document in force at that time.

In her March 10, 2016 administrative appeal letter, the plaintiff requested the claim administrator review two issues: one, the underlying adverse benefit determination, and two, her classification as a Class 2 employee. But the administrator did not timely issue its determination letter by the June 8, 2016 due date. Thus, the plaintiff’s claim was deemed denied on that date and she had the immediate right to sue. Accordingly, because the 2015 plan document was in effect on that date, it was the applicable document.

The court next considered whether under the 2015 plan document the plaintiff was a Class 1 or Class 2 employee. The 2015 plan document included “Managers” as Class 1 employees, and the plaintiff’s job title included the word “Manager.” The claim administrator argued that because the plaintiff’s job description did not include managerial responsibilities, the plaintiff did not satisfy the definition of Class 1 employee. The court disagreed and held in the plaintiff’s favor.

In reaching this conclusion, the court first considered whether the 2015 plan document was ambiguous. The court recognized that the doctrine of contra proferentem applied in ERISA cases to ambiguous plan provisions where the standard of review was de novo. The court nevertheless found that the word “Manager” in the definition of Class 1 in the 2015 document was unambiguous and, thus, it did not apply contra proferentem.  Because the plaintiff’s title was Human Resources Manager, she satisfied the definition in the 2015 plan document. But even if the word was ambiguous and it applied the doctrine, the court recognized, it would be required to construe the term in the plaintiff’s favor and find that she satisfied the definition of Class 1 employee under the 2015 plan.

The court also considered whether the doctrine of reasonable expectations would lead it to the same result. The court recognized that because a plan participant reading the 2015 plan document would reasonably understand the word “Manager” to apply to employees with the word “manager” in their job titles, the participant’s expectation would control even if it differed from the drafter’s intent.

Accordingly, the court concluded that the plaintiff was a Class 1 employee and that she was entitled to past due and future LTD benefits as a Class 1 employee, as long as she continued to be disabled under the plan. [Vaccaro v. Liberty Life Assurance Co., No. 16-cv-03220 (N.D. Cal. Nov. 20, 2017)]

Nebraska Federal District Court Holds Plan’s Investment Services Provider Was Not an ERISA Fiduciary

In this case, the plaintiff was a participant in the Safe Auto Insurance Company 401(k) plan, both an employee pension benefit plan and an individual account plan under the Employee Retirement Income Security Act of 1974 (ERISA). The plan negotiated a contract (the Contract) with United of Omaha Life Insurance Company (United) to provide various investment services for employees. In his complaint to the U.S. District Court for the District of Nebraska, the plaintiff alleged that United had breached its fiduciary duties. United moved to dismiss the complaint on the ground that it was not a plan fiduciary, a prerequisite for liability. The court granted the motion.

Under the Contract, the plan had the option to invest in three separate investment accounts. Only one, the maturity account, was at issue in this case. Maturity accounts held contributions for a fixed period of time.

Pursuant to the Contract, United declared a monthly guaranteed interest rate for any contributions directed to a maturity account. United would declare a guaranteed interest rate before the plan made any contributions to the account. If the designated rate was too low, the plan could invest in one of the other available funds. Under the Contract, there was no minimum guaranteed interest rate.

Also under the Contract, United could limit the plan’s maturity account contributions to $50,000 and, if the plan sought to invest more than that, United could deposit the excess funds into a new maturity account with the same maturity date and a different guaranteed interest rate declared by United based on current rates. For compensation, United would retain the spread, the difference between the guaranteed interest rate and the return that United actually earned on the funds in the maturity account. United also charged an administrative fee of 15 basis points on the balance invested in the account.

The plaintiff further alleged that United breached its fiduciary duties by engaging in various prohibited transactions. The plaintiff based the allegation that United was a plan fiduciary on United’s alleged discretionary authority over the Contract, which the parties agreed was a plan asset – in particular, its ability to declare the monthly guaranteed interest rate and its ability to limit contributions to a maturity account to $50,000 and open a new account with a different guaranteed interest rate.

But because United was not a named plan fiduciary, the plaintiff would have needed to plead facts that United was acting as a fiduciary, that is, exercising discretionary authority over the plan, when it engaged in the conduct alleged in the complaint. Complying with the terms of a properly bargained-for contract was insufficient. Accordingly, United claimed that it was not a fiduciary under ERISA and moved to dismiss the plaintiff’s complaint.

The court granted United’s motion.

In its decision, the court first found that the Contract required United to declare monthly a guaranteed interest rate; thus, by setting the rate, United complied with the Contract and United lacked the discretionary authority to change the terms of the Contract. Simply put, United had not become a fiduciary by declaring the monthly guaranteed interest rate.

Similarly, the court rejected the plaintiff’s contention that United’s ability to limit contributions to a maturity account made it a fiduciary. Under ERISA, the court reasoned that a person must exercise discretionary authority over a benefit plan, not merely possess it, to qualify as a fiduciary. The court noted that the plaintiff had not alleged that United had ever actually limited the maximum amount of contributions and invested the excess in a new maturity account with a different guaranteed interest rate, even though United had the authority under the Contract to do so. Moreover, the court added, the plaintiff failed to allege injury.

Finally, the court also noted that United’s authority to retain the spread as compensation did not make United a fiduciary. The court found that the connection between the guaranteed interest rate and United’s compensation was “too attenuated as to give United discretion over its compensation.” If United set a lower interest rate, the court noted, fewer members presumably would choose to invest in the maturity account as opposed to other options with a more attractive rate. Ultimately, the court recognized, the plan and its participants determined how much to invest in the maturity account.

Accordingly, the court concluded, the effect of the guaranteed interest rate on United’s compensation did not make it a fiduciary. [Insinga v. United of Omaha Life Ins. Co., No. 8:17CV179 (D. Neb. Oct. 26, 2017).]

Third Circuit Explains When a Plan Is a “Top-Hat” Plan

In 2008, the plaintiff in this case became a participant in the University of Pittsburgh Medical Center and its Health System and Affiliates Non-Qualified Supplemental Benefit Plan, governed by the Employee Retirement Income Security Act of 1974 (ERISA). His participation in the plan ended upon his voluntary termination from the medical center in 2011.

The plaintiff subsequently sued the medical center in the U.S. District Court for the Western District of Pennsylvania. The medical center moved to dismiss on the grounds that the plan was a top-hat plan and that because three of the plaintiff’s claims relied on provisions of ERISA inapplicable to top-hat plans, those claims should be dismissed.

The district court concluded that the plan was a top-hat plan and it granted the medical center’s motion. The plaintiff appealed to the U.S. Court of Appeals for the Third Circuit.

In its decision affirming the district court’s decision, the Third Circuit stated that, under ERISA, a top-hat plan has three elements:

1. It must be unfunded;
2. It must be maintained by an employer primarily to provide deferred compensation; and
3. It must cover a “select group” of employees.

The Third Circuit recognized that the plaintiff did not dispute that the plan satisfied elements (1) and (2). The plaintiff argued that the plan did not meet the third element because it did not cover a “select group” of employees. The Third Circuit disagreed.

The court explained that the “select group” element had both “quantitative and qualitative” restrictions. In number, the plan must cover relatively few employees. In character, the plan must cover only high level employees. Applying both the quantitative and qualitative restrictions of the “select group” element, the Third Circuit held that the plan qualified as a top-hat plan.

The court noted that because approximately 0.1 percent of the medical center’s workforce participated in the plan, the plan satisfied the quantitative restriction.

It added that the plan participants were “indisputably” select members of management, and were highly compensated employees. Therefore, the court concluded, the plan also satisfied the qualitative restriction of the “select group” element. The plaintiff nevertheless argued that the plan failed the “select group” requirement because there was insufficient evidence of the plan participants’ bargaining power. Analyzing the case law considering the issue of bargaining power, however, the court rejected the plaintiff’s argument and concluded that bargaining power is not a requirement. Accordingly, the plan qualified as a top-hat plan; thus, the district court did not err in dismissing the complaint. [Sikora v. UPMC, No. 17-1288 (3d Cir. Nov. 24, 2017).]

Fourth Circuit Rejects Challenge to Change to Top-Hat Plan

As highly compensated executives of Computer Sciences Corporation (CSC), the plaintiffs in this case were eligible to participate in the Computer Sciences Corporation Deferred Compensation Plan for Key Executives. The plan qualified as a top-hat plan, because it was an unfunded, deferred-compensation plan, through which key executives of CSC could elect to forgo compensation during their employment in exchange for payments in retirement.

Plan participants’ deferrals accrued in a notational account, and the company made payments to participants from CSC’s general assets after retirement. CSC pegged the crediting rate to a market-based valuation fund, although plan documents did not require this. Moreover, because the plan was unfunded, CSC did not invest actual assets in the valuation fund, but rather applied this crediting rate to calculate each participant’s payout.

After retirement, plan participants received their deferred income, plus credits earned according to this crediting rate, via either a lump-sum payment or in annual payments over a predetermined number of years. If a participant elected to receive annual payments, the plan required CSC to make these payments in “approximately equal annual installments.”

The plan granted discretionary authority to its administrator to determine questions of eligibility and to interpret the plan and any relevant facts for the purpose of plan administration, among other things. The plan also provided that “in its sole and absolute discretion,” CSC’s board could amend the plan, including the crediting rate, “from time to time,” in whole or in part.  The plan, however, limited the board’s amendment authority as follows: “no amendment shall decrease the amount of any . . . [participant’s account] as of the effective date of such amendment.”

The board had twice amended the plan’s crediting rate. Between 1995, when CSC established the plan, and 2003, the plan used a crediting rate equal to 120 percent of the 120-month rolling average yield to maturity on 10-year U.S. Treasury notes. In 2003, the board changed the crediting rate to track the 120-month rolling average yield to maturity of an A+ rated corporate bond index as of December 31 of the prior plan year (the 2003 crediting rate). Application of the 2003 crediting rate generally delivered above-market yields and low volatility. Furthermore, the method of calculating deferred income payments subject to the 2003 crediting rate smoothed out market fluctuations and made annual payments predictable and even. Accordingly, while using the 2003 crediting rate, CSC calculated the amounts of most future annual payments before the first installment was ever paid.

In May 2012, CSC’s board again amended the crediting rate. Unlike earlier crediting rates, the 2012 amendment resulted in a more flexible rate linked to a participant’s selection of one, or more, of four valuation funds. The 2012 amendment’s expansion of choice brought the potential for volatility and risk, including the possibility of losing value in a participant’s notational account. Because the value of the funds would rise and fall with the market CSC could no longer predict future payments precisely. Thus, applying the new crediting rate, the plan did not issue strictly equal payments from year to year.

The plaintiffs, plan participants since the 1990s, subsequently sued CSC, challenging three features of the 2012 amendment:

1. The change to the crediting rate;
2. The introduction of potential risk and volatility into the plan; and
3. Variations in annual distributions, which the plaintiffs argued were no longer “approximately equal,” as required by the plan.

CSC moved for summary judgment. The U.S. District Court for the Eastern District of Virginia granted CSC’s motion, holding that the 2012 amendment was valid and thus the plaintiffs were not entitled to relief.

The plaintiffs appealed to the U.S. Court of Appeals for the Fourth Circuit, which affirmed.

Considering first the applicable standard of review, the Fourth Circuit noted that “[s]ince top-hat plans involve non-fiduciary administrators, circuit courts have disagreed about whether the Firestone [abuse-of-discretion] standard applies to a district court’s review of these plans,” when the plan grants discretionary authority. Ultimately, the court decided regardless of what standard of review applies, the nature of top-hat plans requires courts to consider the reasonableness of an administrator’s determination. Accordingly, the court found that the 2012 amendment was valid. The court recognized that the plan permitted the board to change the crediting rate so long as the change did not decrease the value of a participant’s notational account at the time of the amendment. The court added that the plan generally required the administrator to uniformly and consistently administer the plan. It then found that the board had amended the plan in accordance with the plan’s terms and that the 2012 amendment applied uniformly to all participants and had changed the crediting rate but had not decreased the value of any participant’s notational account at the time the amendment took effect.

The court observed that the plan never promised that the crediting rate would remain the same forever. Rather, the court noted, “the opposite was true” as the crediting rate was “subject to amendment” by the board. Further, the plaintiffs pointed to no plan language to support their argument that the plan prohibited the 2012 amendment.

In fact, the court found, the plan explicitly permitted amendment of the crediting rate, the 2012 amendment conformed to the plan’s requirements and limitations, and the change to the crediting rate was valid and reasonable.

Moreover, the court rejected the plaintiffs’ contention that the 2012 amendment was invalid because it exposed the plan to increased risk and volatility. The court stated that the plan placed “no limit on a crediting rate’s exposure to market-based risk.” Accordingly, the 2012 amendment did not violate the plan’s terms.

Finally, the court rejected the plaintiff’s argument that the 2012 amendment was improper because it led to variation in the plan’s annual distributions. The court explained that before the 2012 amendment, the distributions were actually equal, not “approximately equal” as required by the plan. The court noted, however, that the predictability of the plan’s pre-2012 payments was merely an incidental effect of applying a crediting rate that pegged in the value of participants’ notational accounts to a crediting rate associated with very low volatility. The court stated that merely because the post-2012 amendment distributions were subject to market fluctuation, did not mean that the plan’s distributions were not “approximately equal” as required by the plan. In fact, the court found they were.

Accordingly, the court concluded that the 2012 amendment was valid. [Plotnick v. Computer Sciences Corp. Deferred Compensation Plan, 875 F.3d 160 (4th Cir. 2017).]

Florida Federal District Court Holds Employee’s Claim for Statutory Penalties for Failure to Provide Documents May Proceed

As an employee of Southwest Florida Maritime, Inc., the plaintiff was a participant in a health insurance plan established and maintained by his employer and governed by the Employee Retirement Income Security Act of 1974 (ERISA). In the complaint, the plaintiff alleged United Healthcare of Florida Inc. administered the plan.  The plaintiff needed a liver transplant. United authorized the procedure and referred the plaintiff to a hospital for treatment.

The hospital, however, advised the plaintiff that he was not eligible for a transplant, but that he could try again in six months. The plaintiff was expected to live only four months if he did not receive the necessary transplant.

Through United’s patient advocate, the plaintiff asked United to find an alternative in-network provider. After the advocate failed to find another provider, the plaintiff sought a transplant provider on his own. He located the Cleveland Clinic in Weston, Florida.

Because the Cleveland Clinic was not a part of United’s network, however, the clinic billed United for the procedure. United made some partial payments, but it did not cover approximately $290,000 of the cost of the transplant, which the plaintiff paid for himself.

The plaintiff requested documentation and information from United regarding the plan and the disputed procedure but, he alleged, United either refused to provide the documentation or belatedly provided only partial documentation.

The plaintiff sued United in the U.S. District Court for the Middle District of Florida to recover benefits (Count I) and for statutory penalties relating to his request for documentation and information (Count II) under ERISA.

United moved to dismiss Count II on the grounds that 29 U.S.C. § 1132(c) subjected an ERISA plan administrator to penalties, not a plan’s claim administrator, and the documents requested by the plaintiff were not subject to statutory penalties.

In its decision denying United’s motion to dismiss, the court explained that, under 29 U.S.C. § 1132(c), a plan administrator has 30 days to respond to a request for specified information from a plan beneficiary or participant or face a penalty of $110 per day for each day beyond 30 days that the plan administrator does not respond to the request. With respect to the first basis for United’s motion, the court agreed with United’s argument that only a plan administrator and not the claim administrator is subject to ERISA’s statutory penalties as a matter of law, but that at the motion to dismiss stage, where the court must accept as true the plaintiff’s allegations and the plaintiff alleged United was the plan administrator, the court denied United’s motion.

Further, with respect to the second basis for United’s motion, the court recognized that ERISA requires the administrator to furnish, upon a plan participant’s written request, “a copy of the latest updated summary, plan description, and the latest annual report, any terminal report, the bargaining agreement, trust agreement, contract, or other instruments under which the plan is established or operated.” 29 U.S.C. § 1024(b)(4).

Because the plaintiff had requested “a complete, certified copy of the subject insurance policy/plan in effect at the time of the subject Cleveland Clinic medical services” and “[a] copy of the ‘in-network’ provider list pertaining to type of transplant at issue that was/is in effect following the time of the transplant and related services through the present,” the court held that these documents fell within the broad scope of “other instruments under which the plan is established or operated.” Accordingly, the court denied United’s motion to dismiss Count II of the complaint for statutory penalties under ERISA. [Atherley v. United Healthcare of Florida, Inc., No: 2:17-cv-332-FtM-99CM (M.D. Fla. Nov. 7, 2017).]