Employee Benefit Plan Review – From the Courts

May 29, 2019 | Employment & Labor | Insurance Coverage

Second Circuit Finds That Claim for ERISA Pension Plan Benefits Was Time-Barred

Historically, employees leaving Xerox Corporation typically received a lump sum payment equal to the total value of their then-accrued pension benefit under the Xerox pension plan, an employee benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA). Employees who later returned to Xerox and then subsequently retired had their final pension benefits reduced by the lump sum they had previously received upon their initial departure.

In those instances, the plan administrator also deducted from the rehired employees’ benefits an additional sum approximating the interest that the previous disbursement would have earned had it remained in the plan. This hypothetical interest deduction came to be known as the “phantom account offset.”

The U.S. Court of Appeals for the Second Circuit recently issued a decision deciding the timeliness of a lawsuit challenging the phantom account offset that was brought by a retired employee against the plan and its administrator.

The Case

The plaintiff began working at Xerox in 1972. He left Xerox in 1983 and took a lump-sum distribution of roughly $30,000 from the plan. Xerox rehired the plaintiff in 1985. When the plaintiff retired in 2008, the plan administrator applied the phantom account offset to calculate the plaintiff’s pension benefits.

The plaintiff received a pension calculation statement in January 2009 providing the amount of benefits he would receive pursuant to the phantom account offset calculation. In January 2009, the plaintiff sued the plan and the administrator under 29 U.S.C. § 1132(a)(1)(B), alleging that he had been improperly denied benefits to which he was entitled, and under 29 U.S.C. § 1132(a)(3), alleging that the plan administrator failed to comply with an earlier court order in breach of his fiduciary duties.

The defendants moved to dismiss the plaintiff’s denial-of-benefits claim on timeliness grounds and moved for summary judgment on the plaintiff’s breach of fiduciary duties claim on the grounds that the plaintiff could not maintain a viable breach claim because his benefits claim was time barred. The U.S. District Court for the Western District of New York granted the motion to dismiss and denied the summary judgment motion, and the plaintiff appealed to the Second Circuit. The defendants cross appealed.

The Second Circuit’s Decision

In its decision affirming the district court on the limitations issue, the court stated it would apply New York’s six-year limitations period for contract actions, “the most nearly analogous” state law statute of limitations, because ERISA does not provide a limitations period for denial of benefits claims. The court next considered accrual.  The court recognized that an ERISA denial-of-benefits claim typically accrues when a plan denies a beneficiary’s formal application for benefits, but that a claim also accrues “upon a clear repudiation by the plan that is known, or should be known, to the plaintiff – regardless of whether the plaintiff has filed a formal application for benefits.”

The court then found that the plan administrator had first clearly repudiated the plaintiff’s claim for pension benefits in 1998 – when the plan’s summary plan description (SPD) was updated “to state clearly that the phantom account offset would be used for all employees.”

The court observed that SPDs play a “central role . . . in communicating the terms of a plan to its members” and that courts in the Second Circuit “routinely” have decided that a plan’s SPD can constitute a “clear repudiation[] of benefits.”

The court concluded that because the 1998 SPD was a clear repudiation of benefits, the six-year limitations period began to run in 1998. Accordingly, the plaintiff’s denial-of-benefits claim became untimely in 2004, well before he filed his lawsuit.

In reversing the district court’s decision denying the defendants’ motion for summary judgment on the 1132(a)(3) claim, the court held that because the plaintiff’s breach of fiduciary duties claim was essentially a repackaged claim for benefits, allowing the 1132(a)(3) claim to proceed would render hollow the decision dismissing the benefits claim on limitations grounds.

The court also held that even if it allowed the plaintiff’s 1132(a)(3) claim to proceed, notwithstanding the limitations issue, the court still would have reversed the district court, because it found no breach of fiduciary duties.  The plaintiff incorrectly argued that the defendant plan administrator failed to comply with a court order in breach of his fiduciary duties. [Testa v. Becker, Nos. 17-1826-cv, 17-1985-cv (2d Cir. Dec. 12, 2018).]

Federal Court in Massachusetts Upholds Benefit Determination Denying Coverage for Wilderness Therapy

The U.S. District Court for the District of Massachusetts recently upheld the benefit determination of a medical plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) to deny coverage for the costs of the plaintiffs’ children’s wilderness therapy programs.

The Case

Blue Cross and Blue Shield of Massachusetts HMO Blue, Inc., and Blue Cross and Blue Shield of Massachusetts, Inc. (BCBS) administered employment-sponsored health insurance plans for the plaintiffs and their three children. The children suffered mental health and substance abuse issues, the plaintiffs enrolled them in wilderness therapy programs on the advice of their healthcare providers, and the plaintiffs sought coverage for this treatment.

BCBS denied coverage for wilderness therapy. The plaintiffs filed suit to recover benefits under the plan and for breach of fiduciary duties.

The district court granted BCBS’s motion to dismiss that claim.

The District Court’s Decision

The court explained that the plans specifically excluded coverage for “residential or other care that is custodial care,” including services “performed in educational, vocational, or recreational settings; and ‘outward bound-type,’ ‘wilderness,’ ‘camp,’ or ‘ranch’ programs.”

After finding the relevant plan language unambiguous, the court rejected the plaintiffs’ argument that the wilderness therapy programs did not amount to “custodial care,” because “custodial” implied “a confined, prison-like setting” where a patient was “not progressing,” but nevertheless required “some sort of medical intervention.”

The court determined that the plans intended a broader definition of “custodial care,” noting that they defined the term as, among other things, care “given primarily by medically-trained personnel for a member who shows no significant improvement response despite extended or repeated treatment.” The court found that this described the wilderness program at issue, because the plaintiffs’ children were treated in such a program by mental health professionals after other therapies had failed. Accordingly, the court concluded, BCBS properly denied coverage under the plans.

The plaintiffs also alleged that BCBS breached its fiduciary duty under ERISA, because BCBS failed to act in accordance with the plans. BCBS disagreed. The court dismissed the plaintiffs’ breach claim applying established First Circuit precedent, because a breach claim fails when a plaintiff has an otherwise viable claim for benefits, even if the plaintiff pleads the two counts in the alternative and even if the plaintiff ultimately does not prevail on the benefits claim.  Accordingly, the court dismissed the plaintiffs’ breach of fiduciary duty claim because they had a viable claim for benefits. [Cotten v. Blue Cross and Blue Shield of Massachusetts HMO Blue, Inc., No. 16-12176-RGS (D. Mass. Dec. 6, 2018).]

Federal Court in Missouri Decides That ‘No Reasonably Objective Evaluation’ of Medical Record Supported Denial of Benefits

A federal district court in Missouri recently ruled that the claim administrator of an employee benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) abused its discretion in denying the plaintiff’s claim for long term disability benefits.

The Case

When the plaintiff stopped working as a nurse practitioner for the Lester E. Cox Medical Center in August 2013, she applied for long term disability benefits under Cox Medical’s employee benefit plan.

As part of her application, the plaintiff submitted an employee statement indicating she could not work as well as a Long-Term Disability Claim Physician’s Statement (CPS) completed on November 17, 2013 that stated under “objective findings” that the plaintiff had spondylolisthesis, failed fusion, and nerve root scarring. The physician who completed the CPS stated that he saw the plaintiff every three months since August 2010 and that her symptoms had been constant. He opined that the plaintiff was first unable to work on January 1, 2013; that she had a failed lumbar fusion that occurred on April 1, 2011; and that she would receive no benefit from medical rehabilitation or therapy. The physician added that the placement of a spinal cord stimulator had failed and that the plaintiff would be unable to work without unlimited ability to rest and take breaks.

The claim administrator had sole discretionary authority to determine eligibility and to administer claims in accordance with its interpretation of plan provisions. It denied the plaintiff’s initial claim for benefits.

The plaintiff appealed, and the claim administrator submitted the file to a physician for review. After receiving the reviewing physician’s report, the claim administrator determined that the plaintiff was eligible for benefits during the first 24 months of benefits, the own occupation period.

Thereafter, the plan’s definition of disability changed to any occupation and applying that definition the claim administrator determined the plaintiff was no longer eligible for benefits. The plaintiff appealed and the claim administrator upheld its determination. The plaintiff sued.

The District Court’s Decision

In granting the plaintiff’s motion for summary judgment, the district court explained that it reviewed the claim administrator’s decision for an abuse of discretion because the plan granted to the claim administrator discretionary authority to determine eligibility and to make benefit eligibility determinations under the plan. Applying this standard, the court would uphold the claim administrator’s determination as long as it was based “on a reasonable interpretation” of the plan and was “supported by substantial evidence.” In addition, the court needed to weigh as a factor the claim administrator’s inherent conflict of interest as both claim administrator and funding source of plan benefits.

The court then held that the claim administrator abused its discretion. The court found that the plan administrator had chosen to pick only opinions that supported its adverse benefit determination, while ignoring treating physician records and the medical opinion of one of its own experts finding that the plaintiff was unable to work.

The court said that “no reasonably objective evaluation of the medical record” supported the claim administrator’s determination. The court noted that the plaintiff’s treating physician and the claim administrator’s expert physician retained to review the plaintiff’s records both opined that the plaintiff was unable to work.

According to the court, the “only evidence supporting denial of benefits” was the opinion of the physician who performed a file review earlier in the administrative claim process and opinions from non-physicians who failed to fully review all the medical records, who never physically examined the plaintiff, and whose opinions contradicted the opinion of the plaintiff’s treating physician and the claim administrator’s second expert who opined the plaintiff could not work.

Accordingly, the court concluded that the claim administrator abused its discretion. [Flanagan v. Lincoln National Life Insurance Co., No. 17-cv-05060-MDH (W.D. Mo. Dec. 6, 2018).]

Federal Court in Missouri Holds Short-Term Disability Payroll Practice Was Not a Contract Between Employer and Employee

A federal district court in Missouri has held that an employer’s short-term disability payroll program (the STD Program), which was designed to be exempt from the Employee Retirement Income Security Act of 1974 (ERISA), did not amount to a contract between the employer and an employee and, therefore, the employee could not sue the employer for breach of contract.

The Case

The plaintiff sued Ascension Health Alliance for breach of contract, alleging that it had improperly denied her claim for short-term disability benefits under Ascension’s STD Program.

Specifically, the plaintiff asserted that Ascension failed to take the necessary steps to ensure timely payment of benefits, failed to pay covered losses, failed to deal with the plaintiff in good faith, and failed to honor other terms and conditions of the contract.

Ascension moved to dismiss the breach of contract claim, contending that no contract existed between the plaintiff and Ascension. The district court granted Ascension’s motion.

The District Court’s Decision

The district court noted that Ascension notified its employees in both the STD Program itself and the plan summary of its right to modify or terminate the plan at any time. Moreover, the district court continued, the STD Program stated: “This Program constitutes neither a contract between the Participating Employer and any person nor a consideration or inducement for the employment of any person.”

Under these circumstances, the district court held a reasonable employee could not interpret the language of the STD Program as an offer to enter into a contractual relationship. It concluded that without an offer there could be no contract, and without a contract there could be no cause of action for breach of contract. [Hart v. Ascension Health Alliance, No. 4:18CV1548 JCH (E.D. Mo. Dec. 3, 2018).]

2d Circuit Affirms District Court’s Decision to Reform Plan to Cure ERISA Notice Violations

The U.S. Court of Appeals for the Second Circuit recently held that, under the Employee Retirement Income Security Act of 1974 (ERISA), a district court did not abuse its discretion in crafting an equitable remedy to cure violations of ERISA’s notice provisions.

THE CASE

A number of employees of Xerox Corporation who left the company in the 1980s and received lump-sum distributions of retirement benefits they had earned up to that point, and who were later rehired, sued the company’s pension plan administrator, asserting that the administrator’s method of calculating their post-rehire retirement benefits violated ERISA.

This case has a lengthy history.  The Second Circuit previously decided that the plan administrator’s method of accounting for distributions of prior benefits, and its resulting calculation of the plaintiffs’ new benefits, violated the plaintiffs’ rights under ERISA.

Thereafter, the plan administrator proposed a method of calculating the plaintiffs’ new benefits that the U.S. District Court for the Western District of New York decided was a reasonable interpretation of the plan.

The Second Circuit disagreed with the district court, however, holding that the plan administrator’s proposed approach was based on an unreasonable interpretation of the plan and that the plan and its related documents, as interpreted and applied by the plan administrator, violated ERISA’s notice provisions. The Second Circuit remanded the case to the district court to craft an appropriate equitable remedy.

On remand, the district court decided to reform the plan, reasoning that plan reformation was an appropriate equitable remedy under the circumstances.

The case again reached the Second Circuit.

THE SECOND CIRCUIT’S DECISION

In its decision affirming the district court’s decision, the circuit court explained that district courts generally should avoid interpreting a pension plan and instead should fashion equitable remedies for ERISA violations where the plan was “significantly incomplete” and misled its employees. Under those circumstances, the court continued, a district court may, for example, “properly reform[ ] [a pension] plan to reflect the representations that the defendants made to the plaintiffs.”

Here, the court continued, the district court found that there was no reasonable plan interpretation as to which notice had been provided by Xerox. Therefore, the court held, the district court’s decision, that is, to reform the plan and its method for calculating retirement benefits, was not an abuse of discretion. The Second Circuit also affirmed the district court’s decision awarding pre-judgment interest. [Frommert v. Conkright, Nos. 17-114-cv(L), 17-738-cv(CON) (2d Cir. Jan. 22, 2019).]

 

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