Employee Benefit Plan Review – From the Courts

June 19, 2018 | Ian S. Linker | Employment & Labor | Insurance Coverage

Determining the appropriate standard of judicial review is the threshold issue a court decides when reviewing an adverse benefit determination under the Employee Retirement Income Security Act of 1974 (ERISA). If the court applies the arbitrary and capricious standard of review, it gives deference to the administrator’s determination. By contrast, if it reviews the determination de novo, it gives no deference to the determination.

Courts typically will apply the deferential standard of review if the applicable benefit plan grants discretionary authority to the administrator to construe the plan and to make benefit eligibility determinations. Otherwise, courts review the determination de novo. If an applicable state law bans the use of discretionary clauses in group insurance policies, however, several courts have held ERISA does not preempt the state law; thus, de novo review applies. A recent decision by a federal district court in Kentucky held Kentucky law does not ban the use of discretionary clauses in ERISA plans.

The Case

In this case, the plaintiff had disability coverage through an employee welfare benefit plan governed by ERISA. The plaintiff submitted a claim for benefits. The claim fiduciary denied the claim, and the plaintiff filed suit.

The parties disputed the appropriate standard of review. The plaintiff argued that Kentucky law banned grants of discretionary authority and, therefore, the court should review the determination de novo. The claim fiduciary contended that Kentucky law did not ban the plan’s grant of discretion and, accordingly, the court should apply the arbitrary and capricious standard of review.

The Court’s Decision

The court first determined that the plan contained sufficient language to confer discretionary authority on the claim fiduciary. The court then held that Kentucky law did not ban the plan’s grant of discretionary authority; thus, it would apply the arbitrary and capricious standard of review.

In its decision, the court recognized that under Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989), courts review adverse benefit determinations de novo unless the plan grants discretionary authority to determine eligibility for benefits or to construe the terms of the plan. If the plan grants discretionary authority, courts review the benefit determination under the arbitrary and capricious standard.

In this case, the court determined that the plan contained a sufficient grant of discretionary authority to the claim fiduciary to determine eligibility for benefits and to construe the terms of the plan.

Moreover, the court noted that because the plan required claimants to provide to the claim fiduciary satisfactory proof of disability, this too was sufficient – under Sixth Circuit precedent – to grant discretionary authority to warrant application of the arbitrary-and-capricious standard of review.

Accordingly, the court held the plan granted discretionary authority to the claim fiduciary; thus, it would apply the arbitrary and capricious standard of review.

The court was not persuaded by the plaintiff’s argument that Kentucky law bans discretionary clauses in ERISA plans. The court found “no case, statute, or regulation” in Kentucky that explicitly prohibited discretionary clauses. Instead, the plaintiff cited to a Kentucky statute that requires the commissioner of the Department of Insurance to reject insurance policies containing “conditions which deceptively affect the risk purported to be assumed in the general coverage of the contract.” Moreover, Kentucky’s Department of Insurance issued an advisory opinion in which it concluded that “discretionary clauses deceptively affect the risk purported to be assumed in any policy and as such, any forms containing discretionary clauses may be disapproved.” Thus, the plaintiff argued Kentucky law should be interpreted to prohibit the use of discretionary clauses.

The court disagreed. The Sixth Circuit has held consistently that the department’s advisory opinion fails to invalidate discretionary clauses; thus, the court concluded that the arbitrary and capricious standard applies. [Ritter v. Liberty Life Assur. Co., No. 3:17-CV-00445-JHM (W.D. Ky. March 7, 2018).]

Court Dismisses Claim for Statutory Penalties Under ERISA Against Claims Fiduciary

The Employee Retirement Income Security Act of 1974 (ERISA) requires a plan administrator of an ERISA-governed employee benefit plan, upon written request, to furnish certain plan documents to plan participants, and imposes penalties against the plan administrator for failing to comply. A federal district court in Missouri recently reaffirmed the settled rule that these provisions do not apply to entities or individuals other than the plan administrator.

The Case

The plaintiff filed suit after the plan’s claims fiduciary determined that the plaintiff was not entitled to long-term disability benefits under her employer’s ERISA-governed benefit plan. Among other things, the plaintiff alleged that the court should impose penalties on the claim fiduciary under 29 U.S.C. § 1132(c) because the fiduciary had failed to provide her with the plan documents she had requested.

The fiduciary moved to dismiss the plaintiff’s penalties claim on the grounds that it was not the plan administrator and only the plan administrator is subject to statutory penalties as a matter of law. The plaintiff contended that the court should impose penalties on the fiduciary under 29 U.S.C. § 1132(c) for failing to timely provide the plan documents because the fiduciary performed plan administrator functions. The plaintiff also argued the fiduciary was a de facto plan administrator because the insurance documents did not designate the employer as the plan administrator, even though the governing plan documents did.

The Law

Under ERISA, the “plan administrator” is “the person specifically so designated by the terms of the instrument under which the plan is operated.” 29 U.S.C. § 1002(16)(A). The plan administrator, upon written request, must furnish a plan participant with a copy of the latest summary plan description, 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).

A plan administrator who fails or refuses to comply with the written request for documents within 30 days faces penalties of up to $110 a day. 29 U.S.C. § 1132(c)(1)(B); 29 C.F.R. § 2575.502c-3. Whether or not to impose the penalty and, if so, in what amount, is within the court’s discretion. 29 U.S.C. § 1132(c)(1)(B).

The Court’s Decision

The court dismissed the plaintiff’s penalties claim because under ERISA only the plan administrator can be liable for penalties under 29 U.S.C. § 1132(c); thus, another entity, such as the plan’s claims fiduciary, is not subject to penalties as a matter of law.

Because the governing plan documents expressly designated the employer as the sole plan administrator, the court rejected the plaintiff’s argument that the claims fiduciary was the de facto plan administrator.

Accordingly, the court dismissed the plaintiff’s claims for statutory penalties against the fiduciary. [Dunivin v. Life Ins. Co. of North America, No. 4:17CV1530 HEA (E.D. Mo. March 23, 2018).]

Ninth Circuit Rules That Plan’s Offset-of-Earnings Provision Did Not Violate ERISA’s Disclosure Rules or Reasonable Expectations Doctrine

The Employee Retirement Income Security Act of 1974 (ERISA) requires that a summary plan description (SPD) explain the circumstances that may result in disqualification, ineligibility, or denial or loss of benefits in a manner calculated to be understood by the average plan participant. The U.S. Court of Appeals for the Ninth Circuit recently held that an ERISA plan’s work incentive offset met those disclosure requirements and did not violate ERISA.

The Case

The plaintiff in this case sued the claims administrator and the plan sponsor of a long-term disability (LTD) plan in which he was enrolled, alleging violations of ERISA. The plaintiff contended that his monthly LTD benefit had been improperly offset by 50 percent of his monthly wages pursuant to the SPD’s work incentive offset provision. The plaintiff argued he was entitled to his maximum monthly benefit without any offsets.

The U.S. District Court for the Central District of California dismissed the plaintiff’s complaint, and the plaintiff appealed to the Ninth Circuit. The court of appeals affirmed.

The Law

ERISA mandates that a plan’s SPD explain the circumstances that may result in disqualification, ineligibility, or denial or loss of benefits in a manner calculated to be understood by the average plan participant.

The SPD must be sufficiently accurate and comprehensive to reasonably apprise plan participants of their rights and obligations under the plan. See Scharff v. Raytheon Co. Short Term Disability Plan, 581 F.3d 899, 904 (9th Cir. 2009); 29 U.S.C. § 1022(a)-(b). Further, exceptions to coverage and provisions restricting or limiting benefits must “not be minimized, rendered obscure, or otherwise made to appear unimportant.” 29 C.F.R. § 2520.102-2(b).

The Ninth Circuit’s Decision

In its decision affirming the district court, the Ninth Circuit first ruled that the SPD’s work incentive offset provision did not violate ERISA’s disclosure requirements. It reasoned that the SPD “clearly” explained how the plaintiff’s monthly benefit would be impacted by work earnings he received while receiving plan benefits. The SPD stated:

If you return to work while disabled, your monthly benefit will not be offset for employment earnings during the work incentive benefit period. . . . Work Incentive benefits for CIGNA . . . can continue for 24 months and apply only once to each period of disability. . . . After 24 months of disability, [we] will reduce your monthly benefit by 50% of your current earnings.

The court stated that the “circumstances . . . result[ing] in . . . [a] loss of benefits” were “apparent from the language” of the work incentive offset provision. That is, after 24 months, the monthly benefit would be reduced by 50 percent of the beneficiary’s monthly income. In the court’s opinion, that language would “reasonably apprise” an “average plan participant” of his or her rights and obligations under the plan and the circumstances under which a monthly benefit would be offset.

Moreover, the court held that the SPD satisfied the applicable regulation because it did not “minimize, render obscure,” or otherwise make the work incentive offset provision seem unimportant within the meaning of 29 C.F.R. § 2520.102-2(b). The court explained that the SPD described the work incentive offset provision in the “same style, typeface, and type size” as the rest of the SPD and was located “in close conjunction with” the description of the plan’s benefits.

Accordingly, the court ruled, the work incentive offset did not violate ERISA and was valid and enforceable.

Similarly, the court decided that the SPD’s offset provision did not violate the common law reasonable expectations doctrine, requiring restrictive provisions in insurance contracts be “clear, plain, and conspicuous.” In the court’s view, the words of the work incentive offset were “clear” and plainly described how monthly benefits were offset by income after 24 months of disability. The court also found that the work incentive offset provision was sufficiently conspicuous in the group insurance documents, noting that it was described in two different places, including in the “Schedule of Benefits,” which a beneficiary had to read to understand how benefits were calculated.

The court concluded that because the work incentive offset provision was clear, plain, and conspicuous, it did not run afoul of the reasonable expectations doctrine and, thus, was enforceable. [Abrams v. Life Ins. Co. of North America, No. 16-55858 (9th Cir. March 7, 2018).]

Federal Court in Florida Holds Assignment of Benefits to Hospital Did Not Entitle It to Bring Suit Against Third-Party Claim Administrator Under ERISA  

Under the Employee Retirement Income Security Act of 1974 (ERISA), only plan participants and their beneficiaries may bring civil actions to recover benefits. Participants, beneficiaries, and fiduciaries may sue for non-benefit equitable relief under ERISA. A healthcare provider is neither a participant, beneficiary, nor fiduciary, but may nevertheless have derivative standing to sue for unpaid benefits if the participant or beneficiary assigned his or her rights to the provider.

A federal district court in Florida, however, recently considered whether a healthcare provider would have derivative standing if the applicable ERISA plan prohibited plan participants from assigning those rights, including to a healthcare provider.

The Case

A participant in an ERISA-governed health benefit plan was admitted to a hospital in the Lee Memorial Health System after she was injured in a motor vehicle accident. The participant assigned to Lee Memorial all rights to receive payments from the plan for hospital services rendered by Lee Memorial. Blue Cross Blue Shield of Florida was the plan’s third-party claims administrator.

Lee Memorial provided hospital services to the participant and then submitted a claim to Blue Cross under the plan for payment of those services pursuant to the assignment.

Blue Cross denied coverage, and Lee Memorial sued, seeking a declaratory judgment against Blue Cross as to:

  1. The proper interpretation of a provision in the ERISA plan;
  2. The sufficiency under ERISA of certain procedures followed in the denial of its claim; and
  3. The proper interpretation of a separate agreement between Lee Memorial and Blue Cross.

Blue Cross moved to dismiss the declaratory judgment claim.

The Law

Under ERISA, a “participant” or a “beneficiary” of an ERISA plan may bring a civil action “to recover benefits due to [the participant or beneficiary] under the terms of [the] plan, to enforce [the participant or beneficiary’s] rights under the terms of the plan, or to clarify [the participant or beneficiary’s] rights to future benefits under the terms of the plan.” 29 U.S.C. § 1132(a)(1)(B).

Additionally, a “participant,” “beneficiary,” or “fiduciary” may bring a civil action for certain equitable relief. 29 U.S.C. § 1132(a)(3).

A healthcare provider is not a “participant” or a “beneficiary” under ERISA and, therefore, does not have independent standing to sue for benefits under 29 U.S.C. § 1132(a)(1)(B). Additionally, a healthcare provider is not a “fiduciary” under ERISA and, therefore, does not have independent standing to sue under 29 U.S.C. § 1132(a)(3).

A healthcare provider, however, may acquire derivative standing to sue under ERISA by obtaining a written assignment from a participant or beneficiary of that person’s right to payment of medical benefits.

The Court’s Decision

The court granted Blue Cross’s motion to dismiss, rejecting Lee Memorial’s contention that it had derivative standing as the plan participant’s assignee.

The assignment provided:

I hereby assign to LMHS payment from all third party payors with whom I have coverage or from whom benefits are or may become payable to me, for the charges of hospital and health care services I receive for, related to, or connected with my admission or treatment (past, present, or future). . . . I also assign payment of any available insurance benefits to the physician(s) who provide me treatment at LMHS.

The court ruled that the assignment failed to provide standing to Lee Memorial, because the plan contained an “unambiguous anti-assignment provision” stating:

A Covered Member is expressly prohibited from assigning any right to payment of Covered Expenses or any payment related to Benefits.

According to the court, this was a “clear, unambiguous prohibition of assignment.” Thus, the court concluded, the assignment was “void” and Lee Memorial lacked standing to sue. Accordingly, the court dismissed Lee Memorial’s claim for relief against Blue Cross. [Lee Memorial Health System v. Blue Cross and Blue Shield of Florida, Inc., No: 2:16-cv-738-FtM-29CM (M.D. Fla. March 9, 2018).]

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