Employee Relations Law Journal – From the Courts

First Circuit Applies Abuse of Discretion Standard to Uphold Denial of Long-Term Disability Benefits

The U.S. Court of Appeals for the First Circuit has upheld a claim administrator’s decision denying a claim for long-term disability (LTD) benefits under an employee welfare benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA), finding that the decision was reasonable and substantially supported by the information in the administrative record.

THE CASE

After working as an accountant for Shell Chemical Yabucoa, Inc., for more than 25 years, the plaintiff submitted a claim for disability benefits under Shell’s ERISA-governed employee benefit plan for disabilities arising from a mental disorder or illness due to major depression. The claim administrator paid benefits to the plaintiff under the plan’s limited 24-month benefit duration period.

In April 2010, the claim administrator informed the plaintiff that his limited disability benefits would expire that November unless it received objective medical information establishing that he was eligible for LTD benefits. In November 2010, the claim administrator sent the plaintiff a letter notifying the plaintiff that it had determined that he was no longer eligible for disability benefits on the ground that his disability was a limited-benefit condition as defined by the plan. The claim administrator added that, “based on review of the information submitted for [the plaintiff’s] non psychiatric medical issues, the medical documentation does not support the inability for [the plaintiff] to perform [his] job which is sedentary in nature or any exclusion to the 24 month limitation.”

The plaintiff appealed, explaining that he was completely disabled from any employment due to a combination of mental and physical conditions. The claim administrator consulted two independent physicians, one for psychiatry and one for occupational medicine, and issued a final denial of the plaintiff’s claim.

The plaintiff sued the claim administrator, which moved for judgment on the administrative record. The U.S. District Court for the District of Puerto Rico found that the claim administrator had acted reasonably, and granted its motion.

The plaintiff appealed to the First Circuit.

THE FIRST CIRCUIT’S DECISION

In its decision affirming the district court’s decision, the First Circuit explained that it reviewed the district court’s judgment on the administrative record de novo to determine whether the claim administrator abused its discretion. The court added that, if the claim administrator reasonably interpreted the plan, then the court would uphold the determination.

The court addressed the plaintiff’s three primary arguments.  First, the plaintiff argued that the claim administrator’s adverse benefit determination was arbitrary and capricious because the claim administrator “cherry-picked evidence it preferred while ignoring significant contrary evidence.”

The court summarized some of the case law condemning an administrator’s “cherry-picking,” including the U.S. Supreme Court’s decision in Metropolitan Life Ins. Co. v. Glenn, 554 U.S. 105, 128 S. Ct. 2343, 171 L. Ed. 2d 299 (2008), but ultimately stated that even if cherry-picking of favorable evidence might be an independent ground for reversal, the plaintiff failed to show that the claim administrator cherry-picked favorable evidence while adjudicating his claim.

According to the court, the claim administrator considered the evidence that the plaintiff argued the administrator had overlooked, but determined that the evidence did not satisfactorily prove that the plaintiff was eligible for LTD benefits under the plan. Moreover, the court continued, the claim administrator’s determination that the information in the administrative record failed to show that the plaintiff was physically disabled under the plan was “reasonably supported by the record and thus not arbitrary or capricious cherry-picking.”

Second, the court upheld the claim administrator’s determination that the plan required the plaintiff to submit objective evidence of a condition that allowed him to receive additional benefits and objective evidence showing that the condition caused the plaintiff to be disabled under the plan.

The court explained that the claim administrator had the “discretion to assess the sufficiency of proof offered” by the plaintiff, and it ruled that the objective evidence the claim administrator sought “was reasonable to determine [the plaintiff’s] eligibility for LTD benefits” under the plan.

Finally, the court rejected the plaintiff’s contention that the claim administrator had acted arbitrarily and capriciously by considering the functional limitations of his condition. According to the court, functional limitations caused by an alleged physical disability were “part and parcel” of a disability assessment. Therefore, the court concluded, the claim administrator had not acted arbitrarily by considering the presence (or absence) of such functional limitations in determining whether the plaintiff was disabled under the plan. [Santana-Díaz v. Metropolitan Life Ins. Co., No. 17-1428 (1st Cir. March 29, 2019).] 

State-Mandated Auto-Enrollment Retirement Savings Program Was Not an Employee Benefit Plan Preempted by ERISA

The U.S. District Court for the Eastern District of California has held that the California Secure Choice Retirement Savings Program (CalSavers), a state-mandated auto-enrollment retirement savings program, does not create an employee benefit plan preempted by the Employee Retirement Income Security Act of 1974 (ERISA).

BACKGROUND

In 1975, the U.S. Department of Labor (DOL) issued a regulation (the 1975 Safe Harbor) exempting certain individual retirement account (IRA) plans from ERISA. 29 C.F.R. § 2510.3-2(d). Under the 1975 Safe Harbor, employer payroll deductions for remittance to an employee’s IRA are exempted from ERISA if:

1. No contributions are made by the employer or employee association;
2. Participation is completely voluntary for employees or members;
3. The sole involvement of the employer or employee organization is without endorsement to permit the sponsor to publicize the program to employees or members, to collect contributions through payroll deductions or dues checkoffs, and to remit them to the sponsor; and
4. The employer or employee organization receives no consideration in the form of cash or otherwise, other than reasonable compensation for services actually rendered in connection with payroll deductions or dues checkoffs.

The term “completely voluntary” is not defined by the 1975 Safe Harbor.

In recent years, several states have begun to explore state-run retirement savings programs. In 2012, the California legislature passed the California Secure Choice Retirement Savings Trust Act, creating the CalSavers program in a stated effort to address the lack of retirement savings for many Californians. CalSavers provides a state-sponsored retirement savings plan for California employees who do not have access to an employer-provided plan. The program requires an “eligible employer” to “allow employee participation in the [CalSavers] program” via payroll deductions if that employer does not offer a retirement savings program of its own.

Eligible employers must automatically enroll their employees and remit payroll deductions to the program “unless the employee elects not to participate.” That is, employees of eligible employers are automatically enrolled, but can “opt out” of CalSavers if desired.

Faced with concerns that state-mandated retirement savings programs with “opt out,” as opposed to “opt in,” enrollments may not be “completely voluntary” as contemplated in the 1975 Safe Harbor, the DOL issued additional regulatory guidance in 2016 (the 2016 Safe Harbor) establishing ERISA exemptions for state-sponsored auto-IRAs. See 81 FR 59464.

The 2016 Safe Harbor set up a “voluntary” participation standard for “state required and administered programs,” such that “automatic enrollment arrangements with employee opt-out features” would be expressly exempt from ERISA.

The 2016 Safe Harbor would have exempted CalSavers from ERISA’s provisions. However, under the Congressional Review Act, Congress passed and the president signed legislation in 2017 repealing the 2016 Safe Harbor. Despite the repeal of the 2016 Safe Harbor, California continued in its efforts to implement the CalSavers program.

THE CASE

On May 31, 2018, the Howard Jarvis Taxpayers Association (HJTA) and two HJTA employees sued CalSavers and California’s state treasurer, seeking a declaration that ERISA preempted CalSavers and an injunction permanently enjoining spending of taxpayer funds on CalSavers.

The defendants moved to dismiss.

THE COURT’S DECISION

In its decision granting the defendants’ motion to dismiss, the court first concluded that HJTA had standing, even though its two employees did not, and the case or controversy was ripe for judicial review.  The court then held that CalSavers did not create an employee benefit plan; thus, ERISA did not preempt CalSavers.

The court declined to hold that CalSavers was entitled to the protection of the 1975 Safe Harbor, citing the “completely voluntary” requirement. The court then stated that, regardless of whether CalSavers was subject to the exemptions afforded by the 1975 Safe Harbor, it still was not preempted by ERISA under traditional federal preemption principles.

The court reasoned that eligible employers were required to adhere to the administrative requirements of CalSavers, but because CalSavers only applied to employers without existing retirement plans, CalSavers neither “governed” nor “interfered” with any ERISA plans. In the court’s view, eligible employers were not required to make any promises to employees – they simply had to remit payroll deducted payments to CalSavers and otherwise had no discretion regarding the funds. Such “ministerial duties,” the court held, fell outside of the scope of conduct that Congress intended ERISA to regulate.

The court noted that CalSavers “does not govern a central matter of an ERISA plan’s administration, nor does it interfere with nationally uniform plan administration.” On this basis, the court concluded, ERISA did not preempt CalSavers. [Howard Jarvis Taxpayers Ass’n v. California Secure Choice Retirement Savings Program, No. 2:18-cv-01584-MCE-KJN (E.D. Cal. March 29, 2019).]

 Eighth Circuit Concludes Retiree Health Care Benefits Were Not Vested

The U.S. Court of Appeals for the Eighth Circuit, relying on a pair of decisions by the U.S. Supreme Court, recently held that two collective bargaining agreements did not provide vested retiree healthcare benefits.

THE CASE

Former employees of Honeywell International Inc. who retired before age 65 sued Honeywell, alleging that the company’s announced plan to terminate early retiree healthcare benefits at the end of 2017 breached the terms of Honeywell’s 2007 and 2010 collective bargaining agreements (CBAs) with Local 1145 of the International Brotherhood of Teamsters and violated the Employee Retirement Income Security Act of 1974 (ERISA) because those healthcare benefits vested when each class member retired. 

The U.S. District Court for the District of Minnesota granted a preliminary injunction in favor of the plaintiffs, concluding they had a “fair chance of prevailing” on their claims of vested healthcare benefits.

Honeywell appealed to the Eighth Circuit.

THE EIGHTH CIRCUIT’S DECISION

In its decision reversing the district court’s decision, the court held that the plaintiffs’ retiree healthcare benefits were not vested as a matter of law. The Eighth Circuit discussed the Sixth Circuit’s decision in UAW v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983), which held that courts should infer that the parties to a CBA likely intended those benefits to continue as long as the beneficiary remained a retiree when the parties to the CBA contracted for benefits that accrued upon an employee’s retirement. The Eighth Circuit expressly rejected the Yard-Man inference much as the U.S. Supreme Court rejected it in M & G Polymers USA, LLC v. Tackett, 135 S. Ct. 926, 933, 190 L. Ed. 2d 809 (2015). The Supreme Court ruled that, “when a contract is silent as to the duration of retiree benefits, a court may not infer that the parties intended those benefits to vest for life.” The Supreme Court reiterated these principles in CNH Indus. N.V. v. Reese, 138 S. Ct. 761, 200 L. Ed. 2d 1 (2018).

Applying Tackett and Reese, the Eighth Circuit decided that the retiree healthcare benefit provisions of Honeywell’s 2007 and 2010 CBAs did not vest the retirees’ healthcare benefits.

The court noted that the retiree healthcare benefit provisions in the 2007 and 2010 CBAs provided, “The following insurance and benefit plans . . . shall be implemented and maintained as specified by the time periods outlined below for the duration of this agreement.” (Emphasis added.) The court added that the 2007 and 2010 CBAs contained “substantially identical general duration provisions,” with the 2010 CBA stating, for example, that it “shall become effective February 1, 2010 and shall remain in full force and effect up to midnight January 31, 2013.”

Moreover, the court said, the summary plan descriptions (SPDs) stated that Honeywell reserved the right to eliminate or modify healthcare benefits at any time.

Accordingly, the court held, the CBAs and SPDs demonstrated an “unambiguous intent not to confer vested retiree healthcare benefits.” Because these documents were unambiguous, the court would not consider any extrinsic evidence. [Pacheco v. Honeywell International Inc., Nos. 18-1006, 18-1294 (8th Cir. March 21, 2019).] 

Employee Benefit Plan’s Exclusion for Wilderness Programs Did Not Violate Mental Health Parity Act 

A federal district court in Illinois recently held that an employee benefit plan governed by the Employee Retirement Income Security Act of 1974 (ERISA) providing coverage for residential treatment centers but not for wilderness programs did not violate the Mental Health Parity Act.

THE CASE

When the plaintiff was between 16 and 17 years old, her psychiatrist opined that she should be admitted to “a long term [r]esidential [s]etting away from home in order to save her life.” She subsequently was admitted to Second Nature, an outdoor therapy program in Duchesne, Utah, from February 18, 2015 to May 26, 2015.

The claim administrator for the Sandbox Holding, LLC Welfare Benefit Plan, which was sponsored by the plaintiff’s father’s employer and which was governed by ERISA, denied coverage for the plaintiff’s stay at Second Nature, finding that it was a “wilderness program” rather than a “residential treatment center” (RTC) as defined by the plan and, therefore, that her stay at Second Nature was not covered by the plan because it did not cover wilderness programs.

The plaintiff sued, alleging, among other things, that the plan’s exclusion of coverage for wilderness programs violated the Mental Health Parity and Addiction Act of 2008 (the Parity Act).

The parties moved for summary judgment.

THE COURT’S DECISION

The court decided that the plan’s definition of RTC did not violate the Parity Act and, therefore, it found in favor of the claim administrator with respect to its denial of coverage for the plaintiff’s treatment at Second Nature.

The court explained that the Parity Act requires group health plans to provide the same aggregate benefits for mental healthcare as they do for medical and surgical benefits. In particular, the court added, the Parity Act requires parity among quantitative and non-quantitative “treatment limitations” placed on mental health and medical or surgical benefits. Treatment limitations subject to the Parity Act include limits on the frequency of treatment, number of visits, days of coverage, or other similar limits on the scope or duration of treatment.

The court noted that regulations promulgated by the U.S. Departments of Labor, Health and Human Services, and Treasury clarify that treatment limitations should be scrutinized with respect to certain classifications of treatment:

1. Inpatient, in-network;
2. Inpatient, out-of-network;
3. Outpatient, in-network;
4. Outpatient, out-of-network;
5. Emergency care; and
6. Prescription drugs.

See 29 C.F.R. § 2590.712(c)(2)(ii). If a plan provides medical benefits within a certain classification, it cannot impose more stringent limitations on a mental health benefit within the same classification. Plans need not apply the same limitations to all benefits; rather, the court observed, “the processes, strategies, evidentiary standards, and other factors plans use[] to impose those limitations [have] to be comparable for all benefits.”

The court noted that the regulations confirm that “skilled nursing facilities” are the medical equivalent to residential mental health treatment centers. In this case, the court continued, the plan defined a “skilled nursing facility” (SNF) as an “institution or a distinct part of an institution which is primarily engaged in providing comprehensive skilled services and rehabilitative [i]npatient care and is duly license[d] by the appropriate governmental authority to provide such services.” The definition did not exclude wilderness programs or make any mention of them.

The court then rejected the plaintiff’s contention that the plan’s exclusion of wilderness programs from the definition of RTC but not from the definition of SNF amounted to a more stringent geographic limitation on residential mental healthcare as opposed to inpatient medical care.

The court reasoned that the plan defined RTC as one type of program, offering therapeutic intervention in a controlled environment, medical monitoring, and 24-hour onsite nursing, while wilderness programs offered a different service providing merely a supportive environment and methods to address social needs. It found no geographic limitation on RTCs that was not present in the plan’s coverage of SNFs.

The court conceded that defining RTCs to exclude the types of services offered by wilderness programs still could violate the Parity Act if similar services also were not excluded from medical care under the plan. The court added, however, that the plan made clear that it did not cover admission to SNFs “for the primary purposes of providing [c]ustodial [c]are [s]ervice, convalescent care, rest cures or domiciliary care” or “[t]he use of skilled or private duty nurses to assist in daily living activities, routine supportive care or to provide services for the convenience of the patient and/or his family members.”

Accordingly, the court held that neither SNFs nor RTCs covered services that were primarily supportive in nature as opposed to necessary to treat a medical or mental health issue. Therefore, it concluded, these definitions were “in parity” and the plan’s definition of RTCs did not violate the Parity Act. [Alice F. v. Health Care Service Corp., No. 17 C 3710 (N.D. Ill. March 18, 2019).]