A pension plan participant’s challenge to his benefit amount was recently struck down by the United States Court of Appeals for the Third Circuit. The court acknowledged that retirement plans are complex documents comprised of hundreds of pages, appendices, and “peculiarities.” The issue on appeal before the court was examining whether the terms of the plan were merely complex or ambiguous.
The participant was hired by his employer at age 41 in 1988 as the Vice President of Corporate Development. Seven years later, the participant was diagnosed with multiple sclerosis. Unfortunately, by 1997, the participant was deemed to be totally disabled and unable to work at any job by the employer. His final annual base salary was $208,000. The participant was then eligible for long-term disability benefits for the duration of his disability or until he reached the age of 65 in 2012, whichever came first.
In 2012, the participant remained totally disabled, but his long-term disability benefits stopped. He then began drawing on his pension. The plan’s administrator calculated the participant’s benefit by using his years of service from 1988 through 1997 and also included the 15 year period of his total disability from 1997 to 2012. For the credited years, the plan administrator assumed the participant’s salary to be a constant annual $208,000. The participant’s monthly benefit was consequently calculated to be $7,006.96.
The participant objected to this calculation and sought a benefit increase. He challenged the administrator’s calculation of an assumed compensation of $208,000 between the years 1997 and 2012. The challenge was based upon the argument that the participant would have made much more than his base 1997 salary, including bonuses, between 1997 and 2012, thus increasing his monthly benefit.
The plan denied his claim, and after exhausting administrative remedies, the participant filed suit against the plan in the U.S. District Court for the Eastern District of Pennsylvania.
Nearly 300 pages compose the retirement plan document, including 19 articles of content and 137 pages of appendices, schedules, exhibits, and tables. Within these pages is contained the definition of “final average compensation” governing benefit amounts. “Final average compensation” is defined as the participant’s average monthly salary during his or her three highest-earning years. Additionally, the plan provides that disabled participants accumulate credit for years following their disability until the date of their retirement. However, during periods of absences – time not actually worked but credited toward benefits – compensation is to be calculated using the amount paid in the year immediately previous to the absence.
Under this scheme, the plan administrator relied upon the participant’s annual pay of $208,000 paid in the immediate previous year before his total disability. The plan documents afford the administrator discretion to decide and construe ambiguous terms within the plan.
The District Court found the provisions of the plan to be ambiguous, and it deferred to the plan administrator for his calculation of the participant’s benefits. On appeal, the Third Circuit affirmed.
The Third Circuit rationalized that the Employee Retirement Income Security Act (“ERISA”) grants plan administrators discretion to interpret ambiguous plan language. Such interpretations are overturned only when they are arbitrary and capricious. The court also addressed that, while an employer may have a conflict of interest in funding and administering a retirement plan, the mere existence of a conflict is not determinative of whether the administrator’s interpretation was arbitrary or capricious. Instead, the conflict is one of many factors used to evaluate the administrator’s decision. Other factors include the administrator’s patterns or practices of calculations. The court opined that inconsistencies in benefits calculations likely lead to the determination that calculations are arbitrary. On the other hand, where the administrator is walled off from management responsible for finances and penalized for inaccurate decision-making, then the conflict of interest is likely of “vanishing” significance.
The court’s opinion in Dowling v. Pension Plan For Salaried Employees of Union Pac. Corp. & Affiliates, No. 16-1977, was published on September 15, 2017.