Discretionary Authority in ERISA Plan Documents
One of the simplest things an employer can due to minimize risks associated with ERISA benefit claims is to include a “grant of discretionary authority” in plan documents that is not only crystal clear but is conspicuous and repeated often. Not paying attention to whether plan documents properly delegate claim decision making discretion could result in significant unnecessary claim exposure and legal costs that could easily be averted.
Abuse of Discretion versus De Novo Review
When an ERISA benefit plan grants a plan decision maker – such as a plan administrator, a benefits committee, or a third party claims administrator – the “discretionary authority to determine eligibility for benefits or to construe the terms of the plan,” courts review claim decisions under an “abuse of discretion” standard of review. That is a highly deferential standard, meaning that a court must affirm an administrator’s claim decision “if a reasonable person could have reached a similar decision, given the evidence before him, not that a reasonable person would have reached that decision.” If a reasonable person could have reached the decision, only a “scintilla of evidence” need support the claim administrator’s determination. In other words, under abuse of discretion review, a court cannot supplant its own view of the evidence for that of the plan administrator. Instead, the court must grant deference to the administrator’s analysis.
The case is entirely different if an ERISA plan is silent about whether an administrator has discretionary authority, or if a grant of discretionary authority is not sufficiently clear or is placed in a document that plan participants are not shown or is not considered part of the plan. In those cases, the administrator’s claim decisions are reviewed by a court “de novo,” meaning that the court can disregard the administrator’s analysis entirely and render its own decision without deferring to the administrator’s interpretation of the plan or evidence. A case decided de novo is akin to a standard breach of contract case, where the court decides by a preponderance of the evidence whether the claim administrator “breached” the plan terms in denying benefits.
Importance of Standard of Review
Disposition of ERISA cases often pivots on whether a discretionary rather than de novo standard of review is to be applied. Application of discretionary review often dictates that a plan will prevail on a motion for summary judgment, and thereby avoid a trial on the merits. With de novo review, a court is more likely to find genuine issues of material fact that must be decided by a trial, causing the plan to incur consequent additional legal costs, as well as the risk of an adverse judgment if the court does not agree with the plan administrator’s decision. The “settlement value” of a case reviewed de novo typically is significantly higher than that of a case subject to discretionary review.
Take the time to review all of your organization’s ERISA plans – pension, health, dental, disability, life, severance – and note any of these problems:
Not including a grant of discretionary authority at all. Some plans contain no grant of discretion. Be particularly wary of relying on insurance companies and benefit consultants to provide documentation setting forth a grant of discretion to a plan administrator. That typically is not their job, and documents they provide often do not specify a grant of discretionary authority. Also, a severance policy may be covered by ERISA if it provides for an ongoing administrative scheme for determining eligibility for benefits as cases arise. If so, you want to make sure the severance policy contains a grant of discretionary authority, and you should treat it as an ERISA plan for all other purposes (e.g., Form 5500).
Inadequately specifying the discretion granted. Look for language such as “discretionary authority to determine eligibility for benefits and construe plan terms,” and take note if similar language is not included in the plan.
Not including a grant of discretion in the right place. Redundancy is not a bad thing when it comes to specifying a grant of discretionary authority in ERISA plan documents. Best practices dictate that the grant of discretion be included in the summary plan description, and any separate “plan document,” and any third party administration agreement.
*This post was originally written by Steve Wilson.