ERISA-Ninth Circuit Applies Abuse Of Discretion Standard To Uphold A Plan Administrator’s Identification Of A Top Hat Plan’s Beneficiary

In Sznewajs v. U.S. Bancorp Amended & Restated Supp. Benefits Plan, No. 07-16489 (9th Cir. 2009), the Court ruled that, when reviewing a plan administrator’s identification of the beneficiary under a “top hat” plan, the “abuse of discretion” standard must be used. What is a “top hat” plan? It is an unfunded plan which is maintained by an employer primarily to provide deferred compensation to either a select group of management or a group of highly compensated employees.

In Sznewajs, an employee named Robert was a participant in the company’s top hat plan (the “Plan”). Benefit payments under the Plan begin after the employee has both terminated employment with the company and has attained age 55. While still employed, Robert elected to have his benefit under the Plan paid in the form of a joint and survivor annuity, with the survivor annuity to be paid to his surviving spouse. However, Robert did not identify his spouse on the election form. At the time Robert made this election, he was married to Franciene. Robert left the company at age 53. Before reaching age 55, Robert divorced Franciene and married Virginia. Upon reaching age 55, Robert began to receive monthly annuity payments from the Plan, calculated based on the life expectancies of Robert and Virginia. Franciene then filed a claim with the Plan, requesting that it recognize her, and not Virginia, as Robert’s surviving spouse, for purposes of receiving the survivor annuity upon Robert’s death.

The Plan provided that the survivor annuity would be payable to the survivor designated “at retirement”. The plan administrator determined that “retirement” meant the time that benefit payments were calculated and started, as opposed to the time that the employee left the company, so that Virginia should be treated as the surviving spouse. Franciene’s claim eventually found its way to the Ninth Circuit Court of Appeals.

The issue before the Court was whether the plan administrator’s decision that Virginia is the surviving spouse is correct. In analyzing this issue, the Court noted that the Plan grants the plan administrator discretionary authority to interpret the Plan. Therefore, under ERISA (after Metropolitan Life Ins. Co. v. Glenn, ___ U.S. ___, 128 S. Ct. 2343 (2008) ), the abuse of discretion standard, as opposed to the de novo standard, is to be used to review the plan administrator’s decision, treating any conflict of interest that the plan administrator has as a factor to be taken into account in deciding whether it’s discretion has been abused. Here, however, there is no conflict of interest. The identification of Franciene or Virginia as the surviving spouse will not have a financial impact on the Plan or the company. The present value of the anticipated benefits — the amount of the Plan’s liability –is the same either way, because any difference between Virginia and Franciene is offset by a recalculation of the amount of the monthly payment. Further, the de novo review standard, rather than the abuse of discretion standard, does not apply merely because the plan at issue is a top hat plan. While some cases suggest otherwise, it would be too confusing to treat a top hat plan differently from any other employee benefit plan for these purposes.

Continuing, the Court said that, in applying the abuse of discretion standard under ERISA, the Court must determine whether the plan administrator, in reaching the decision in question, exercised its discretion reasonably, meaning that its decision was based on a reasonable interpretation of the plan’s terms and was made in good faith. Here, the plan administrator’s decision centers on its interpretation of the term “retirement”, which is not otherwise defined by the plan. The meaning of that term, as it applies to this case, is ambiguous, and nothing indicates that the plan administrator’s interpretation was unreasonable or made in bad faith. Thus, the Court upheld the plan administrator’s decision to treat Virginia as the surviving spouse.

Note for Employers: Even a top hat plan should provide that the plan administrator has discretion to interpret and apply the terms of the plan. As seen in Sznewajs, this will help ensure that a court will apply the abuse of discretion standard, rather than the de novo standard, when reviewing a decision of the plan administrator.

Posted in:
Updated:

Comments are closed.