In Conkright v. Frommert, No. 08-810 (S. Ct. 2010), the United States Supreme Court faced the issue of when discretion must be given under ERISA to the decision made by a plan administrator.
In this case, the defendants are Xerox Corporation’s pension plan (the “Plan”) and the Plan’s current and former administrators (the “Plan Administrator”). The plaintiffs are employees who left Xerox in the 1980’s, received lump-sum distributions of their benefits under the Plan earned up to that point, and were later rehired. To account for the past distributions when calculating the plaintiffs’ current benefits under the Plan, the Plan Administrator had first interpreted the Plan to apply the “phantom account” method (which generally calculates the hypothetical growth that an employee’s past distributions would have experienced if the money paid out had remained invested in the Plan). After the Second Circuit Court of Appeals disagreed with that interpretation, the Plan Administrator changed its interpretation to account for the time value of money (using an interest rate fixed at the time of distribution as opposed to hypothetical investment). The Second Circuit again disagreed with the Plan Administrator’s interpretation, failing to give it any deference, and the defendants appealed.
The Supreme Court ruled that, in this case, the Plan Administrator’s second interpretation of the Plan-accounting for the time value of money- is subject to a deferential standard of review under ERISA. Under Firestone Tire & Rubber Co. v. Bruch, 489 U. S. 101 (1989), Metropolitan Life Ins. Co. v. Glenn, 554 U. S. ___ (2008) and the Plan’s terms, the Plan Administrator here would normally be entitled to deference when interpreting the Plan. The Court of Appeals, however, crafted an exception to this deference, holding that a court need not apply a deferential standard when a plan administrator’s first construction of the same plan terms was found to violate ERISA. The Supreme Court found no basis in prior cases or otherwise for this exception, rejecting this “one-strike-and-you’re-out” approach. As such, it overturned the Second Circuits’ decision and remanded the case.