Executive Compensation Blog originally appears on CompensationStandards.com
The recent case of Sluimer v. Verity Inc. (N.D. Cal. 2008)
involved a relatively routine question of whether a company properly
denied severance benefits to a former employee under an ERISA plan.
However, the case is significant for all executive compensation
professionals because it marks the first entry of the U.S. Supreme
Court's recent decision in Metropolitan Life Ins. Co. v. Glenn, 128 S. Ct. 2343, 2346 (2008), into the executive compensation arena.
By way of introduction, if an ERISA plan administrator denies
benefits to a plan participant, the participant may sue to recover the
benefits under ERISA ยง502(a)(1)(B). In Firestone Tire & Rubber Co. v. Bruch,
489 U.S. 101 (1989), the Supreme Court held that a plan administrator's
decision to deny benefits was entitled to a deferential standard of
review by the court, so long as the terms of the plan document give the
administrator the discretionary authority to determine eligibility for
benefits or to construe the plan's terms. Under the deferential
standard of review, the court would not overturn the administrator's
decisions unless the court finds that the administrator abused it
discretion by making a decision that was "arbitrary and capricious" (a
high standard). Without the right plan language, the court will review
the denial of benefits de novo (without deference). I first wrote about this as long ago as May 2005, in a Blog about plan drafting tips.
In MetLife v. Glenn, the Court picked up on dicta from Firestone v. Bruch,
indicating that if "a benefit plan gives discretion to an administrator
or fiduciary who is operating under a conflict of interest, that
conflict must be weighed as a 'factor in determining whether there is
an abuse of discretion.'" The Court also found that a conflict of
interest exists where the entity that administers the plan, such as a
company, both determines whether an employee is eligible for benefits
and pays benefits out of its own pocket. The Supreme Court held that,
where such conflicts exist, courts must take account of the conflict
when determining whether the company has abused its discretion.
Previously, the federal courts recognized that a company's primary
reason for maintaining a benefit plan was to provide benefits to
employees, not to save money be denying benefits to employees. Thus,
the courts gave deference to a decision of the company or a committee
of the company's employees and did not presume the decision was
motivated by financial concerns.
Many companies will need to make some changes to ensure that their
benefit plan decisions still receive deference from the courts. This is
much too important of an issue to risk Blogging about on a Friday
afternoon in August. Therefore, I will pick up this thought next week,
hoping that all readers take note.
Michael S. Melbinger
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