August 15, 2008
In the closing days of its most recent term, the U.S. Supreme Court issued two decisions relating to the design and administration of employee benefit plans. The first, Metropolitan Life Insurance Company v. Glenn, addressed (without giving significant guidance) the question of whether a conflict of interest exists when a plan administrator who decides questions of eligibility for benefits is also the person responsible for paying any benefit claims, and the effect of such a conflict on a reviewing court's analysis. The second, Kentucky Retirement Systems v. EEOC, addressed the question of whether a pension plan's failure to increase benefits to disabled retirees once they reach normal retirement age (but continue working) violates the Age Discrimination in Employment Act.
Metropolitan Life Insurance Company v. Glenn
Wanda Glenn, a Sears employee, was diagnosed with a heart disorder and applied for disability benefits under Sears' disability plan. In June 2000, MetLife, the insurer and claims administrator for the plan, determined that Glenn met the plan's standard for disability during the first 24 months of benefits, as she could not "perform the material duties of [her] own job." To continue receiving plan benefits after 24 months, Glenn had to meet a stricter standard - that her condition left her incapable of performing the material duties of any job for which she was reasonably qualified.
In April 2002, the Social Security Administration awarded Glenn disability payments retroactive to April 2000. MetLife, however, denied Glenn benefits under the plan, on the basis that she was capable of "performing full time sedentary work." Glenn appealed her denial of benefits under the plan and ultimately brought suit in federal district court. The district court affirmed MetLife's decision to deny Glenn's claim.
On appeal, the 6th Circuit Court of Appeals reviewed MetLife's decision, applying the deferential abuse-of-discretion standard. Among the "relevant factors" the 6th Circuit considered was what it characterized as the conflict of interest created by MetLife serving as both the insurer and the decision maker on Glenn's claim. The 6th Circuit ultimately reversed the district court's decision, setting aside MetLife's denial of benefits.
The U.S. Supreme Court granted review on two questions: 1) whether a plan administrator with both the discretion to decide claims and the obligation to pay any claims due suffers from a conflict of interest; and 2) how such a conflict should be taken into account by federal courts reviewing discretionary benefit determinations.
The majority opinion, written by Justice Stephen Breyer, affirmed the 6th Circuit, holding that a plan administrator that both evaluates and pays claims does have a conflict of interest, and that such a conflict should be "weighed as a factor in determining whether there is an abuse of discretion."
The majority affirmed the framework for evaluating benefit determinations established in Firestone Tire & Rubber Co. v. Bruch. Firestone established that the standard of review is guided by trust law. Courts review a denial of benefits under a de novo, or nondeferential, standard of review, unless the administrator is vested (as MetLife was in this case) with discretion to determine benefit claims. If the administrator is operating under a conflict of interest, however, the court must weigh that conflict as a factor in determining whether the administrator abused its discretion.
Applying the framework from Firestone, the majority held that a conflict of interest arises when a plan administrator both evaluates and pays claims for benefits, stating that "[the Employee Retirement Income Security Act (ERISA)] imposes higher-than-marketplace quality standards on insurers." Interestingly, the majority extended its analysis in this regard from insurers to all administrators (not just insurance companies, noting that "every dollar provided in benefits is a dollar spent by . . . the employer; and every dollar saved . . . is a dollar in [the employer's] pocket"). Justice Antonin Scalia's dissent characterized the employer analysis as dictum (or having no value as precedent for subsequent decisions).
The majority then turned to how this conflict of interest impacts the reviewing court's analysis. The Supreme Court affirmed the application of the deferential standard of review established in Firestone, stating that the conflict of interest is one factor that a reviewing court should consider. The majority opined that the conflict would be significant if the surrounding circumstances suggested that the conflict affected the benefits decision. Alternatively, the conflict may be insignificant if the administrator has taken steps to reduce bias and promote accuracy, such as "walling off" claims administrators from those interested in the firm's financials or penalizing inaccurate decision making, without regard to whom the inaccuracy benefits. Emphasizing that the standard for evaluating discretionary benefit decisions "does not consist of a detailed set of instructions," the court affirmed the 6th Circuit's set-aside of MetLife's denial of benefits.
Chief Justice John Roberts filed a separate opinion, arguing that a conflict of interest should only be considered "where there is evidence that the benefits denial was motivated or affected by the administrator's conflict." Justice Anthony Kennedy also filed a separate opinion, concurring in part and dissenting in part. Justice Scalia, joined by Justice Clarence Thomas, dissented. Agreeing that a conflict of interest arises when a plan administrator both analyzes and pays out benefits, the dissent argued that the administrator "does not abuse its discretion unless the conflict actually and improperly motivates the decision." Finding "no evidence" of abuse here, the dissenting justices would have remanded the case to the 6th Circuit for an examination of MetLife's denial for reasonableness, irrespective of the conflict of interest.
This ruling does not represent a significant shift in the analysis of the effect of conflicts of interest in several circuits, but rather clarifies the way in which courts should analyze the effect of a conflict of interest under Firestone. It will likely alter the analysis applied in circuits in which courts declined to presume that a conflict of interest impacted the administrator's decision, or in which courts applied a burden-shifting analysis.
Where courts declined to presume a conflict, plaintiffs generally had the burden to prove an actual conflict and its impact on the decision at issue. That body of law is now overturned by Glenn. The same can be said for courts that applied a burden-shifting approach. In most circuits, however, Glenn simply confirmed the status quo, at least as to insured plans.
To the extent the majority's analysis is applied to self-insured benefit plans, however, it represents a departure from the 4th Circuit Court of Appeals' 2005 decision in Colucci v. Agfa Corp. Severance Pay Plan. As Justice Scalia noted in dissent, that court previously held that a conflict was not to be inferred from the simple fact that the employer funds benefit claims in a self-insured plan.
Kentucky Retirement Systems v. EEOC
Under the Kentucky Retirement Systems' Plan, police officers, firefighters and other "hazardous position" workers may retire and receive "normal retirement" benefits after reaching the age of 55, if they have worked at least five years, or after they have worked 20 years without regard to their age. The Plan also affords hazardous position workers an early "disability retirement," if they become seriously disabled before becoming eligible for normal retirement.
In calculating disability retirement benefits, the plan imputes additional years of service under its provisions to render the disabled worker eligible for normal retirement benefits. For example, if a police officer becomes disabled at age 32 with 10 years of service, the plan would add 10 years and calculate the worker's benefits as if he had worked 20 years. A police officer who becomes disabled at age 53 with 10 years of service would be credited with two additional years and his benefit calculated as if he retired at age 55.
Charles Lickteig, a deputy sheriff in the Jefferson County, Kentucky Sheriff's Department, became eligible for normal retirement at age 55, but continued working. He became disabled and quit working at age 61. Because Lickteig became disabled after the normal retirement age, the plan did not impute any additional years in calculating Lickteig's retirement benefits. Lickteig alleged age discrimination, and the Equal Employment Opportunity Commission brought an age discrimination claim against the Kentucky Retirement Systems claiming that the plan's refusal to impute additional years was solely because Lickteig's disability occurred after he turned 55.
The district court granted summary judgment to the Kentucky Retirement Systems, and a panel of the 6th Circuit Court of Appeals affirmed. Rehearing the case en banc, the 6th Circuit held that the plan did violate the ADEA. "[I]n light of the potentially serious impact of the [Sixth] Circuit's decision upon pension benefits[,]" the U.S. Supreme Court granted certiorari to determine whether the Kentucky Retirement Systems' practice of not imputing additional years for employees who become disabled after normal retirement age discriminates on the basis of age, in violation of the ADEA.
The ADEA forbids an employer to "fail or refuse to hire or to discharge any individual or otherwise discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual's age." The majority opinion, written by Justice Breyer, held that the plan does not impermissibly discriminate against workers who become disabled after they reach normal retirement age.
The majority relied heavily on Hazen Paper Co. v. Biggins, which held that a plaintiff's claim of intentional discrimination because of age requires proof that age "actually motivated the employer's decision." While the decision in Hazen Paper concedes that "years of service typically go hand in hand with age," it notes that pension status and age are "analytically distinct," and actions based solely on pension status generally "would not embody the evils that led Congress to enact the ADEA." (Though Hazen Paper made clear that discrimination based on pension status may be unlawful if pension status serves only as a "proxy for age.")
Considering several factors, the majority noted that the difference in treatment of disabled employees under the plan was not "actually motivated" by age. The majority noted that: 1) age and pension status are "analytically distinct" concepts; 2) pension status does not serve as a "proxy for age" under the plan; 3) a clear non-age-related rationale exists for the disparate treatment (the plan imputes only the number of years required for normal retirement eligibility); 4) the plan works to the advantage of older workers in other ways; 5) the plan does not rely on the stereotypical assumptions that the ADEA works to eradicate; and 6) there is no clear remedy that will achieve the plan's legitimate objective and correct the age disparity.
Holding that the plan does not violate the ADEA, the majority adopted the following rule: "where an employer adopts a pension plan that includes age as a factor, and that employer then treats employees differently based on pension status, a plaintiff, to state a disparate treatment claim under the ADEA, must come forward with sufficient evidence to show that the differential treatment was `actually motivated' by age, not pension status."
The dissenting opinion, written by Justice Kennedy, criticized the majority for "undercut[ting] th[e] basic framework" of the ADEA. It predicted that the majority opinion will lead to "unevenness in administration, unpredictability in litigation, and uncertainty as to employee rights once thought well settled." According to the minority opinion: "When an employer makes age a factor in an employee benefit plan in a formal, facial, deliberate, and explicit manner, to the detriment of older employees, this is a violation of [the ADEA]." The plan was not only facially discriminatory, the dissent noted, it applied classifications that were based on stereotypical assumptions regarding age.
This case highlights the difficulties that arise when the structure of retirement plans is viewed through the prism of a charge of age discrimination. Employers should examine the structure of their benefit plans to prevent this type of challenge. Without regard to the outcome of any resulting litigation, considerations involving age are inherently prone to challenge in litigation outside ERISA's civil enforcement scheme (with its limits on relief). Such litigation is costly and time consuming, and may ultimately discourage employers from providing certain types of benefits. Because the interests sought to be protected by ERISA differ from those protected by the ADEA, plan sponsors should exercise care in designing their plan to avoid distinctions, classifications, or benefit structures that are susceptible to challenge as being discriminatory based on age.
Note: This article was published in the July/August 2008 issue of The Employment Law Authority.
This article was drafted by the attorneys of Ogletree Deakins, a national labor and employment law firm that represents management. This information should not be relied upon as legal advice.