Guaranteed benefits denied to beneficiaries of terminally ill employee who died before annuity starting date

A retirement plan committee did not act arbitrarily and capriciously in denying ten years of guaranteed annuity payments to the beneficiaries of a terminally ill employee who died after his last day of work but eight days before his annuity starting date, according to the U.S. Court of Appeals in Boston (CA-1). Although the employee had delayed his retirement date on the advice of his employer, the terms of the plan implicitly conditioned the nearly $500,000 in guaranteed benefits on the employee surviving until the annuity starting date.

Denial of guaranteed annuity payments

An employee worked for United Parcel Service of America (UPS) for 37 years, participating in the UPS retirement plan. In 2008, the employee was diagnosed with terminal cancer. Being eligible for retirement in 2009, he elected to retire at the end of that year. However, relying on the advice of a UPS HR supervisor, but without the assistance of counsel, the employee elected to maximize his time on payroll by taking his seven weeks of accrued vacation and personal time, effectively delaying his official retirement date.

The employee submitted his retirement application on January 7, 2010, his last day of work. However, because he had redeemed his vacation and personal time, his annuity starting date was March 1, 2010, the day after his effective retirement date of February 28, 2010.

From the available plan annuity options, the employee selected a “Single Life Annuity with 120-Month Guarantee,” naming his four children as his beneficiaries. The retirement application stated that the employee would receive a guarantee of monthly benefits for a period of ten years. In the event the employee died within the ten-year guarantee period, his beneficiaries would continue to receive the monthly benefit amount for the remainder of the guarantee period.

The retirement application, did not explicitly condition the ten-year payment guarantee on the employee surviving until the annuity starting date. The terms of the plan (Sec. 5.4) only stated that “if the participant dies after the Annuity Starting Date but before receiving 120 monthly payments, the monthly payments shall be paid to the Participant’s Beneficiary.” The plan further provided, in Sec. 5.6, that if a vested participant “dies prior to his Annuity Starting Date, his Spouse or Domestic Partner will be entitled to receive a Preretirement Survivor Annuity.”

After submitting his application for retirement, the employee, with the assistance of counsel, further elected to participate in an early retirement incentive program (Special Restructuring Program (SRP)). The program provided the employee with one year of compensation ($98,800) in exchange for retiring and releasing the company from all claims, including all known and unknown claims. The release did not cover claims occurring after the execution of the agreement, but did encompass claims that the employee may not have known about at the time of the release.

Having “secured” his retirement, the employee died on February 21, 2010, one week before his official retirement date and eight days before his annuity starting date. Subsequently, one month later, the UPS Retirement Plan Administrative Committee (Committee) informed the employee’s beneficiaries that the payments under the annuity plan would be denied. The letter indicated that only the employee’s ex-wife would be entitled to any benefits (a reduced preretirement survivor annuity (PSA)) under the plan.

Note: UPS paid the ex-spouse a PSA of $315.05 a month. By contrast, UPS would have been required to make a monthly payment of $4,117.35 ($494,082) under the Single Life Annuity with 120-Month Guarantee plan subscribed to by the employee.

After futile appeals to the Committee, the beneficiaries filed suit under ERISA Sec. 502(a)(1), seeking the ten years of annuity payments guaranteed under the plan. The beneficiaries also brought a claim under ERISA Sec. 502(a)(3) for equitable relief to redress the alleged misrepresentations made to the employee when he selected his benefit.

A federal trial court dismissed the beneficiaries’ actions, concluding that the Committee’s construction of the plan terms was not only plausible, but correct. The court strictly interpreted the plan as conditioning payments to the employee’s beneficiaries on the employee having been receiving benefits after the annuity starting date.

Plan interpretation not arbitrary and capricious

The primary issue on appeal was whether the Committee’s interpretation of the plan was plausible and based on substantial evidence in the record or arbitrary and capricious. Adopting the trial court’s rigid contractual analysis, the First Circuit affirmed.

Initially, the court acknowledged that Sec. 5.6 did not explicitly state (nor was the employee informed) that the Preretirement Survivor Annuity would be the only benefit available in the event the participant died before the annuity starting date. However, because no other plan terms expressly authorized a benefit when the participant died before the annuity starting date, the court concluded that the Committee’s interpretation that Sec. 5.6 provided the exclusive benefit under such circumstances, was within the bounds of reasonableness.

The beneficiaries countered that Sec. 5.6 did not address the benefit actually selected by the employee and, thus, did not govern the effect on the guaranteed annuity benefit of a participant dying before the annuity starting date. According to the beneficiaries, Sec. 5.4, applicable to the annuity benefits, guaranteed ten years of monthly payments to a participant and beneficiaries once the benefit was elected. The court conceded that Sec. 5.4 did not directly state or inform participants or beneficiaries that the 120 months of payments would not be made if a participant died before reaching the annuity starting date. However, the court read the plain language of Sec. 5.04 as comporting with the Committee’s interpretation that benefits were guaranteed only if the participant survived to the annuity starting date. The language of Sec. 5.4(d)(iii), authorizing benefit payments to beneficiaries in the event a participant died after the annuity starting date, but before receiving 120 monthly payments, clearly “seems to suggest” and “appears,” the court explained, to indicate that surviving until the annuity starting date was a precondition to benefits, despite any express or clear language to that effect.

To interpret Sec. 5.4 as guaranteeing benefits to beneficiaries of a participant who dies before the annuity starting date would, the court continued, read the term “after the Annuity Starting Date” out of the key provision of the plan, rendering it “completely useless.” Accordingly, because the plan did not expressly guarantee payments to the beneficiaries of a participant who died before receiving 120 payments (i.e., before the annuity starting date), the fact that the plan did not more clearly condition benefits on surviving until the annuity starting date, or expressly deny benefits to a participant who did not survive until the annuity starting date, was not determinative.

Source: O’Shea v. UPS Retirement Plan (CA-1).

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