Plan administrator’s interpretation of ambiguous plan terms in calculating pension benefit of disabled participant upheld as reasonable

A plan administrator’s interpretation of ambiguous plan terms in calculating the final average compensation of a disabled employee, resulting in a reduced pension benefit, was not arbitrary and capricious according to the U.S. Court of Appeals in Philadelphia (CA-3). The fact that the plan sponsor funded and administered the plan suggested a conflict of interest, but no evidence indicated that the conflict affected the administrator’s calculation of the participant’s compensation and benefits.

Plan ambiguities complicate calculation of pension benefit of disabled participant

An employee worked for Union Pacific as a high ranking company officer from 1988 to 1997, at which time he was deemed totally disabled and unable to work because of multiple sclerosis. The employee then received long-term disability benefits from 1997 until 2012, when he turned 65. At that time the employee began to draw on his Union Pacific retirement benefit. The calculation of the participant’s retirement benefits proved problematic.
For purposes of the calculation of his pension benefit, the employee was credited with service for the 15 years during which he received disability payments. In addition, instead of applying the plan’s general rule, under which a nondisabled employee’s benefit would be based on the last 10 years of actual service, the plan administrator operated as if the employee had worked and been paid his final base salary (exclusive of bonuses and incentive compensation) for his credited years of service, beginning in 1997, until his retirement in 2012. Pursuant to the administrator’s final calculation, the employee was entitled to a monthly pension payment of $7,006.
The employee objected to the calculation, maintaining that the terms of the plan required that his pension payment be based on his 10 years of income prior to 1997, when he became disabled and stopped working, rather than on the hypothetical income stream for the 10-year period prior to his 2012 formal retirement date. The employee’s proposed methodology would incorporate performance bonuses in addition to his base salary, thereby increasing the monthly benefit.
The employee lost his administrative claim, exhausted remedies, and filed suit in a federal court in Pennsylvania. The trial court issued summary judgment for Union Pacific, ruling that the plan administrator’s decision was not unreasonable.

Reasonable calculation of final average compensation

Initially, the appeals court noted that the amount of a participant’s pension is a function of compensation and service. The plan clearly stated that a participant’s final average compensation is to be determined by the highest three consecutive years of pay the employee has received in the 10 years before ceasing to be a “covered employee.” Plan terms further indicated that a participant ceases to be a covered employee following separation from service due to disability. However, the plan also provided that during an “absence” from work, a participant is deemed to have received, for the duration of the absence, compensation at the base pay rate in effect prior to the absence.
The ambiguity highlighted by the appeals court was that the plan did not define the term “absence” or indicate whether it encompassed time away from work due to disability. The employee maintained that a participant who is not working due to disability is not absent. Such employees, thus, should not be deemed to receive any pay after they leave work, and final average compensation must be calculated from the date the participant became totally disabled and stopped working. The plan administrator, however, assumed the contrary position, that missing work due to disability constitutes an absence. Accordingly, for purposes of calculating final average compensation, disabled persons are deemed to be paid their base salary for the duration of their disability, up until their retirement date.
The court conceded that the employee’s argument, that total disability does not constitute an absence under the terms of the plan, was reasonable. However, the plan administrator’s interpretation was equally reasonable and, thus, entitled to deference under the applicable fiduciary review standard.

“Gaping hole” in plan treatment of disabled participant’s compensation.

The plan provided rules for calculating a disabled participant’s years of credited service and for determining the date benefits become available, but did not specifically address the calculation of final average compensation for disabled participants. Confronted by this “gaping hole,” the plan administrator elected not to calculate the employee’s final average compensation pursuant to the default scheme applicable to nondisabled employees, but in accord with the authorized disabled participant exceptions that treat the formal retirement date as the final day of work.
The employee argued that the plan’s silence on the calculation of final average compensation for disabled participants indicated that the default rule covering nondisabled participants should have been applied. However, the court reasoned that the plan’s silence on the issue suggested that the plan administrator’s approach was not unreasonable.

Conflict of interest.

As a final argument, the participant maintained that the conflict of interest created by the fact that the administrator was an officer of the plan sponsor, which funded the plan, should call the administrator’s decision into question. The court acknowledged the existence of the conflict, but explained that the mere existence of a conflict does not alter the deferential standard of review. The fact that the plan administrator revised an initial position on the method for calculating the participant’s final average compensation did not suggest an ulterior motive and no other factors indicated that the plan administrator’s otherwise reasonable decision had been affected by the conflict of interest.

Source: Dowling v. Pension Plan for Salaried Employees of Union Pacific Corp. and Affiliates (CA-3).
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