Short-term disability plan was ERISA-exempt ‘payroll practice’

SunTrust’s short-term disability (STD) plan—which paid normal wages from general assets on account of work missed due to medical reasons—was an ERISA-exempt “payroll practice” under Department of Labor regulations, the D.C. Circuit ruled. Further, the court below appropriately applied a deferential standard of review in assessing the plan administrator’s denial of benefits to a SunTrust employee under the bank’s long-term disability (LTD) plan, the appeals court held, affirming both the lower court’s grant of summary judgment against her ERISA claim and the denial of her motion for reconsideration.

After missing work due to a variety of ailments, the mortgage loan closer submitted claims for STD benefits, which were denied by Sedgwick, SunTrust’s plan administrator. SunTrust then terminated the employee based on her absences. Her subsequent claim for LTD benefits was also denied by Sedgwick.

Lower court proceedings. The employee then sued SunTrust and Sedgwick under ERISA Section 1132(a) to enforce her rights under both the STD and LTD plans. On summary judgment, she conceded, and the district court independently determined, that the STD plan was an ERISA-exempt payroll practice. Accordingly, the court granted summary judgment as to the STD plan. It then found that the LTD plan vested Sedgwick with broad discretionary authority, triggering a deferential standard of review under the Supreme Court’s decision in Firestone Tire & Rubber Co. v. Bruch. Applying that standard, the court found Sedgwick had not abused its discretion nor acted arbitrarily or capriciously in denying the employee’s claim for LTD given her failure to submit sufficient objective medical documentation. Finally, the court also denied the employee’s motion for reconsideration, in which she argued that in spite of her concession, the court erred in finding that the STD plan was ERISA-exempt.

Exempt payroll practice. There is no dispute, the appeals court began, that without the DOL’s regulatory exemption, SunTrust’s STD plan would be an “employee welfare benefit plan” under ERISA. But, pursuant to 29 C.F.R. Sec. 2510.3-1(b(2), the DOL exempts certain “payroll practices,” including “[p]ayment of an employee’s normal compensation, out of the employer’s general assets, on account of periods of time during which the employee is physically or mentally unable to perform his or her duties, or is otherwise absent for medical reasons.” Not only did SunTrust’s STD plan clearly fit within this regulatory definition, the court found it appeared as if the bank drafted its plan to match the regulatory exemption.

Nonetheless, the employee argued that the relationship between SunTrust and Sedgwick and the administration of the STD benefits established an on-going administrative scheme that subjected the Plan to ERISA. This argument, however, was not properly raised and preserved before the lower court and, further, said the appeals court, it rested on a flawed assumption. Although the employee cited the Supreme Court’s decision in Fort Halifax Packing Co., Inc. v. Coyne in support of her contention, the Court in that case did not address plans that were exempt from ERISA pursuant to DOL regulations. Moreover, in Fort Halifax the issue was whether the provision of a certain type of benefit should be construed as a plan that was within the compass of ERISA while the question here was whether a benefit program that clearly fell within the compass of ERISA was nevertheless exempt pursuant to DOL regulations. “The answer here is yes,” said the court, finding SunTrust’s STD disability benefit plan fell squarely within the exemption and affirming summary judgment against that claim.

Deference due to plan administrator. The appeals court next found that the district court appropriately applied a deferential standard of review to Sedgwick’s denial of benefits under the LTD plan because the terms of the plan unambiguously granted the administrator alone the power to construe critical plan terms and to decide an employee’s eligibility for benefits. In reaching this conclusion, the court looked for guidance from Supreme Court cases including Firestone and later decisions confirming that, in assessing a claim under Section 1132(a)(1)(B), a court must consider “trust law, the terms of the plan at issue, and the principles of ERISA.”

Looking to trust law, courts “analogize a plan administrator to the trustee of a common-law trust; and . . . consider a benefit determination to be fiduciary act.” Further, observed the court, the Restatement (Third) of Trusts recognizes that a trustee’s powers may be express or implied. Likewise, an ERISA plan document may show that the employer intended for the administrator to have discretionary powers to construe terms or determine eligibility if the terms of the plan direct the administrator to obtain specified objectives of the plan without specifying the means by which to achieve them.

Turning to the terms of SunTrust’s LTD plan, the court found it clear that Sedgwick alone had the power to construe disputed plan terms and determine benefits eligibility. Moreover, when exercising the authority to deny a claim, Sedgwick had to interpret and apply the plan terms. Further, any appeal of the administrator’s denial of benefits was to the administrator and no one but the administrator determines whether an employee is eligible for benefits, said the court, noting that “there is no detailed rubric by which the administrator is constrained in determining whether the definition of disability is met.” These unambiguous grants of discretion to Sedgwick compelled deferential review of its assessments of benefits claims, the court concluded.

Turning finally to the principles of ERISA, the court found that while Firestone instructs that when discretion is not clearly granted to the administrator, de novo review is appropriate, the Court was equally clear in saying that “[n]either general principles of trust law nor a concern for impartial decisionmaking . . . forecloses parties from agreeing upon a narrower standard of review.” Here, said the court, SunTrust unambiguously gave Sedgwick the power to interpret material plan terms and determine eligibility for benefits. Thus, the district court did not err in reviewing Sedgwick’s benefits determination under a deferential standard of review and in concluding that Sedgwick had not abused its discretion or acted in an arbitrary or capricious way in denying the employee’s claim for LTD benefits.

SOURCE: Foster v. Sedgwick Claims Management Services, Inc., (D.C. Cir.), No. 15-7150, November 29, 2016.

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