EBIA Weekly Newsletter

Court Upholds Offset of Disability Benefits and Rejects Penalties for Failure to Disclose Claims-Related Documents

   July 13, 2016

Jones v. Life Ins. Co. of N. Am., 2016 WL 3257781 (N.D. Cal. 2016)

A former employee sued the claims administrator of her employer’s long-term disability plan for wrongfully terminating her benefits, and the administrator agreed to retroactively reinstate them. The benefits were to be offset, however, by the amount of Social Security disability benefits (SSDI) paid to the employee and her children. The employee argued that the offset for the children’s SSDI benefits was improper and asked the court to consider the issue using the nondeferential “de novo” standard of review. The employee also sought penalties under ERISA § 502(c) for the administrator’s failure to produce certain requested documents, including its claims activity diary and notes and analysis on the offset issue.

The employee argued that nondeferential review was appropriate because the plan administrator delegated discretionary authority to the claims administrator only in the plan’s summary plan description (SPD) rather than in the formal plan document, and because procedural irregularities created a conflict of interest. The court, however, found no conflict of interest and observed that the SPD (along with its delegation of authority) was incorporated by reference into the plan document. Thus, the court declined nondeferential review in favor of the abuse of discretion standard, under which a plan administrator’s interpretation of the plan will not be disturbed if reasonable. Using this more deferential standard of review, the court held that the administrator did not abuse its discretion by offsetting the employee’s long-term disability benefits by the amount of the children’s SSDI benefits. The court also denied the employee’s request for penalties, holding that ERISA § 502(c) penalties are limited to a plan administrator’s failure to provide plan documents under ERISA § 104(b)(4) and do not apply to a claims administrator’s failure to produce documents relating to her benefits claim as required by ERISA’s claims regulations.

EBIA Comment: Whether the terms of an SPD can become plan terms through incorporation by reference may depend on the language in the two documents (see, e.g., our Checkpoint article about a case where attempted incorporation by reference was unsuccessful); the better approach is to ensure that a grant of discretionary authority is included in the formal plan document—not just the SPD. In addition, plan administrators should respond promptly to participants’ requests for plan documents and other plan information. Although this employer was spared penalties because the documents requested were claims-related documents, which most courts have concluded are not covered by ERISA’s penalty provision (see, e.g. our Checkpoint article), employers in other situations have faced stiff penalties of up to $110 per day for ignoring participant requests (see, e.g., our article). For more information, see EBIA’s ERISA Compliance manual at Sections XI.B (“Discretionary Authority to Interpret Plan and Determine Facts”), XXV.A (“Participant and Beneficiary Right to Request and Examine Documents”) and XXXVI.C (“Standard of Judicial Review Applied to Benefit Decisions Under ERISA Plans”). See also EBIA’s 401(k) Plans manual at Sections XXIX.H (“Participant and Beneficiary Right to Request and Examine Documents”) and XXXVII.D (“Judicial Review of Plan Administrator’s Decision”), and EBIA’s Self-Insured Health Plans manual at Sections XXVI.J (“Litigation Issues”) and XXVIII (“Participant Disclosure Requirements for Self-Insured Health Plans”).

Contributing Editors: EBIA Staff.