(CN) - The Supreme Court on Tuesday reversed a 2nd Circuit ruling in the tangled world of ERISA law, saying the circuit incorrectly allowed a lower court to refuse to defer to a plan administrator's interpretation of a plan for re-hired workers after an administrator's previous, unrelated interpretation was found to be invalid.
The case concerns Xerox Corp.'s pension plan and workers who left the company in the '80s, got a lump-sum in retirement benefits, and were later rehired. Questions arose in calculating their benefits.
"The dispute giving rise to this case concerns how to account for respondents' past distributions when calculating their current benefits - that is, how to avoid paying respondents the same benefits twice," Chief Justice John Roberts wrote.
In calculating benefits, the administrator interpreted the plan to use the so-called "phantom account" method, which calculates the "hypothetical growth" that past distributions would have experienced if the money had stayed in Xerox's investment funds. Workers' present benefits are then reduced accordingly.
The administrator denied the workers' challenges that the method violated ERISA law.
The District Court granted summary judgment for the plan. The 2nd Circuit vacated the ruling, finding that the plan administrator's interpretation was unreasonable and that the workers were not notified that the "phantom account" method was used to calculate their benefits.
On remand, the District Court considered other approaches for adjusting workers' current benefits with an eye on their past distributions.
The plan administrator then proposed a plan similar to the "phantom account" method that accounted for the time value of the money that workers already got. The new method, however, did not calculate the present value of a past distribution based on events that occurred after the distribution.
"Instead, the new approach used an interest rate that was fixed at the time of the distribution, thereby calculating the current value of the distribution based on information that was known at the time of distribution," Roberts wrote.
The workers argued that the could should apply a deferential standard of review and use it as a reasonable interpretation of the plan.
"The District Court did not apply a deferential standard of review," Roberts wrote, "nor did it accept the plan administrator's interpretation. Instead, after finding the plan to be ambiguous, the district court adopted an approach proposed by (the workers) that did not account for the time value of money."
Under the new calculation, workers' present benefits were reduced only by the "nominal amount of their past distributions," Roberts wrote, "thereby treating a dollar distributed to respondents in the 1980s as equal in value to a dollar distributed today."
The fact that the plan in question does not account for the time value of money, "in the actuarial world ... is heresy, and highly unforeseeable."
The 2nd Circuit affirmed the calculation, finding that the District Court was right by not applying a deferential standard.
"Deference promotes efficiency by encouraging resolution of benefits disputes through internal administrative proceedings rather than costly litigation," Roberts wrote. "It also promotes predictability, as an employer can rely on the expertise of the plan administrator rather than worry about unexpected and inaccurate plan interpretations that might result from de novo judicial review."
"A group of prominent actuaries tells us that it is impossible even to determine whether an ERISA plan is solvent ... if the plan is interpreted to mean different things in different places."
Roberts continued: "The interests in efficiency, predictability and uniformity - and the manner in which they are promoted by deference to reasonable plan construction by administrators - do not suddenly disappear simply because a plan administrator has made a single honest mistake."
The government had argued that continued deference would encourage plan administrators to adopt unreasonable interpretations, thereby "undermining the prompt resolution of disputes over benefits, driving up litigation costs and discouraging employees from challenging the decisions of plan administrators at all."
"All this is overblown," Roberts wrote. "There is no reason to think that deference would be required in the extreme circumstances" that the government predicts.
Justice Sonia Sotomayor did not participate in the discussion or ruling.
Justices Stephen Breyer, John Paul Stevens and Ruth Bader Ginsburg dissented.
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