Ninth Circuit Opinion Holds Structural Conflict Exists Where Employer Pays Benefits Out of a Trust

The Ninth Circuit, in the case of Burke v. Pitney Bowes Inc. Long-Term Disability Plan, weighed in on the interpretation of MetLife v. Glenn in another disability case, appearing to disagree (but not citing) one of the holdings in the recent Eleventh Circuit opinion of Frankie White v. Coca-Cola Co. discussed here. (Rather, the court stated it disagreed with the pre-MetLife decision of Gilley v. Monsanto Co., Inc., 490 F.3d 848, 856 (11th Cir. 2007) relied upon by the Eleventh Circuit in the White case.) These are important cases because there has been much uncertainty regarding how the recent U.S. Supreme Court MetLife decision will impact the Firestone discretionary authority given to plan fiduciaries in administering benefit plans. These Circuit Court opinions provide some important guidance regarding how the MetLife decision will be interpreted and applied.

In the Burke decision, an employee was seeking benefits under the employer’s disability plan which was administrated by a benefits committee. Benefits paid out by the Plan came from the Plan’s Trust, which was funded in part by the employer and in part by employee contributions. The trust was a VEBA and the committee had the authority to determine the amounts of employer and employee contributions to be made to the trust each year. (The court mentioned that it was unclear from the record what portion of the Trust was funded by employees and what part was funded by the employer. )

The court held that, even though there was a trust so that there was no “direct financial impact on [the employer] resulting from the distribution of benefits”, that a structural conflict of interest existed “that must be considered as a factor in determining whether there was an abuse of discretion” in line with the MetLife decision:

We reach this conclusion because, even though benefits are not paid directly by [the employer], [the employer] obviously still has a financial incentive to keep claims’ experience under the Plan as low as possible — the less the Trust pays out as benefits, the less [the employer] will ultimately need to contribute to the Trust to maintain its solvency. Thus, although the impact may be less direct, there is nonetheless a close relationship between benefits paid by the Trust and the money [the employer] must provide from its general assets to fund the Trust.

The court went on to state that the fact that employees made some contribution to the Trust tended “to lessen the structural conflict of interest”, but because the Plan was administered by the employer, rather than an insurer, this aspect of the Plan tended “to increase the Plan’s structural conflict of interest in comparison to the plan at issue in MetLife.” The court then vacated the district court’s ruling and remanded the case for further proceedings.

As in many cases, the footnotes contain some interesting tidbits. Footnote 1 mentions that the record does not disclose the Committee’s makeup, but that the parties argued the case on the assumption that it was a “management” committee controlled by the employer. The court then states in footnote 12:

We must obviously leave for another day the effect of a plan that is jointly-administered by the employer and employee representatives.

In other words, the court is leaving open the answer to this question: Would a committee comprised of management employees as well as non-management employees avoid a conflict of interest holding?

UPDATE: Outline of Key Elements in MetLife, White, and Burke cases:

See this previous post on the MetLife decision here.