Court: Plan Can Recover Retirement Windfall

Employers, plan administrators, HR staff and third party administrators (TPAs) dealing with excess benefit payments from retirement plans may unnecessarily shy away from taking action to recover such excess payments. In many cases, this reluctance is based on administrative errors made in calculating the excess benefit payment at the outset. What administrator likes to acknowledge a costly mistake? This reluctance to act is frequently compounded by the general understanding of plan fiduciaries that they must always act in the best interests of participants. However, a 2014 federal District Court decision makes it clear that administrators can enforce their retirement plan documents as written and they can do so despite their own errors.

The decision of the District Court for the Northern District of New York in Baackes v. Kaiser Foundation Health Plan et al. affirms a retirement plan’s right to recover excess benefit payments from participants even when such payments are made because of the administrator’s own mistaken benefit calculations.

In Baackes the participant, John Baackes, retired and received a lump sum benefit distribution of $782,733.65. Shortly after the distribution, the plan’s third party administrator (TPA) sent a notice advising Baackes that he was entitled to only $54,264.62 because he was mistakenly credited with an extra twenty years of service with a predecessor employer for benefit computation purposes.

A few months later, the employer’s lawyer sent Baackes a letter advising him that the correct lump sum value was not $54,264.62 but actually $57,232.61. Baackes filed an administrative appeal of the denial of his claim for the full $782,733.65, and the claim was denied on the grounds that the plan document did not allow Baackes credit for his twenty years of service with the employer’s predecessor, and because “the mere fact of payment [of $782,733.65] was not a documentary basis for Plaintiff’s entitlement to this amount.”

Baackes sued to retain the full $782,733.65 distribution on the grounds that, among other things, the plan documents did not allow the administrator to change its original benefit computation and did not exclude service with the employer’s predecessor. Moreover, Defendants violated their fiduciary duties in denying Baackes’ claim to the full benefit distribution. Baackes also alleged a breach of his contractual right to “receive fringe benefits accorded to employees at his level,” which claim was dismissed by the District Court as comparable to a direct claim for benefits and, therefore, preempted by ERISA, the applicable federal law.

The District Court rejected Baackes’ claim and granted the Defendants’ motion for summary judgment. In doing so, the District Court concluded that:

• The plan administrator retained discretion under the plan document to change its rationale for calculating the amount of Baackes’ benefits based on a plan provision granting the administrator “full power, authority and discretion to administer the Plan.”
  

• The plan language clearly excluded service with the employer’s predecessor and the initial calculation of the benefit ($782,733.65), although mistaken, could be corrected by the plan administrator, even though it took two tries to do so. 
  

• No duties were breached by the Defendant fiduciaries for allegedly failing to follow the plan’s claim procedures because (a) the Baackes claim was denied within 90 days of submission as required by the plan, and (b) a delay in handling Baackes’ administrative appeal of the denial of his claim was excusable because Baackes was notified of the delay, the delay caused by a lack of quorum for an administrative committee meeting was reasonable, and Baackes was not prejudiced by the delay.
  

• There was nothing in the record that demonstrated that Baackes relied on the plan administrator’s mistaken benefit calculation and was damaged by the Defendants’ conduct. Much like a mistaken credit to a bank account, the mere fact of the error did not create a substantive right to retain the windfall payment. So, despite the recent expansion of fiduciary liability in the wake of the Supreme Court’s Amara decision, unless a fiduciary mistake affirmatively harms a participant, there will be no resulting fiduciary liability.

The opinion in Baackes affirms the right of a plan administrator to enforce the terms of the plan document as it is written. Even multiple administrative errors in computing the Baackes benefit did not by themselves give Baackes the right to retain benefits not expressly granted by the plan. The substantive basis for this holding was a provision in an exhibit to the plan document which clearly denied credit for Baackes’ service with a predecessor employer for benefit accrual purposes.

The Baackes’ opinion also underscores the discretion of the plan administrator to correct its own administrative errors so long as the administrator follows plan procedures and acts in good faith. In Baackes, the Plaintiff’s benefit claim did not support a claim for breach of duty by plan fiduciaries because those fiduciaries followed the applicable plan provisions in dealing with the Baackes’ claim, the denial of that claim, and the appeal of that denial. The caveats to bear in mind are (1) the relevant plan provisions should be clear and unambiguous, and (2) the administrator should have the authority under the plan document to exercise full discretion in administering the plan.

So, it follows that clear and unambiguous plan provisions can be enforced and errors by plan administrators can be corrected, even at the expense of plan participants, so long as plan fiduciaries follow proper procedures

Recommendations: Plan administrators who make mistakes in calculating benefits can correct their mistakes. This conclusion applies even if the correction requires action to recover excess benefits paid to participants by mistake. This is because the payment of excess benefits to participants by mistake does not by itself create any right to retain those excess benefits. Again, benefit rights are determined by plan documents, not mistaken benefit computations. Plan administrators who have concerns about their past conduct may need to engage advisors or legal counsel. But bear in mind that communications with the employer’s regular corporate or benefits attorney may not be subject to the attorney client privilege. Consider seeking independent legal counsel to assure the confidentiality of communications concerning issues relating to fiduciary errors and possible misconduct.

Andrew S. Williams
Golan Christie Taglia LLP
70 West Madison St.
Suite 1500
Chicago, Illinois 60602
(312) 696-1373
aswilliams@GCT.law