Court: Plan Can Recover Retirement Windfall
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.
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
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.”
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
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.
opinion in Baackes
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.
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.
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
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.
Chicago, Illinois 60602
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