Congress Must Ban Discretionary Clauses In ERISA Plans

• Jurisdiction: United States,Federal
• Law Firm: DeBofsky Law
• Subject Matter: Employment and HR, Insurance, Litigation, Mediation & Arbitration, Retirement, Superannuation & Pensions, Insurance Laws and Products, Trials & Appeals & Compensation
• Author: Mr Mark Debofsky
• Published date: 05 January 2023

A recent Law360 guest article argued that discretionary clauses in employee benefit plans governed by the Employee Retirement Income Security Act serve a valuable function, and that if efforts to prohibit their inclusion are successful, the statute would be undermined.

However, as will be explained below, discretionary clauses are contrary to ERISA's purpose and intent. Legislation that would prohibit discretionary clauses in benefit plans other than multi-employer plans, and that also would prohibit mandatory arbitration of ERISA benefit cases¹ was recently passed by the U.S. House of Representatives,² and it must be passed by the U.S. Senate as well, and signed into law by President Joe Biden.

Here's why.

ERISA was enacted in 1974 by Congress to protect ... participants in employee benefit plans and their beneficiaries, by requiring the disclosure and reporting to participants and beneficiaries of financial and other information with respect thereto, by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the Federal Courts.³

Contrary to that statement of legislative purpose, discretionary clauses in employee benefit plans have been used to thwart meritorious claims by requiring claimants to not only prove that their claims were wrongfully denied, but in addition, that the denial was an abuse of discretion or arbitrary and capricious.⁴

For years, courts questioned whether a deferential standard of review over denied employee benefit claims was appropriate.

For example, in 1987 in Van Boxel v. Journal Company Employees' Pension Trust,⁵ the U.S Court of Appeals for the Seventh Circuit wrote:

[Benefits] are too important these days for most employees to want to place them at the mercy of a biased tribunal subject only to a narrow form of "arbitrary and capricious" review, relying on the company's interest in its reputation to prevent it from acting on its bias.

In 1991, the U.S. Court of Appeals for the Third Circuit, in Luby v. Teamsters Health, Welfare and Pension Trust Funds,⁶ also weighed in by observing that plan administrators "may be laypersons . without any experience in or understanding of the complex problems arising under ERISA."⁷

And, of course, the U.S. Supreme Court, in its seminal 1989 ERISA ruling in Firestone Tire & Rubber Co. v. Bruch,⁸ deemed the de novo standard the default standard of review of ERISA cases, although the court's ruling permitted plans to...