BY Justin Alex, Proskauer Rose Law Firm
Defined benefit plan sponsors can solve plan overpayments in several ways, including using IRS self-correction programs. But it’s important to remember that plans are not required to keep paying benefits to those not eligible for them to begin with, Proskauer Rose law firm associate attorney Justin Alex reminds us in a recent client blog post. In addition, plan sponsors can and do win estoppel claims that bar retrying previously litigated cases.
The 6th U.S. Circuit Court of Appeals recently rejected an ineligible retiree’s claim for reinstatement of erroneous benefit payments under her former employer’s pension plan in Adams v. General Motors Co. (No. 12-2084, 6th Cir., Oct. 24, 2013). The retiree starting in 2007 received benefit payments for 21 months before the plan administrator realized that she was ineligible for benefits under the plan and ceased further benefit payments. The retiree was discharged on disability after an on-the-job injury suffered while she worked intermittently for about three years for GM in the 1970s.
Temporary Employees Excluded
The GM plan covered employees, but specifically excluded temporary employees. Under the terms of the applicable collective bargaining agreement, employees were regarded as temporary employees until their names were placed on the union seniority list. Adams’ name was never added to the union seniority list, yet she received benefit payments until the error was discovered.
The plan granted the plan administrator discretion to determine eligibility. As a result, both the U.S. District Court for the Eastern District of Michigan and the appellate court in this decision reviewed the plan administrator’s determination under the “arbitrary and capricious” standard. The plaintiff raised various arguments to assert that she was an eligible employee under the plan, but failed to convince the court that the plan administrator’s interpretations of the plan and the applicable CBA were arbitrary and capricious.
Among other things, the court in the 2013 appellate review rejected the plaintiff’s claims of collateral estoppel (a legal doctrine that bars litigated issues from being litigated again) and res judicata (another doctrine, one that bars claims either already litigated or that could have been litigated, from being litigated again). Through these claims, Adams said she was an employee for purposes of the plan based on a previous state administrative agency’s determination that she was an employee in the 1970s and her employer’s failure to deny that she was an employee before a state workers’ compensation appeal board.
The 6th Circuit rejected both arguments, noting that “employee” carries a different meaning under the state workers’ compensation statute and that ERISA-covered pension plans are governed by their own terms.
No Obligation for Continued Payment
This case is an excellent reminder that plans can overcome estoppel claims and are not under an unconditional obligation to continue to pay erroneous benefits to individuals who are not eligible for benefits in the first place.
Alex concludes in his Nov. 26 blog post that proper correction for pension overpayments also may involve qualification issues for which the IRS Employee Plans Compliance Resolution System correction program may be appropriate. Additionally, there are fiduciary issues to consider as to whether it is necessary or appropriate for the plan to seek recoupment. Plan administrators seeking to correct overpayments should carefully consider their options.
Finding out More
To learn more about dealing with ineligible employees in your plan, see ¶300 of the Pension Plan Fix-It Handbook.