It is Always Good to Follow the Plan’s Claims Procedure in Denying a Claim

[author: Angela Bohmann]

A recent Eighth Circuit Court of Appeals decision involved high ranking executives who participated in a company’s long-term incentive plan. Under the plan agreements, executives who did not continue employment for a three year performance period forfeited benefits under the plan unless they qualified for a pro-rated award. A pro-rated award was available for participants who were involuntarily terminated without cause or who retired.

The agreements governing the plan expressly gave the executive compensation committee of the board of directors the authority to interpret and administer the plan. The plan specified that the committee is to be composed of two or more non-employee directors.

The executives terminated employment when the office at which they worked was closed. They had been offered positions in a different location. One declined; the other worked from the new location briefly before terminating employment.

Although the agreements required the board committee to make determinations under the plan, the senior vice president of administrative services, a member of the company’s benefit plan committee, alone determined that the executives were not entitled to pro-rated payments. The committee with authority under the plan documents never considered the question.

The district court determined that the executives were entitled to pro-rated benefit and the Eighth Circuit Court of Appeals affirmed. The Eighth Circuit determined that no deference was to be accorded the decision that was made since it was not made in accordance with the terms of the plan documents. The court then made its own determination that the participants had “retired” (although they were ages 47 and 49 when they terminated employment) and therefore were entitled to benefits under the plan. The court also concluded that the payments that were owed would constitute “wages” under the applicable state law (Nebraska) so that the state statute providing for attorney’s fees in wage claim suits would also apply. Thus, the executives could recover not only the benefits under the plan but also their attorneys’ fees in bringing the suit.

Lesson from the case:  Read the claims procedure of the applicable plan or agreement and follow those procedures in deciding claims. The result for this employer might have been different had the employer followed that advice.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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