The Importance of Creating an Administrative Record in ERISA Claims

ERISA requires employees to exhaust all administrative remedies before pursuing claims in court.  This means that an employee must follow the claims procedures outlined in his or her Summary Plan Description.  Abiding by these requirements and taking this phase of the process seriously is crucial.   

Typically, a claim is filed with the plan administrator in accordance with the plan’s procedures.  The plan administrator then must provide adequate notice to the employee in writing, setting forth the specific reasons for such denial.  ERISA provides that every plan participant must be afforded a full and fair review of the decision denying the claim.  Any documentation, records, or other relevant information submitted by the claimant along with additional evidence, documentation and records used by the plan administrator constitutes the administrative record. 

Developing a sufficient administrative record is imperative because after an administrative appeal and once a claim is filed in court, various circumstances determine whether or not the court’s review of the administrator’s decision is limited to the evidence in the administrative record or if additional discovery is allowed. Certain language in a plan along with an employee’s location can determine his or her rights.    

The first step in determining whether discovery is allowed outside the administrative record is to decide the applicable standard of review.  As discussed in my prior article, the Supreme Court in Firestone Tire and Rubber Co. v. Bruch, decided that a de novo standard (allowing the court to substitute its own judgment) applies when reviewing a claim denial, unless the language of the plan gives the plan administrator discretion to interpret and apply the plan.  If a plan provides such discretion, the reviewing court applies an abuse of discretion standard and gives the benefit denial deferential treatment. 

Since the abuse of discretion standard assesses the reasonableness of the benefit decision based upon the facts known to the plan administrator at the time, consideration of evidence outside the record is extremely rare. 

However, when a de novo standard applies, the circuits have articulated a variety of rules concerning discovery outside the administrative record. 

• The Fifth and Sixth Circuits do not permit the introduction of extrinsic evidence reasoning that federal courts are not to function as substitute plan administrators.
• The Seventh and Eleventh Circuits allow the admission of all extrinsic evidence because de novo review requires an independent decision rather than an independent review. 
• The First and Second Circuits have limited discovery of extrinsic evidence to show procedural irregularities or conflict of interest
• The Fourth and Tenth Circuits apply a multi-factor approach.  Generally, review is limited to evidence in the administrative record except where the court finds that additional evidence is necessary for resolution of the claim.  These circuits have discussed a number of exceptional circumstances which may warrant a court to exercise its discretion, such as cases with concerns of impartiality or procedure, complex medical issues, or circumstances where the claimant would not have been able to present the evidence during the administrative process. 
• The Eighth and Ninth Circuits permit extrinsic evidence upon a showing of good cause.  “Good cause” is similar to the exceptional circumstances articulated by the Fourth and Tenth Circuits.  However, if the plan participant had multiple opportunities to submit evidence to the plan administrator but failed to do so, such evidence will be excluded at trial.   
• The Third Circuit looks to whether the administrative record was sufficiently developed and may allow the admission of additional evidence where there is a lack of an administrative record. 

Savvy employers will likely include language in the plan that gives the plan administrator discretion to interpret and apply the plan, thus limiting review of the benefit denial to the administrative record.  However, even if a plan does not contain discretionary language, de novo review does not guarantee the admission of extrinsic evidence.  In sum, creating an adequate administrative record is crucial for Plaintiffs. 

If you are a claimant needing assistance in handling a claim, contact the attorneys at Cosgrove Law Group, LLC.

Circuit Split. Which Standard of Review Applies to ERISA Top-Hat Plans?

The Employee Retirement Income Security Act (“ERISA”) regulates the operation of private sector employee benefit plans once a plan has been established by an employer. ERISA requires employers to implement certain safeguards for employee benefit plans by setting minimum standards for things such as for participation, vesting, benefit accrual, funding, and reporting.  In addition, ERISA establishes fiduciary responsibilities for plan administrators.  ERISA generally defines a fiduciary as anyone who exercises discretionary authority or control over a plan's management or assets, including anyone who provides investment advice to the plan.

Generally, when a plan participant has a claim for benefits, there are specific procedures that must be exhausted.  The claims and review process is usually spelled out in the Summary Plan Description.  If a claim for benefits is denied, ERISA requires that the reason for any denial of benefits is explained to the employee in writing and that employee must be given an opportunity for full and fair review of the decision through an internal appeals process. 

If benefits are again denied after the internal appeals process, the employee can then file a claim in court.  Generally, the reviewing court applies a de novo standard (allowing the court to substitute its own judgment) when reviewing a claim denial, unless the language of the plan gives the plan administrator discretion to interpret and apply the plan.  If a plan provides such discretion, the reviewing court applies an abuse of discretion standard and gives the benefit denial deferential treatment.  When announcing this standard of review, the Supreme Court in Firestone Tire and Rubber Co. v. Bruch reasoned that since the plan administrator is a fiduciary, his or her exercise of discretion should not be subject to control by the court. 

This standard of review poses significant problems for ERISA top-hat plans.  To be designated a top hat plan, ERISA requires that the plan be (1) unfunded and (2) maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.  Top hat plans are specifically exempt from ERISA’s provisions on participation, vesting, funding, and fiduciary responsibility but are subject to ERISA’s enforcement provisions.  Thus, top-hat plans are merely contractual agreements. 

Top-hat plans are unique in that plan participants must utilize ERISA’s enforcement provisions when challenging benefit denials, yet none of the substantive and fiduciary provisions apply to such plans.  Under ERISA (modeled after trust law) a plan administrator or fiduciary is required to make all decisions in the plan participant’s best interest.  However, since top-hat administrators are not fiduciaries, they are not required to make any decisions in the best interest of the top-hat plan participant.  Since an unfunded top-hat plan is essentially an unsecured promise to pay benefits at termination or later, an inherent conflict of interest is present when the role of the plan administrator and employer overlap.  Paying the benefits to the top-hat plan participants will always have a direct and immediate impact on the cost to the employer.

Furthermore, when a plan confers discretion upon the administrator in a top-hat plan, the trust principals relied on by the Supreme Court in Firestone are not present.  If following the holding in Firestone, the decision of a plan administrator with discretion to interpret and apply the plan, owing no fiduciary duties to the top-hat employees and where a conflict of interest is present, would still be subject to an abuse of discretion standard.  This hardly seems fair when top-hat employees are afforded no remedies under fiduciary duty claim and their plans are not required to be funded. This nearly renders the promises and obligations of the employer illusory.    

After the holding in Firestone, courts have grappled with whether or not to apply the abuse of discretion standard to top-hat plans because of their unique nature.  The Eight Circuit has concluded de novo review applies to top hat plans even when it give their administrators interpretive discretion because “a top hat administrator has no fiduciary responsibilities” under ERISA.  The Third Circuit has also declined to extend the holding in Firestone to top-hat plans because top-hat plans are unilateral contracts and the principals of federal common law should be applied. 

However, without a discussion distinguishing top-hat plans from ordinary ERISA plans, the Seventh and Second Circuits have held that the abuse of discretion standard articulated in Firestone applies to top-hat plans that provide the administrator with discretion.  The Ninth Circuit also held that abuse of discretion standard applies to top-hat plans with discretionary language reasoning that the application of a de novo standard does not materially change the outcome and applying a different standard to top-hat plans would create unnecessary confusion.  The Sixth Circuit sided with the Ninth Circuit’s reasoning that “the same conclusion would be reached under either standard,” although it was unclear whether it was applying that reasoning solely to the case at bar or more broadly.  The remaining Circuits have taken no position.    

Therefore, top-hat ERISA participants have a higher burden to overcome in “abuse of discretion” circuits than in “de novo” circuits.