5 Plan Provisions That Can Reduce ERISA Litigation Risk
Avoiding litigation should be plan sponsors’ primary goal, but prudent plan drafting goes beyond mere risk avoidance.
A new analysis by litigation attorneys at Mayer Brown (registration required) points out that the focal point of any lawsuit under ERISA for benefits purportedly owed under the terms of an employee benefit plan is the plain language of the plan itself.
By ensuring that ERISA plans include the following five provisions, plan sponsors can significantly limit the risks and costs associated with ERISA benefit claims litigation.
1. Ensure a Deferential Standard of Review
Any discussion of the extent to which plan sponsors can tip the ERISA litigation scales in their favor must begin with the Supreme Court’s 1989 decision in Firestone Tire & Rubber Co. v. Bruch, where the Court found, relying on trust law, that the standard of review depends upon whether the trust instrument gives the trustee discretion to construe disputed or doubtful terms. If it does, courts must defer to the trustee’s interpretation of plan terms and benefits eligibility decisions so long as they are not an abuse of discretion.
As a result many plan sponsors moved to amend their plans to vest plan administrators with discretion to interpret plan terms and decide claims for benefits. The authors note that this so-called “Firestone language” is now a fundamental part of every prudently drafted ERISA plan — and has become the first thing ERISA litigators look for when evaluating claims for benefits.
2. Avoid Exceptions to the Administrative Exhaustion Requirement
The authors explain that it is in plan sponsors’ interest to ensure that participants exhaust the administrative claims procedures all ERISA plans are required to provide, and that even when a plan includes carefully drafted Firestone language, the courts’ willingness to defer to plan administrators’ determinations as to benefits depends upon participants actually exhausting their plan’s administrative remedies. Exhaustion of administrative remedies also provides plan administrators with the opportunity to review and resolve potentially meritorious claims before participants begin litigation. If litigation does ensue, in most cases discovery will be limited to the record before the plan administrator, and its decision will be reviewed under the more favorable abuse of discretion standard.
3. Limit the Deadline for Participants’ Suits
The authors explain that ERISA does not provide a statute of limitations applicable to participants’ claims for benefits, and as a result, courts borrow the limitations period applicable to the most analogous state law claim — typically the forum state’s limitations period for breach of contract claims. However, they note that state statutes of limitations are often lengthy, and can expose plans to lawsuits years after participants’ claims accrue. Not to mention that the significant differences in various states’ limitations periods undermines ERISA’s goal of promoting uniform plan administration.
As a result, many plan sponsors have taken matters into their own hands by incorporating limitations periods directly into their plans. Citing the 2013 decision in Heimeshoff v. Hartford Life & Accident Ins. Co., the Supreme Court upheld the use of such “plan-based” statutes of limitations. Following Heimeshoff, plan sponsors should make certain that their plans include reasonable limitations and accrual periods for filing suit.
4. Control the Place Where Participants Can Sue
By including a venue selection clause in their plans, plan sponsors can ensure that challenges over plan administration and benefits decisions proceed in a convenient forum, and the authors note that a majority of courts have upheld ERISA plan venue selection clauses. In fact, some courts, such as the 6th Circuit, have held that venue selection clauses further ERISA’s goals of ensuring uniform decisionmaking and minimizing plan sponsors’ administrative costs.
While other courts disagree, finding that venue selection clauses are inconsistent with ERISA’s own venue provisions, the authors explain that the Supreme Court’s Heimeshoff decision, upholding plan-based limitation periods and recognizing the importance of enforcing ERISA plan terms “as written,” lends strong support for the majority view upholding ERISA plan venue selection clauses.
5. Prohibit the Assignment of Claims
In addition to designing plans with built-in limitations periods and venue selection clauses that restrict when and where participants can file suit, the authors note that it is important for plan sponsors to take steps to prevent plaintiffs from circumventing ERISA’s limitations on who can file suit. While ERISA provides that benefit claims may be brought only by plan participants or beneficiaries, most courts uphold participants’ and beneficiaries’ assignment of their claims to third parties. This assignment of claims is not prohibited by ERISA, but the authors explain that it is not an absolute right. Accordingly, many courts have upheld the anti-assignment provisions plan sponsors have included in their ERISA plans.