Many employers find themselves in the position of having to decide an employee’s
claim for benefits under an ERISA plan. Even if a third party administrator is retained to make claims decisions, the employer, as plan administrator, may still retain the right and obligation under the plan to decide denial of benefits appeals.

Most plan documents, no matter how well drafted, contain many ambiguities requiring the exercise of judgment by the plan administrator.  Even though the administrator may be in the best position to decide how the plan should be administered, without language giving the administrator clear authority to interpret the plan, the administrator’s decisions can be overruled, resulting in increased costs of benefits. Plan administrators can protect against this possibility by having plan documents carefully reviewed, especially those portions that relate to claims for benefits, to ensure that these provisions comply with federal law and give the plan the scope it needs for effective and efficient administration.

Under federal law, a beneficiary can bring a lawsuit pursuant to ERISA to recover benefits due under the terms of the plan. A denial of benefits which is challenged in court will be reviewed under a de novo standard unless the benefit plan gives the administrator discretionary authority to determine eligibility for benefits and construe the terms of the plan. De novo means the court looks at the record and decides for itself whether the claim should be paid. This leaves the plan vulnerable to second guessing by a judge who could decide in hindsight that the administrator should have interpreted the plan differently. Any ambiguity or uncertainty in the meaning of the language of the plan will be interpreted in favor of the participant. This rule of law works strongly in favor of the participant and against the plan.

On the other hand, if the plan clearly gives the administrator the right to interpret the language of the plan to remedy ambiguities, the rule that ambiguities will be interpreted against the plan will not apply. Instead, the court must apply a deferential standard of review. Under this standard, the administrator’s decision must be upheld unless the court finds that it was arbitrary and capricious. Under the arbitrary and capricious standard of review, the administrator’s decision need not be the only logical one, or even the best one. When an ERISA plan administrator is given authority to interpret the plan language and more than one interpretation is rational, the administrator can choose any rational alternative. It need only be supported by substantial evidence in the administrative record concerning the claim for benefits.

Substantial evidence means evidence reasonably sufficient to support a conclusion. Even contradictory evidence will not change this result. Therefore, under the arbitrary and capricious standard, the court must uphold the decision even if the judge would have decided the question differently had he or she not been required to defer to the decisions of the plan’s administrator. The court need only confirm that the administrator’s decision falls somewhere on a continuum of reasonableness, even if on the low end. In conducting this review, a court may generally consider only the record available to the administrator in deciding the claim for benefits. This, of course, assumes that the participant has been given the opportunity to include information which he or she feels suports the claim.
In sum, the employer should ensure that plan documents contain language that specifically gives the plan administrator the express and unambiguous power to determine eligibility for benefits and to construe the terms of the plan. Failure to do so can cost the plan, as well as the employer, money.