Most of the time our “Hot off the press, ERISA News” will be about cases from the 11th Circuit and 5thCircuit Courts of Appeals jurisdictions. However, every now and then a case from another jurisdiction will be mentioned because of its critical importance to our clients. The Day case is such a case.

Facts of the case

This case pertained to whether Sedgwick, as the claims administrator for the AT&T Disability Income Plan, could reduce the long term disability (LTD) benefit by the amount of an accrued pension benefit that had been rolled into an Individual Retirement Account (IRA) account at the time of Day’s termination of employment. Day could not access the funds from the IRA without substantial tax penalties for early withdraw. The check for the rollover was not actually made out to Day but rather to the trustee for his IRA. The LTD plan provided that if you are eligible and apply for AT&T pension benefits, the LTD benefit would be reduced by the amount of the pension benefit. On the other hand if you are eligible, but you fail to apply for the benefit, this would not cause a reduction of the LTD benefit. The reduction of the LTD only occurred when the person was actually paid the pension benefits.

Arguments

Day argued that he never received or was actually paid the pension benefit because the money was tied up in his IRA subject to penalties and taxes for early withdraw. He was not using the money.

Sedgwick in response said that he did receive the pension benefits because “the economic reality is that the proceeds were under the full dominion and control of Mr. Day, to be invested as Mr. Day saw fit, and to be paid out to Mr. Day at times and in amounts that is determined by Mr. Day in his sole discretion and utterly unfettered by any of the rules or the requirements of the pension plan from which they had come”.

Mr. Day argued that Blankenship v. Liberty Life Assurance Company of Boston, 486 F.3d 620, 624-25 (9th Cir. 2007) supported his position that a rollover from the pension plan into an IRA meant that he did not actually receive the funds.

Sedgwick countered that the Blankenship case was a case in which de novo review was applicable and in this case the plan conferred full discretion to Sedgwick to interpret the plan and apply its provisions before making a decision.

Day also argued that Sedgwick was conflicted because it conferred with AT&T about this matter. Sedgwick countered that this was not enough to show a conflict.

Ruling

The district court ruled that Sedgwick was reasonable in finding that Day had in fact received or taken possession and control of the pension benefit by rolling it into his IRA. Therefore Sedgwick’s reduction of the LTD benefit was warranted. The reason why the court arrived at this conclusion however was based entirely on the fact that the plan conferred full discretion on Sedgwick which was not the case in Blankenship. The court found that under the deferential abuse of discretion standard of review, the decision would not be disturb if reasonable. Any ambiguous plan provisions would not be construed against the plan, when the plan grants the administrator to construe its terms. Thus Day lost this case.

Lessons for our clients:

First of all, DO NOT roll over any monies from a retirement account or pension account into a individual retirement account without obtaining sound advice from an attorney experienced in ERISA. Additionally it is a good idea to get the plan to commit to an interpretation as to whether such benefits will be offset against other benefits such as long term disability benefits. In this instance Mr. Day’s long term disability benefit was dramatically reduced by the amount of his IRA he was not using to live on. As a result, Mr. Day was forced to either live on much less or invade his IRA thus incurring substantial penalties and taxes. This was really unfair to Mr. Day but seeking advice in advance and obtaining an interpretation from the plan in advance would have helped here.