Pension Protection Act Blog

On June 28, 2007, the Court of Appeals for the 11th Circuit issued an interesting opinion about an employee whose benefits were denied due to the plan adopting an amendment which changed the way hours of service are calculated for vesting credit purposes. (Hat tip to Brian King of Brian King’s ERISA Blog, who refers to this opinion as Federal Judges: ERISA Makes Our Heads Hurt).

In Gilley v. Monsanto Co. Inc., ___ F.3d ___, 2007 U.S. App. LEXIS 15353 (11th Cir. 2007), the court found that the district court erred in concluding that the plan amendment adopting the 95-Hour Rule could not be applied to the employee because the amendment was adopted after the employee started earning years of service for vesting purposes but before he was vested.

When the employee, Gilley, started working for Monsanto in 1972, Monsanto’s defined benefit plan contained a 10-year cliff vesting schedule. Gilley worked for Monsanto for 4 months in 1972. Gilley continued working for Monsanto until February 16, 1982, when he was terminated after being laid off in March of 1981 due to Monsanto closing a plant. Gilley filed suit against Monsanto after Monsanto denied his claim for pension benefits, stating that at the time his employment terminated, he was not vested under the plan. Monsanto determined Gilley’s hours of service in 1972 for vesting purposes using the 95-Hour Equivalency Rule, which Monsanto adopted by amendment in 1981. Using this equivalency rule, Monsanto determined that Gilley was not entitled to a year of vesting credit for 1972 because they credited him with 887.2 hours of service. The opinion does not contain an explanation of why the court was deciding this in 2007 for an employee whose employment was terminated in 1982.

One important fact to remember when reading the opinion is that ERISA was enacted in 1974, two years after Gilley began working for Monsanto, so the Monsanto’s plan in 1972 was a pre-ERISA plan. Even though the Court was deciding a pre-ERISA issue, the way the Court reaches its conclusion is very interesting.

Monsanto adopted the amendment implementing the 95-Hour equivalency rule in 1981. The Court states that the record was not clear when the amendment was adopted but is was adopted between 1979 and January of 1981. Monsanto closed the plant where Gilley worked in March of 1981. The district court found that the amendment did not apply to Gilley, because “later amendments to the Plan should not have an effect on the 1972 calculations if they impact adversely on plaintiff’s entitlement”.

The 11th Circuit disagreed with the district court, finding that the amendment did apply to Gilley because it was adopted before Gilley was vested. The Court reasoned that because Gilley was not vested, the amendment did not violate the anti-cutback rule in ERISA Code section 204(g). Stating that the plain language of ERISA Code section 203 states that it applies to benefits that are nonforfeitable, and Gilley’s rights were not nonforfeitable yet because he was not yet vested, ERISA Code section 203 was not violated.

In reaching this decision, the Court discussed the standard of review to be given to an administrator’s decision. The Court stated:

ERISA does not explicitly establish the standard of review to be applied to a plan administrator’s decision. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 109, 109 S. Ct. 948, 953 (1989). Following the Supreme Court’s direction, however, we have adopted three different standards to guide us: (1) de novo review applies where the plan administrator has been given no discretion in deciding claims; (2) arbitrary and capricious review applies where the plan administrator has discretion in deciding claims and does not suffer from a conflict of interest; and (3) heightened arbitrary and capricious review applies where the plan administrator has discretion but suffers from a conflict of interest. HCA Health Servs. of Ga., Inc. v. Employers Health Ins. Co., 240 F.3d 982, 993 (11th Cir. 2001). For purposes of that third standard, a conflict of interest exists when a provider has to pay benefit claims out of its own assets, making it directly advantageous to the provider for the claims to be denied. These three standards have been broadly applied to both the administrator’s interpretation of plan provisions as well as the administrator’s decision to grant or deny benefits. Williams v. Bellsouth Telecomms., Inc., 373 F.3d 1132, 1135 n.3 (11th Cir. 2004); Paramore v. Delta Air Lines, Inc., 129 F.3d 1446, 1451 (11th Cir. 1997).

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