Rejecting actuarial heresy, the United States Supreme Court has refreshingly acknowledged that “People make mistakes. Even administrators of ERISA plans.” Specifically, the Court held that a single honest mistake in plan interpretation does not justify stripping the administrator of deference for subsequent related interpretations.

In Conkright v. Frommert, a case that has been winding through the courts for the past decade, rehired employees of Xerox Corporation alleged that the Xerox pension plan administrator improperly offset their benefit calculations for prior lump sum distributions of pension benefits. Their claims involved a series of plan amendments, communication to participants, and how the plan administrator interpreted the plan provisions. The rehired employees alleged that Xerox violated ERISA requirements regarding summary plan description provisions, notices regarding amendments, and anti-cutback rules.

The Xerox plan administrator had interpreted the offset provision of the plan to allow for a “phantom account method” for computing the offset. The district court granted summary judgment for the plan, but the Second Circuit held that this interpretation was unreasonable and proper notice was not provided, and remanded the case to the district court. There, the plan administrator proposed an alternative interpretation that accounted for the time value of money previously received by the employees. The district court declined to apply a deferential standard of review to the interpretation, and adopted a method that did not account for the time value of money. The Second Circuit held that the district court was not required to apply a deferential standard of review, and that the decision was not an abuse of discretion.

The Supreme Court disagreed, finding that this “one-strike-and-you’re-out” approach had no place in an ERISA matter. The plan administrator was entitled to a deferential standard of review, regardless of its prior error. Notably, the Supreme Court provided a reminder that ERISA represents a “careful balancing” between ensuring fair and prompt enforcement of rights under a plan, and the encouragement of the creation of such plans. Further, as the Supreme Court explained, the Second Circuit’s approach of ignoring the time value of money was “heresy” in the actuarial world. The plaintiffs’ own actuary even testified that recognition of the time value of money was required. Failing to recognize time value would cause a windfall for the plaintiffs, providing them with greater benefits than employees who never left the company, and draining plan assets at the potential expense of the other employees.

This case serves as a timely reminder to the courts, Congress, and Administration that employers are not required to maintain employee benefit plans, and benefit plan assets are limited. Careful balancing is needed to encourage employers to continue to adopt and maintain employee benefit plans.