Recent Successful Benefit Claim Against Employer Highlights Importance of Prudent Service Provider Selection and Document Review

A recent decision by the U.S. Court of Appeals for the Second Circuit is a reminder to employers that fiduciary responsibility under ERISA is nontransferable, even when a third-party administrator (TPA) commits an error that leads to litigation.

Background

Kathleen Sullivan was employed by the New York Telephone Company, a predecessor to Verizon, from 1970 to 1978 with an annual income of $18,600. She received a number of employment benefits, including life insurance. During her employment, she received numerous statements showing a life insurance benefit of more than $679,700 due to a coding error that entered her annual pay as weekly pay. Although Sullivan questioned this amount with her employer’s third-party benefit service center several times, the error was never fully investigated or corrected. 

In her later years, Sullivan fell ill and was taken into her daughter’s home where she lived rent-free and was financially supported by her daughter in anticipation of receiving the life insurance benefits of $679,700.

After Sullivan died, the life insurance carrier paid a benefit to her daughter of $11,400 instead of the $679,700 that was expected.

The Case

In Sullivan-Mestecky v. Verizon Communications, Inc., Sullivan’s daughter filed suit claiming fiduciary breach for failure to pay the full benefit amount. The plaintiff claimed that she was entitled to benefits under the group life plan’s terms, and that even if the plan terms specified otherwise, she should receive the larger amount outlined in the numerous statements provided by Verizon’s third-party administrator. The trial court dismissed the claims against Verizon and Sullivan-Mestecky appealed to the Second Circuit.

The Second Circuit ruled that the group life plan’s terms were clear and did not change because of the third-party administrator’s errors. Therefore, under the plan terms, Sullivan-Mestecky was entitled only to the lower amount.

However, the Court also held that her claim could proceed against Verizon, noting that there were “extraordinary circumstances” in this case that led the plaintiff to reasonably believe that she would receive the larger amount. 

Key Takeaways for Employers

Responsibility cannot be outsourced. As plan administrators, employers are ultimately responsible for any errors in administering benefit plans, even when those errors are made by TPAs in the administration of benefit plans. 

Review your records. Employers should check payroll records at regular intervals to ensure they are accurate. In this case, a payroll records check may have caught the error much earlier and litigation could potentially have been avoided.

Investigate thoroughly. Even though Sullivan alerted her employer’s TPA several times that she believed her life insurance benefits were incorrectly calculated, the matter was never fully investigated. Employers that outsource plan administration need to put processes in place for accurate reporting and monitor vendors to assure compliance.

The experienced, responsive team of ERISA attorneys at Hall Benefits Law helps plan administrators understand what regulations and rulings are relevant and how best to apply these rulings in practice. Learn more by calling 678-439-6236.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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