Court Finds Board Approval Not Needed for Exec to Get SERP Benefits

Although it was a longstanding practice for the trustees of the Young Adult Institute to vote on executives’ entry into the plan, an appellate court found that practice went against the plain language of the plan document.

An appellate court has ruled that the Young Adult Institute Inc. (YAI) and the trustees of its supplemental executive retirement plan (SERP) erred in denying an executive benefits under the plan.

A District Court had held that the trustees (referred to in court documents as “the board”) arbitrarily and capriciously denied the executive’s claim for benefits principally because its decision rested on an unreasonable interpretation of the SERP. The defendants argued on appeal that the District Court erred in declining to defer to the board’s interpretation of the SERP. However, citing prior case law, the 2nd U.S. Circuit Court of Appeals said where an administrator “imposes a standard not required by the plan’s provisions, or interprets the plan in a manner inconsistent with its plain words, its actions may well be found to be arbitrary and capricious.” It said that, for purposes of an Employee Retirement Income Security Act (ERISA) claim, it applies a federal common law of contract, informed both by general principles of contract law and by ERISA’s purposes as manifested in its specific provisions.

According to the appellate court’s decision, the SERP’s “eligibility” provision provides:

“Each management employee who shall complete 15 years of service with [YAI] and whose compensation is not fully considered in the computation of federal Social Security benefits, shall be eligible to participate in the plan. Entry into the plan as a plan participant shall be on the July 1 coincident with or next following the employee’s compliance with the eligibility requirements.”

The 2nd Circuit notes that the board interpreted the phrase “eligible to participate” in this provision to mean that employees do not automatically become SERP participants upon satisfying the stated eligibility criteria, but that the SERP also requires employees to obtain board approval to participate. But the appellate court said this interpretation “imposed a standard not required by the [SERP’s] provisions” and was “inconsistent with [the SERP’s] plain words.” It added that the language of the SERP document “is mandatory.”

“Nowhere does the SERP purport to require board approval for an employee’s entry into the SERP or otherwise to give the board discretion to assess an employee’s entitlement to benefits based on criteria external to the SERP,” the court wrote in its decision.

The defendants also argued that the court should defer to their interpretation because the board had a longstanding practice of selecting and voting to approve participants in the SERP. But the appellate court said they failed to argue that was integrated into the SERP’s terms or that their practice introduced ambiguity into the meaning of the SERP—“arguments that at least one of our sister circuits has deemed appropriate in review of a top hat plan.”  

The court said that in the absence of such arguments, “we see no reason to disturb the SERP’s plain text based on extrinsic evidence of its meaning.”

Noting that the executive met the SERP’s eligibility requirements, and that the defendants do not dispute that she did, the 2nd Circuit affirmed the lower court’s decision.