Congress Considers Banning Discretionary Clauses in ERISA Plans

On May 12, 2022, the “Employee and Retiree Access to Justice Act” was introduced in the House of Representatives by Mark DeSaulnier (D-CA).  Senator Tina Smith (D-MN) introduced a companion bill in the Senate. The bill seeks to ban arbitration and discretionary clauses in employer-sponsored benefit plans governed by the Employee Retirement Income Security Act (ERISA).  Not only does the bill seek to prohibit benefit plans from requiring arbitration of claims challenging the administration and fiduciary management of the plan, thereby forcing plan disputes into the judicial system, this legislation, if passed, would dramatically alter the long-standing standard of review by courts when a plan participant or beneficiary is denied retirement, health, or other benefits under an ERISA-regulated plan.

By way of background, a court reviews a plan or claim administrator’s decision denying a claim for benefits under an ERISA plan on a de novo basis unless the plan grants the administrator discretionary authority to interpret, construe and apply the terms of the plan.  If such discretionary authority is granted to the administrator, the decision is to be reviewed under a heightened “abuse of discretion” standard.  Under this standard, a plan administrator’s discretionary decision will generally only be reversed if the decision is “arbitrary or capricious.”  Most ERISA plans have adopted some form of a discretionary clause. 

The bill under consideration by the House Education and Labor Committee would amend ERISA to prohibit any plan post-dispute arbitration clause, class action waiver, representation waiver, or discretionary clause, and to make any such existing clauses unenforceable.  Notably, the bill exempts multiemployer plans from the ban on discretionary clauses to determine plan benefits or interpret plan language.

As a result, were H.R. 7740 to pass into law, it would cause a fundamental shift in the administration of ERISA plans.  Courts would no longer give deference to the claims decisions made by plan and claim administrators with discretionary authority under the terms of the plan to make such decisions (and who have expertise in applying the terms of the plan to participants), meaning that those decisions would be substantially more likely to be challenged in court and second-guessed by courts.  This would drive the costs of plan administration substantially upwards, likely increasing plan fees and premiums.  It could also cause employers to reconsider offering certain benefits under ERISA plans in the first place.

If H.R. 7740 advances through the House Education and Labor Committee, which it is expected to do, it will be sent to the House Rules Committee for additional markup and then to the House Floor.  In the Senate, S. 4219 has been referred to the Senate HELP Committee, which has not yet announced plans for markup.  Littler’s ERISA and Benefit Plan Litigation Practice Group and WPI will continue to monitor these bills and provide updates.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.