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In re Adoption of N.J.A.C.

Superior Court of New Jersey, Appellate Division

February 21, 2019

IN RE ADOPTION OF N.J.A.C. 17:2-3.8 AND 17:2-3.13.

          Argued January 7, 2019

          On appeal from the New Jersey Department of the Treasury, Division of Pensions and Benefits.

          Richard A. Friedman argued the cause for appellant New Jersey Education Association (Zazzali, Fagella, Nowak, Kleinbaum & Friedman, attorneys; Richard A. Friedman, of counsel and on the brief; Kaitlyn E. Dunphy, on the briefs).

          Amy Chung, Deputy Attorney General, argued the cause for respondent Board of Trustees, Public Employees' Retirement System (Gurbir S. Grewal, Attorney General, attorney; Melissa H. Raksa, Assistant Attorney General, of counsel; Amy Chung, on the brief).

          Before Judges Messano, Fasciale and Gooden Brown.

          FASCIALE, J.A.D.

         This appeal focuses on two amended regulations (the two regulations) promulgated by the Board of Trustees (the Board), Public Employees' Retirement System (PERS): N.J.A.C. 17:2-3.8(b) (implementing N.J.S.A. 43:15A-93 by clarifying the effective date for converted individual insurance policies); and N.J.A.C. 17:2-3.13 (implementing N.J.S.A. 43:15A-50 by addressing benefits payable when a member dies with a retirement application pending). The category of PERS members primarily affected by this appeal are those who exercised a "conversion privilege," died while their retirement applications were pending, and whose beneficiaries chose "retired" benefits, not "active" benefits. The New Jersey Education Association (NJEA) argues that the two regulations conflict with the enabling statutes they purport to implement, and that the Board therefore exceeded its statutory authority and acted arbitrarily.[1]

         The two regulations maintain the longstanding practice that beneficiaries of PERS members may generally receive a "retired" benefit (from the member's retirement allowance) or an "active" benefit (from the member's life insurance), but not both. For years, PERS members have had the right to convert a group insurance policy to an individual policy. This "conversion privilege" allows members who terminate employment to maintain adequate life insurance.

         This appeal requires us to decide two underlying issues. First, may a beneficiary make a claim against the converted individual insurance policy when the member merely applied for that insurance protection and submitted a premium check to protect the "conversion privilege," died while a retirement application was pending, and whose beneficiary opted for a statutory "retired" benefit? Second, under the enabling statutes, is that beneficiary entitled to receive both the member's life insurance and retirement allowance simultaneously? The answers to these questions inform our conclusion that the two regulations are valid.

         As to the first question, the answer is no. If a PERS member whose retirement application is pending and whose beneficiary has chosen the "retired" benefit exercises the "conversion privilege," and then dies during the statutory thirty-one-day grace period applicable to the group insurance policy, the beneficiary's life insurance claim is against the member's group policy. That is so because the converted individual insurance policy will not become effective until after expiration of the grace period for the group policy. By statute, "the amount of life insurance which [a beneficiary] would have been entitled to . . . under the individual policy shall be payable as a claim under the group policy, whether or not application for the individual policy or the payment of the first premium therefor had been made" during the grace period. N.J.S.A. 17B:27-72(k).

         The answer to the second question is also no. Generally, a beneficiary cannot receive the member's retirement allowance in addition to the death benefit, which of course has been the law for years. But payment on a life insurance claim for a member on "active" status, in accordance with longstanding precedent, entitles the beneficiary to reimbursement of the member's pension contributions plus interest on those contributions.

         Applying the presumption of validity and reasonableness ordinarily accorded to administrative regulations, and giving the Board wide latitude to achieve its legislatively assigned tasks, we hold that the two regulations - both effective in January 2018 - comport with the overall framework, objectives, and terms of the enabling statutes and established precedent. Any other result would require that we re-write the legislative framework of the enabling statutes and ignore precedent, which we will not do. We therefore decline to invalidate the two regulations, and affirm.


         A familiar standard of review guides our analysis. "Administrative regulations are entitled to a presumption of validity and reasonableness." In re Adoption of N.J.A.C. 17:1-6.4, 454 N.J.Super. 386, 395 (App. Div. 2018). The burden of overcoming that presumption is on the party challenging the agency action. Ibid. Here, NJEA has the burden.

         Overturning an administrative determination occurs only if it was "arbitrary, capricious, unreasonable or violated express or implied legislative policies." Ibid. "Administrative agencies have wide discretion to decide how best to approach legislatively assigned administrative tasks." Ibid. We liberally construe "the grant of authority to an administrative agency . . . to enable the agency to accomplish its statutory responsibilities." Ibid.

         Consequently, we "readily imply such incidental powers as are necessary to effectuate fully the legislative intent." Ibid. Administrative regulations must nevertheless be "within the fair contemplation of the delegation of the enabling statute." Ibid. The substantial deference we ordinarily apply to an agency regulation is available if it is "consistent with the governing statutes' terms and objectives." Ibid.

         In determining whether an agency possessed the requisite authority to issue a regulation, courts strive "to determine the intent of the Legislature." Id. at 396. To that end, we begin with the statutory language, which is the best indicator of legislative intent. DiProspero v. Penn, 183 N.J. 477, 492 (2005). Although we will analyze the text of two enabling statutes (N.J.S.A. 43:15A-93 and N.J.S.A. 43:15A-50), we perform that analysis by considering the entire enabling legislation. Ibid. That is, we look beyond the specific terms of the enabling act to the statutory policy by examining the entire legislation in light of its surroundings and objectives. Ibid. We defer to the interpretation of legislation by the administrative agency to whom its enforcement is entrusted, but only if that interpretation "is not plainly unreasonable." Matturri v. Bd. of Trs. of the Judicial Ret. Sys., 173 N.J. 368, 382 (2002).


         With those standards in mind, we begin by summarizing the pertinent legal principles. Our summary focuses on two distinct benefits: (1) a lump sum payment to a beneficiary upon death of a member; and (2) a retirement allowance to a member or that member's beneficiary. Our summary bolsters the conclusion that a converted life insurance policy becomes effective when the group policy expires at the end of the thirty-one-day grace period. And the summary applies well-grounded precedent that beneficiaries of PERS members may receive a "retired" benefit or an "active" benefit, but not both, regardless of the effective date for a converted individual insurance policy.

         As to the first benefit, PERS members are entitled to life insurance while actively employed. We commonly call this a death benefit. Beneficiaries of PERS members generally receive life insurance benefits under a member's group life insurance policy (the group life policy) issued by the Prudential Insurance Company (Prudential), which provides a lump sum payment in the event of death. N.J.S.A. 43:15A-41(c); N.J.S.A. 43:15A-88. The group life policy remains in effect for thirty-one days after a member's employment ceases. Indeed, the group life policy must "contain a provision that the policyholder is entitled to a grace period of [thirty-one] days." N.J.S.A. 17B:27-72(b). Before retirement, the death benefit is generally one-and-one-half times the final salary of the PERS member. N.J.S.A. 43:15A-41(c). Thereafter, the amount of the death benefit decreases.[2]

         Recognizing that the amount of the death benefit will decrease, the Legislature passed a law that allowed members to maintain adequate life insurance. Under N.J.S.A. 43:15A-93, members receive a "conversion privilege," which allows them to convert their group life policy to an individual insurance policy (the individual policy). If a member wishes to exercise this conversion privilege, the member must do so during the thirty-one day grace period.

         Therefore, exercising the conversion right allows for adequate life insurance at the end of the grace period. N.J.S.A. 43:15A-93 provides in pertinent part:

Any such group policy or policies shall include, with respect to any insurance terminating or reducing because the member ceases to be eligible for participation under the [PERS] or because the member has ceased to be in service or has retired, the conversion privilege available upon termination of employment as prescribed by the law relating to group life insurance; and shall also include, with respect to insurance terminating because of termination of the group policy resulting from a termination of the death benefits for all members established under . . . [N.J.S.A.] 43:15A-38, 43:15A-41, 43:15A-45, 43:15A-46, 43:15A-48, 43:15A-49, 43:15A-57, the conversion privilege available upon termination of the group policy as prescribed by the law relating to group life insurance. Any such group policy or policies shall also provide that if a member dies during the [thirty-one]-day period during which he would be entitled to exercise the conversion privilege, the amount of insurance with respect to which he could have exercised the conversion privilege shall be paid as a claim under the group policy. When benefits payable upon the death of a member following retirement are determined as though the member had not retired, the death ...

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