Retiree allowed to sue to enforce ERISA guaranteed rights without exhausting plan remedies

A retiree was not required to exhaust administrative remedies before bringing suit to enforce the substantive guarantee under ERISA and IRS regulations to lump-sum benefits without unreasonable delay, the Court of Appeals for the District of Columbia (CA-DC) has ruled. ERISA and the IRS regulations, and not the plan, framed the basis of the claimant’s right to relief, the court reasoned.

Delay in payment of lump-sum benefits

Two retiring airline pilots elected to receive their retirement benefits from a pension plan in a lump sum, rather than in a series of annuity payments. The pilots received their benefits 45 days later than they would have received the first annuity payment. The DC Circuit eventually, in July 2011, determined that the length of the delay in payment was not reasonable under IRS Reg. Sec. 1.401(a)-20, and remanded for a calculation of the interest owed to the pilots.

Exhaustion of remedies

On remand, the pilots sought to certify a class consisting of all pension plan participants and beneficiaries who had retired between 1997 and 2003 and elected to receive their benefits as a lump sum. The federal trial court, however, refused to certify the class, explaining that because only one pilot had exhausted the internal remedies prescribed under the plan prior to bringing suit, his claim was not typical of the putative class. While the court acknowledged that exhaustion is not required when a violation of ERISA’s substantive guarantees is alleged, the retirees’ claim implicated issues of plan administration that would be resolved by reference to the plan and not ERISA. The remaining pilot appealed.

Exhaustion not required to assert statutory rights

The DC Circuit initially joined the Third, Fourth, Fifth, Ninth, and Tenth Circuits in holding that exhaustion of remedies is not required when ERISA participants and beneficiaries seek to enforce statutory ERISA rights, rather than contractual rights created by the terms of a plan. Allowing parties asserting statutory rights direct access to the court, the court explained, promoted the Congressional intent of creating minimum terms and condition for pension plans.

Claim of unreasonable delay alleged statutory violation

The court then noted that it had previously determined (in the 2011 ruling) that the reasonableness standard pursuant to which the retiree’s claims was to be judged was set forth in IRS Reg. Sec. 1.401(a)-20, and not the plan. Thus, ERISA and the IRS regulations actually framed the basis of the claimant’s right to relief. Accordingly, the trial court in evaluating the plan’s payment procedures on remand would need to apply a reasonableness standard created and defined by federal law. As the retiree’s claim was not subject to exhaustion, the court concluded, the lower court’s ruling on the typicality of the class representatives’ claim was erroneous. On remand, the motion to deny certification of the class was to be reconsidered.

Source: Stephens v. Pension Benefit Guaranty Corporation (CA-DC).
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