Case illustrates lessons for ERISA plan sponsors

CINCINNATI—A federal appellate court ruling on how disputes over delayed pension plan benefit payments must be resolved should prompt employers to address the issue in their disability plans as well, according to benefits experts.

A 6th U.S. Circuit Court of Appeals panel largely reversed a lower court's decision that it did not have jurisdiction to rule on a pension benefit dispute over whether interest must be paid on a lump sum benefit the plan delayed paying to calculate the exact benefit.

The Sept. 13 ruling is applicable to disability benefit plans as well as to pension plans, benefit experts say. Like the pension plan in the 6th Circuit case, disability plans typically are governed by the Employee Retirement Income Security Act.

"I think there are a lot of (disability) plans that are silent on the interest issue," said Henry Saveth, an attorney with Mercer Human Resource Consulting in New York.

"It's the exception rather than the rule that a plan talks about interest," said employer attorney Nancy G. Ross, a partner with McDermott, Will & Emery L.L.P. in Chicago.

The interest payment issue at the center of the 6th Circuit case arose two years after pension plan sponsor US Airways Inc. of Tempe, Ariz., negotiated an oral agreement with the Air Line Pilots Assn. over how the airline would disburse lump sum pension benefits. In 1994, the airline and union agreed that US Airways would have 45 days from the date a pilot retired to calculate and disburse the pilot's benefit without interest. The airline said it needed that time to calculate the benefit.

Two years later, though, a US Airways retiree who elected to take a nearly $488,500 lump sum benefit insisted that the airline pay him more than $14,700 of interest he said had accumulated over the 45 days between his retirement and the day US Airways paid his benefit.

The four-member retirement board that the airline and union had created to resolve retirement plan disputes deadlocked over the dispute. But an arbitrator, who relied on both the oral agreement and a history of around 780 lump sum payments the airline had made since 1989 without paying interest, ruled in favor of US Airways.

In a lawsuit seeking class action status, several US Airways retirees argued that the oral agreement as well as the retirement plan violated various provisions of ERISA because the agreement was not in writing, it restricted how the plan would operate and it made the lump sum benefit unequal to an annuity benefit.

A federal court refused to assume jurisdiction over the case. It ruled that each of the plaintiffs' claims required an interpretation of US Airways' retirement plan and that the retirement board had exclusive jurisdiction over such interpretations.

The court based its decision on its interpretation of the Railway Labor Act, which Congress amended in 1936 to include airline labor-management disputes. The district court reached its decisions by classifying the plan participants' claims as a "minor dispute," which the RLA defines as a controversy over the meaning of an existing collective bargaining agreement.

But the appeals court classified several of the retirees' claims as "major disputes," which the RLA defines as those arising out of the formation or change of collective bargaining agreements. The appellate court remanded those claims to the lower court.

The retirees' attorney, J. Bruce Bennett of Austin, Texas-based Cardwell Hart & Bennett L.L.P., said he was unsure how many retirees eventually would attempt to join the litigation. But he said the interest the current group of plaintiffs lost ranged from $15,000 to $25,000 each.

The Pension Benefit Guaranty Corp., the U.S. agency that insures pension plans, represented US Airways in the case. The PBGC in 2003 took over and terminated the pilots' plan, which was severely underfunded. It did not comment on the ruling.

While the appellate panel's decision was procedural and leaves the case open to the federal district court to resolve, the case illustrates valuable lessons for ERISA plan sponsors, according to Ms. Ross and Mr. Saveth.

Participants in all kinds of ERISA plans--and the plaintiffs bar--are paying much closer attention to participants' rights, Ms. Ross noted.

"This delayed payment issue is on the radar screens of plan participants," she said.

Disability claimants are raising the interest payment issue most often, Ms. Ross and Mr. Saveth said. That's because disability claims often are resolved long after a plan participant has become disabled, so the participant is owed back payments, they said. Interest payments are debated often because so few plans address the issue, they said.

The 6th Circuit case underscores the problems that inadequate ERISA plan language can create for employers, the experts said.

"If you have an ERISA issue and it's not addressed in writing, you're looking at litigation," Mr. Saveth said.

And any clarification of plan language has to be written, the experts said.

"Employers need to recognize they need to memorialize anything that is adopted--whether it's with a union or done unilaterally," Ms. Ross said.

James C. Stephens et al. vs. Retirement Income Plan for Pilots of US Air Inc., 6th U.S. Circuit Court of Appeals, Sept. 13; No. 01-3913.