Using administrative exhaustion as a defense to statutory ERISA claims

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In a recent decision, the Sixth Circuit joined six other circuit courts in holding that ERISA claims that seek vindication of statutory ERISA rights pertaining to the legality of a plan amendment, as opposed to an interpretation of the plan, are not subject to administrative exhaustion requirements.

The Sixth Circuit joined the Third, Fourth, Fifth, Ninth, Tenth, and D.C. Circuits in so holding, while the Seventh and Eleventh Circuits require administrative exhaustion even where plaintiffs assert statutory rights.

(Administrative exhaustion, in short, prevents a litigant from seeking a remedy in a new court until all claims or remedies have been exhausted. In the case of retirement plans, the plan administrator must inform every participant of a change to the plan and prove they have made every effort to locate every plan member who is affected by this change to the best of their ability.)

In Hitchcock v. Cumberland University 403(b) DC Plan, No. 16-5942, — F.3d —-, 2017 WL 971790 (6th Cir. Mar. 14, 2017), Plaintiffs, participants in the Defendant University’s defined contribution pension plan, challenged a retroactive amendment pertaining to matching contributions.

In 2009, the University added a 5% matching contribution, and amended the summary plan description to define the match. However, in October 2014, the University amended the plan to replace the 5% match with a discretionary match, and retroactively made the match for the 2013-14 year 0% In May 2014, the University had announced that the match for the 2014-15 year would also be 0%.

In November 2015, Plaintiffs filed suit on a purported class basis bringing four counts: wrongful denial of benefits under 29 U.S.C. § 1131(a)(1)(B), an anti-cutback violation under 29 U.S.C. § 1054(g), failure to provide notice under 29 U.S.C. § 1132(a)(3), and breach of fiduciary duty under 29 U.S.C. § 1104.

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Defendants ultimately filed a motion to dismiss, which was converted to a motion for judgment on the pleadings. This in relevant part asserted that Plaintiffs had failed to administratively exhaust their anti-cutback and breach of fiduciary duty claims. The district court granted the motion, finding that Plaintiffs had failed to exhaust their administrative remedies. Plaintiffs appealed.

The Sixth Circuit reversed, holding that Plaintiffs’ claim challenged the “legality of the Plan amendment . . . [not] the calculation of their benefits.” The district court improperly construed Plaintiffs’ claims, because the “resulting benefits are not the gravamen of Plaintiffs’ challenge. ... It is a serious mischaracterization to simply say that because the denial of benefits claim and the statutory ERISA claims result in the same monetary sum, all must constitute denial of benefits claims. Our precedent indicates that administrative exhaustion is a futile requirement for statutory ERISA claims that challenge the legality of a plan amendment.

The Court cautioned that “plan-based claims ‘artfully dressed in statutory clothing,’ such as where a plaintiff seeks to avoid the exhaustion requirement by characterizing a claim for benefits as a claim for breach of fiduciary duty” are still subject to administrative exhaustion.

The touchstone is what forms the basis for the right to relief: “[T]he contractual terms of the pension plan or the provisions of ERISA and its regulations. ... The rights Plaintiffs assert — the right to receive accrued benefits which have not been decreased by an illegal amendment, and the right to have a fiduciary discharge his or her duties in accordance with the statute — are granted to them by ERISA, not by the Plan’s contractual terms. Thus, Plaintiffs assert statutory claims, which are not subject to the exhaustion requirement.”

With the majority of circuits now firmly holding that exhaustion is not required for statutory claims, it is unclear whether Hitchcock is a likely vehicle for the Supreme Court to resolve the dispute. In the meantime, plan defendants seeking to require administrative exhaustion must make their best efforts to characterize plaintiffs’ claims as challenges to plan terms or benefits determinations, rather than seeking vindication of statutory rights under ERISA.

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