By: Fredric S. Singerman, Violet Borowski and Sam Schwartz-Fenwick
In Stephens v. U.S. Airways Group, 644 F.3d 437 (D.C. Cir. 2011), plaintiffs were members of a defined benefit plan which allowed participants to receive their benefits in the form of a single lump sum or an annuity. Plaintiffs elected to take their benefits in the form of a single lump-sum. They filed a lawsuit claiming that because they received their lump sum pension payments 45 days after their annuity starting date, they should have received interest for the delayed payment. Defendant claimed that the delay was administratively necessary when issuing a lump sum payment instead of an annuity payment. The district court rejected plaintiffs’ claims.
On appeal, plaintiffs argued that the 45-day delay rendered their lump sum benefits worth less than the annuities they could have received, and therefore, the plan violated the requirement set forth in Section 204(c)(3) ERISA that lump sums paid in lieu of an annuity “shall be the actuarial equivalent” (the full value) of the annual benefit. The court found that the 45 day delay between the participants’ stated “annuity starting date” in the plan document and when the lump sum distributions were actually made, was indeed unreasonable because it was not justified by administrative necessity. The court explained that the delay was unreasonable because (i) historically, the plan took only 21 business days to calculate the lump sum, and (ii) in practice, most pension plans treat a delay of 30 days, not 45, to be reasonable. The court also noted that the plan made no argument explaining why plaintiffs’ lump sums were delayed beyond the 21 days. On remand, the court ordered that the district court calculate the appropriate amount of interest owed to plaintiffs due to the unreasonable delay.
One judge dissented, arguing that the 45 day delay was not unreasonable particularly because the administrator needed final average pay to perform the benefit calculation. Another judge concurred because he believed that plaintiffs should receive interest for the full 45-day delay.
The case is an important reminder that defined benefit plans should review their benefit commencement practices from time to time to confirm that they result in timely payment and that any delays built into the system can be documented to be reasonable.