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What Hitchcock v. Cumberland Means for Plan Fiduciaries

Earlier this year, the 6th U.S. Circuit Court of Appeals ruled that the participants in a university’s pension plan do not have to exhaust administrative remedies before they pursue claims of ERISA violations. A recent blog entry discusses what this ruling means for plan fiduciaries.

In “Exhaustion of Plan Administrative Remedies: Important Considerations Following Hitchcock v. Cumberland,” an entry in Proskauer Rose LLP’s Employee Benefits & Executive Compensation Blog, Neal S. Schelberg and Lisa A. Schlesinger write that like the majority of its fellow circuit courts, in its Hitchcock v. Cumberland University 403(b) Plan ruling the 6th Circuit held that unlike claims that seek to enforce contractual rights under a plan’s terms, ERISA violations do not require that administrative remedies be exhausted. They contend that the circuit courts’ split on the matter could have a significant effect on ERISA litigation in the future.

Since 2009, the university’s plan document provided that the university would match employee contributions of up to 5% of salary. The university amended the plan in 2014, replacing the match with a discretionary match, retroactively applicable to 2013. The university then said through email that for 2013-2014 and 2014-2015 that the match would be 0%.

The plaintiffs filed a class action suit against the university and the plan in November 2015, alleging that the retroactive adoption of the amendment was a breach of fiduciary duty and violated the anti-cutback provision of ERISA. The U.S. District Court for the Middle District of Tennessee in June 2016 dismissed the case without prejudice so that the plaintiffs “may administratively exhaust their claims” before the case could proceed; the plaintiffs appealed to the 6th Circuit.

The circuit court said that the key question is whether the plaintiffs’ claims properly assert statutory violations or instead are “plan-based claims artfully dressed in statutory clothing.” If they are the latter, said the court, they would need to exhaust administrative remedies first. But since the allegation that the university violated ERISA’s anti-cutback provision was based on “the right to receive accrued benefits which have not been decreased by an illegal amendment,” and because the claim that the university breached its fiduciary duty was based on “the right to have a fiduciary discharge his or her duties in accordance with the statute,” the court said the plaintiffs’ claims were not plan-based claims and were indeed statutory rights.

“The trend in the cases is clear,” say Schelberg and Schlesinger, noting that a majority of circuit courts have issued similar rulings. But, they warn, “plan fiduciaries should be aware that some plaintiffs, who are ostensibly subject to the exhaustion requirement, may attempt to circumvent administrative exhaustion prior to filing their lawsuit by framing their ERISA claims as statutory violations rather than as claims of plan interpretation.”

Schelberg and Schlesinger suggest that plan fiduciaries may address this possibility if they:

  • review their claims and appeals procedures to establish guidelines distinguishing ERISA statutory claims from plan interpretive claims;

  • consult with legal counsel before making benefit decisions; and

  • carefully and thoughtfully articulate the basis for a denial of benefits in a letter.

These steps won’t entirely eliminate the chances of a participant trying to get around the exhaustion requirement, Schelberg and Schlesinger say, they can increase the chances that a plan fiduciary to convince a court that such an action should be dismissed.