The issue in Stephens v. U.S. Airways Group, Inc., No. 10-7100, 2011 U.S. App. LEXIS 14502 (D.C. Cir., July 15, 2011) was one on which there is surprisingly little authority: Under what circumstances must a pension plan add interest to a late benefit payment? The plaintiffs retired at the mandatory age for airline pilots (age 60) and elected to receive immediate distributions of the lump sum value of their pension benefits. The plan’s practice was to make lump sum payments 45 days after the end of the last month of service. Participants who elected annuities began receiving their pensions on the first day of the month after retirement. The plan paid no interest on lump sums to compensate for the later payment date. The plaintiffs alleged that the omission of interest violated ERISA’s requirement that a lump sum distribution be the actuarial equivalent of their accrued benefits.
The district court dismissed the suit. On appeal, the judges split three ways:
One agreed with the district court that no interest was required, because the delay in payment was reasonably necessary to allow time for an accurate calculation of the benefit. That conclusion was based on Treas. Regs., §1.401(a)-20, Q&A-10(c), which states, “A payment shall not be considered to occur after the annuity starting date [the date as of which benefits are supposed to commence] merely because actual payment is reasonably delayed for calculation of the benefit amount, if all payments are actually made.”
A second judge agreed that interest did not have to be added during a period of reasonable administrative delay but held that 45 days was unreasonably long. A study by the employer had found that the calculation process took at most 21 days. Therefore, the plan owed at least 24 days of interest. (The first judge disagreed about the significance of the study, which, in her view, did not take all pertinent factors into account.)
The third judge agreed with the plaintiffs that the payment of less than the exact actuarial equivalent of the accrued benefit was a prohibited forfeiture. “Money has time value. And because the lump sum payments had the same value as the annuity on the annuity start date, the lump sums US Airways paid 45 days later were worth less than the annuity. US Airways’ pension plan thus violated ERISA’s requirement that lump sum payments ‘be the actuarial equivalent’ of the plan’s annuity option.” He was unimpressed by the IRS regulation, which did not, he noted, address the actuarial equivalence requirement.
With a majority of the court agreeing that some interest was due, the case went back to the district court, which will now labor under the burden of knowing that, whatever it decides, it will be in disagreement with two-thirds of the appellate panel.
Tardy lump sum benefit payments are not at all uncommon. Stephens suggests, however, that plans may owe interest in many more situations than they currently tend to recognize.