Recently, the Sixth Circuit ruled in Hitchcock v. Cumberland University 403(b) Plan that pension plan participants are not required to exhaust their plan’s administrative remedies before pursuing claims alleging statutory violations of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).[i] In so deciding, the Sixth Circuit joined the majority of circuit courts in holding that claims alleging statutory violations of ERISA do not impose the same administrative exhaustion requirements that are applicable to claims seeking to enforce contractual rights under the terms of a plan. By deepening the current split on this issue among the circuit courts, the ruling could have a significant impact on future ERISA litigations.
The Historical and Procedural Background of Cumberland
In Cumberland, the plaintiffs were employees of Cumberland University (“University”) who participated in the University’s defined contribution pension plan (the “Plan”). Since 2009, the Plan document provided that the University would match employee contributions of up to five percent of an employee’s salary. In 2014, the University amended the Plan, replacing the five percent match with a discretionary match, retroactively applicable to 2013. Thereafter, the University announced through email that the discretionary match would be zero percent for both the 2013-2014 and 2014-2015 years.[ii]
In November 2015, the plaintiffs filed a class action against the University and the Plan, alleging, among other claims, that the retroactive adoption of the 2014 Plan amendment constituted a breach of fiduciary duty and a violation of ERISA’s anti-cutback provision. In June 2016, the district court dismissed the case without prejudice so that the plaintiffs “may administratively exhaust their claims” before proceeding. The plaintiffs appealed.[iii]
On appeal, the Sixth Circuit concluded that the district court erred in requiring the plaintiffs to exhaust their administrative remedies before filing suit.[iv] Specifically, the Sixth Circuit stated that, while administrative exhaustion serves an important policy purpose when dealing with plan interpretation questions – such as disputes involving benefits claims – such purpose is not served when the claims allege statutory violations of ERISA. According to the Sixth Circuit, it is the courts, not plan administrators, who are best suited to settle disputes “directed to the legality of a plan”, not to a mere interpretation of it.” Since the plaintiffs in Cumberland conceded that their benefits were properly calculated under the terms of the Plan as written, the Sixth Circuit concluded that it would be futile to force them to pursue the administrative process simply to confirm such undisputed calculation.[v] The court reasoned that, when plaintiffs challenge the legality of a plan’s provision, they should not face the same administrative exhaustion requirement as those making claims for benefits. The key question, the Sixth Circuit noted, is whether the plaintiffs’ claims properly assert statutory violations or instead are “plan-based claims artfully dressed in statutory clothing.” And if the latter, then the claims would require administrative exhaustion before the plaintiffs could file suit.[vi]
Sixth Circuit Sides with the Majority of Circuits
In analyzing the nature of a claim, the Sixth Circuit stated that “[t]he relevant inquiry is what forms the basis of [Plaintiffs’] right to relief: the contractual terms of the pension plan or the provisions of ERISA and its regulations.” In Cumberland, the Sixth Circuit noted that because the alleged anti-cutback violation was based on “the right to receive accrued benefits which have not been decreased by an illegal amendment,” and because the breach of fiduciary duty claim was based on “the right to have a fiduciary discharge his or her duties in accordance with the statute,” the plaintiffs’ claims were statutory rights granted to them by ERISA.[vii] In contrast, the court stated that if the plaintiff’s claims challenged the administrator’s interpretations of the contractual terms of the pension plan, then the claim would require administrative exhaustion. Based on its determination that plaintiffs asserted ERISA statutory claims, the Sixth Circuit held that administrative exhaustion was not required before the plaintiffs could proceed with their lawsuit.[viii]
While the precise impact of the Cumberland decision is unclear, the overall trend is clear. The Sixth Circuit has now joined the majority of circuit courts holding that administrative exhaustion is not required for plaintiffs asserting statutory rights under ERISA. These circuits include the Third, Fourth, Fifth, Ninth, Tenth, and D.C. Circuits. Only two circuits – the Seventh and Eleventh Circuits – have held otherwise, requiring plaintiffs to exhaust their claims internally with the plan, even when asserting statutory violations. These latter circuit courts emphasize that administrative exhaustion serves the important function of reducing the number of frivolous ERISA lawsuits. And if the claims eventually are litigated, it aids the litigation process with a more complete factual record compiled by a plan fiduciary.[ix] After the Sixth Circuit’s ruling in Cumberland, the Seventh and Eleventh Circuits have now become an even smaller minority than before. And there is little indication that this trend will not continue. Further, it is important to note that the Seventh and Eleventh Circuit decisions were rendered in 1996 and 1985, respectively. It will be informative to see if these circuit courts revisit their position if they are asked to address this issue again. It is also possible that the U.S. Supreme Court will choose to resolve the current split among the circuit courts.
Key Take-Aways for Plan Fiduciaries
The trend in the cases is clear. The majority of circuit courts have held that plaintiffs alleging statutory ERISA claims, as opposed to challenges to the plan administrator’s interpretations of the plan, will not be required to exhaust their administrative remedies. However, 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.
To address this concern, plan fiduciaries should consider taking several steps, including: (1) reviewing their claims and appeals procedures to establish guidelines distinguishing ERISA statutory claims from plan interpretive claims; (2) consulting with legal counsel before making benefit decisions; and (3) carefully and thoughtfully articulating in the denial letter the basis for the benefit denial. Of course, while these steps cannot entirely eliminate the possibility that a participant will attempt to circumvent the exhaustion requirement by asserting that he is vindicating an ERISA statutory right and not pursuing a contractual claim under the plan, by adopting and following plan guidelines, the plan fiduciaries may stand a better chance of convincing a court that the action should be dismissed for failing to exhaust administrative remedies.