Stephens v. US Airways Group, Inc., No. 10-CV-7100, 2011 BL 185803 (D.C. Cir. July 25, 2011) The majority of a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit held that two retired US Airways pilots were entitled to receive interest for a 45-day delay in payment of their lump-sum pension benefits under the US Airways pension plan (Plan) and remanded for a calculation of such interest. The controlling opinion by Circuit Judge Janice Rogers Brown held that: (1) US Airways did not violate Section 204(c)(3) of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1054(c)(3), by failing to pay plaintiffs the "actuarial equivalent" of the annuity they would have received under the Plan as of the annuity start date; and (2) US Airways's 45-day payment delay was not "reasonable" in violation of 26 C.F.R. § 1.401(a)-20 Q & A-10(b)(3). Circuit Judge Brett Kavanaugh concurred only in the judgment, opining that plaintiffs were entitled to interest for the 45-day delay on payment of the lump sums because the failure to pay interest on the delay violated ERISA § 204(c)(3). Circuit Judge Karen LeCraft Henderson dissented, concluding that payment was "reasonably" delayed and plaintiffs were entitled to no interest.
Plaintiffs' Lump-Sum Benefits Distributed 45 Days Later Than Annuity Distribution DateJames Stephens and Richard Mahoney (collectively, plaintiffs) retired as US Airways pilots in the 1990s. Each was a participant in the Plan, which US Airways sponsored and administered. The Plan offered the option of receiving upon retirement: (1) an annuity in monthly installments; or (2) a lump-sum payment actuarially equivalent to the projected value of all annuity payments. Plaintiffs opted to receive lump-sum payments from the Plan. The Plan would begin paying annuity payments on the first day of the month after the pilot retired (mandatory at age 60). If the retiring pilot chose to receive a lump-sum payment, the Plan did not distribute the payment until 45 days after the first day of the month after retirement, meaning 45 days later than the pilot would have started receiving an annuity had the pilot opted to do so. US Airways explained that such delay was necessary for administrative purposes to make additional calculations and take precautions when issuing lump sums. The delayed lump-sum payments included no interest, however, for the 45 days between the annuity start date and the date when lump-sum recipients received their benefits. Stephens received his lump-sum payment of $488,477 and Mahoney received his lump-sum payment of $672,163, both 45 days after their annuity start dates. Plaintiffs' expert opined, on the basis of a 6.25% interest rate for the 45-day delay, that Stephens should have received an additional $3,665 and that Mahoney should have received an additional $5,043.
District Court Rejected Plaintiffs' ClaimsIn 2000, plaintiffs filed a putative class action complaint against US Airways claiming that it violated the Plan's requirement that it pay lump sums on the annuity start date and that it violated ERISA § 204(c)(3), 29 U.S.C. § 1054(c)(3), by failing to pay them the "actuarial equivalent" of the Plan's annuity payments because US Airways failed to pay interest on the 45-day payment delay. In 2003, the Plan was terminated because US Airways declared bankruptcy. The Pension Benefit Guaranty Corporation (PBGC) then became the Plan's statutory trustee. The district court dismissed certain claims, Stephens v. US Airways Group, Inc., 555 F. Supp. 2d 112 (D.D.C. 2008); Bloomberg Law Reports - Employee Benefits, Vol. 1, No. 10 (June 2, 2008), and granted summary judgment to the PBGC on the remaining claims. Stephens v. US Airways Group, Inc., 696 F. Supp. 2d 84 (D.D.C. 2010); Bloomberg Law Reports - Employee Benefits, Vol. 3, No. 7 (Mar. 29, 2010). Plaintiffs appealed.
Lump-Sum Payments Were Actuarially Equivalent, But 45-Day Delay Was UnreasonablePlaintiffs alleged that their lump-sum payments were not actuarially equivalent to annuities that they could have received under the Plan because US Airways withheld interest on their lump sums for the 45-day lag between their annuity start date and their lump-sum payment date. The PBGC countered that it made no difference whether plaintiffs received their lump-sum payments on their annuity start dates as long as the Plan correctly computed sums equivalent to the annuities. As the controlling opinion stated, ERISA § 204(c)(3) requires that a lump-sum payment in lieu of an annuity be "the actuarial equivalent" of the annual benefit. The controlling opinion noted that, pursuant to the "established meaning," two methods of payment are "actuarially equivalent" when their present values are equal in light of a set of actuarial assumptions. If a lump-sum payment does not contain the full value of the benefits that a retiree would have received in the form of an annuity, the two forms of payment are not actuarially equivalent. See Contilli v. Local 705 International Brotherhood of Teamsters Pension Fund, 559 F.3d 720, 722 (7th Cir. 2009). The controlling opinion stated that ERISA § 204(c) is silent regarding whether interest is due when an actuarially equivalent pension payment is paid late. The controlling opinion also noted, by contrast, that ERISA § 204(e)(3), 29 U.S.C. § 1054(e)(3), requires that a defined benefit pension plan reimburse distributions that improperly reduced service credit with interest, possibly implying that Congress knew how to require interest payments when it chose to do so. The controlling opinion thus concluded that, since it was undisputed that US Airways accurately computed plaintiffs' lump sums to be actuarial equivalents of the annuities as of the annuity start dates, the lump-sum payments did not violate ERISA § 204(c)(3). Noting that a pension plan could not delay payment of an actuarially equivalent sum indefinitely, however, the controlling opinion highlighted an Internal Revenue Service regulation stating that "[a] payment shall not be considered to occur after the annuity starting date merely because actual payment is reasonably delayed for calculation of the benefits amount if all payments are actually made." 26 C.F.R. § 1.401(a)-20 Q & A-10(b)(3). The controlling opinion opined that the regulation reinforced its conclusion that US Airways' late payment of plaintiffs' lump sums did not violate ERISA § 204(c)(3). The controlling opinion emphasized, however, that the regulation allowed only "reasonable delays" and found that US Airways' 45-day delay was not reasonable because computation of the lump sum took at most 21 business days, or about a month, and the PBGC failed to proffer an explanation for the additional delay, such as administrative necessity. Plaintiffs' expert witness also opined that 45 days exceeded the industry norm. The controlling opinion thus concluded that plaintiffs were entitled to interest on the 45-day delay.
ConcurrenceJudge Kavanaugh concurred only in the judgment, stating that the lump-sum payment was not actuarially equivalent to the annuity when paid 45 days after the annuity start date because "[m]oney later is not the same as money now" and the lump sums were less valuable 45 days later than on the annuity start date. The concurrence concluded that the PBGC, as the successor to US Airways, owed plaintiffs the difference between the lump-sum payments that plaintiffs received and the value of such sums 45 days earlier. While ERISA provides for reasonable delays for calculation purposes, the concurrence opined that any "delayed payment" must be with interest regardless of the reasonableness of the delay. The concurrence faulted the PBGC for ignoring the effect of the delay on the lump-sum benefits.
DissentIn dissent, Judge Henderson agreed with the controlling opinion that, as long as the lump-sum benefit was equivalent to the present value of a pilot's annuity computed as of the benefit commencement date, a reasonable delay in payment would not violate the actuarial equivalence requirement. The dissent opined that plaintiffs were not entitled to recover interest, however, because the 45-day delay was reasonable. The dissent faulted the controlling opinion for failing to account for the time it took US Airways to determine the "Final Average Earnings" as of the 18th day of the month after the pilot's retirement and that such period was a necessary part of the calculation process.
Cautionary NoteThe dissent warned that the majority's decision to remand for computation of interest "may well open the courthouse doors to litigation over de minimis amounts of interest accrued" during a short period of time. The dissent also opined that plaintiffs' success was "hollow" because they achieved a four-digit recovery at the cost of five-digit or six-digit legal fees. The dissent also remarked that plaintiffs had already received more than many US Airways annuitants will ever receive because those who reached retirement age after April 1, 2000, received zero from the distribution of Plan assets and were thus limited to receiving the statutory maximum of $28,585 per year. See 29 U.S.C. § 1322(a)-(b). Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.
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