Administrative Remedies Need not be Exhausted in Cash Balance Case

October 23, 2009 ( - The U.S. District Court for the Eastern District of Kentucky has declined to dismiss a case against BP Corporation North America over calculations used in its cash balance plan, saying the plaintiff was not required to exhaust his administrative remedies under the plan.

The court found that Robert French’s complaint challenges the overall legality of BP’s plan methodology, so administrative exhaustion would be futile and is not required. The court said a 6 th U.S. Circuit Court of Appeals opinion makes clear that when a plaintiff’s “suit [i]s directed to the legality of [a plan], not mere interpretation of it[,] exhaustion of the plan’s administrative remedies would be futile.”

In his opinion, U.S. District Judge David L. Bunning said exclusive reference to plan language is insufficient to evaluate whether the overall methodology of the plan’s conversion divests participants of already earned benefits; however, consideration of plan terms is an inevitability for purposes of determining whether the Employee Retirement Income Security Act’s (ERISA) mandate to preserve already earned benefits has been violated. “That said, cursory consideration of plan language does not require the Court to treat the case as one solely involving plan interpretation such that administrative exhaustion is required,” Bunning wrote.

In January of 1989, BP converted its traditional defined benefit plan to a cash balance plan. French alleges that during and after the cash balance conversion, the BP Plan unlawfully reduced previously accrued participant benefits.

First, he claims that in establishing the opening accounts the BP Plan used an interest rate of 8% to determine the present value of the benefits that accrued under the BP Plan and any predecessor plan, but the maximum rate the BP Plan could have used under ERISA and the IRC was less than 8%. In addition, French claims that he and other participants of the traditional DB plan were transferred into the BP Master Hourly Plan for Represented Employees and accrued benefits in that plan, but when BP established their opening accounts balances for the cash balance plan, it used their accrued benefit from the traditional DB plan as of January 1, 1989, causing them to forfeit their accruals earned under the hourly plan.

The case isFrench v. BP Corp. North America Inc.,E.D. Ky., No. 08-216-DLB, 10/15/09.