Court Enforces 401(a) Plan’s Mandatory Arbitration Provision

The U.S. District Court for the District of New Jersey ruled that a 401(a) plan’s mandatory arbitration provision for benefits claims does not violate the Employee Retirement Income Security Act (ERISA).

The court noted in its opinion that Section 1133(2) of ERISA requires that employee benefit plans provide “a reasonable opportunity to any participant whose claim for benefits has been denied for a full and fair review by the appropriate named fiduciary of the decision denying the claim.”

Plaintiff Lorraine H. Luciano alleged that the 401(a) plans arbitration provision required her to share the cost of arbitration, which violated Section 1133(2) of ERISA.

Luciano’s argument relied on a split decision by the 8th U.S. Circuit Court of Appeals in Bond v. Twin Cities Carpenters Pension Fund. The majority found that Section 1133, and its accompanying regulations, apply to all claims procedures based on the language of the regulations and an opinion letter from the Department of Labor. Additionally, based on the opinion letter from the Department of Labor, the majority held that a plan that required arbitration with a presumption of cost-splitting hindered the processing of claims and was unduly burdensome, thus, not permitted by ERISA.

However, the New Jersey court noted that the dissent in Bond found that Section 1133 “simply did not govern these plan provisions because it did not purport to deal with proceedings that occur after a review by the fiduciary.” Specifically, the dissent found that Section 1133’s full and fair review was fully satisfied, because, according to the plain language of the statute, Bond did not contest the fact that the plan’s named fiduciary provided him with a “full and fair review.” In doing so, the dissent rejected the Department of Labor’s position in the opinion letter “that any plan that requires arbitration as a pre-requisite to initiating a civil action and that requires employees to bear an equal share of arbitration expenses violates ERISA. The dissent stated that, “If Congress wants employers to bear the cost of arbitration arising from Section 1133 claims, it can presumably pass legislation to that effect. It has not chosen to do so.”

The district court agreed with the dissent's reasoning in Bond. The court said it reads the regulations cited by Luciano to speak to only the practices that would "unduly inhibit or hamper" the processing of a claim up until and through an appeal to the named fiduciary. “Therefore, as Plaintiff here had submitted a claim for benefits and appealed the denial of that determination to the named fiduciary, Section 1133 does not govern,” the court said in its opinion.

It found that Luciano’s claims seeking relief from the mandatory arbitration provision in the 401(a) plan under Section 1133(2) fail to state a claim, so it dismissed them with prejudice. Additionally, the court compelled arbitration pursuant to the mandatory arbitration provision of the plan.

As for the 403(b) plan from which Luciano was also seeking benefits, the court found it does not contain a mandatory arbitration provision, but “in the interest of judicial efficiency,” a stay would be appropriate until the arbitration resolves the 401(a) plan issue.

The Case 

Luciano’s husband was a participant in the 401(a) and 403(b) plans sponsored by Educational Testing Service and administered by Teachers Insurance and Annuity Association of America - College Retirement Equities Fund (TIAA-CREF). Before Luciano and her husband were married, her husband named his sister as his beneficiary for the plans.

After his death, Luciano made a claim for benefits as a surviving spouse. TIAA-CREF informed Luciano that she was entitled to a death benefit of $119,253.33, one half of her husband’s account balance, and the other half would be paid to his sister.

Luciano applied to receive all of her husband’s account balance, and that was denied. She appealed the denial and was denied again, so she sued in federal court.