An important part of the Employee Retirement Income Security Act of 1974 was reforming the practice of "backloading" pensions - in other words, having the lion's share of contributions come at the end of the employee's career, resulting in smaller retirement payouts. This D.C. Circuit decision, affirming a ruling that the Hilton Hotel pension plan violated the anti-backloading rule, furnishes an important lesson to all persons enrolled in such "defined benefit" plan: keep an eye on your benefit statements.
Kifafi v. Hilton Hotels Retirement Plan, No. 11-7113 (D.C. Cir. Dec. 14, 2012): Under 29 U.S.C. § 1054(b), ERISA provides three, exclusive ways in which a defined benefit plan (i.e., an annuity that produces set, regular payments upon retirement) can satisfy the anti-backloading rule: the 3% rule (in no year may the contribution fall below 3% of total retirement contributions); the fractional rule (each year, the employee's accrued benefit is proportionate to the anticipated number of years of service); and the 133 1/3% rule (in any future year, the rate of benefit accrual may not be more than one-third greater than the rate in the current year).
In this case, the plan used a calculation that guaranteed, "at a minimum, 2% of the participant's average monthly compensation multiplied by the participant's years of service up to twenty-five years, plus 0.5% of the average monthly compensation for each year after twenty-five years, minus the integrated benefits offset." The offset for "integrated benefits" included the participant's Social Security payments. The plan claimed that this formula met the 133 1/3% rule. (The plan was amended in 1999 after the lawsuit was filed, adding an optional modified accrual formula, which, as the IRS subsequently determined, satisfied the fractional rule.)
The district court granted summary judgment to the plaintiff and a class of participants, holding that the pre-amended plan violated 29 U.S.C. § 1054(b). The court also granted relief to the class on a second claim that the plan "failed to credit employees with years of union service for vesting purposes." As relief, the court "ordered Hilton (1) to amend the Plan's benefit accrual formula by capping the social security offset, thereby bringing the Plan into retroactive compliance with the 133 1/3% rule, and (2) to administer a claim procedure for crediting participants' years of union service for vesting purposes."
The D.C. Circuit affirms. After rejecting an argument that the 1999 plan amendment mooted the case, the panel then addresses and affirms the remedy. The panel agrees that it was not an abuse of discretion for the judge to order compliance with the 133 1/3% rule, rather than compliance with anti-backloading rules generally:
"Once the court determined the Plan violated ERISA, it entered the world of equity. See 29 U.S.C. § 1132(a)(3); CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1875, 1879-80 (2011) (concluding that 29 U.S.C. § 1132(a)(3) authorized district court's reformation of plan and injunction requiring the plan to pay corresponding benefits). And Hilton's premise that a plan's prospective compliance with ERISA's anti-backloading mandate circumscribes a court's remedial options in the face of past violations cannot be sustained. We see no reason why the court's remedy need be a perfect reflection of the legal violations supporting the remedy; the district court exercised a discretion informed by much more than just the ERISA violation."
In particular, the panel notes that Hilton made the judge's remedial task more difficult by amending the plan several times during the litigation, in some ways to the material disadvantage of the participants. "Read in this context, we understand the district court's remedial order to be an attempt to pin Hilton down, denying it the opportunity to avoid the consequences of its ERISA violations."
The panel also rejects Hilton's argument - citing the limitations period - to limit relief to those who received benefits more than three years before the suit-filing date. Hilton argued that the period accrued as soon as it commenced paying the backloaded benefits, thus "amount[ing] to a repudiation of the participants' right to addition al benefits." Here, the participants were simply not put on notice of the violation. "[I]f one thing in this case is clear, it is that Hilton's miscalculation was anything but simple. To catch the backloading, Plan participants would have needed to apply complex law to complex facts."
The panel likewise affirms the award of a remedy to participants who received benefits more than three years before the plaintiff filed suit, and rejects the participants' addition al arguments to expand the remedy to credit non-union years.
As the D.C. Circuit notes, anti-backloading violations are tough to catch. Participants who suspect underpayment might seek legal consultation.