District court’s choice of remedy for backloading violation not an abuse of discretion

A district court did not abuse its discretion when it ordered an employer found to have impermissibly backloaded benefit accruals in its defined benefit plan to comply with the specific accrual formula described in a statement of intent set forth in the plan, the U.S. Court of Appeals for the District of Columbia (CA-DC) has ruled.

An employer’s defined benefit plan contained a formula for benefit accrual that, according to plan terms, was “intended to satisfy the requirements of the 133 1/3 rule” provided in Code Sec. 411(b)(1)(B). Faced with a class action lawsuit arguing that the accrual formula violated ERISA’s rules against backloading benefit accruals, the employer amended the plan (the 1999 Plan) to cure any backloading problem (the IRS eventually determined the 1999 Plan satisfied the fractional rule). After years of litigation, the district court granted summary judgment to the participants and, among other things, ordered the employer to amend the plan into retroactive compliance with the 133 1/3 rule. On appeal, the employer conceded the pre-1999 plan ran afoul of the backloading prohibition, but objected to the district court’s chosen remedy.

Mootness

The employer initially claimed that the 1999 Plan mooted the backloading claim. The appellate court rejected this argument. To render a claim moot, a defendant’s voluntary cessation of allegedly unlawful conduct must create a reasonable expectation the unlawful conduct will not recur. No such expectation was present in this case, the appellate court explained, in part because the employer had initially defended the legality of its pre-1999 formula and in part because even for parties acting in good faith, ERISA compliance is a complicated area where even the best-intentioned parties may go wrong.

Use of 133 1/3 rule

The appellate court agreed that the district court misspoke when it stated that the employer was bound by the pre-1999 plan’s statement of intent to adhere to the 133 1/3 rule. So long as a plan satisfies one of the three benefit accrual rules, it is not bound by any statement of intent to comply with a specific rule.

In this instance, however, the pre-1999 plan failed to satisfy any of the three accrual formulas. Moreover, the district court was within its discretion to fashion an equitable remedy intended to deny the plan the opportunity to avoid the consequences of its ERISA violations. Prospective compliance with ERISA’s anti-backloading provisions can’t limit a court’s remedial actions in the face of past violations.

Statute of limitations

The court also rejected the employer’s attempt to limit the size of the affected class by arguing that the claims of participants who received benefits more than three years before the named participant filed suit were time-barred. Participants who received these benefits, the employer argued, should have discovered that their benefits were backloaded. The court rejected this, concluding it was unreasonable to hold plan participants responsible for navigating the complexities of the benefit accrual rules.

Vesting

Finally, the appellate court rejected the participants’ argument that the district court’s remedy for the employer’s violation of ERISA’s vesting provisions was an abuse of discretion.

Source: Kifafi v. Hilton Hotels Retirement Plan (CA DC).

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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