Kifafi v. Hilton Hotels Retirement Plan

• Citation: 616 F.Supp.2d 7
• Decision Date: 15 May 2009
• Docket Number: Civil Action No. 98-1517 (CKK).
• Parties: Jamal J. KIFAFI, individually and on behalf of all others similarly situated, Plaintiff, v. HILTON HOTELS RETIREMENT PLAN, et al., Defendants.
• Court: U.S. District Court — District of Columbia

616 F.Supp.2d 7

Jamal J. KIFAFI, individually and on behalf of all others similarly situated, Plaintiff, v. HILTON HOTELS RETIREMENT PLAN, et al., Defendants.

Civil Action No. 98-1517 (CKK).

United States District Court, District of Columbia.

May 15, 2009.

Stephen Robert Bruce, Washington, DC, for Plaintiff.

Robert N. Eccles, Karen M. Wahle, O'Melveny & Myers LLP, Washington, DC, for Defendants.

MEMORANDUM OPINION

COLLEEN KOLLAR-KOTELLY, District Judge.

Plaintiff Jamal J. Kifafi, on behalf of himself and similarly situated individuals, brings this lawsuit alleging that the terms and implementation of the Hilton Hotels Retirement Plan violated the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), 29 U.S.C. § 1001, et seq. In particular, Kifafi alleges that (1) the terms of the Plan produced an impermissible amount of variation among accrual rates, commonly called "backloading," (2) Defendants improperly applied the Plan's vesting provisions, and (3) Defendants committed multiple other ERISA violations as to Kifafi individually by, for example, failing to keep on file records of his marital status. On May 11, 1999, the Court certified a so-called "benefit-accrual class" as to the first allegation, and on March 30, 2005, the Court certified four sub-classes as to the second allegation.

Defendant Hilton Hotels Corporation (together with the Hilton Hotel Retirement Plan, Committee, and individual members, "Hilton"), assert that the terms of the Plan have not violated ERISA, and that they have fully implemented the Plan in accordance with its terms. Hilton has, nevertheless, continuously amended its Plan throughout the course of this litigation in an attempt to respond to Kifafi's allegations and to moot all of the claims in this case.

Currently pending before the Court are the parties' Cross-Motions for Summary Judgment, Hilton's Motion to Strike certain declarations submitted by Kifafi in support of his Motion for Summary Judgment, and a Motion for Leave to submit a Sur-Reply, which was filed by Kifafi as support for his Opposition to Hilton's Motion to Strike. After thoroughly reviewing the parties' submissions, relevant case law, applicable statutory and regulatory authority, and the record of the case as a whole, the Court shall GRANT-IN-PART and DENY-IN-PART Kifafi's [177] Motion for Summary Judgment, GRANT-IN-PART and DENY-IN-PART Hilton's [180] Cross-Motion for Summary Judgment, DENY Hilton's [183] Motion to Strike, and DENY [194] Kifafi's Motion for Leave to file a Sur-Reply, for the reasons that follow.

I. BACKGROUND

A. Statutory and Regulatory Background

It is well established that ERISA does not require employers to establish retirement plans for their employees and does not mandate any particular level of benefits that must be provided should an employer choose to have such a plan. See Lockheed Corp. v. Spink, 517 U.S. 882, 887, 116 S.Ct. 1783, 135 L.Ed.2d 153 (1996). "Employers or other plan sponsors are generally free under ERISA, for any reason at any time, to adopt, modify, or terminate welfare plans." Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 78, 115 S.Ct. 1223, 131 L.Ed.2d 94 (1995). Nevertheless, employers' discretion with respect to their retirement plans is not without limitation. ERISA contains certain requirements that "protect[] employees' justified expectations of receiving the benefits their employers promise them." Central Laborers' Pension Fund v. Heinz, 541 U.S. 739, 743, 124 S.Ct. 2230, 159 L.Ed.2d 46 (2004).

The present case involves ERISA protections associated with employees' accrual of benefits (the amount of benefits to which an employee is entitled) and vesting of benefits (the time at which an employee obtains a right to his or her accrued benefits). These are distinct but related concepts:

the `vesting schedule' specifies the time at which an employee obtains his nonforfeitable right to a particular percentage of his accrued benefit. It does not provide any formula or schedule for determining the amount of the accrued benefit. Thus, `vesting' governs when an employee has a right to a pension; `accrued benefit' is used in calculating the amount of the benefit to which the employee is entitled.

Holt v. Winpisinger, 811 F.2d 1532, 1536 (D.C.Cir.1987) (quoting Stewart v. Nat'l Shopmen Pension Fund, 730 F.2d 1552, 1562 (D.C.Cir.1984) (emphasis in original omitted)). Because "vesting is tied to length of employment" and the accrual of benefits "depends upon participation in the plan," it is possible for employees to "earn credit toward vesting without accumulating any pension benefits." Id. at 1537.

With respect to the accrual of benefits, ERISA protects employees by limiting the variation associated with rates of accrual, setting forth three alternative tests for monitoring accrual rates. See Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 512-13, 101 S.Ct. 1895, 68 L.Ed.2d 402 (1981). By requiring defined benefit plans to comply with any one of these three alternative tests, ERISA prevents employers from "backloading" benefits, a term of art used to describe "a plan's use of a benefit accrual formula that postpones the bulk of an employee's accrual to [his] later years of service." In re Citigroup Pension Plan ERISA Litig., 470 F.Supp.2d 323, 333 (S.D.N.Y.2006). See also 26 C.F.R. 1.411(b)-1 ("[a] defined benefit plan is not a qualified plan unless the method provided by the plan for determining accrued benefits satisfies at least one of the alternative methods . . . for determining accrued benefits with respect to all active participants under the plan").¹ Backloading is prohibited because it defeats ERISA's minimum vesting provisions:

[t]he primary purpose of [minimum accrual rates] is to prevent attempts to defeat the objectives of the minimum vesting provisions by providing undue `backloading,' i.e., by providing inordinately low rates of accrual in the employee's early years of service when he is most likely to leave the firm and by concentrating the accrual of benefits in the employee's later years of service when he is most likely to remain with the firm until retirement.

Langman v. Laub, 328 F.3d 68, 71 (2d Cir.2003) (quoting H.R.Rep. No. 93-807 (1974), reprinted in 1974 U.S.C.C.A.N. 4639, 4688).

The three alternative tests are set forth in Section 204(b) of ERISA, 29 U.S.C. § 1054(b)(1). The first test is commonly called the "3% rule," 29 U.S.C. § 1054(b)(1)(A).² The second test is commonly called the "133 1/3% rule," and it requires that the annual rate of accrual in any later year of participation not exceed 133 1/3% of the accrual rate in any earlier year under the plan:

[a] defined benefit plan satisfies the requirements of this paragraph of a particular plan year if under the plan the accrued benefit payable at the normal retirement age is equal to the normal retirement benefit and the annual rate at which any individual who is or could be a participant can accrue the retirement benefits payable at normal retirement age under the plan for any later plan year is not more than 133 1/3 percent of the annual rate at which he can accrue benefits for any plan year beginning on or after such particular plan year and before such later plan year.

Id. § 1054(b)(1)(B). The third test is commonly called the "fractional rule," and it requires an employee's accrued benefit to exceed a fractional projected retirement benefit:

[a] defined benefit plan satisfies the requirements of this paragraph if the accrued benefit to which any participant is entitled upon his separation from the service is not less than a fraction of the annual benefit commencing at normal retirement age to which he would be entitled under the plan as in effect on the date of his separation if he continued to earn annually until normal retirement age the same rate of compensation upon which his normal retirement benefit would be computed under the plan, determined as if he had attained normal retirement age on the date any such determination is made (but taking into account no more than the 10 years of service immediately preceding his separation from service). Such fraction shall be a fraction, not exceeding 1, the numerator of which is the total number of his years of participation in the plan (as of the date of his separation from the service) and the denominator of which is the total number of years he would have participated in the plan if he separated from the service at the normal retirement age.

Id. § 1054(b)(1)(C).

With respect to vesting, Section 203(a) of ERISA provides that an employee's accrued benefits cannot be forfeited once an employee reaches the age of retirement. Id. § 1053(a). Whether an employee has reached the age of retirement turns, at least in part, on his or her years of service. Id. § 1002(24) (allowing retirement plans to specify the age of retirement or, alternatively, setting the age of retirement as 65 years old or the fifth year of participation in the plan).

Pursuant to Section 203(b) of ERISA, employers are required to count all of an employee's years of service for calculating his or her years toward vesting. Id. § 1053(b)(1) (requiring employers to count "all of an employee's years of service with the employer or employers maintaining the plan"). An employee's years of service are counted even if they occur prior to participation in the retirement plan. See Holt, 811 F.2d at 1537 (citing H.R. Conf. Rep. No. 1280, 93rd Cong., 2d Sess. 268 (1974), reprinted in 1974 U.S.Code Cong. & Admin. News 5038, 5050 ("generally, . . . once an employee becomes eligible to participate in a pension plan, all his years of service with an employer (including pre-participation service, and service performed before the effective date of [ERISA]) are to be taken into account for purposes of determining his place on the vesting schedule")).

An employee who is credited with 1,000 hours of service during an "eligibility computation...