When Congress passed the Employment Retirement Income Security Act (ERISA) in 1974, they were trying to reform a number of practices that pensions engaged in, which cheated employees out of accrual of benefits under retirement plans. Paul Mollica, employment attorney with Outten and Golden in Chicago, Illinois, explains that Hilton Hotels uses a defined benefit plan for retirement. Like a traditional pension, the employee and the employer contribute to a trust that creates an annuity and when you retire, you get a set benefit every month that's adjusted for the cost of living for the rest of your life.
Some employers became engaged in a practice called backloading, which meant that instead of an employee accruing their benefit regularly during employment, they would have their benefits "bulked up," so they would acquire most of them at the end of their career, says Mollica. He adds that this is a problem for employees who leave and want to roll out their benefits and as a result of fewer benefits accrued earlier in their career, they wind up with smaller payments.
Congress decreed that for defined benefit plans, employees must be allowed to accrue their benefit in a regular way until retirement, says Mollica. Congress added the 133 1/3% rule which says that in no one year should the benefit provide more than that percentage of accrual and has to be consistent each year and in the Hilton case, this rule applies, according to Mollica.
In the Hilton Hotels case, there was violation of this rule, so benefits didn't accrue evenly but much greater as one's career moved on. An employee filed a class action against Hilton to have that plan term rewritten and benefits recalculated so that it would be paid out as if they were properly accrued. Mollica says that a district court in D.C. affirmed this. The court agreed the plan violated the statute and ordered the recalculation.
Mollica says that a well-counseled plan will be updated regularly to conform to the ERISA statute and amendments that pertain to retirement plans. Sometimes, he says, employers will skirt right to the edge of the line and in the Hilton case, went right over the line. He notes that sometimes, a plan simply gets out of date but when Hilton became aware of the class action, they amended their retirement plan.
The D.C. circuit court mentioned in their ruling that these violations are very technical in nature, making it very hard for a beneficiary to determine if there's a problem. However, if an employee suspects there is a problem, Mollica advises that they get a copy of the plan from the plan administrator in the company and not to rely on the plan summary but to look at the plan itself. Upon written request, they are required to get that to an employee within 30 days, adds Mollica. He also suggests comparing the statement against the plan and if a problem exists, to go to a lawyer with expertise in pension plans to see if the plan has made in error in calculating the benefits.
Paul Mollica is counsel for Outten and Golden LLP, a law firm focusing on employment law. For more information on Paul Mollica, click here. Paul’s commentary was hosted by The Employment Law Channel, part of The Legal Broadcast Network.