The opinion of the court was delivered by: Colleen Kollar-kotelly United States District Judge
This action is brought by Plaintiff Jamal J. Kifafi, on behalf of himself and similarly situated individuals, to recover for violations of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), 29 U.S.C. § 1001, et seq., in the Hilton Hotels Retirement Plan (the "Plan"). Defendants are the Plan, the individual members of the Committee of the Plan, the Hilton Hotels Corporation, and individual Hilton officers or directors (collectively, "Defendants" or "Hilton"). On May 15, 2009, this Court granted-in-part Plaintiff's motion for summary judgment, finding that Defendants had violated ERISA's anti-backloading provision, 29 U.S.C. § 1054(b)(1)(C), and had violated the Plan's vesting provisions with respect to the rights of four certified subclasses. See Kifafi v. Hilton Hotels Retirement Plan, 616 F. Supp. 2d 7 (D.D.C. 2009) (Kifafi III). Having found that Defendants violated ERISA, the Court requested that the parties submit briefs regarding the equitable relief appropriate to remedy the violations. Plaintiff filed a  Brief on Equitable Relief, to which Defendants filed a  Response Brief on Equitable Relief, and Plaintiff filed a  Reply Brief on Equitable Relief. Defendants have filed a  Motion for Leave to File Sur-Reply on Equitable Relief and for Expert Discovery in Advance of Remedies Hearing, to which Plaintiff has filed an Opposition, and Defendants have filed a Reply.
The parties' briefs on equitable relief reflect a number of significant disagreements about the proper scope of equitable relief that should be ordered by the Court. The parties have filed competing proposals to remedy the benefit accrual and vesting violations previously found by the Court, and the parties also dispute how each party's proposal should be applied to the certified classes. This Memorandum Opinion sets forth the Court's ruling as to a number of the issues disputed by the parties. However, a final order of equitable relief cannot be issued until the parties further confer about the proper means of implementing this Court's rulings and a hearing is held to resolve certain disputed factual issues.
As explained below, the Court shall generally endorse Defendants' proposal for remedying the backloading violations, but the Court rejects Defendants' contention that relief should be limited to participants who separated from service after 1987. With respect to Defendants' failure to credit union service for purposes of vesting, the Court shall order Defendants to credit union but not other non-participating service; the Court shall require Hilton to search its corporate records for information relating to class members' union service and permit class members to submit claims based on union service not reflected in records. With respect to Defendants' violation of the 1000 hours of service standard, the Court shall adopt the parties' proposal to apply the 870/750 hours worked standard with hours equivalencies but reject Plaintiff's proposal to apply equivalencies to periods of time for which there are no records of hours of service. With respect to Defendants' failure to credit the first year of participation, the Court shall reject Plaintiff's proposal to credit participants with a year of service for the first year in which there is any record of participating service. With respect to Defendants' failure to credit leaves of absence, the Court shall not order additional discovery of corporate records as requested by Plaintiff. The Court declines to order additional discovery of Hilton's records except with respect to union service, as mentioned above. The Court also does not see the need to appoint a class action administrator to oversee the implementation of final relief, but the parties should develop a more limited mechanism for monitoring Hilton's implementation of remedies. The Court shall not approve lump sum payments in lieu of future benefits owed to participants, nor shall it include a cy pres provision in its final order. Other disputed issues of fact, such as the alleged application of unlawful equivalencies or elapsed time methods and discrepancies between versions of the Plan's database, shall be decided at a final remedies hearing.
The factual and procedural history of this case was thoroughly discussed by the Court in its Memorandum Opinion issued on May 15, 2009. See 616 F. Supp. 2d at 10-21. The Court incorporates that discussion herein and assumes familiarity with that opinion. Nevertheless, the Court shall briefly summarize its prior ruling and the relevant background facts.
The Hilton Hotels Retirement Plan (the "Plan") is a defined benefit pension plan subject to ERISA. Benefits under the Plan accrue according to a formula based on an employee's average compensation and years of service, with an offset for the employee's Social Security benefits. See 616 F. Supp. 2d at 13-14. ERISA prevents employers from "backloading" benefits, i.e., using a benefit accrual formula that postpones the bulk of an employee's accrual to his later years of service. Id. at 11. In order to prevent backloading, ERISA requires defined benefit plans to satisfy one of three alternative minimum accrual rules, known as the "3% rule," the "133 1/3% rule," and the "fractional rule." Id. at 11-12; see 29 U.S.C. § 1054(b)(1). Beginning in 1976 and continuing until 1999, the Plan contained an accrual schedule that was supposed to comply with ERISA's "133 1/3% rule." 616 F. Supp. 2d at 14. In 1999, after this lawsuit was filed, Hilton amended the Plan's benefit accrual formula seeking to comply with the fractional rule. Id. at 16. The 1999 amendment (Amendment 1999-1) also changed two unrelated aspects of the Plan that lowered benefits for participants. Id. Following briefing on summary judgment, this Court held that the pre-amendment Plan failed to comply with any of the three minimum accrual rules and that the pre-amendment Plan was required to comply with the 133 1/3% rule. Id. at 24. The Court concluded that "the Plan's participants are entitled to receive the benefits they would have accrued had the Plan complied with the 133 1/3% rule." Id. at 24. The Court also concluded that the 1999 amendment to the Plan did not moot the ERISA violation found by the Court. Id. at 25-28. The Court's ruling applies to a certified class of current and former Hilton employees (the "benefit-accrual class").*fn1
The Court also found that Defendants had violated ERISA with respect to the vesting of benefits under the Plan, i.e., the time of service required for an employee to obtain a right to his or her accrued benefits.*fn2 Employees who terminated after January 1, 1989 need five years of service to become vested; employees who terminated prior to that date needed ten years of service. ERISA requires employers to count all of an employee's years of service for calculating his or her years toward vesting, even if they occur prior to participation in the retirement plan. 29 U.S.C. § 1053(b)(1); 616 F. Supp. 2d at 12. ERISA generally requires an employee with 1000 hours of service during a twelve-month period to be credited with one year of service. 29 C.F.R. § 2530.200b-1. In calculating the 1000 hours of service, the employer must count not only hours worked but also hours "during which no duties are performed... due to vacation, holiday, illness, incapacity... layoff, jury duty, military duty or leave of absence." Id. § 2530.200b-2(a). If an employer's existing records do not allow it to properly calculate an employee's hours of service, the employer may "use a permitted equivalenc[y]." Id. § 2530.200b-3(a). One such equivalency focuses on "hours worked," in which an employee who works 870 hours is credited with 1000 hours of service. Id. § 2530.200b-3(d).
Beginning in 1976 and continuing until the Plan was amended in December 2002, Hilton applied the 1000 hours standard for calculating employees' years of service. 616 F. Supp. 2d at 29. By its terms, the Plan required all periods of employment between the date of hire and the date of termination to be taken into account, including leaves of absences and union service. Id. at 14. The Court found that Defendants had violated the Plan's vesting provisions with respect to four certified subclasses: (1) they failed to credit employees' union service for purposes of vesting*fn3; (2) they failed to properly apply the 1000 hours standard because they kept inadequate records; (3) they failed to credit employees' leaves of absence; and (4) they failed to count the year in which employees became participants in the Plan for vesting purposes. 616 F. Supp. 2d at 29-32. Accordingly, the Court ruled that the members of these vesting subclasses should be awarded the vesting credit to which they are entitled.
Section 502(a)(1)(B) of ERISA allows a participant or beneficiary to bring a civil action "to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan." 29 U.S.C. § 1132(a)(1)(B). Pursuant to this provision, the Court may order that participants' benefits be recalculated consistent with the terms of the Plan. See Frommert v. Conkright, 433 F.3d 254, 270 (2d Cir. 2006) ("The relief that the plaintiffs seek, recalculation of their benefits consistent with the terms of the Plan, falls comfortably within the scope of § 502(a)(1)(B).")
ERISA also has a "catchall" provision, Section 502(a)(3), which allows a participant, beneficiary, or fiduciary to "(A) enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan." 29 U.S.C. § 1132(a)(3); Varity Corp. v. Howe, 516 U.S. 489, 507, 511 (1996). Where relief is otherwise available under Section 502(a)(1)(B), equitable relief under Section 502(a)(3) will not be "appropriate." Varity Corp., 516 U.S. at 515. However, where a plan does not conform with the requirements of ERISA, relief under the catchall provision may be appropriate. The phrase "appropriate equitable relief" encompasses those categories of relief typically available in equity, such as injunction, mandamus, and restitution, but it does not include compensatory or punitive damages. See Mertens v. Hewitt Assocs., 508 U.S. 248, 256-58 & n.8 (1993); id. at 258 n.8("'Equitable' relief must mean something less than all relief.") Thus, courts have found that equitable relief is appropriate in ERISA cases where it places participants "in basically the same financial position in which they would be if the employer had complied with the minimum requirements necessary for the [plan] to satisfy the accrual and vesting provisions of ERISA." Carrabba v. Randalls Food Markets, Inc., 145 F. Supp. 2d 763, 770-71 (N.D. Tex. 2000), aff'd, 252 F.3d 721 (5th Cir. 2001) (per curiam).
The parties have each filed briefs in support of their separate proposals for remedying the minimum accrual rate and vesting violations previously found by the Court. After Plaintiff filed its Reply Brief on Equitable Relief, Defendants filed a Motion for Leave to File Sur-Reply on Equitable Relief and for Expert Discovery in Advance of Remedies Hearing. Defendants ask the Court for permission to file a Surreply, which they attached to their motion, in order to rebut certain arguments raised by Plaintiff in his Reply regarding Defendants' proposed remedies. Plaintiff opposes this request, arguing that Defendants' motion is untimely and that the Surreply merely restates arguments that were or could have been raised in Defendants' Response Brief on Equitable Relief. While the Court notes that surreplies are generally disfavored, Plaintiff's Reply Brief does contain detailed criticisms of Defendants' proposals as well as a supplemental declaration from its expert, to which Defendants should be permitted to respond. Moreover, Plaintiff has failed to identify any prejudice suffered by any delay in filing,*fn4 which occurred while the parties were in mediation. Therefore, the Court shall grant Defendants' motion for leave to file a Surreply, and the Court shall consider the Surreply in ruling on the appropriate equitable relief.
With respect to Defendants' request for discovery in advance of a remedies hearing, the Court agrees with Plaintiff that discovery is not warranted at this time. The Court has not yet determined that there are material factual issues in dispute that require a remedies hearing. Cf. United States v. Microsoft Corp., 253 F.3d 34, 101 (D.C. Cir. 2001) (holding that courts must conduct an evidentiary hearing to resolve disputed factual issues in determining appropriate relief). The parties have submitted separate proposals for equitable remedies that rely on the declarations of experts who disagree about the propriety of the other party's proposals under ERISA. This Court shall make a legal ruling about what equitable relief is appropriate based on its prior decision as to liability, relying on facts that are not in dispute. The Court shall then hold a remedies hearing to resolve any factual disputes as to methodology, if necessary. Accordingly, the Court shall deny Defendants' motion for expert discovery.
The parties agree that all relief should be provided in the form of benefits to be provided from Hilton's tax-qualified plan. However, the parties disagree regarding the benefit calculations that should be required to remedy the minimum accrual rate and vesting violations previously found by the Court. The Court shall address each of their proposals below.
A. Remedies for the Minimum Accrual Rate Violation
The parties agree that the cause of the unlawful "backloading" of benefits under the Plan*fn5 is the fact that the Plan's benefit formula includes an offset for Social Security benefits that is disproportionately large during an employee's early years of plan participation. Generally speaking, the Plan's benefit formula provides that the amount of benefits payable at retirement age is equal to 2%*fn6 of the employee's average monthly compensation (as defined by the Plan) multiplied by the number of years of service for that employee, minus an offset for "Integrated Benefits," which includes, inter alia, an estimate of the Social Security benefits that the worker will receive at retirement. See Hilton Hotels Retirement Plan (As Amended and Restated Effective January 1, 1987), Decl. of Jonathan K. Youngwood, Ex. B ("1987 Plan")*fn7 § 4.1.*fn8 Thus, the amount of benefits an employee accrues each year under the Plan depends in part on his estimated Social Security benefits. Due to the payment structure of the Social Security program, the Plan's offset for Social Security payments is relatively high during an employee's early years and relatively low during the employee's later years. The result is that the accrual rates during the early years of the Plan are very low compared to later years, violating the 133-1/3% rule.
The parties agree that for purposes of remedying the backloading violations in the Plan, the maximum annual accrual rate under the Plan is 1.91% of the employee's average monthly compensation ("AMC").*fn9 To comply with the 133 1/3% rule, the annual accrual rate in any given year cannot be more than 133 1/3% of the annual accrual rate in any previous year. Therefore, the minimum accrual rate allowable under the Plan is 1.91% divided by 133 1/3%, which is 1.4325%.*fn10
Plaintiff's proposed remedy, stated most simply, is to increase the benefits paid to participants so that any annual accrual rate below 1.4325% will be raised to 1.4325%, and all annual accrual rates at or above 1.4325% remain unchanged. Plaintiff's actuarial expert, Claude Poulin, has calculated a schedule of revised benefits for members of the benefit-accrual class based on this proposed remedy. Plaintiff's proposal calls for participants to receive a "base benefit increase" that varies based on the year the participant separated from the Plan, with certain adjustments. See Pl.'s Br., Decl. of Claude Poulin ("Poulin Decl.") ¶¶ 5-18. Mr. Poulin contends that different base benefit amounts are necessary to account for changes in the Social Security wage base and schedule each year. See Pl.'s Reply, Supp. Decl. of Claude Poulin ("Supp. Poulin Decl.") ¶ 23. According to Mr. Poulin's calculations, 22,015 participants who are currently vested should receive benefit increases to remedy the backloading violation. Poulin Decl. ¶ 22. Plaintiff relies on a complex set of schedules and adjustments to ensure that each participant's benefits are adjusted accordingly.
Defendants' proposed remedy is simpler and rather more elegant. Defendants propose amending the benefits formula by capping the Social Security offset at.5676% of AMC, thereby mathematically ensuring that the annual accrual rate never falls below the required minimum of 1.4325%.*fn11 Under this approach, Plan participants will receive an increase if, as a result of the original offset, they received a benefit that was less than what would have accrued had the Plan ensured that the annual accrual rate could not fall below 1.4325% during the first 25 years of service.*fn12 Defendants propose providing these participants with "true up" payments to remedy the deficiencies to date and increase their annuity payments going forward. However, Defendants note that not all participants will receive an increase under their proposed remedy because some participants would not have accrued higher benefits even if they had a minimum annual accrual rate of 1.4325% during their first 25 years of service. See Defs.' Br. at 9. Many of these participants, Defendant argues, "outgrow" the backloading that occurs during their early years of service. See id. at 14-15. Some other highly paid participants never had annual accrual rates of less than 1.4325%. Id. at 12-14; Decl. of Ian H. Altman ("Altman Decl."), Ex. 2 (Chart 2C).
Although they sound similar, the parties' proposals are distinctly different. Plaintiff's proposal essentially freezes the Plan's existing accrual rates and then seeks to add benefits to early years until the minimum annual accrual rate reaches 1.4325%. By contrast, Defendants' proposal changes the benefits formula in a way that shifts benefits accrued in later years to earlier years. The result is that under Defendants' plan, the annual accrual rate decreases slightly during some later years to make up for the fact that there are higher accrual rates in early years. This happens purely by mathematical operation of Defendants' modified benefits formula.
In his Reply, Plaintiff argues that Defendants' proposed remedy does not satisfy the 133 1/3% rule because it employs an "average rate of accrual" methodology that is explicitly rejected by ERISA regulations. See Pl.'s Reply Br. at 5-11. Plaintiff (and his expert, Mr. Poulin) point to an example in the Treasury Regulations in which the rate of accrual is 2% for the first five years, 1% for the next five years, and 1.5% for each following year. See 26 C.F.R. § 1.411(b)-1(b)(2)(iii) (Example 3). Although the average rate of accrual under such a scheme "is not less rapidly than ratably," it nevertheless fails the 133 1/3% rule because 1.5% is more than 133 1/3% of the lowest rate, 1%. Id. However, Defendants' proposed solution caps the Social Security offset so as to ensure that the minimum accrual rate in any given year is never less than 1.4325% (or 1.0575% for participants who separated before 1982). Therefore, it does not, in fact, rely on an "average rate of accrual" methodology. Plaintiff also relies on the IRS's Technical Advice Memorandum ("TAM") issued in 2002, which analyzed the Plan and found that it failed to comply with the 133 1/3% rule because the initial rate of accrual under the Plan is generally.71%. See Supp. Poulin Decl., Ex. 4 (TAM). Plaintiff argues that the IRS's analysis contradicts Defendants' assertion that some highly paid participants never had rates of accrual below 1.4325%. See Pl.'s Reply at 8-9. However, Defendant's expert, Ian Altman, correctly explains that the IRS's analysis was based on Social Security calculations in 1996, which cannot be applied retroactively to prior years when determining compliance with the 133 1/3% rule. See Supp. Expert Report of Ian Altman ¶ 5.
Plaintiff's criticism of Defendants' proposal is founded on his view that because the Plan violated the 133 1/3% rule, every Plan participant must be owed some remedy. But the backloading violation in the Plan does not affect all participants equally. As the Court explained in its decision on liability,
The 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)). Thus, by preventing the backloading of benefits, ERISA protects employees who work only a short period from vesting with only a minimal amount of accrued benefits. See Hoover v. Cumberland, Maryland Area Teamsters Pens. Fund, 756 F.2d 977, 982 n.10 (3d Cir. 1985). But employees who stayed in the Plan for a longer period of time eventually accrued those benefits that were denied to them in earlier years of service. The term "backloading" is quite appropriate to explain this phenomenon, as the benefits that did not accrue in early years of service are loaded into the back end of an employee's years of service. As Hilton describes it, longer-term employees "outgrow" the violation of the 133 1/3% rule that would have affected them if they had separated in early years. Thus, although Hilton's proposed remedy provides additional benefits to workers who were shortchanged because they terminated after a relatively brief period of service, it does not provide additional benefits to longer-term workers who made up any initial deficiency through their longevity with Hilton. That is not to say that there was no ERISA violation with respect to these longer-term workers. But those workers suffered no decrease in benefits as a result of the violation and therefore are not entitled to equitable relief. See Mertens, 508 U.S. at 256-58 & n.8 (holding that equitable relief under ERISA does not include compensatory damages to fully remedy all injuries). Indeed, as Hilton points out, such workers are not even a part of the benefit-accrual class, which is limited to employees whose benefits "have been, or will be, reduced as a result of the Defendants' failure to accrue retirement benefits at the annual rates that ERISA requires." Plaintiff's proposal improperly provides a windfall to many of these participants whose benefits were not reduced by backloading.
Therefore, the Court endorses Hilton's proposed remedial benefits formula, which is easier to implement and properly compensates individuals whose benefits were reduced as a result of Defendants' failure to comply with the 133 1/3% rule. The Court shall require the parties to recalculate benefits for the benefit-accrual class based on Defendants' formula and attempt to resolve any disagreements about the specific amounts owed to particular class members.
The Court must also address Defendant's contention that equitable relief should be limited to Plan participants who separated from service after December 29, 1994 (or, alternatively, January 1, 1987). Defendants argue that this is appropriate because the Plan did not explicitly provide for compliance with the 133 1/3% rule until an amendment was signed on December 29, 1994 (and made retroactive to January 1, 1987). In essence, then, Defendants ask the Court to provide no remedy for 6096 participants whose benefits were calculated under an unlawfully backloaded plan. That is not an equitable result. It is true that Plan participants could not have relied on the Plan's purported compliance with the 133 1/3% rule until the 1994 amendment was signed. However, the pre-amendment Plan did not comply with any of the three minimum accrual tests under ERISA, and it is appropriate for the Court to reform the Plan so as to comply with ERISA. See Carrabba v. Randalls Food Mkts., Inc., 145 F. Supp. 2d at 773 ("Due to the absence of an accrual method in the plan, the court is called upon to select for use in the calculations of the awards to be made to the participants against defendant one that, in equity, most appropriately recognizes the objectives of the [plan] in an ERISA context.") The 1994 amendment explicitly adopted the 133 1/3% rule, and it did so without substantially changing the benefits formula that existed previously.*fn13 By contrast, when Hilton amended the Plan in 1999 to comply with the fractional rule, it made substantial ...