Not all benefits claims are created equal. At least, not from a risk management perspective. Benefits claims that reach issues applicable to a broad class of participants have the potential to exponentially increase liabilities.
Kifafi v. Hilton illustrates this risk. A recent court order quantified the cost of a judgment that Hilton Hotels and its retirement plan (“Hilton”) violated ERISA’s vesting and anti-backloading requirements. To date, Hilton has paid $33.3 million to more than 11,000 class members, approximately $22 million to Plaintiffs’ counsel, and provided notice of increased benefits to another approximately 5,600 participants.
A single individual’s claim for benefits was the genesis of this multi-million dollar award.
In the late 1990s, Jamal Kifafi, a participant in Hilton’s retirement plan, brought a claim challenging the calculation of his pension benefit. Mr. Kifafi asserted that the Plan improperly credited Kifafi’s years of service and impermissibly “backloaded” his benefit accruals. Broadly speaking, a plan is backloaded if it awards benefits to employees in later years of service at a rate disproportionately higher than the rate for service in earlier years of service. The claims administrator denied these claims and asserted that neither the plan nor its operation violated any requirement of ERISA.
Mr. Kifafi responded by filing a class action lawsuit, and 15 years of litigation ensued.
In December 2012, the U.S. Court of Appeals for the D.C. Circuit affirmed multiple district court rulings that Hilton backloaded plan benefits and failed to credit certain years of service for a certified class of participants. The Court rejected Hilton’s assertion that a remedial plan amendment during the course of litigation mooted the plaintiffs’ claims. Hilton had argued that it would be illogical not to have amended the plan to stem further violations of ERISA’s anti-backloading requirement. The Court responded that Hilton’s intentions are not “a good predictor of reality,” in light of Hilton’s prior position “that the Plan satisfied ERISA’s benefit accrual requirements even without amendment.”
Cases like Mr. Kifafi’s serve as a potent reminder for the need to adopt comprehensive risk management strategies for benefit claims. Claims administrators should have open lines of communication with legal counsel to identify—early on—those claims with potential to impact other participants. With early identification of such claims, remedial and other defensive measures (if appropriate) can be deployed as soon as possible. If such claims lack merit, administrators will be well served to seek advice of counsel with litigation experience in articulating the reasons for denial. Optimally, the analysis set forth in the claim determination should form the backbone of the plan’s defense in any ensuing litigation. An integrated team that can effectively address systematic issues with a plan is the most effective way to manage risk in complex benefit plans.