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April 9, 1997


Eugene H. Nickerson, U.S.D.J.

The opinion of the court was delivered by: NICKERSON

NICKERSON, District Judge:

 Plaintiff Calogero Carollo brought this action on June 25, 1996 under the Employee Retirement Income Security Act of 1974 (the Act), 29 U.S.C. § 1001 et seq., against the Cement and Concrete Workers District Council Pension Plan (the Plan) and its Board of Trustees (the Board). The Board is an "Administrator" of the Plan within the meaning of 29 U.S.C. § 1002(16)(A), and Carollo is a participant in the Plan within the meaning of 29 U.S.C. § 10002(7). This court has jurisdiction under 28 U.S.C. § 1331.

 Carollo makes fifteen claims for relief, alleging, among other things, that the Plan's pension benefit accrual formula violates the Act and that the Board breached its fiduciary duties. The complaint seeks declaratory relief, reformation of the Plan, and recalculation of Carollo's pension benefit.

 Defendants move to stay the action pending an audit by Internal Revenue Service (the Service), or, in the alternative, for summary judgment on the grounds that all Carollo's claims are time-barred.

 Carollo cross-moves for partial summary judgment on his first two claims for relief. Claim One says that the Plan violates the Act's minimum accrual rates for employment after the Act took effect, April 1, 1976 (post-Act). Claim Two says that the Plan violates the Act's minimum accrual standards for employment before April 1, 1976 (pre-Act).


 Carollo has had employment covered by the Plan in every year between 1969 to the present, except for 1975 and 1976. Plan records credit Carollo with six years of service before 1976 and nineteen years of service after 1977.

 Counsel appealed this calculation to the Board, pointing out, among other things, that the Plan's benefit accrual rate fell below the Act's minimums. He asked for reformation of the Plan. On February 27, 1996, the Board told Counsel that it found no "basis to approve your appeal." The present complaint was filed on June 25, 1996.


 For the reasons stated hereafter in Parts VII and VIII, the court will deny defendants' motions for a stay and summary judgment. The court turns first to Carollo's motion for partial summary judgment.

 Under Federal Rule of Civil Procedure 56(c) the court will grant summary judgment if the evidence shows that there is no genuine issue as to any material fact and the movant is entitled to a judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). The court views the record in the light most favorable to the non-movant and resolves all ambiguities and draws all reasonable inferences against the movant. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S. Ct. 993, 994, 8 L. Ed. 2d 176 (1962); Donahue v. Windsor Locks Bd. of Fire Comm'rs, 834 F.2d 54, 57 (2d Cir. 1987).


 The essence of Carollo's claims is that the Plan unlawfully "backloads" pension benefits so that employees who have worked for 25 consecutive years receive a pension benefit calculated on a higher base than those who have not worked for 25 consecutive years.

 When Congress passed the Act in 1974, it found that despite the enormous growth in employee benefit plans "many employees with long years of employment are losing anticipated retirement benefits owing to the lack of vesting provisions in such plans[.]" 29 U.S.C. § 1001(a). Not only did Congress enact minimum vesting standards determining when an employee is entitled to a pension benefit, but it established minimum accrual rates to prevent the employer from backloading benefits--making benefits accrue very slowly until the employee is near retirement age. See Jones v. UOP, 16 F.3d 141, 143 (7th Cir. 1994) (citations omitted). A congressional report explained:

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.

 H.R. Rep. No. 93-807 (1974), reprinted in 1974 U.S.C.C.A.N. 4639, 4688.

 Section 1054 of the Act sets out three backloading tests--the "3% Rule," the "133 1/3% Rule," and the "Fractional Rule." These three tests specify the minimum rates at which retirement benefits must accrue, and compliance with the Act requires satisfaction of one of the three. Carollo says, and defendants do not dispute, that the 133 1/3% Rule is the only standard the Plan is capable of satisfying.

 The 133 1/3% Rule is met so long as (1) pension benefits accrue ratably such that participants receive, each year, a definite portion of their projected retirement benefit, and (2) the rate of accrual does not, in any given year, increase by more than 33 1/3%. The statute requires that, under the plan, the benefit payable at retirement accrues at a rate such that the rate of accrual for any later plan year is "not more than 133 1/3 percent of the annual rate at which [a participant] can accrue benefits for any plan year beginning on or after such particular plan year and before such later plan year." 29 U.S.C. § 1054(b)(1)(B).

 The regulation provides that the 133 1/3% Rule is not satisfied "if the base for the computation of retirement benefits changes solely by reason of an increase in the number of years of participation." 26 C.F.R. § 1.411(b)-1(b)(2)(ii)(F). Thus, a pension plan may not change the base in the accrual formula--e.g. from average monthly pay to highest monthly pay--solely because a participant has worked more years than other participants. Id.


 The Plan in section 302(a) makes the following provisions pertinent here for a participant's benefit accrual. For the first 24 years of service after March 31, 1976, a participant's pension benefit accrues at 2% of Average Monthly Earnings, that is, a participant's career average pay (Average Earnings). Participants who work for 25 years without a break in service longer than two years, will, in their 25th year, have their pension benefit recalculated for all previous years of service at 2% of Final Average Monthly Earnings (Final Average Earnings) Final Average Earnings is the average pay based not on the career average pay but on a participants' highest five years of earnings in the ten years prior to retirement (Final Average Earnings). For each year of employment after such a participant's 25th year, the benefit accrues at 1.66% of Final Average Earnings.

 In contrast, participants who have worked less than 25 years or have had a break in service for longer than two years will have all their post-Act employment credited at only 2% of Average Earnings, that is, career average pay.


 Carollo says the Plan violates the Act's minimum accrual rates for post-Act service for two reasons. First, it fails to satisfy the 133 1/3% Rule because the increase between year 24 and year 25 is greater than 33 1/3% and this increase results from the Plan's use of a higher base, Final Average Earnings rather than Average Earnings. Second, the Plan unlawfully disregards a participant's years of employment prior to a two year break in service.

 A. The Plan's change in base

 Carollo says that the Plan violates the Act because it changes the base "solely" by reason of a participant's increased service in violation of the regulation, 26 C.F.R. § 1.411(b)-1(b)(2)(ii)(F).

 Defendants say that the Plan's rate of accrual remains constant at 2% through a participant's 25th year and then actually decreases to 1.66% for subsequent years of employment. Although they admit that the base used does change in a participant's 25th year of service (from Average Earnings to Final Average Earnings), they say that change is not "solely" because of an increase in the number of years of service, but is also conditioned on: (1) at least one year of service after December 1, 1980 and (2) no break in service longer than two years.

 Plainly section 302(a) of the Plan operates so that few employees will have their pension benefit recalculated using the higher base. For many, this will be only because they have not participated in the Plan as long as others. It would make no sense to interpret "solely" in the regulations, 26 C.F.R. § 1.411(b)-1(b)(2)(ii)(F), in such a way as to defeat the purpose of the Act to prevent backloading. But neither can the term be ignored.

 The word "solely" can be reconciled with the purpose of the Act by reading it to mean that while the base may be changed because of factors such as salary increases, the base may not be changed, absent such factors, by reference to length of service. Salary increases, often linked with longer service, can increase the amount of benefit by raising the base. Patently, nothing in the Act sought to limit the effect that wage increases would have on the base in the computation for retirement benefits.

In applying the 133 1/3% test, social security benefit levels for future years and other factors relevant in computing benefits, including salary differentials, are to be held constant. With respect to compensation related fluctuations in rates of accrual or, in an appropriate case, fluctuations on account of differing rates of contribution, it is the intention that such fluctuations be disregarded for purposes of applying the 133 1/3 % test. Such matter, of course, will be subject to regulations of the Secretary of ...

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