Benefits and Compensation, Recruiting

Despite Phony Divorces, Pension Plan Must Pay Spousal Benefits

Retirement plan administrators do not have the authority to conclude that a domestic relations order (DRO) is not qualified because it is based on a “sham” divorce, the 5th U.S. Circuit Court of Appeals decided July 18, 2011.

The 5th Circuit stated that a key ERISA section “does not authorize an administrator to consider or investigate the subjective intentions or good faith underlying a divorce” in Brown v. Continental Airlines Inc.

Affirming the 2009 decision by the U.S. District Court for the Southern District of Texas, the 5th Circuit echoed the lower court’s holding that a plan administrator is bound by ERISA’s unambiguous language.

After becoming concerned about the health of the plan in which their retirement benefits were vested, a senior group of Continental Airlines pilots initiated a series of sham divorces so their spouses could collect money from their company’s retirement plan. The pilots had already reached retirement age, but had not retired and were not eligible for plan distributions.

The divorces were allegedly for the sole purpose of obtaining a qualified domestic relations order (QDRO), which is an exception to ERISA’s anti-alienation provision.

The pilots obtained divorces from various states and presented the plan administrator with DROs that assigned 100 percent (in one case 90 percent) of their retirement plan benefits to their (now former) spouses. The plan administrator “qualified” the DROs. The alternate payees requested immediate lump sum disbursements. Because the pilots in question were of retirement age at the time of the requests, the plan paid the benefits.

After the distributions had been made, the plan administrator discovered that the pilots and their former spouses were not behaving in a manner consistent with the breakup of a marriage. For example, many of the couples continued to cohabitate, did not tell their friends or family about the divorce, and generally acted as if the divorces had never happened. The plan administrator eventually realized that the pilots had obtained divorces for the specific purpose of withdrawing their pensions early.

The plan administrator immediately stopped recognizing similar DROs as QDROs and sued to recover the money it claimed was erroneously paid. But the lower court held that the plan administrator had no authority to reject a DRO, and that an agreement meeting the definition of a DRO must be qualified if it meets the criteria for a QDRO.

The 5th Circuit agreed with the district court in rejecting Continental’s assertion that a plan administrator has the authority to refuse to qualify a DRO if the divorce in question is a sham, stating that “good faith” is not a criterion in obtaining a divorce. Furthermore, the court said:

“Our reading … is in harmony with the reasoning of the Supreme Court, our court, and other federal appellate courts, which have described the determination of whether a DRO is qualified as a straightforward matter that requires the administrator to take DROs at face value and not to engage in complex determinations of underlying motives or intent.

Practitioner’s Note: When a plan administrator fears that a DRO was fraudulently obtained, the plan administrator is not free to ignore evidence of a sham divorce. A DRO issued under false pretenses may not have been validly issued based on state domestic relations law and would, in that case, not meet the requirement of a “domestic relations order” under ERISA Section 206(d)(3)(B).

When presented with information of a sham divorce, a plan administrator should take reasonable steps to determine the credibility of such evidence. The plan administrator should do this without spending an inappropriate amount of plan assets on the investigation and without involving the plan in state domestic relations proceedings. The U.S. Labor Department has suggested that the appropriate steps could include such steps as relaying the evidence to the state court or agency that issued the divorce. However, regardless of the outcome of the state court or agency’s analysis, in no circumstance is a plan administrator authorized to make an independent determination of whether a DRO is valid under state law.

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