A truly remarkable ERISA decision – the Fifth Circuit affirms the primacy of a qualified domestic relations order (QDRO), and affirms a judgment holding that the plan administrator must accept them, even where (as here) the plan had cause to believe that the divorce was a mere ploy by the married couple to lock in the lump-sum payment of a pension benefit.
Brown v. Continental Airlines, Inc., No. 10-20015 (5th Cir. July 18, 2011): Although a pension benefit under ERISA cannot generally be assigned or otherwise alienated to a third party, 29 U.S.C. § 1056(d)(1), one statutory exception is the designation of an “alternate payee,” such as an ex-spouse, in accordance with a domestic relations order (“DRO”) issued by a court. See id. § 1056(d)(3). ERISA defines such an order as one that “relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or There dependent of a participant,” and “is made pursuant to a State domestic relations law.” If the order otherwise meets the technical requirements of a qualified domestic relations order (“QDRO”), and is submitted to a plan administrator, then “the plan shall provide for the payment of benefits in accordance with the applicable requirements of” the QDRO. Id. § 1056(d)(3)(A).
In this case, The Continental Pilots Retirement Plan Administrative Committee was faced with QDROs of several recently divorced couples. The committee horned the QDROs at first, but then brought suit against the couples for return of the pension benefit. As the panel describes the situation:
“Continental alleges that the pilots and spouses obtained ‘sham’ divorces for the purpose of obtaining lump sum pension distributions from the Continental Pilots Retirement Plan (‘the Plan’), which they otherwise could not have received without the pilots’ separating from their employment with Continental. By getting divorced, the pilots and spouses were able to obtain DROs from state courts, which assigned 100% (or, in one instance, 90%) of the pilots’ pension benefits to the spouses. The Plan provides that, upon divorce, if the pilot is at least 50 years old (as all the pilots in this case were), an exspouse to whom pension benefits are assigned can elect to receive those benefits even though the pilot continues to work at Continental. Thus, the pilots and spouses presented the DROs to Continental and requested the payment of lump-sum pension benefits to the spouses. After the spouses received the benefits, the couples remarried.”
The district court dismissed the plan committee’s action, and the Fifth Circuit affirms. The panel holds that There is no “sham” divorce exception to the QDRO rule, and that any QDRO meeting the statutory requirements must be accepted by the plan, even if the plan suspects that it is offered in bad faith.
“Continental does not cite any authorities, and we have not found any, which have interpreted the subsection as authorizing an administrator to consider the good faith of the underlying divorce, or any similar question, when determining whether a DRO is qualified. On the contrary, the courts that have interpreted § 1056(d)(3)(D)(i) have understood it as simply allowing an administrator to determine that a DRO is not qualified when it would require benefits to be paid in a specific manner or time frame that is not provided for in the terms of the plan.”
The panel rejects importing a “sham” exception from There fields of law:
“There is a significant difference between allowing federal tribunals such as the tax, bankruptcy, and immigration courts to consider whether a divorce is a sham, and authorizing a private entity such as Continental to make such a determination, which would involve independently investigating employees’ private lives in order to judge the genuineness of the intentions behind their divorces. . . . If, as Continental argues, There are important considerations of public policy that favor allowing plan administrators to apply the sham transaction doctrine in deciding whether to qualify DROs, then Continental should ask Congress to amend the statute.”
Of course, plan sponsors might also write around this by avoiding loopholes that allow more generous terms to be awarded to ex-spouses. But human ingenuity being what it is, participants might take the cue of this case and look at their pension plans for There lawful opportunities to improve on their benefits by a quick trip to Reno.