By Linda Morra
What are your options when you’re worried that your employer is failing, and if it fails, the government will take over your pension plan, and if that happens, your pension will be cut back significantly, and you’ll be stuck with a smaller monthly benefit instead of a large lump sum distribution?
There aren’t many options for participants in this situation, so a group of Continental Airlines pilots decided that divorce was the answer. If they divorced, their former spouses could obtain QDROs and that’s exactly what they did. The QDROs awarded between 90% and 100% of their full benefits to their former spouses, and the former spouses cashed out lump sum distributions. Then they remarried, with their pension money in the bank, no longer at risk if Continental failed.
Continental’s Administrative Committee for the Pilots Retirement Plan became suspicious and they investigated. They discovered that the pilots and their former spouses were remarried to each other, and that they had continued to conduct their lives as married couples throughout the time they were divorced. In fact, in many cases, the pilots never informed their families and friends that they had divorced.
Continental concluded that the divorces were obtained so that the family court would have jurisdiction to issue the QDROs and the former spouses could receive the pilots’ full benefits. The Plan’s Administrative Committee sued the pilots and their spouses for equitable relief under the Employee Retirement Income Security Act of 1974 (“ERISA”). It sought restitution of the benefits paid because the court orders did not meet the statutory requirements for status as domestic relations orders. Continental’s theory was that the couples had no intention of divorcing; the QDROs were obtained on the basis of sham divorces.
The decision is Brown v. Continental, 647 F.3d 221 (5th Cir. 2011). The Court of Appeals didn’t have to agree or disagree with Continental’s theory that the divorces were a sham. Instead, it held that the Plan’s Administrative Committee didn’t have the authority to determine that the underlying divorce was a sham and, therefore, it didn’t have the authority to refuse to qualify the orders as QDROs on that basis. ERISA requires a plan administrator to treat an order as a QDRO if it satisfies the statutory criteria. “[T]he participants’ good faith in obtaining a divorce is not among those criteria.”
The QDRO requirements provide a straightforward process whereby plan administrators can approve or reject orders “without engaging in complex determinations of underlying motives or intent…. a ‘statutory checklist working to spare [an administrator] from litigation-fomenting ambiguities.’” In fact, the 5th Circuit previously held that “ERISA does not require, or even permit, a pension fund to look beneath the surface of the order. Compliance with a QDRO is obligatory…This directive would be empty if pension plans could add to the statutory list of requirements for ‘qualified’ status’.”
In other areas of law, such as tax, bankruptcy and immigration, sham divorces can be disregarded under the sham transaction doctrine. However, the 5th Circuit declined to apply this doctrine to ERISA, where Congress had not done so. Thus, unless a divorce is declared a sham, or the court order is otherwise invalidated, by the court or agency of competent jurisdiction, participants who obtain properly drafted domestic relations orders must have their benefits distributed in accordance with the QDRO.
As an aside, the litigants in Continental also disputed whether a plan administrator has the authority to retroactively revoke QDRO status when it previously determined that the order was qualified. The court did not decide that issue, however.
In conclusion, just as the rest of ERISA’s statutory scheme is focused on the written plan documents and procedures, the plan administrator’s QDRO inquiry does not involve factually complex and subjective determinations. The plan administrator’s task is to confirm compliance with the relatively straightforward statutory QDRO requirements and, if the order is a QDRO, to pay accordingly. No questions asked.
According to ERISA Advisory Opinion 99-13A, if a plan administrator receives evidence casting doubt on the validity of a purported DRO, the plan administrator has a fiduciary duty to take reasonable steps to determine the credibility of that evidence. If the administrator determines that the evidence is credible, the plan administrator has a further duty to decide how best to resolve the question of the validity of the order, without inappropriately spending plan assets or inappropriately involving the plan in the state domestic relations proceeding. Facts and circumstances will determine the reasonableness of the plan administrator’s course of action. For example, the plan administrator could relay the evidence of invalidity to the state court or agency that issued the order for further action. However, the plan administrator may not independently determine that the order is not valid under state law.