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District Court Finds that Plan Administrators Cannot Consider Motivation When Determining Whether to Qualify a Domestic Relations Order

    Client Alerts
  • November 13, 2009

A federal district court in Texas recently held in Brown v. Continental Airlines, Inc . that a plan administrator cannot consider the motivation for the plan participants' divorces when determining whether to qualify domestic relations orders (DROs).  In general, under ERISA, plan participants cannot alienate or assign their benefits to others.  However, an exception to the anti-alienation provision exists in the form of a DRO that assigns some or all of a participant's pension benefits to a spouse, former spouse, child, or other dependent to satisfy family support or marital property obligations if, and only if, the order is a "qualified domestic relations order."  In this case, the court stated that the plan administrator may not refuse to qualify a DRO except for reasons enumerated in the applicable section of the Employee Retirement Income Security Act of 1974 (ERISA).  Because ERISA does not provide the plan administrator with the ability to deny a DRO due to an illegitimate motivation behind a divorce, the court found that the plan administrator could not deny the DROs by utilizing such logic.

In 2005, a group of Continental Airlines, Inc.'s (the "Company") pilots became worried about the state of the Continental Pilots Retirement Plan (the "Plan"). The pilots had already reached retirement age, but had not retired or been otherwise separated from their employment with the Company.  The pilots, worried about whether they would be able to obtain their full pensions, each obtained divorces from various states and DROs that assigned 100% (and in one case, 90%) of their retirement benefits under the Plan to their former spouses, the named alternate payees under the Plan.  After obtaining their divorces, the Plan's administrator qualified the DROs and paid lump sum benefits to the now ex-spouses of the pilots. However, the pilots continued to cohabitate with their ex-spouses, and most remarried their ex-spouses shortly after obtaining the payments from the Plan.  Eventually, the Plan administrator became aware of the reason for the divorces, and stopped qualifying the DROs they received that showed similar facts to the scenario described above.  The Plan administrator then filed suit to seeking equitable liens/equitable restitution to retrieve the money it erroneously paid to the participants.

In reviewing the facts of the case, the court first considered the definition of a DRO under ERISA.  Next, the court stated that in order for a DRO to allow alienation of plan funds to the alternate payees (i.e. pay the amounts to the ex-spouses) the Plan administrator must qualify it.  The Company argued that ERISA gave the Plan administrator the authority to refuse to qualify a DRO based on criteria not present in the statute.  In response, the court stated that if a DRO meets the requirements of ERISA and the requirements of the terms of the Plan document, the plan administrator has a duty to qualify that DRO.  The court held that under the plain language of the statute, the Plan administrator may not refuse to qualify a DRO except based on reasons enumerated in the statute.  Motivation or good faith behind a divorce is not one of the enumerated requirements of the statute, and the Plan administrator could not refuse to qualify a DRO on those grounds.
Despite this ruling, plan sponsors and administrators should be aware of a 1999 Department of Labor ("DOL") advisory opinion (1999-13A) that also considered the topic of so-called "sham divorces" in order to obtain lump sum pension payments.  This DOL advisory opinion stated that when a plan administrator is made aware of evidence that DROs were fraudulently obtained, the plan administrator has a duty to determine if the evidence is credible without inappropriately spending plan assets or inappropriately involving the plan in the state domestic relations proceeding for the plan participant in question.  The DOL recommended that the plan administrator take an appropriate course of action that depends on the facts and circumstances of each case, but did go so far as to say that the appropriate action could include relaying the evidence of invalidity of the DRO to the state court or agency that issued the order.  The DOL also advised that the plan administrator's ultimate treatment of the DRO could then be guided by the state court or agency's response to the validity of the divorce under state law.  If, however, a plan administrator could not obtain a response from the state court or agency in a reasonable period of time, the DOL stated that the plan administrator may not independently determine that the DRO is not valid under state law.  In such case,  the plan administrator should simply proceed with its analysis of whether the DRO is a qualified under ERISA and the plan document's requirements.

Based on the guidance of the case and the DOL advisory opinion, plan administrators should qualify DROs based upon the requirements of ERISA and their plan document.  If the plan administrator believes that the motivation behind the DRO is fraudulent, the plan administrator may reasonably investigate the allegations and contact the appropriate state court or agency, but may not independently make a judgment on whether the DRO is valid under state law.