Several Continental Airlines pilots, worried about the prospect that their pension plan might someday be taken over by the Pension Benefit Guaranty Corporation (PBGC) and their benefits cut back to the PBGC’s maximum guaranteed level, hatched a scheme to get immediate lump sum distributions.  Normally, a plan participant could receive a distribution only after termination of employment.  There was an exception, however:  If a qualified domestic relations order divided the benefit between the participant and his ex-spouse, the spouse could elect a distribution at any time after the participant reached age 50.

To take advantage of this “loophole” (which ERISA does not allow plans to close), the pilots and their wives obtained divorces and Qualified Domestic Relations Orders (QDRO) assigning the entire accrued benefit to the ex-wife.  The wives then elected and received lump sum distributions, after which the couples remarried, usually without having lived apart in the interim or informed family or friends of their change in marital status.

When it learned what had happened, Continental sued the pilots and their wives, demanding that they return distributions obtained through what the company characterized as “sham divorces.”  The courts, however, have proven uncooperative.  Affirming a district court decision, Brown v. Continental Airlines, Inc., No. 10-20015, 2011 U.S. App. LEXIS 14661 (5th Cir., July 18, 2011) held that a plan administrator reviewing a domestic relations order has no authority to question the validity of the marital action on which it is based.  ERISA lists a series of criteria for QDROs.  Whether the parties divorced in good faith is not one of them.  Also, the court observed, determining whether a divorce was bona fide would require the plan administrator “to engage in complex determinations of underlying motives or intent” and lead to its “independently investigating employees’ private lives in order to judge the genuineness of [their] intentions.”

It should be noted that this scheme may not turn out entirely well for all of the perpetrators.  The pension distributions belong to the alternate payees, who presumably rolled them into IRA’s in most cases.  The pilots may thus find themselves dependent on their spouses for retirement income and, if marital troubles later arise, may find themselves bargaining for a share of the benefits that they earned during employment.