Affirming a lower court decision, the Court of Appeals for the Fifth Circuit ruled that a plan administrator may not recoup benefit payments from participants who allegedly obtained sham divorces so they could receive distributions of their retirement benefits while still employed. Under the Employee Retirement Income Security Act (ERISA), retirement benefits may be assigned to an alternate payee, such as an ex-spouse, under the terms of a domestic relations order (DRO) issued by a court. If the plan administrator determines that the DRO satisfies the criteria to be a qualified domestic relations order (QDRO), ERISA requires the plan to pay benefits in accordance with the terms of the QDRO.
In this case, the plan administrator claimed that a group of participants became concerned that financial problems affecting their employer might result in their pension plan being taken over by the Pension Benefit Guaranty Corporation, resulting in diminished benefits for participants upon retirement. In response, the participants allegedly obtained divorces solely for the purpose of obtaining immediate lump sum pension distributions from the company retirement plan. Under the terms of the plan, if a participant is at least 50 years old, an ex-spouse may receive a lump sum distribution of the benefits assigned to the ex-spouse under a QDRO, even if the participant is still employed. The participant would not otherwise be eligible to receive payment unless he or she actually terminated employment. By getting divorced, the participants and their spouses were able to obtain QDROs, assigning up to 100 percent of their benefits to the spouses.
Only after the plan had paid out benefits under the QDROs did the plan administrator determine that the couples had obtained divorces solely for the purpose of receiving payment of their pension benefits. Following divorce, the couples “essentially conducted themselves as if the divorce had never happened,” including continuing to cohabitate and, in some cases, concealing the divorce from family and friends. Eventually, after collecting their benefits, the couples remarried.
With this knowledge in hand, the employer sued the couples for restitution of benefits paid, claiming that a plan administrator has the authority to refuse to qualify a DRO based on its determination that the underlying divorce is a sham. The Fifth Circuit rejected this assertion, holding that ERISA requires an administrator to determine that an order is a QDRO if it satisfies all the statutory criteria, and that a participant’s “good faith in obtaining a divorce is not among those criteria.” The court emphasized that its reading of ERISA is in harmony with the reasoning of the Supreme Court and other appellate courts, which have described the qualification of a DRO 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.” (Brown v. Continental Airlines Inc., 5th Circ. 2011)