A Texas federal court has ruled that a pension plan administrator may only look at the factors specified by law when deciding whether to qualify a domestic relations order transferring an employee’s pension to an ex-spouse. The fact that the divorce was a sham intended to get funds out of the plan without retiring was of no consequence, said the court.

What happened. Several senior pilots working for Continental Airlines who were worried about the health of the company pension plan came up with a scheme to get their retirement benefits paid out without having to retire. They obtained divorces with domestic relations orders assigning 100 percent of their retirement benefits to their spouses as alternate payees. The plan administrator determined that the orders were qualified domestic relations orders (QDROs). When the alternate payees requested a lump sum disbursement, the plan paid the benefits. Some payments were as much as $900,000.

Eventually the administrator learned that the pilots had obtained divorces to let them obtain their pensions early. The uncontested facts showed that the pilots and their former spouses did not break up their marriages. Many of the pilots continued to cohabitate, remarried soon after obtaining the lump sum payout, and all conducted themselves as if the divorce had never happened. The administrator stopped acting on similar orders that were in the pipeline and sued the pilots who had received the payments, seeking restitution of the lump sums because they were paid under false pretenses.

What the court said. ERISA bars retirement plans from paying benefits to a third party, even under court order. There is one exception for QDROs that give “alternate payees” the right to receive all or a portion of participants’ benefits. A QDRO must be made pursuant to state domestic relations law and must specify the dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee.

The court determined that a plan administration may not refuse to determine that a court order is a QDRO based on criteria not present in the statute. The court ruled that the good faith of the divorce and resulting domestic relations order is not required by the statute. Thus, Continental could not refuse to qualify or retroactively disqualify domestic relations orders that met the specific criteria set out by Congress. Brown v. Continental Airlines, Inc., U.S. District Court for the Southern District of Texas, Civil Action H-9-1148 (10/19/09).

Point to remember: While an administrator may not add criteria for determining if an order is a QDRO, he or she must carefully review all orders that the plan receives to make sure that all the specific requirements for a QDRO are met before paying any benefits to an alternate payee.