Administrators Have No Place in the Bedrooms of Plan Members

5 Aug

When a pension plan member divorces his or her spouse, often the accrued pension benefits are the single largest family asset.  H0w a pension benefit is divided varies by jurisdiction, with some jurisdictions entitling the former spouse to all of the benefits accrued during the period of marriage.  What’s more is that some jurisdictions allow former spouses to “unlock” the divided interest prior to the member’s retirement, rather than requiring the monies to continue to be used only for pension benefits.

But what happens when a couple decides they want to access the accrued pension benefits and are willing to go through with a divorce to get access?  What if the couple just happens to reconcile shortly after the benefits have been transferred?  Can an administrator investigate and question the validity of the divorce?  Apparently not.

In 2009, Continental Airlines filed a lawsuit against nine of its pilots claiming that the pilots filed fake divorces in order to receive early distribution of their pension benefits.  Many of the pilots continued to cohabitate with their ex-spouses, and in many instances they did not inform any of their family or friends that they had gotten a divorce.  Continental sought restitution to the pension plan of the benefits that were distributed to the spouses on the basis that the divorces were “shams”.  The trial court dismissed Continental’s claim, holding that Continental did not have the right to investigate employees’ divorces in order to decide whether those divorces were authentic.

The 5th U.S. Circuit Court of Appeals recently dismissed Continental’s appeal of the lower court decision.  The Court of Appeal agreed with the lower court that the relevant legislation (ERISA) does not authorize an administrator to consider or investigate the subjective intentions or good faith underlying a divorce.  On the contrary, the legislation requires benefits be divided in satisfaction of a qualifying marriage breakdown order that has met the necessary prescribed criteria, of which the divorce being done in good faith is not a factor.  Therefore, the administrator could not interfere by investigating the bona fides of the divorces.  Only where a court finds that a divorce is, in fact, a sham could an administrator refuse to pay out the divided pension.

Counsel for the pilots are championing the decision as a victory for employee privacy rights, given the restrictions on administrator’s abilities to investigate plan members’ family relationships.

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