In my professional work I came across this odd little court decision. The circumstances behind the case are a caution to those who don't believe in the concept of "unintended consequences". Basically, recent pension reform (well, a 2006 law which is finally being implemented fully now) requires that a plan that is woefully underfunded shall be no longer allowed to pay out benefits in a form that are "accelerated", such as a single lump sum of the present value of the future lifetime obligation. That's a reasonable rule - it means that a plan that might not be able to meet all of its obligations right now will have more time to recover and, maybe, will be able to get back to full funding. There has also been in place, for a long time, a pension law which provides that if an employee is married, the benefit he is accruing is really a benefit for him and his spouse, so the benefit is automatically payable as a "joint and survivor" benefit: payable upon retirement to both spouses and then at the first death payable to the survivor. (They can elect to receive only a single life pension instead - in a higher amount - only with the signature of both spouses). In the circumstances of a divorce, the non-employee ex-spouse has a right to some pension benefits, but she (typically the non-employee spouse is the wife, so I will phrase it that way even though it applies equally well to a reverse situation) doesn't want to leave the timing of when she gets that benefit to depend on her employee husband's decision to retire and start payments, or to delay that. So the law allows the plan to provide, if specified under the qualified divorce arrangement (a QDRO, Qualified Domestic Relations Order), that the wife can get her benefits out now in full, so it is no longer tied to her rat of an ex-husband.
Now enter in the Continental pilots, who are on the look out for good ol' numero uno. The plan sends them a (required) notice saying funding level is below the threshold, they will have to curtail lump sum payments. What do they do? They divorce their wives, and set up QDROs that assign their entire pension rights to the ex-wives, and that provide the ex-wives are to be paid their retirement benefit immediately, in full. The ex-wives gets the money and roll it into their IRAs so no taxes are due. Then the couples re-marry !!!
What could be simpler? The pension plan is on shaky ground, may be in danger of folding or at least in danger of having to pay out reduced benefits, so they made sure they got theirs. Hey, the airline industry is pretty wobbly, there is no guarantee that Continental will ever recover well enough to properly fund the plan. Get yours while the getting is good, is their motto.
Not surprisingly, the pension plan (and its sponsor Continental airline) didn't like that. The whole operation clearly defeats the very purpose of the no-accelerated-benefits law. Paying out the lump sums all together exacerbated the funding problem. And the divorces were shams - many of them didn't even move out of the house. After the retirement plan paid the benefits, they submitted a claim to recover the amounts paid. The plan sued in federal court to get the money back into the plan. The court declined to support the pension plan's argument.
My initial feeling was one of outrage at the pilots, and anger at the court. It is totally obvious that the pilots were using a merely pro-forma legal mechanism, without any underlying substance, to effectively skirt the law and its entirely reasonable intent. Effectively, the court is allowing the pilots to make a total mockery of marriage.
But then I came to the last bit: the footnote on the last page, which I will quote for you:
We emphasize that this holding is a narrow one, and our decision should not be construed to prevent a retirement plan administrator from recouping benefits paid out if a divorce is declared a sham (or a DRO is otherwise invalidated) by a court or agency of competent jurisdiction, and thus the doctrine of res judicata precludes further litigation in an ERISA proceeding on the question of good faith. That scenario is not before this panel.
The judges were, in effect, telling Continental and its pension plan: you filed in the wrong court for the wrong type of remedy, stupid. Go and file in state court to have the QDROs nullified, and you will have what you need. This ruling is narrow, so you have all the maneuvering room you need to do that. If I am reading their remonstrance to the plaintiffs correctly, the judges are virtually begging them to fix the matter by filing in state court instead. So, instead of having a court that is allowing marriage to be trampled underfoot, the court is doing 2 things: properly exercising restraint by identifying the limits to their own authority to allow a pension plan to write their own fixes to legal mess-ups, and explaining how such fixes can be achieved WITHOUT re-writing the law from the bench. How's that for good behavior from the bench? Or am I mistaken and misreading the whole thing?