by James G. Wargo (Winter 2017)

Local pension funds and beneficiaries should be aware that a Qualified  Illinois Domestic Relations Order (“QILDRO”) does not attach to disability benefits awarded under the Illinois Pension Code. However, even though a QILDRO may not attach to disability benefits, this does not mean that such disability benefits may not be subject to a post-marital division of assets.

According to the Illinois Pension Code, an Illinois court in any proceeding for a dissolution of marriage “may order that all or any part of any: (i) member’s retirement benefit, (ii) member’s refund payable to or on behalf of the member, or (iii) death benefit, or portion thereof, that would otherwise be payable to the member’s death benefit beneficiaries or estate be instead paid by the retirement system to [an] alternate payee.” (40 ILCS 5/1-119(b)(1)) Any such diversion of retiree benefits to an alternate payee may only be accomplished through a QILDRO. (40 ILCS 5/1-119(b)(2))

The scope of a QILDRO is limited and “shall not apply to or affect the payment of any survivor’s benefit, disability benefit, life insurance benefit, or health insurance benefit.” (40 ILCS 5/1-119(b)(4)) Accordingly, a QILDRO is only capable of diverting payment of a retirement benefit, a refund, or a death benefit. (40 ILCS 5/1-119(b)(2); also, see In re Marriage of Benson, 2015 IL App (4th) 140682, ¶ 36)

However, simply because a QILDRO cannot attach to disability benefits does not mean that these benefits are immune from a post-marital division. In fact, courts can still divide benefits to effectuate the intentions of the parties in a divorce, by ordering the pensioner to make direct payments to a spouse, former spouse, child, or other dependent. In diverting post-marital assets, courts will focus their attention on the nature of the post-employment benefits rather how those benefits are labeled. (In re Marriage of Schurtz, 382 Ill.App.3d 1123, 1126 (3rd Dist. 2008))

In Benson, for instance, the circuit court entered an order dissolving the marriage of a firefighter and his spouse. The court’s final judgment order awarded the spouse a one-half interest in the firefighter’s “retirement” benefits. The firefighter was injured nine years later and began drawing disability benefits in 2008. At the time of his injury, the firefighter was eligible to retire and draw a retirement pension, but he chose to receive disability benefits because of the tax and insurance advantages associated with the disability pension. The former spouse did not initially receive any portion of the awarded disability benefits.

Several years later in 2013, the former spouse filed a petition to enforce the terms of the dissolution of marriage judgment order seeking to recover one-half of her former husband’s disability benefits while contending that they constituted retirement benefits subject to the court’s judgment order. The circuit court ruled in favor of the former spouse and awarded her a sum of $116,345.19 for prior benefits due as well as 37.7% of each monthly disability check to be paid directly by the firefighter.

On appeal, the appellate court affirmed, finding that the disability benefits were more akin to retirement benefits since the “disability benefits did not serve as income replacement, but as a substitute for his retirement pension.” Therefore, the benefits were subject to division under the court’s judgment of dissolution of marriage.

While the court fully embraced the notion that a QILDRO is not a proper mechanism to divert disability benefits, the court noted that nothing in the Pension Code prohibits a court from ordering a pensioner from making direct payments of a portion of his or her disability benefits to a former spouse or other dependent.

Although a court may find that disability benefits are subject to division under a marital dissolution agreement and/or judgment of dissolution of marriage, a QILDRO may not be used as the mechanism to convey such disability benefits to a spouse, former spouse, child or other dependent. After a court determines that benefits are to be shared between former spouses, such funds can be distributed “triangularly” from the pension fund to the retiree and then from the retiree to the spouse, former spouse, child, or other dependent.

In short, a pension fund should not divert disability benefits through a QILDRO. Instead, it should continue to pay disability benefits to the member and allow the matter to be handled in the context of a court order or settlement agreement entered in a judicial proceeding.