Is Deferred Compensation a Marital Asset?

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Is Deferred Compensation a Marital Asset?

Many employers provide a variety of benefits that employees can earn – in time. These executive compensation benefits and employee benefits aren’t payable right away like a paycheck or health insurance benefits. The benefits accrue over time – often by placing funds in a separate account. The employee is entitled to take the benefits after certain conditions are met – such as reaching a certain age, leaving the company, or working with the company for a specific number of years.

When spouses divorce, a determination needs to be made whether or not this deferred compensation is a marital asset.  Does the deferred compensation benefit affect the amount of alimony or child support the employee must pay his/her spouse or children?

Deferred compensation is normally categorized as either qualified deferred compensation or nonqualified deferred compensation. The right of a spouse to equitable distribution of a qualified deferred compensation plan or equitable distribution of a non-qualified compensation plan requires the skills and experience of an experienced deferred compensation divorce lawyer – to protect the spouses and also to make clear the obligations of the employer.

What types of deferred compensation can be considered a marital asset?

In New Jersey, deferred compensation includes:

  •         Pensions
  •         Profit-sharing plans
  •         Retirement plans
  •         Stock options
  •         Bonus deferral plans
  •         Individual retirement accounts (IRAs)
  •         Workers’ compensation benefits
  •         Profit thrift plans
  •         Tiered salaries
  •         Keogh plans
  •         Money-purchase plans
  •         Restricted stock units
  •         401(k) plans and other similar plans

Deferred compensation may also include vacation or sick pay that hasn’t been used and structured bonuses and other benefits.

How does deferred compensation affect a divorce?

Generally, spouses in New Jersey have the right to the equitable distribution of marital property. Marital property normally includes the assets of the spouses that they acquire while they are married. Deciding if deferred compensation is a marital asset is a complex issue and  depends on when the compensation was acquired during the marriage. This happens because the working spouse accrues the benefits during the marriage but doesn’t have the right to access the benefits until after the spouses divorce – unless the benefits have already vested. If however the deferred compensation was granted to a spouse for work performed during the marriage, it is generally considered marital and distributable in the divorce.

The amount of deferred compensation benefits a spouse has is a factor in determining the amount of alimony a spouse is entitled to.

Qualified vs Non-Qualified deferred compensation plans as marital assets

Deferred compensation plans are often used to postpone when taxes must be paid – to a time when the employee’s tax bracket should be lower than when he/she works full-time. The tax benefits differ depending on whether the plan is considered a “qualified” plan or a “non-qualified plan.” Deferred compensation plans of either type help the employee budget for retirement.

Qualified plans are governed by ERISA – the Employee Retirement Income Security Act, the Securities and Exchange Commission, and the IRS. Qualified plans need to be held in trust and are generally protected from creditors – while non-qualified plans aren’t held in trust and may not be protected from creditors. This can make distribution of these assets difficult.  401(k) plans fall into the qualified category. Stock options generally fall into the non-qualified category.

What is a QDRO?

Even when there is an agreement or court order regarding the right of a spouse to deferred compensation divorce benefits (based on deferred compensation of equitable distribution or deferred compensation alimony benefits), the spouse can’t withdraw the funds right away. The employee also can’t withdraw the funds and pay the spouse. A skilled New Jersey divorce lawyer works to ensure that this type of deferred compensation marital assets are available to the spouse when they vest or become due.

To ensure the proper payments are made at the correct time, the spouses need to draft a document called a Qualified Domestic Relations Order (QDRO) – for qualified deferred compensation plans. The QDRO provides that the non-employee spouse is an alternate payee and has the right to payment of a portion of the deferred compensation account. The QDRO also helps avoid tax penalties and penalties for early withdrawal.

Equitable Distribution of Non-qualified Deferred Compensation Plans

The right of a spouse to a Non-Qualified compensation plan is more problematic because there’s no guarantee the funds will be available when the employee has the right to demand payment. Another type of order needs to be prepared which provides payment – if and when the employee is paid. The order must also address how the spouse will be paid. Will this type of deferred compensation be considered a marital asset? The answer depends on each individual situation. 

In many cases, a divorce lawyer will work to avoid the use of a QDRO or other nonqualified deferred compensation and divorce order by negotiating that the spouse’s right to deferred compensation should be traded off for other assets – such as the marital home. The spouses may also consider using a Callahan trust.

Generally, the attorney for the employee wants to ensure that the deferred compensation is used for equitable distribution or alimony – but not both.

At DeTorres & DeGeorge Family Law, our family lawyers understand a spouse’s property and alimony rights and can guide you through complex issues such as determining if  deferred compensation is a marital asset. We understand how to negotiate and contest these complex plans. To speak with an experienced New Jersey deferred compensation lawyer, call us at 908-691-2104 or fill out our contact form to schedule an appointment. We have offices in Clinton and Morristown.

Erin D. DeGeorge
Erin D. DeGeorge joined DeTorres & DeGeorge, LLC as partner to the firm in June of 2010. Prior to joining DeTorres & DeGeorge, Erin was associated with the national firm of Fox Rothschild LLP and Cutler, Simeone, Townsend, Tomaio & Newmark, LLC...
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