Employment Benefits Can Be A Large Part Of Assets To Be Divided In A Divorce
Employment benefits are of two broad kinds:
- Equity benefit plans, such as stock options or restricted stock units in the employer’s stock or
- Deferred compensation plans such as pensions and retirement accounts (401(k) or similar tax deferred plans).
If such benefits are a substantial part of your net worth or your spouse’s net worth, it is a good idea to consult with a knowledgeable attorney who can advise you of your rights and obligations concerning these assets.
Defining Community Interest
With these kinds of benefits, the community is only entitled to the benefits that were earned during marriage, i.e., between the date of marriage and the date of separation. Where some of the benefits were earned before marriage or after separation then the courts must allocate the benefits between the community and the employee spouse’s separate property. The court has discretion as to how to allocate the benefits depending on how the benefit plan provides for accrual of benefits and other circumstances, but commonly apply what is referred to as the “time-rule” to make the allocation.
The Time Rule
This rule simply provides that the community interest is the ratio of the benefits that accrued during marriage to the benefits that accrued before marriage or after separation. With a grant of options or other equity benefits, the period of accrual starts with the date of the grant of a specific number of options or shares of stock and continues until the options or stock vests, i.e., the date the options become exercisable or the stock becomes entirely the property of the employee.
Thus if options were granted 1 year before the date of marriage and vested 1/4th annually, the employee would have a separate property interest of 100% for the first quarter of the grant, 50% in the second quarter, 33% in the third quarter and 25% in the final quarter (assuming the parties did not separate at least until the last quarter of the options vested). The community would own the balance of the options, 0% in the first quarter of the grant, and 50%, 67% and 75%, respectively, in the last three quarters.
With an Employee Stock Purchase Plan, contributions deducted from a paycheck have the same character as the character of the wages, as will the stock eventually purchased with the contribution.
Similarly, with a pension the ratio of the time the employee worked for the employer during marriage to the time the employee worked before marriage and after separation determines the community interest in the pension. The rest is the separate property of the employee. Where the employee remains employed at the same company after separation, the actual ratio of the community and separate property interests cannot be determined until the time the employee leaves the company by retirement or otherwise.
401(K)s & Other Defined Benefit Plans
With a defined contribution plan such as a 401(k) or similar retirement or deferred compensation plan, the time rule acts somewhat differently. If the employee made contributions before marriage, the employee’s interest at date of marriage is the value of the investments in the plan on that date. As the employee makes contributions from community earnings, the community starts having an interest in the plan measured by the contributions. Both community and separate portions of the plan also take a portion of the “investment experience,” (the total of the investment income, capital gains, capital losses and fees) in proportion to the ratio of the assets that are community and separate. Contributions from earnings after separation work the same way. The character of contributions and earnings in IRA accounts and Keogh plans are measured in the same way.
Qualified Domestic Order (QDRO)
Note that some retirement assets must be divided by a Qualified Domestic Relations Order (QDRO) under Federal law to prevent taxation of the money distributed from the plan to the non-employee spouse and to protect plan administrators. Where a QDRO is necessary, the common practice is to come to an agreement as to the method for determining each party’s interest in the retirement assets and use a joint specialist to prepare the actual documentation. Many employers have approved forms for a QDRO, but care should be used before agreeing to use the approved form since the employer forms will tend to favor the plan administrator and the employee over the non-employee spouse and may or may not be revised as new statutes or case opinions affect the applicable law.
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