Deferred Compensation Packages - Divisible in Divorce

Many companies establish nonqualified deferred compensation packages that provide supplemental retirement income to top management and highly paid individuals through company contributions and deferred salary. These packages allow top management and key people to defer compensation without immediate regard for government limitations, including taxes.

These packages include a variety of saving or postponed income schemes that are often accumulated during the marriage.

The value of deferred compensation packages is sometimes difficult to calculate and very often requires the services of professionals, particularly in the case of high-income professionals or top managers. These assets often have present and future values that make them very valuable, and sometimes these packages appreciate both actively and passively.

Retirement assets, which are subject distribution in a divorce, should be evaluated carefully. The date of classification of the assets, which is the date when marital and separate property are identified, is very important in determining their distribution.

The distribution of a deferred compensation package often becomes a leverage factor.

Generally, each year an employee may decide to defer a certain percent of his or her compensation, including bonuses, and these deferrals are credited to a special account in his or her name. In addition, the company credits the employee’s account with company contributions in his or her name.

The deferred compensation is not subject to federal or state taxes until the plan makes a distribution in the following tax year. There is a risk of forfeiture, and these assets are subject to distribution in a company bankruptcy.

Most plans allow for the participant to take distribution before retirement;’ however, there may be a 10 to 20 percent penalty for such withdrawals.

Deferred compensation plans are not qualified under ERISA, and a property settlement may be used to divide them in a divorce. However, the plan may impose a penalty if the distribution is prior to the date set forth in the plan rules. A nonparticipant spouse may seek early distribution if the participant’s asset allocation is subject to the risk of forfeiture or the claims of creditors if the company becomes insolvent.

Authored By: Theodore K. Long, Jr., President, Pension Appraisers Online, Inc.

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