Early Retirement Subsidies, Severance Packages, and Retirement Incentives During Divorce Definition: An early retirement subsidy (also called early retirement incentive or severance package) is a benefit or bonus offered by a corporation to employees to induce them to retire prior to their normal retirement age.

General Discussion: Early retirement subsidies are a common happening in corporate America today and are part the continuing downsizing of American business. Companies offer these bonuses for early retirement to eliminate outdated jobs, unproductive employees, and long-time, high-paid employees in obsolete positions.

Retirement often occasions appeals for modification of spousal and/or child support on the part of the payor. In the aftermath of divorce, early retirement may have a significant impact on the obligations of the payor of spousal or child support. In considering motions for modification, courts generally consider whether the disadvantage to the recipient outweighs the benefit to the payor, and whether retirement is in good faith or bad faith. In general, courts consider five factors in modifying support occasioned by retirement. They are 1) whether retirement was foreseen at the time the order was entered; 2) the age of retirement; 3) the circumstances of the retirement (good faith or "involuntary," such as health or a buyout offer) and efforts to find other employment; 4) whether the action was taken to avoid support; and 5) whether retirement was taken voluntarily for a reason other than health or forced retirement.

When a retiree argues that early retirement is being taken for health reasons, the burden of proof is on him or her.

Companies offer early retirement subsidies to employees in a number of routines:

1. To those who have attained a set amount of years of service (maybe 30 years) are able to retire at an earlier age without penalty to their benefits.

2. To those who have achieved a set amount of years of service are given the opportunity to retire immediately, with the employer adding a set amount of years of service to their pension benefits.

3. To those with a set number of years of service to whom a lump sum cash payment or severance package is offered in order to make early retirement more attractive.

4. Any combination of the above in one package. Further, a corporation can offer anything perceived to have value to the employees in order to induce early retirement.

Classification: Courts must determine if early retirement subsidies, incentives or severance packages are marital assets subject to distribution. In doing this, the critical issues include the reasoning for developing the benefit package, how the package is intended to compensate the employee, and when the employee receives it.

The Courts have looked at the following specific issues:

1. Whether the early retirement subsidy rewards the employee for work performed in the past or is a severance package to compensate him or her for the loss of future earnings.

Some courts view retirement subsidies as a reward for work in the past. Many early retirement subsidies are calculated upon an employee’s years of service with the company. Various courts have viewed this enhancement to the pension as a bonus for work performed in the past, thus classifying it as deferred compensation. The enhancement is merely a modification of the pension, not a new benefit, and therefore, marital property subject to distribution. This view works to the advantage of the worker’s spouse.

Some courts have viewed severance compensation as payment for the loss of future earnings. Therefore, the bonus is intended to assist the employee until new employment can be found. Since it can be viewed as replacement of income, the courts have considered it the separate property of the employee. This view works to the advantage of the worker.

2. Whether the employer commonly offered the retirement subsidy, thereby, making it a benefit package that the employee expects to receive.

Many courts have declared that if the parties had an expectation prior to the date the marriage ended that an early retirement package or subsidy would be received later, such benefit would be considered marital property and thereby distributable. This view can work to the advantage of the worker’s spouse.

Conversely, courts have decided that if a lump sum payment/severance package/early retirement subsidy is offered by a corporation at its discretion, and therefore, not available to all employees, such benefit, if received after the date the marriage ended, should be considered the separate property of the employee. This benefit is not a reward for prior service, nor was it expected, therefore, cannot be classified as jointly owned property. This works to the advantage of the worker.

Courts in community property jurisdictions have tended to analyze the classification issue, whether the subsidy is for past or future service, an expected benefit or unexpected bonus, in more detail that courts in equitable distribution jurisdictions. The court’s ability to classify the individual benefit received in each case has dictated its consideration as marital or separate property.

Early retirement subsidies become the can easily argued from two points of view in divorce actions.

A lawyer representing the spouse of any employee normally argues that the severance package or subsidy is deferred compensation. The practitioner shows that the subsidy is directly linked to the employee’s years of service and salaries achieved with the company during the marriage, and that the parties, during happier days, expected to receive the retirement subsidy upon the employee’s retirement.

A practitioner representing the employee argues that the possibility of receiving an early retirement subsidy or severance package at some time in the future is too speculative to quantify, particularly when or if an early retirement subsidy has not been offered at the time of divorce. The practitioner also asserts that the subsidy or severance package is strictly compensation for the loss of future income rather than a form of deferred compensation.

Valuation: The court has discretion in its choice of method of valuation. However, the most commonly used approach would be the time rule or coverture Fraction. This method compares the employee’s length of service during the period of marriage with the employee’s total length of service with the company.

Distribution: Distribution often depends upon when the retirement subsidy is offered.

If the early retirement subsidy has been offered to the employee at the time of divorce, the present value of the early retirement subsidy can be quantified, and offset by other assets acquired during the period of marriage. In this case, the distribution can be made by immediate offset. If the subsidy or enhancement has not been put into place at the time of divorce, it is impossible to attribute value to it.

If the early retirement subsidy has not been offered or realized at the time of the divorce, a deferred distribution is the preferable method of distribution. It can be provided that in the event such a subsidy is offered and accepted by the employee, at that time the former spouse shall be entitled to a portion of such subsidy. Therefore, it is divided among the parties if, as and when it is actually received.


Dillard v. Dillard, 28 Ark. App. 217, 772 S.W.2d 355 (1989)
To the extent the benefits paid upon termination of employment are additional compensation for prior services or a replacement for lost marital pension rights, the benefits are marital property.

Severance pay earned through employment during the marriage is marital property, even if received after the divorce. Severance pay that husband would receive after the divorce was marital property, where he earned such additional pay for employment during marriage, and he began drawing it before divorce.

Lawyer v. Lawyer, 288 Ark. 128, 702 S.W.2d 790 (1986)
Payments that salesman/husband would receive upon termination of his employment contract with an insurance company were intended to compensate for lost future earnings rather than past services, and thus were not marital property.

In re Marriage of Skaden, 19 Cal. 3d 679, 566 P.2d 249 (1977)

In re Marriage of Gram, 25 Cal. App. 4th 859, 30 Cal. Rptr. 2d 792 (1994)

When applying the time rule any supposed years of service credited to the employee spouse must be added to the total length of the employee’s service. Such supposed years of service are not supplied by the employee but are merely a means of enhancing the pension benefit, the court reasoned.

In re Marriage of Lehman, 18 Cal. 4th 169, 955 P.2d 451 (1998)

The court held that a nonemployee spouse who owns a community property interest in an employee spouse’s benefits under a defined benefit pension plan owns a community property interest in the employee’s retirement benefits as enhanced after marriage dissolution.

In re Marriage of Kuzmiak, 176 Cal. App. 3d 1152,222 Cal. Rptr. 644 (1986)
The court held that separation pay received upon a postdissolution involuntary discharge from military service is the service member’s separate property. Separation pay is intended to ease the transition into civilian life, not as compensation for past services. If the service member is married at the time of discharge, the loss of employment is a community loss, and separation pay helps the couple adjust to the loss of employment, the court noted, but if the service member is not married at the time of discharge, the adjustment to civilian life is his alone to make, and the separation pay is his separate property.

In re Marriage of Lawson, 208 Cal. App. 3d 446,256 Cal. Rptr. 283 (1989)
The court held that a husband’s severance pay was separate property because it did not involve a contractual right and instead constituted a voluntary noncontractual payment that was intended as future compensation during husband’s transition period.

In re Marriage of Horn (1986) 181 Cal.App.3d 540 [226 Cal.Rptr. 666]
The court reviewed and analyzed four cases and concluded the chief characteristic in cataloging termination or severance benefits is whether the benefits constitute (a) deferred compensation for past services or (b) present compensation for loss of earnings. If the benefits are deferred compensation for past earnings, the benefits are community property; if they are present compensation for loss of earnings, they are separate property.

In re DeShurley, 207 Cal. App. 3d 992 (1989)
The court held that severance pay received by a husband pursuant to a bankruptcy court order was compensation for electing to forego future employment and not deferred compensation.

In re Frahm, 53 Cal. Rptr. 2d 31 (Cal. Ct. App. 1996) Post-separation severance pay not divisible.

In re Marriage of Heupel, 936 P.2d 561 (Colo.1997)
In re Holmes, 841 P.2d 388 (Colo. App. 1992)
Husband’s right to severance pay as a substitute for a loss of future wages does not constitute marital property.

In re Marriage of Bishop, 46 Wash. App. 198, 729 P.2d 647, 649 (1986)

Lipsitt v. Lipsitt, 580 So. 2d 174 (Fla. DCA 1991)

To the extent the termination benefits are additional compensation for prior services or a replacement for lost marital pension rights, the benefits are marital property.

Brotman v. Brotman, 528 So. 2d 550 (Fla. DCA 1988)
Severance pay that husband received after separation but before dissolution was a marital asset, since the pay was acquired during marriage.

Stouffer v. Stouffer, - Haw. App. 867 P.2d 226 (1994)
Court held that the calculation of the husband’s gross retirement benefits under a decree awarding the wife a share of his pension included amounts provided through a special early retirement program, regardless of whether the early retirement program was foreseeable at the time of divorce.

In re Marriage of Frazier, 164 Ill. App. 3d 207, 517 N.E.2d 775 (1988)
Termination benefits which husband would be entitled to receive if his insurance agency agreement were terminated were includable in determining the value of the agency.

In re Marriage of Hodowal, 627 N.E.2d 869 (Ind. Ct. App. 1994)
An early retirement subsidy, available only if certain age and service requirements are met, was not marital property subject to division because subsidy was not a vested right but a contingent option.

Hutchins v. Hutchins, 71 Mich. App. 361, 248 N.W.2d 272 (1976)
Court suggested that severance pay received during the marriage might be marital property.

Mikoda v. Mikoda, 413 N.W.2d 238 (Minn. Ct. App. 1987)
Early retirement bonus received by husband after dissolution was not a benefit which the dissolution court intended for the wife to share. The court reasoned that at the time of the decree, the husband had no right to an early retirement bonus, and there was no indication that the company offered an early retirement program.

Balven, 734 S.W. 2d 909 (1987)
To the extent the termination benefits are additional compensation for prior services or a replacement for lost marital pension rights, the benefits are marital property.

Shockley v. Shockley, 251 Neb. 896, 560 N.W.2d 777 (1997)
Where the husband’s company, in determining his pension, accorded him five additional years of employment as part of an early retirement enhancement, the trial court should have used the enhancement in figuring the marital portion of the husband’s pension. Early retirement incentives are marital if given during the course of the marriage.

Reinbold v. Reinbold, 311 N.J. Super. 460, 710 A.2d 556 (App. Div. 1998)
The enhanced value of the husband’s pension as increased by early retirement incentives was distributable property under the parties’ property settlement agreement.

Ryan v. Ryan, 261 N.J. Super. 689, 619 A.2d 692 (Ch. Div. 1992)
Severance pay is separate property if it replaces postmarital earnings.

Kikkert v. Kikkert, 177 N.JSuper. 471, 427 A.2d 76 (App.Div.1981), aff’d o.b. 88 N.J 4, 438 A.2d 317 (1981)

Franklin v. Franklin 859 P.2d 479 (Ct. App. 1993)
Early retirement subsidy not included in marital property.

Tanchick v. Tanchick, - A.D.2d -, 593 N.Y.S.2d 692 (1993)
Early retirement benefits were compensation for lost postmarital wages, and thus separate property, even though amount was based on length of prior employment.

Olivo v. Olivo, 82 N.Y.2d 202, 624 N.E.2d 151 (1993)
The court held that a former spouse who has been awarded a share of an employee’s eventual pension benefits is entitled to share in the increased retirement benefits offered to induce the employee’s early retirement after the divorce. In addition, a former spouse has no right to share in Social Security bridge payments (payments to compensate the employee for not yet being eligible to receive Social Security) or separation payments included in a postdivorce early retirement package.

Harrell v. Harrell, 120 A.D.2d 565, 502 N.Y.S.2d 57 (1986)
To the extent that severance benefits are received before the cutoff date for identifying marital property, the funds have been "acquired" during marriage and thus constitute marital property. Funds that husband received at the time his employment was terminated and before commencement of the divorce action were part of the marital estate.

Biddlecom v. Biddlecom, 113 A.D.2d 66, 495 N.Y.S.2d 301 (1985)
Severance pay and supplemental benefits are husband’s separate property because the right to receive the payout did not exist prior to the commencement of the divorce action.

Boger v. Boger, 103 N.C. App. 340, 405 S. E. 2d 591 (1991)
Court held that a husband’s early retirement pension benefit was his separate property.

Gultiz v. Gultiz, Ohio Ct. App. Unrptd 1998
Lump sum early retirement incentive is marital property.

McClure v. McClure, 98 Ohio App.3d 27, 647 N.E.2d 832, 841 (1994), cert. denied, 71 Ohio St.3d 1491, 645 N.E.2d 1260 (1995)
Given the Congressional intent behind the VSI program, VSI payments are more closely analogous to severance benefits than retirement benefits. Like severance payments, VSI benefits attempt to compensate a separated service member for future lost wages. The mere fact that the amount of the payments is determined according to the number of years of service does not necessarily render these payments compensation for past services. Rather, severance pay is frequently calculated according to the number of years of employment. Although severance pay received during the marriage is marital property to the same extent that wages paid during the marriage are marital property, severance payments intended to compensate for wages lost after the divorce cannot be characterized as marital property. Accordingly, the trial court did not abuse its discretion when it determined that VSI payments were separate income and not marital property. If it is an attempt to compensate for lost wages, such payments are not considered marital property.

Meyer v. Meyer, Pa. Unrptd. 1998
Post-separation early retirement incentive may not be divided during equitable distribution.

Gordon v. Gordon, - Pa. Super. 647 A.2d 530 (1994)
Early retirement incentives generally are unpredictable and fortuitous events not normally anticipated by the employee. Unlike normal retirement benefits that accrue during the period of employment, the early retirement incentive is basically a company device to encourage termination of employment by the employee. Here the incentive was offered to the employee/husband ten years after the court determined separation date and, therefore, is not marital property.

Ressler, 644 A. 2d 753 (1994)
Early retirement subsidy not included in marital property.

LaBuda v. LaBuda, 349 Pa. Super. 524, 503 A.2d 971 (1986)
Early retirement incentives paid after the date of separation should be classified as marital property if the spouses have an expectation before that date that the payments will be received later or if the payments take the place of deferred compensation that the parties expected to receive. Early retirement incentive payments were separate property because the right to the payments did not arise until after the parties separated and neither spouse expected prior to separation that husband would receive these payments.

Berrington v. Berrington, 534 Pa. 393, 633 A.2d 589 (1993)
A special lump-sum payment that husband received upon early retirement was marital property since it partially took the place of regular retirement benefits that the spouses expected the husband to receive.

Whorrall v. Whorrall, 691 76 S.W.2d 32 (Tex. Ct. App. 1985)
The court decided that a lump-sum payment made upon the husband’s early retirement was his separate property.

Perez v. Perez, 587 S.W.2d 671 (Tex. 1979)
Military readjustment benefits are analogous to military retirement benefits. Readjustment benefits are a property right earned during active service and, like retirement benefits earned during marriage, constitute community property.

Luczkovich v. Luczkovich, 26 Va. App. 702, 496 S.E.2d 157 (1998)
Severance pay should be considered his separate property because he negotiated and received the severance package two years after the dissolution of the marital partnership, and the package was not compensation for services provided during the marriage.

Caudle v. Caudle, Va. App. -1 447 S.E.2d 247 (1994)

McClanahan v. McClanahan, 19 Va. App. 399, 401, 451 S.E.2d 691, 692 (1994)

In re Marriage of Bishop, 46 Wash. App. 198, 729 P.2d 647 (1986)

In Marriage of Roark, 34 Wash.App. 252, 659 P.2d 1133 (1983)

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

< Return to QDRO Articles

< Go to QDRO Information Center

Start Your QDRO

Questions? Call
Free Consultation

Service of Pension Appraisers, Inc. - Since 1989

BBB Rating

We also value pensions online at:
PensionAppraisalDesk.com & PensionAppraisers.com
Buy now with PayPal
BBB Accredited Business