Q&A: How Do Deferred Compensation Plans Get Treated in a Divorce?

What is deferred compensation? Very simply it is when an employer holds back a little bit of your pay and gives it to you at a later date. They defer paying you, in other words, till you retire or some other event occurs. For example, all pensions are types of deferred compensation. This is money you earn during your years of working but you don’t get paid till later. When you retire. Other types of deferred compensation are employee stock options and other types of retirement plans that your employer offers such as tax-deferred annuities, 401K, 403B, and certain types of profit sharing and stock option plans – and any other retirement products within the company’s overall ERISA plan.

Deferred compensation often has a tax benefit for the recipient. It depends on whether it is a qualified plan or a nonqualified plan (golden handcuff plan) Taxes are usually deferred or in some instances, if there is no early withdrawal, there potentially may be no tax consequences at all. As a divorcing spouse, both you and your attorney, as well as your accounting and tax professionals, will have a lot of homework to do to figure out the value and nature of the deferred compensation in your divorce.

What is the difference between a qualified plan and a non-qualified plan?
Qualified plans are eligible for tax deferment meaning that no tax is paid until the funds are disbursed. Non-qualified plans are not eligible for the same tax benefits. They have to pay taxes even before the funds are disbursed.

Who is entitled to get What from a deferred compensation plan?

It is usually going to be marital property unless the parties have a special agreement in writing. So depending on which state the parties live in, the judge will either treat it as community property or it will be equitably distributed. Of course, a lot will also depend on the plan rules themselves. The judge cannot force the plan to do what the plan never intended to be possible to do as far as when funds will be paid, for example. Usually, a QDRO will have to be completed by a qualified professional versed in these matters.

How can a spouse get the facts about their spouse’s deferred compensation accounts?

If you are getting divorced, you may not know for sure what deferred compensation plans your spouse actually has, never mind the value of those plans. Your attorney will have to request information during the discovery process of your divorce and he or she will have to get an accounting or statement of the accounts that your spouse owns at the company. This is your legal right to obtain this.

But a good place to start your research is the employee handbook of the company where your spouse works. These handbooks will usually offer descriptions of any deferred compensation plans that the company offers and which types of employees are eligible for those plans.