Deferred Compensation: How Will It Be Divided When You Split Up?

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The decision to divorce comes with more than its share of financial issues. Among other things, you may be confused about the whole point of equitable distribution. For one, will your deferred compensation count as marital property and therefore be eligible for division?

Many businesses offer deferred compensation as additional incentives for their employees. In the case of both small and large corporations, this often includes provisions for stock options that are tied to a vesting schedule.

In the meantime, some of the publicly traded technology companies issue restricted stock units (RSUs) in place of stock options. When employees pass the vesting period, the company shares can be assessed a fair market value and become income.

Deferred compensation is not cash in hand – and reflective of monies to be paid out in the future. If you are the non-employee spouse, you may question your entitlement to a portion of your husband or wife’s stock options. One consideration includes whether or not the vesting period has passed or when they will vest.

At the end of last year, the New Jersey Appellate Division ruled on a matter involving the division of restricted stock that did not vest until after the filing of the divorce complaint.   M.G. v. S.M. is a published case and therefore considered precedential law.

Deferred Compensation and Divorce

According to the case history, M.G. and S.M. married in May of 1998. M.G. began working for a multi-national corporation in 2001. In August of 2003, the employer awarded M.G. with 490 shares of its stock. In the years up to and including 2010, M.G. received shares to add to his compensation package.

The availability of the stock was subject to a vesting schedule. For example, of the shares awarded in 2003 did not start to vest until 2011. At that time, 174 shares became available on an annual basis.

On July 28, 2014, M.G. filed the divorce complaint. As noted, he received a total of eight annual stock awards from 2003 until 2010. Meanwhile, only three of the awards were fully vested. The others would continue to vest annually from August 31, 2014, forward.

As far as S.M. was concerned, she was entitled to equitable distribution of all of the stock awarded to M.G. during their marriage. M.G. disagreed. He felt his obligation was limited to division of the shares that already vested before the filing of the divorce. In particular, M.G. first questioned dividing the shares that vested on August 31, 2014. They were not assessed value until a month after he filed the divorce complaint.

Upon consideration, the trial court judge disagreed with M.G. The stocks were awarded to him in recognition of his past job performance, which occurred during the marriage. Therefore, the “RSUs awarded…up to and including the August 2014 award are the result of pre-filing, marital efforts, and are thus subject to equitable distribution.”

M.G. subsequently returned to court for reconsideration of the trial court’s opinion. He submitted documentation indicating that in order to vest under the Stock Award Agreement, he must remain continuously employed with the corporation. Nonetheless, the judge ruled that “literature from [his employer] going over the general details of the stock plan fails to overcome this presumption that it was received through spousal efforts.”

On Appeal

On appeal, the Appellate Division wrote in great deal of its deference to trial courts when it came to factfinding and expertise in family matters. Family court judges are given broad discretion in identifying assets and determining their division. “However, an equitable distribution does not presume an equal distribution.”

The Appellate Division agreed with M.G.’s contention that his situation was different than prior case law regarding stock that became available after the divorce complaint.  M.G. would not be vested unless his employment continued. The employer itself described the vesting as a “rewards program.”

Meanwhile, the upper court also rejected S.M.’s argument that this just meant he had to stay alive and go to work.  The record supported that M.G. was viewed as “a high-level corporate employee in a highly competitive industry.”

New Guidance Regarding Deferred Compensation

Deferred compensation is an issue of concern in many jurisdictions throughout the United States. In fact, the Appellate Division referred to a Massachusetts case in suggesting adoption of this rubric:

(1) Where a stock award has been made during the marriage and vests prior to the date of complaint it is subject to equitable distribution;

(2) Where an award is made during the marriage for work performed during the marriage, but becomes vested after the date of complaint, it too is subject to equitable distribution; and

(3) Where the award is made during the marriage, but vests following the date of complaint, there is a rebuttable presumption the award is subject to equitable distribution unless there is a material dispute of fact regarding whether the stock, either in whole or in part, is for future performance. The party seeking to exclude such assets from equitable distribution on such grounds bears the burden to prove the stock award was made for services performed outside of the marriage. That party must adduce objective evidence to prove the employer intended the stock to vest for future services and not as a form of deferred compensation attributable to the award date. Such objective evidence should include, but is not limited to, the following: testimony from the employed spouse; testimony of the employer's representative; the stock plan; any employer correspondence to the employed spouse regarding the award; and the employed spouse's stock plan statements from commencement of the award and nearest the date of complaint, along with the vesting schedule.

The case was remanded and reversed. Overall, this decision should help guide other litigants in similar disputes regarding deferred compensation as it provides guidance.

Contact Us

At the Law Offices of Sam Stoia, we recognize deferred compensation as an issue in many high net asset divorce cases. Contact us to schedule an appointment regarding your individual circumstances. We look forward to meeting with you.