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Non-Qualified Plans and Arrangements:
Are These Assets Assignable in Divorce?

Due to pressure to produce greater profits, employers seek new forms of deferred compensation to incentivize their key Executives. This has produced a benefits trend emphasizing “Pay for Performance.” These performance based programs are designed to discriminate (“permitted discrimination”) in favor of a select group: Highly Compensated Executives. A catch-all term for these Plans is Non-Qualified Plans and Arrangements. Among the most popular plans are: Supplemental Executive Retirement Plans, Excess Benefit Plans, Stock Options, Restricted Stock, Performance Unit Plans, Rabbi Trusts (unrelated to Rabbis) and fixed payments at retirement (for a finite period) based on high interest rate assumptions.

In the majority of jurisdictions there is agreement that these Non-Qualified Plans and Arrangements are to some extent marital/community property subject to division upon divorce. Nevertheless, two issues present themselves to the practitioner for consideration. First: the methodology to be employed to determine the marital/community portion of these Plans. Second and perhaps most difficult: crafting of a procedure to “assign” and deliver to a Former Spouse that portion of these Deferred Compensation Benefits awarded by Agreement or Decree.

It is emphasized that determination of the marital/community component and subsequent award of a portion of these assets in divorce is the initial phase of a difficult process that culminates in actual “distributions” to a Former Spouse. It is Troyan, Inc.’s view that the crafting of a procedure to effectively deliver an agreed upon award to a Former Spouse is the most pressing and complex issue in the area of Non-Qualified Plans and Divorce.

Central to this Practice Aid is the fact that the overwhelming majority of Corporate employers will not honor, let alone administer distributions to a Former Spouse from benefits derived from any Non-Qualified Plan or Arrangement. The informed practitioner recognizes that agreement that some portion of these Non-Qualified Plans and Arrangements constitute marital/community property and the subsequent “assignment” of some portion of these Non-Qualified Plans and Arrangements to a Former Spouse does not in fact cause the actual transfer of such plans to the Former Spouse. The key is the implementation (enforcement) of the Agreement.

To an increasing degree the attorney representing the non-titled spouse is confronted by a corporate culture that refuses to accept or implement an Order intended to transfer a portion of any Non-Qualified Plan or Arrangement to a Former Spouse. Again, it is emphasized that the key issue of actual distribution (read enforcement) to a Former Spouse arises subsequent to a determination that the Plans in question are marital/community property. Troyan, Inc.’s experience indicates that Practitioners representing non-titled spouses are becoming painfully aware of the fact that employers do not recognize attorney efforts to assign and transfer all or a portion of the Non-Qualified Plans or Arrangements to a Former Spouse. The issue is not your jurisdiction’s treatment of these Non-Qualified Plans and Arrangements as marital/community property, rather it is actual delivery to a Former Spouse of her interest! There is a wide gap between agreement that such assets constitute marital/community property and a family court’s ability to effectively assign and transfer such assets to a Former Spouse. Invariably, the obstacle is the employer.

A further complication results from the death of the Executive prior to effecting a “transfer” to the Former Spouse. Since, the operative instrument used in these exercises will not be a Qualified Domestic Relations Order, the practitioner is bereft of an opportunity to provide security to the Former Spouse in the form of a Joint & Survivor Annuity. Moreover, the structure of SERP’s and Excess Benefit Plans, which may be viewed as Defined Benefit Plans for Key Executives, do not contain language providing for a Former Spouse to be treated as a surviving spouse. In the case of Stock Option Plans, the obstacle is a Plan Administrator who refuses to recognize that the distribution of stock options to a Former Spouse upon the death of the Executive does not create adverse tax consequences for the employer or the deceased Executive.

Regardless of the reasons, the fact remains that the death of the Executive prior to effecting a “transfer” to the Former Spouse extinguishes his/her agreed upon or court ordered award. This loss of anticipated benefits by the Former Spouse can represent a significant exposure to the attorney. Too often, this potential for loss of entitlement as a result of the untimely death of the Executive is neither understood, anticipated or properly explained to the Former Spouse. The Former Spouse focuses on the award, not the contingent nature of his/her award. When the practitioner fails to establish a paper trail delineating his/her detailed coverage of the circumstances which creates a contingent rather than an irrevocable right bad things can happen.

In conclusion we alert the practitioner to still another concern in this area, DISCOVERY. Absent very extensive discovery with a variety of units within the firm it is not likely that the total Deferred Pay Program of the Executive will be known and quantified. An essential first step in any case involving a highly compensated Executive is discovery. Such discovery must obtain all of the underlying documents and data that are the basis for the Executive’s Deferred Pay Program. Absent a very comprehensive data base it is unlikely that the Former Spouse’s position can be effectively advanced. Troyan, Inc. offers full discovery services regarding Executive Compensation and Deferred Pay Programs.