Employee Compensation Plans in Connecticut
Connecticut Divorce and Employee Compensation Plans
An employee compensation plan refers to the entire package of pay and benefits that an employee receives in exchange for work. Plans typically include payment in the form of wages or salary and may include bonuses, commissions or incentive payments for some types of jobs. Compensation plans also include benefits offered by the employer such as subsidized premiums for family health insurance, dental insurance or an employer-sponsored 401(k) retirement plan. An employee compensation package may also include fringe benefits such as use of the company gym or car or the provision of catered meals in the office. Provision of these fringe benefits typically contributes additional value to the employee and he or she may agree to take a lower salary because of the comprehensive benefits package.
In cases where a worker has a comprehensive employee compensation plan complete with medical benefits, pay incentives, company cars and other perks, it is clear that the worker derives more value from work than just the salary. It is also true that the employee’s family may spend less money out-of-pocket or pay less money in taxes because of the benefit plan.
In light of this information, how should a divorcing couple in Connecticut divide the value of an employee compensation plan with its various components?
Connecticut Law Regarding Division of Marital Property
In Connecticut, marital property is divided in accordance with the principles of equitable distribution. This means property is divided fairly, but not necessarily equally. When determining how to divide marital assets, judges look to factors such as the cause of the breakdown of the marriage, each spouse’s marital contributions, each spouse’s age, occupation, and earning potential, the length of the marriage, and the couple’s standard of living.
Employees must keep in mind that their entire compensation package, not just salary or wages, must be valued during a divorce process. Failure to do so could result in one spouse receiving an inadequate share of the marital property to which he or she is entitled.
For example, some parts of an employee compensation plan that may be valued as marital property include:
- Health Insurance;
- Retirement benefits; ;
- Stocks; ;
- Use of a company vehicle; ;
- Golden parachutes (promises for additional benefits if the recipient’s employment is terminated); ;
- Bonuses and commissions not yet paid; and;
- Other fringe benefits (e.g. catered meals, taxis, use of a company gym). ;
Given the intangible nature of many of these employment benefits, it may be difficult or impossible to apportion percentages of these forms of marital property in kind after a divorce. Instead, as a practical matter, it may be useful to have a financial expert value each component of the marital property individually. In doing so, the spouse not possessing the employment package can seek a higher share of the more fungible marital property, such as funds in a bank account, in exchange for allowing the spouse with the employment package to keep his or her employment package intact after the divorce.
Legal Treatment of Benefits After Divorce
At the Prince Law Group, LLC, many of our clients have questions about how two particular types of assets, health insurance and retirement benefits, may be divided after a divorce. Below is a short explanation of how Connecticut law treats each of these types of marital assets:
Health insurance: In Connecticut, any health insurance coverage under a spouse’s insurance plan terminates when the couple’s divorce becomes final. Though some Connecticut legislatures tried to change this law in 2012, their bill never passed. A former spouse may temporarily remain on the employed spouse’s insurance plan through the COBRA temporary insurance plan, and may pay additional premiums for up to three years after the divorce. Alternatively, due to the cost of the COBRA package, some former spouses who are no longer insured elect to obtain private insurance coverage elsewhere.
As a practical matter, in some divorce settlements, the now-uninsured spouse may not have to front the cost of the private insurance herself; many divorce settlements require the more financially well-off former spouse to pay for all or a portion of the other former spouse’s health insurance coverage for a designated period after the divorce. The more financially well-off spouse may either pay all or a portion of health insurance premiums directly, or the settlement may agree in general to award a higher alimony amount to the non-insured spouse to cover increased healthcare costs.
Retirement plans: Depending upon how long an employee has been with a company, retirement benefits can be one of the most valuable marital assets. When it comes to a divorce, valuing these types of assets is challenging in part because retirement benefits may be earned during the marriage, but may not be payable until potentially several years after the marriage ends. In addition, the term “retirement benefits” can include several accounts, such as a traditional pension account as well as the employer-subsidized 401(k) plan. “Retirement benefits” may also include rights to survivor’s pension from the Social Security Administration, which must be specifically requested at the time of divorce. Each type of benefit may be treated and evaluated differently under Connecticut law and by Connecticut financial analysts.
In a Connecticut divorce, retirement plans earned during the marriage are considered marital property. Only part of the pension, 401(k) or other type of deferred income may be deemed “marital” property to be divided between spouses. A court may factor in the length of the marriage and the time that the pension was being accrued in their determination.
One common mistake divorcing spouses make is to undervalue the worth of the retirement plan by assuming it is worth the amount it reflects at the time of divorce. In reality the plan fluctuates and usually increases beyond the rate of inflation. The retirement plan should be valued by a professional analyst at the rate at which it is expected to pay out upon the employee’s retirement.
Once you have valued the retirement plan, there are two primary options available for how to divide it. A non-benefit holding spouse can trade his or her interest in the plan for a more easily transferable asset of equal value, such as a car. The spouse can also agree to take a portion of the plan along with his or her other pension or Social Security at the time of retirement. Some clients prefer this option because it more directly protects one’s quality of life during later years in life.
Additionally, in some situations involving Social Security retirement benefits, a former spouse may be able to apply for Social Security retirement benefits on the employee’s account even if the employee did not look into this option before. This option may be available for former spouses who had been married for longer than 10 years and do not qualify for Social Security benefits based on their own work records.
Once spouses have agreed how to best divide the different types of retirement benefits, they will need to receive a Qualified Domestic Relations Order (QDRO) and submit a copy to the company servicing the retirement plan. This procedure may also apply for the division of similar, non-tangible assets during divorce proceedings.
Stocks: A spouse may have accrued stocks or “options” as part of their compensation plan. Stock options give the employee the right to buy stocks at a certain price at some future date. The price is often low, allowing the employee to make a significant gain when sold. A spouse may also have “restricted stock” which refers to stock that cannot be transferred until certain conditions are met (i.e. employment for a set period of time). These stocks can be incredibly valuable, and divorcing spouses must be careful to account for them in divorce.
It is often difficult to identify these assets, because options and restricted stock may not appear on traditional financial documents. It is particularly important for the nonemployee spouse to be diligent in getting a full accounting.
Once identified, the stocks must be valued. This can be a complex process, because the value at a future date may be uncertain. However, there are different technical approaches to this work that can be used to come up with some amount. In most cases the stock options or restricted stock are not assignable to another, and so an “in-kind” division in divorce is not possible. As a result, the most likely outcome is for the nonemployee spouse to receive assets of off-setting value or for the employee spouse to buyout the other. A slightly more sophisticated option is to use deferred distribution which can more evenly share the uncertainty in future value. However, a deferred distribution plan does not provide finality at the time of the divorce.
Contact a Connecticut Attorney for Help in Your Divorce
Employee compensation and pension valuation is a common element of a high net worth divorce in Connecticut. Attorneys at the Prince Law Group, LLC will work collaboratively with accountants, actuaries, and economists to accurately value your assets in anticipation of divorce proceedings. To speak with an experienced member of our team about your employee compensation benefits or your interests in your spouse’s compensation plans, contact the Prince Law Group, LLC today.