There can be a lot of confusion surrounding divorce. What counts as a marital asset? Are deferred compensation plans subject to division? How can I ensure that I am getting what is fair? These are common questions you may have if you are in the process of seeking a divorce from your spouse.
Texas is a community property state. In a community property state, each spouse equally owns assets and property acquired throughout the marriage. If both spouses equally own marital assets, it should be a breeze dividing property. Unfortunately, that is rarely the case. Dividing assets in a community property state can be complicated, especially when deferred compensation plans come into play.
If you are contemplating divorce, you need an experienced and skilled Katy family law attorney to help you reach a fair and favorable resolution. At Adams Law Firm, our Katy asset division lawyers have over 35 years of legal experience navigating the Texas family court system. For more information about how we can help you during this challenging time, contact our Katy office today by calling (281) 391-9237.
What Is a Deferred Compensation Plan?
A deferred compensation plan is a money management program that typically allows you to delay receiving a portion of your income or compensation until a later date. Many of these plans are offered to employees by their employers. For example, an employer can allow an employee to set aside a portion of their earnings in a separate account. Later, typically at retirement, the employee has access to those funds. Paying into a deferred compensation plan can help reduce income taxes because federal taxes are generally deferred until the money is paid out at retirement.
Examples of potential deferred compensation plans may include:
- Retirement plans
- 401(k) plans
- Individual retirement accounts or IRAs
- Profit-sharing plans
- Bonus deferral plans
- Money-purchase plans
- Tiered salaries
- Stock options
Sometimes, deferred compensation can also include vacation or sick pay that has gone unused and will eventually be paid to an employee.
Can Deferred Compensation Plans Be Considered Marital Assets?
The answer is maybe. Under Texas community property rules, deferred compensation earned during a marriage can be considered a marital asset. Therefore, income earned, even though it is deferred, can be divided as an asset during a divorce. The waters can get a little murky when individuals contribute to these plans before marriage and continue investing during the marriage.
To understand whether your deferred compensation plan is subject to division during a divorce, you should consult with an experienced Texas divorce attorney.
Qualified Versus Non-Qualified Deferred Compensation Plans
There are two types of deferred compensation plans: qualified and non-qualified plans. It is crucial to understand the differences between the two because different programs can have different benefits and drawbacks.
Qualified Deferred Compensation Plans
A qualified deferred compensation plan is generally a pension plan backed by the federal government and overseen by the Employee Retirement Income Security Act. The ERISA was passed in 1974 and is a federal law that sets minimum standards for retirement plans established voluntarily. When a company offers its employees enrollment in a qualified deferred compensation plan, it must offer the benefit to all individuals employed with the company, excluding independent contractors.
One of the benefits of qualified deferred compensation plans is that creditors cannot access the money held in these accounts if a company fails to pay its debts. However, the downside is contributions to these accounts are capped by law. In addition, if you attempt to withdraw funds from these accounts early, you will generally have to pay an early withdrawal penalty.
Common examples of qualified deferred compensation plans include:
Non-Qualified Deferred Compensation Plans
Non-qualified deferred compensation plans are not backed by ERISA. Instead, these plans are generally contractual agreements between an employer and an employee. Often, they are used to attract and retain employees and are sometimes known as “golden handcuffs.”
Unlike qualified plans, unqualified deferred compensation plans do not have to be offered to all employees. In addition, independent contractors may be eligible for non-qualified deferred compensation benefits. These plans also have no contribution limits. While these plans are often more flexible than qualified plans, they aren’t without risk. If the employee’s company goes bankrupt, creditors can seize non-qualified deferred compensation funds. Unfortunately, non-qualified plans don’t carry the same level of protection that qualified plans carry.
Examples of non-qualified deferred compensation plans include:
- Stock options
- Deferred savings plans
- Supplemental executive retirement plans
Dividing Deferred Compensation Plans
If your deferred compensation plan is eligible for division, you may have questions about how these accounts are paid out, especially if you aren’t of retirement age and don’t have access to the money yet. The division of qualified deferred compensation accounts requires a court-ordered Qualified Domestic Relations Order or QDRO. Since an employee cannot withdraw the funds from these accounts early without penalty, technically, neither can a spouse. A QDRO gives the non-employee spouse access to the account funds as if they are a plan participant, and the former spouse can be allocated a share of the account. A QDRO can also help a spouse avoid tax penalties and penalties for early withdrawal.
Obtaining and managing a QDRO can be complicated. However, so can obtaining assets from a non-qualified plan because there is no guarantee the money will be available when it is time for an employee to ask for payment.
A skilled divorce lawyer can assess all marital assets and help you sort through what you are entitled to and how you can gain access to those assets.
Contact an Experienced Katy Asset Division Lawyer Today
Dividing assets during a divorce is never easy. The process can be complicated and emotionally draining. At Adams Law Firm, we understand the challenges posed by asset division. Our compassionate legal team can help guide you through the asset division process and prepare you for what can happen with your deferred compensation plans.
When you have Adams Law Firm on your side, you are never alone. Let our highly regarded legal team help you understand your rights and work to help you keep your fair share. Call our Katy office today at (281) 391-9237 to set up a confidential legal consultation.