A common asset in a marital dissolution proceeding is the Employee Stock Ownership Plan (“ESOP”). An ESOP is a specialized employment benefit in which the corporate employer makes contributions of either cash or stock to a trust for its participant employees. The employees are then allocated a pre-determined amount by percentage in direct proportion to the employee participant’s compensation.
The ESOP contributions are not taxable to the employee/participant until withdrawn from the ESOP by the employee.
There are two main types of pension plans available from corporate employment: 1) A Defined Benefit Plan (“DBP”), in which the employee is entitled to receive a specific sum upon retirement, either based upon a monthly sum or a percentage of salary; and 2) the Defined Contribution Plan (“DCP”), in which the employer makes recurring contributions and the employee’s withdrawal entitlement is largely dependent upon performance of the DCP. DCPs almost always take the form of Profit Sharing Plans, 401(k) plans, Money Purchased Pension Plans, and ESOPs.
When a party to a marital dissolution proceeding is a participant to an ESOP, there is not only a potential community property interest in the ESOP. If the ESOP pays dividends directly to the participant/party, those dividends can also be income available for support.
In order to properly divide an ESOP or any other DCP or DBP in a divorce, the account should be valued by either an accountant or an actuarial skilled in valuation. A DCP is not valued the same as a DBP. If the parties want to award the ESOP or other such plan to the employee spouse in exchange for the non-employee spouse receiving other property (called an “in-kind” division), it must be borne in mind that the value on any given statement does not take into consideration the future tax consequences to the recipient, nor is an account’s value guaranteed in the future. Thus, pre-tax assets should be valued against other pre-tax assets, and post-tax assets should be valued against other post-tax assets, or adjustments should be made to compensate for the future tax liability.
If the parties choose to divide the account, a qualified domestic relations order (QDRO – “qua-dro”) will be needed. A QDRO is a legally binding order that sets forth the non-employee’s interest in the account. The QDRO usually includes a survivorship provision to protect that non-employee’s interest in the event of the death of the employee spouse, and binds the plan administrator to divide the account as stated in the QDRO. A QDRO should be prepared by an attorney that is experienced in the drafting of such orders. Most companies have “model QDRO’s” available in the event of divorce. However, blindly following a model QDRO without the drafter knowing the significance of certain provisions can prove disastrous at a later time.
If you are considering a marital dissolution, or have additional questions about dividing ESOPs or other employee benefits in a divorce, you can reach our team by calling 949-345-1621 or by completing a short online contact form. Flexible appointments are available by request.