Longtime readers may recall that the Family Advocate produced an issue on “Perks and Fringe Benefits” in 2001. Since that issue, there has been an astonishing proliferation in the types of noncash or nonwage compensation and benefits offered by employers. In past years, “fringe” benefits usually represented only a small, auxiliary component of overall compensation. By contrast, in the present tax and corporate climate, stock-based compensation and other forms of incentive compensation often have the potential to have values that equal or exceed wages. For family law practitioners, that means there may be a growing array of benefits or entitlements that have some potential value or utility to one or the other of the participants in a divorce, child support, or other family law proceeding.
From the Editor in Chief
From the Editor in Chief
By Kathleen A. Hogan
Samuel V. Schoonmaker IV and Peter M. Bryniczka have provided an overview discussion of “Employee Benefits and Perks in Family Cases.” The authors explain that employee “benefits” are a form of indirect, nonwage compensation, some required by law (e.g., employer contributions to Social Security) and some discretionary. Corporate “perquisites” are offerings designed to convince an employee to value one employer over another. Flexible work hours and free delivery of dry cleaning are examples of perks. Some nonwage compensation straddles both definitions. Some such benefits can and should be valued; others, such as flextime or work-from-home options, may be a key consideration when determining physical custody and parenting plans.
“Identifying and Valuing Nontraditional Benefits in a Divorce” is written by Brant M. Webb and Pam Faris. They describe a multistep approach that starts with identifying the benefit in question and then a determination of whether there is an interest subject to division. Typically, if there’s an interest subject to division, a value must be assigned. This article discusses the various steps from the initial considerations to the actual identification and valuation to the discussions with the client about how much the benefit in question may actually be worth. In so doing, the authors delineate different standards of value, including fair market value, value to the owner, intrinsic or fundamental value, and special or pecuniary value.
Sandra R. Klevan has provided an article called “Beyond Salary and Bonus: The Where, What, and How of Complex Executive Compensation from a Divorce Perspective.” The author notes that even when both spouses are W-2 wage earners, the wage earners may also participate in executive compensation plans that could impact the marital estate and/or the income available to pay support. The author describes some of the most common types of plans, suggests where to look to find and identify the details of the plans, and suggests methods for classifying, valuing, and distributing the plans.
Stock-based compensation is frequently encountered, and Donna Pironti and Mitchell Benson have provided an article addressing the tax and divorce issues associated with “Performance Awards Through Employee Stock Compensation Plans.” The most common performance awards are incentive stock options, nonqualified stock options, and restricted stock units. However, there are also phantom stock, stock appreciation rights, restricted stock, and reload/replacement options. Each of these plans has different taxable outcomes, reporting conditions, and basis considerations. A number of factors will need to be considered; it will need to be determined, for example, when the shares were granted and when they vest, if they are transferrable, and then whether they are marital or nonmarital.
It is critical to understand the tax consequences of various types of options. Barry S. Sziklay provides an article entitled “Stock Options: Discovery, Taxation Issues, and Problems.” This article covers the applicability of I.R.C. § 83, corporate insider-trading blackout periods, and what the family lawyer needs to know about all of these matters. The author also describes the differing tax treatments of nonstatutory or nonqualified stock options and qualified or statutory incentive stock options. The author also addresses the SEC’s anti-insider-trading restrictions during “blackout periods,” which can be financially significant. Suggested lists of documents that should be sought in discovery are also provided in this article.
Employment benefits are not exclusive to workers whose employment is ongoing. Gregory K. Brown has written on “Severance Benefits: An Overview for Family Law Practitioners.” The author outlines the reasons such benefits are offered, types of severance benefit arrangements, and the advantages and disadvantages of each; ERISA requirements; conditions of receipt of severance benefits; calculation methods; taxation; and the implications of including health and life insurance benefits in severance packages.
“Retirement as Deferred Compensation: What the Divorce Lawyer Needs to Know Regarding Qualified and Nonqualified Plans” has been written by Joseph DiPiazza. We have long understood that retirement savings often comprise a substantial component of marital assets. For executives and other high-income earners, there may be additional deferred compensation beyond traditional 401(k) or IRA accounts. While yearly contributions to those accounts are limited, additional options for deferred compensation present high-income earners with an enhanced ability to defer income to a future time. This article discusses both qualified and nonqualified types of plans, as well as what the family law practitioner must understand and consider when valuing and dividing these assets during a divorce.
Jeffrey W. Brend and Jennifer M. Fletchall discuss “How Financial Documents Can Help Find Hidden Income.” The authors have provided not just a useful list of the common financial tracking documents that should be sought but also the types of entries that may be significant. The authors also discuss electronic tracking as an information source and the importance of not running afoul of the federal Wiretap Act and the federal Stored Communications Act. They additionally describe the benefits of forensic accounting analysis.
Brian C. Vertz has contributed the article “In the Money or Under Water? Capturing the Value of Incentive Compensation in Divorce.” Incentive compensation presents special challenges for divorcing spouses who are dividing property or resolving alimony and spousal support claims because stock options, restricted stock, and appreciation rights that have no ascertainable value today may become valuable in the future. As well, incentive compensation is different from wages and salary because its value may depend upon the passage of time, the future performance of the employee, the financial success of the company, and even the fluctuations of the stock market and national economy. The article examines in detail the nature of restricted stock, restricted stock units, stock options, and stock appreciation rights. It delves into intrinsic value and fair market value as valuation standards and also explores different statistical option valuation methods: the Black-Sholes model, the lattice model, and the Monte Carlo method. Finally, it addresses the benefits and pitfalls of immediate offset or deferred distribution.
Many of our cases will involve employees of smaller businesses, which have benefits that won’t be found on a proxy statement or an SEC 10b-5 form. Kenneth G. Raggio has provided an article for such situations: “Perks: Flying Under the Radar in the Smaller Business.” The small business’s books are usually kept internally and are not subject to audit or a compliance review by accountants or general counsel. Rather, if accountants are involved at all, it is usually to receive the books of the business after the end of the year to prepare a tax return. The tax returns of this small business deserve scrutiny for “adjustments” to either income or book value and a search for perks that are buried way down in the details, below the surface or under the radar. The author provides a starter list of what to look for and descriptions of how personal benefits or expenses may be buried in the seemingly routine business expenses.
A key consideration for family law practitioners will always be the need to manage client expectations. That need is particularly important when considering the valuation and treatment of noncash or deferred employment benefits. The saying “Show me the money” has become iconic. However, the reality of employment benefits and many forms of deferred compensation is that there is no way to convert the benefit to immediate cash. A more creative approach is likely to be more productive.