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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.
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