In Connecticut divorces, deferred compensation plans can be complex and contentious. It is one thing to determine fair distribution of more straightforward qualified plans like pensions or 401(k)s. But it can be quite another to equitably resolve matters related to more amorphous, riskier and potentially more valuable nonqualified plans or other unique future compensation vehicles in some executive retirement packages.
Basic framework
Our state courts ask three questions in divorce about property, including deferred compensation plans:
- Classification: Is the plan a concrete marital property interest or is it a mere expectancy?
- Valuation: If it is marital property, can the court discern present value and by what methodology? The court has considerable discretion to choose methodology.
- Distribution: How should the judge equitably distribute the plan between the two spouse-litigants? Or the court could assign different property outside the plan to the nonowner litigant to offset their interest in the plan.
See Cunningham v. Cunningham, 140 Conn.App. 676 (2013).
Marital property is that in which ownership is sufficiently concrete and measurable that it would be fair to include it as a countable asset in the division of property in divorce. It is property that if not part of the distributable marital estate would be a windfall to the owner-litigant who gets to retain it in full.
In Connecticut, marital property includes property the litigants own jointly or singly, even if they acquired it before the marriage, through inheritance or as a gift. CT Gen. Stat. sec. 46b-81. In a deferred income plan, even accrued interests from before the marriage could become marital property.
Deferred compensation is difficult to classify
Because deferred compensation plans have a variety of structures subject to various contingencies for eventual payout, classification, valuation and distribution can be challenging. When is the right to a potential income stream down the road sufficiently concrete at the present time that it should be part of divisible marital property?
Mere expectancies
Our courts look at whether a future asset is sufficiently concrete to be marital, or a “mere expectancy.”
The classic expectancy example is an inheritance. A relative or friend may have told the litigant that they plan to leave them property in a will or trust, or the spouse-litigant may assume they will inherit from family members.
But inheritance is uncertain. The litigant could outlive the benefactor, who also could change their mind or lose their wealth – or never get around to creating the will or trust. It would be unfair to include in marital property an interest so remote as this – a mere expectancy – in marital property.
Qualified deferred compensation plans
Connecticut courts accept that employer-sponsored qualified deferred compensation plans like pensions and 401(k)s are marital property because they are concrete assets with enforceable contractual obligations. Ingles v. Ingles, 216 Conn.App. 782 (2022). They are highly regulated by the federal Employee Retirement Income Security Act of 1974 (ERISA) and tax law, have contribution limits, are not speculative and constitute valid contracts with likely payouts.
Other examples include 403(b)s, SIMPLE IRA plans, profit sharing, SEP plans and others.
The court may issue a qualified domestic relations order (QDRO) to the administrator of a qualified plan directing them how to split the eventual payout between the divorced litigants. Even if the court cannot determine a pension’s present or future dollar value, it is acceptable to apply a percentage split as of the divorce date. Later at payout, the administrator can use a formula called a coverture fraction to calculate a division accounting for the payout amount that is marital.
Nonqualified deferred compensation plans
Nonqualified plans (NQDCs) like 409As are not subject to ERISA, have no contribution limits and do not guaranty payout like qualified plans do (if the employee meets certain criteria like years of service). Nonqualified plans accept the chance of a higher payout in lieu of the relative security of an ERISA plan. Employers usually offer nonqualified plans to highly compensated executives.
In other words, NQDCs are closer to mere expectancies on the continuum because the chance of payout is more remote. Is the NQDC interest concrete enough to be marital property? One factor that may influence the court is whether the employer sets aside funds for eventual payout. Without funding, the chance of future payout is even less concrete.
Speculative interests
D.S. v. D.S., 217 Conn.App. 530 (2023), involved a retirement plan in a partnership at the mere-expectancy end of the spectrum. The trial court had found, and the appeals court agreed, that the wife’s law firm’s retirement plan was not marital property because the chances of her becoming eligible for future benefits was too speculative and a mere expectancy.
An expert testified at length about the plan, illuminating factors making the likelihood of future receipt too remote, including:
- The plan was unfunded and not classified as an employer liability.
- A few partners could eliminate or reduce payments if the outflow cut into profits too much.
- In certain circumstances, retiree payments could be adjusted, delayed or not paid.
- The plan would only pay out if the firm remained a going concern, which was not certain.
- Present values were too hard to determine given so many “variables and uncertainties.”
The expert witness said that the plan’s potential payout was “the epitome of a mere expectancy.” The trial court agreed, saying that the potential income at retirement was “not guaranteed, not transferable, not saleable, not funded and [could] be entirely eliminated at any time … [was] not a property right, or an asset, it has no worth and no value as of the date of [the divorce].”
Final thoughts
Many factors may be relevant in the analysis of deferred income plans, including:
- Whether the plan is qualified or unqualified
- Whether the rights are vested or unvested
- Whether the future payout is funded or unfunded
- Whether the plan is funded with nonmonetary assets such as stock
- Employee-litigant’s age vis-à-vis age requirements in the plan
- Whether the plan creates an enforceable contract between the employee and the employer
- Nature and likelihood of contingencies
- Whether the benefits can be defined or calculated without speculation
An experienced divorce litigator is important when deferred compensation is involved, particularly when the plan is nontraditional or unique. Counsel can consult with financial experts about the plan’s nature – concreteness versus mere expectancy. To protect the litigant’s interests, the family lawyer can request articulation from the court if its findings on deferred compensation are at all unclear. See Brown v. Brown, 199 Conn.App 134 (2020) (fn24).
