Chapter 16 Evaluating Employee Benefits and Stock Options

• Library: Divorce & Money (Nolo) (2020 Ed.)

CHAPTER 16: Evaluating Employee Benefits and Stock Options

Employee Benefits

Health Insurance

Group Term Life Insurance

Accidental Death or Dismemberment Insurance

Health Savings Accounts

Dependent Care Assistance Programs

Cafeteria Plans

Severance Plans

Educational Assistance Programs

Group Legal Services

Employee Assistance Programs

Stock Options and Nonqualified Deferred Compensation Plans

Types of Stock Options

What Are Stock Options Worth at Divorce?

Nonqualified Deferred Compensation Plans

Questions to Ask an Attorney or a Tax Specialist

As companies get more creative in compensating their employees, the stakes are raised in the divorce process.

Today's employees receive more than what shows up on the pay stub or tax form. Benefits such as stock options, insurance, retirement plans, and other fringes are forms of compensation. And to the extent they can be considered income to you or your spouse, they can help determine how much spousal and child support you are eligible to receive, or must pay.

For divorce purposes, the key question is whether to classify various types of employee compensation as:

• income—a continuing source of money that can affect decisions about alimony and child support
• an asset—property of some sort that can be apportioned between the spouses in the settlement
• neither income nor an asset, or
• both income and an asset. (For more on the distinction between income and assets, see Chapter 12.)

This chapter looks at different forms of employee compensation in light of their value to you and your spouse in the divorce process.

Employee Benefits

Employee benefits (also known as nonwage compensation) have mushroomed in recent years as companies and nonprofit organizations have sought to attract and retain employees. Start-up businesses, especially, use nonwage compensation because they may not yet generate the cash to pay competitive salaries. Employee benefits include retirement plans—both pension plans and deferred compensation plans; insurance coverage; disability and death benefits; employee assistance plans; educational assistance; and perks such as company cars, health club memberships, and discounts at stores or hotels.

This aspect of divorce law is far from settled. Courts can and do disagree about how to classify particular benefits at divorce. One court may say that use of a company car lowers an employee's living expenses, freeing up more money for spousal and child support; another may not. So it's important to talk to your attorney about the role that employee benefits may play in your case.

Various types of retirement plans, employer sponsored and otherwise, are explained in Chapter 14. In the following sections, we provide an overview of other common employee benefits and how they could affect your divorce settlement. The question that's usually at issue is whether a particular benefit can be considered taxable (or gross) income. If so, a court may take it into account in setting child or spousal support. In other instances, a benefit may be regarded as a marital asset—something that gets allocated between spouses at the time of divorce.

Health Insurance

The employee benefits that most affect day-to-day living are in the insurance area. Medical insurance, especially, is one of the most important benefits that are subject to a divorce court's powers. Health insurance can also cover prescriptions, therapy, dental and vision care, and the like.

Many health insurance plans provide benefits through an insurance company or a health maintenance organization (HMO). Other plans are paid directly by the employer (known as "self-funded" or "self-insured" plans).

An employer's contributions for health insurance are not considered taxable income to the employee. Nor does an employee report as taxable income amounts paid by the insurance company for covered medical expenses.

A court may order a parent to provide health coverage for children as part of a child support order (see Chapter 18). But this benefit is not considered an asset to be divided at divorce.

Disability Plans

These plans protect employees against the risk that illness or injury will interrupt their ability to work. Typically, the employer offers coverage for disability under an accident or health plan.

Usually, the employer's contribution is excluded from the employee's gross income on the tax return. In the event of disability, however, amounts the employee receives are included as gross income.

Employer-sponsored disability insurance is not an asset to be divided between spouses at divorce. But a contribution paid by the employer may be factored into the court's calculation of child and spousal support.

Group Term Life Insurance

This is an insurance policy carried by an employer to provide death benefits for employees and, occasionally, for retirees. Unless an employee is upper management, this insurance is generally available only during the term of employment.

The employee generally excludes from taxable income the employer's contribution to the premium up to $50,000. In the event of death, the beneficiary is not taxed on the death benefits received.

Group term life insurance is not an asset that a court divides. However, the court may order a party to maintain all employer-provided life insurance, naming a former spouse or children as the beneficiary (see Chapter 10).

Accidental Death or Dismemberment Insurance

Again, employer contributions to premium payments and insurance proceeds received by the employee are excluded from the employee's income. If the employee pays the premium, the amount paid may be a factor the court considers in a child support order; however, the policy itself is not an asset to divide.

Health Savings Accounts

A health savings account (HSA) is a tax-advantaged medical savings account to which contributions may be made by employers, employees, or both. Funds in an HSA account may be invested in a manner similar to a 401(k) account or an IRA. Those funds later can be withdrawn tax free for qualified medical expenses, such as deductibles, coinsurance, dental, vision, and chiropractic care, and other items not necessarily covered under a traditional health insurance plan.

Each HSA account must be combined with a separate catastrophic health insurance policy with a high deductible. Medical expenses must hit $1,350 for an individual and $2,700 for a family before coverage kicks in. Once the deductible is met, the insurance usually covers 100% of health care costs. The idea is that Americans will consume less...