It is not unusual for deferred compensation (eg. stock options, restricted shares, RSU, REUs, and a whole host of others) to be addressed in marital settlement agreements, either as assets divided in equitable distribution, for purposes of computing income for support, or both. Often the language is complicated and in some agreements it is incomprehensible. A proper goal and something that you often see is the attempt to avoid the double dip – that is, if deferred compensation is divided in equitable distribution, that same deferred compensation should not be used in the calculation of the payor’s income for support purposes in cases where there is some type of support formula based upon income. Given that deferred compensation often vests over three or four years, when using a formula, it would not be unusual if the support is lower in the first 3-4 years because it will take the old deferred comp that was divided that long to pay out, and that long for newer, post-divorce deferred comp to start paying out.
But as I said, sometimes the Agreements are not clear and that can lead to both confusion, and future litigation over exactly what was intended at the time of the Agreement. A perfect example of this is the case of Molloy v. Molloy , a unreported (non-precedential) Appellate Division decision released on February 7, 2020. In this case, the parties divorced after a 26 year marriage. In their Marital Settlement Agreement (MSA), plaintiff agreed to pay a base alimony of $66,667 per year, and an additional lump sum alimony of 33.3% of the gross pretax amount of “compensation for
lump sum alimony purposes[, ]” . . . defined as any salary above $220,000 gross per year and any incentive award, stock, restricted stock award, stock option award, bonus, commission, or other compensation that would be characterized as W-2 or 1099 income paid to [plaintiff] by his employer(s). In addition, with regard to equitable distribution of deferred compensation, the MSA provided the defendant 200 of an 1122 award of RSUs from plaintiff’s employer, with the plaintiff retaining the rest. Yet another paragraph of the MSA contained typical boilerplate language, as follows:
Except as provided in this [a]greement, each party may dispose of his or her property in any way. Each party waives and relinquishes any and all rights he or she may
now have or hereafter acquire under the present or future law of any jurisdiction to share in the property or the estate of the other as a result of the marital
As one would expect, in 2018, the parties disputed whether the additional lump-sum alimony plaintiff calculated and paid to defendant was accurate for 2015 through 2017. When the parties could not resolve their dispute amongst themselves, defendant filed a motion for enforcement claiming she was underpaid. she included the 1122 RSUs in her calculation of plaintiff’s gross 2015 earnings and calculated his income to be $429,609.69. Also not surprisingly, Plaintiff’s calculations differed as he subtracted the total value of the 1122 RSUs, The motion judge sided with the defendant, including all of the 1122 RSUs in the formula and the plaintiff appealed.
The Appellate Division rejected plaintiff’s argument the lump sum alimony calculation required the motion judge to include defendant’s share of the RSUs noting that the MSA clearly stated that [i]ncreases in [defendant’s] earned income shall reduce [plaintiff’s] alimony obligation.” Therefore, the Appellate Division held that the liquidation of defendant’s share of the RSUs constituted a realization of unearned income and did not affect alimony. The Appellate Division also rejected plaintiff’s argument the MSA created an “impermissible double-dipping” pursuant to Innes v. Innes because the RSUs were not a retirement benefit but earned income (though I believe that this misses the point of Innes).
Notwithstanding, the Appellate Division was constrained to remand the matter for a plenary hearing because the parties’ common intent respecting the treatment of the 1122 RSU tranche is not
readily discernable. The Court noted that:
Indeed, it is possible to read the additional lump sum alimony language consistent with defendant’s argument the parties intended to include plaintiff’s share of the 1122 tranche in the calculation of the additional lump sum alimony. However, when the provision is read in conjunction with the parties’ mutual express waiver of any interest in the other’s equitable distribution, plaintiff’s argument the 1122 tranche was not a part of the lump sum alimony calculation is equally plausible. Moreover, the “[e]xcept as provided in this [a]greement”
language contained in the waiver paragraph did not resolve whether plaintiff’s share of the RSUs were excluded from the alimony calculation because the parties had opposite explanations regarding the reason for the disproportionate distribution of the RSUs in question. The motion judge’s findings did not resolve these issues. Therefore, a plenary hearing was necessary to determine the parties’ common intention regarding the 1122 RSUs.
The point again is that when you are dividing deferred compensation and/or using a formula for alimony and/or child support that is based upon a percentage of income, the language of the agreement must reflect that parties’ intent. In fact, the language is critical. For instance, in the 2004 reported decision Heller-Loren v. Apuzzio, the parties’ MSA included a provision that the child support would be enhanced by 11.6% of the father’s gross income over $180,000. Seems clear enough, right? However, Property Settlement Agreement specifically defined gross earned income as “all gross wages, commissions, salaries, bonuses and income from bonuses.” Elsewhere in the Agreement stock options are mentioned but the specific phrase “stock options” does not appear within the definition “income[.]” In that case, despite clearly being part of the father’s earned income, the stock options were excluded by the trial court and Appellate Division because they were not included in the definition of gross income. It seems like a simple “including but not limited to” and/or some reference to all income from employment in whatever form could have resolved the issue but because the definition was specific, the stock option income was excluded, to the detriment of the children.
The bottom line is that care must be taken in the agreement to flesh out the intent when dealing with deferred compensation so you don’t run into a situation where there is a double dip – i.e. the same asset is being both divided and used in the support calculation. Otherwise, the parties may buy themselves the costs of litigation that exceed the amount in dispute.
Eric Solotoff is the editor of the New Jersey Family Legal Blog and the Co-Chair of the Family Law Practice Group of Fox Rothschild LLP. Certified by the Supreme Court of New Jersey as a Matrimonial Lawyer and a Fellow of the American Academy of Matrimonial Attorneys, Eric is resident in Fox Rothschild’s Morristown, New Jersey office though he practices throughout New Jersey. You can reach Eric at (973) 994-7501, or firstname.lastname@example.org.