Income Averaging

It is not unusual to use a three or five year average of someones income when calculating alimony and/or child support if their income fluctuates.  Why does income fluctuate?  Sometimes people earn commissions based upon sales which vary from year to year.  Sometimes the economy or other reasons dictate how much of a bonus they get.  Some times deferred compensation, when it vests and/or is cashed in, yields more in some years than in others.  There are many reasons why income can fluctuate.  As such, both the case law and child support guidelines advise that we should use an average when calculating support.

That said, is this always fair?  What do you do in cases where it is clear that the prior income wont be repeated?  That was the issue in the case of Harwelik v. Harwelik, an unreported Appellate Division opinion decided on December 19, 2011.  In this case, the husband’s average income was about $300,000.  However, this included both short term bonuses that he was able to defer and long term bonuses that had a 3 year vesting period.  In July 2006, when the husband’s employer, Verizon, sold most of its international assets, his title was downgraded from director to manager. As a result of the change, he was no longer eligible to receive long-term bonuses, although the bonuses previously
granted would still vest and be fully payable. In addition, as a manager, plaintiff could no longer defer the short-term bonuses he received after 2006.  When excluding this deferred compensation from the average income, it was substantially less.  That said, the trial court used the $300,000 average.

In a confusing opinion, the Appellate Division affirmed the use of an average but reversed the use of the $300,000 number because it included the deferred compensation that the husband no longer had, through no fault of his own.

Continue Reading Should Income Be Averaged for Alimony and Child Support Purposes When the Components That Made Up the Income Have Changed?

Very often, we deal with cases where one or both parties’ incomes are variable, because they are tied to commissions, etc,. or heavily tied to a bonus which can vary.  In fact, for many people who work on Wall Street, their salary (oftentimes in the $120,000 to $150,000 per year range), makes up a small percentage of their annual income with the rest coming as bonus at the end of the year or in the first quarter of the next year.  Moreover, it is not uncommon for the bonuses to vary widely from year to year based upon company performance, etc.

This often makes cases difficult to settle, especially during the uncertain if not unstable economic times of the last several years. Typically, the law provides that when someones income is variable, that a 3 or 5 year average should be considered for support purposes.  In these times, is that fair.  Take the person working at a hedge fund who was earning seven figures for several years, but for the last few years, if they still had a job, only earned their $120,000 per year salary.  Ask that person if taking an average of 3 or 5 years for support purposes is fair.  Moreover, from a cash flow perspective, even when an average is used, the payor can be really strained to pay support if their actual income is lower than the average used.  As time goes by after the divorce, in theory, this should be balanced by the years when they earn in excess of the average.  In the years closest to a divorce, after all assets were distributed and perhaps the liquid assets were used to pay for the divorce, to pay equitable distribution, to buy a new home, etc., there may be no fund to serve as the buffer in one of these under average years. 

Continue Reading Can a Judge Order That a Percentage of a Bonus Be Paid As Additional Alimony