Highlights from the November 5, 2021 webinar presented by HBK Valuation, Litigation & Forensics, “Valuation of Retirement Assets and Executive Compensation,” hosted by Beth A. Mascetta, CPA, CVA; Christopher J. Pattison, CVA; and Christopher J. Mascetta, CVA.

Understanding compensation packages is critical in divorce litigation, where valuation of these assets for division can be complex. The seminar provided an overview of the types of executive compensation and retirement plans, employee rights and benefits associated with each, the tax implications involved, and methods of valuation and division.

 Kinds of compensation

• Base salary (without benefits, bonuses, raises, etc.) calculated for equitable distribution
  • Want to understand when base salary increase during the year.
  • Typical reductions from base salary include union dues, alimony, mandatory retirement contributions.
  • Voluntary retirement contributions are deductible for federal income tax purposes but not for Medicare or state taxes.
  • Typically include Medicare contributions as disposable income reduced by employee contributions.

• Short-term incentive compensation calculated for equitable distribution
  • Compensate executives for achieving short-term goals, including bonuses, commissions, and profit-sharing plans; can be based on department and firm-wide achievements.
    • Bonuses: Want to know when the bonuses were earned rather than paid, and that it is in the marital account; also whether bonus is recurring or non-recurring.
    • Commissions: Need to know how commissions are computed; also normalize for commission spikes.
    • Profit-sharing; If executive is not vested immediately amount is not available for distribution.

• Long-term incentive compensation for achieving longer-term objectives (also a form of golden handcuffs). Types include:
  • Stock options: the right but not the obligation to buy company stock
    • Vesting period is important to valuation.
    • Use the date of the grant to determine marital or non-marital value of the stock option.
    • Determining equitable distribution includes consideration of current share value, strike price, time to expiration, volatility, and dividends.
    • Executive doesn’t recognize any income until they exercise the option.
    • Value of shares are reduced by purchase price and taxes (compute the taxes at the front end before equitable distribution). Two types of distribution: deferred distribution and immediate offset via assets on the balance sheet.
  • Restricted stock units: issued to employees in the form of company shares
    • Paid in cash or stock and issued through a vesting plan.
    • Typically executed via a brokerage firm.
    • Assigned a fair market value at vesting.
    • No strike price is required.
    • Have to recalculate taxes to determine net after-tax value.
  • Restricted stock award: Rights to the stock are restricted until the shares vest; also gives stockholder voting rights.
  • Performance share awards: Granted for past or future performance and for individual, department, or company performance; if performance is after separation or in part after separation, an asset for equitable distribution when it is paid out.
  • Phantom stock: No shares being issued but tied to an event, like a company sale, which would include a sharing arrangement.
  • Employee stock purchase plan (ESOP): Allows employees ownership in company; not reflected in pay stubs; a right to purchase at a discount, which will be reflected in pay stub.

Documentation

• Documents to request to summarize base, short-term, and long-term compensation:
  • W-2s and pay stubs are necessary to determine total compensation and what is available for equitable distribution and if there are any deductions for additional compensation items outside of wages.
  • Paystubs are used to look at total compensation; request two years of W-2s and paystubs, any employment contracts, 1099s, and K-1s to determine any supplemental income.
  • Documents regarding perquisites, such as employer-provided vehicle and insurance.
  • For valuing stock options and restricted stock: grant dates, shares granted, vesting schedule, expiration date, and date of marriage and separation; what is considered marital is based on grant date not the vesting date.

Retirement benefits

• Includes deferred compensation, including qualified—401ks, 403b, IRAs—and non-qualified plans; documents are statements:
  • Defined contribution plans: typically funded by employee contribution and matching contribution from employer; typically tax–deferred and withdrawals are taxable; statements will include value including growth.
    • Generally, contributions made during the marriage and any subsequent growth are considered marital assets.
    • Look at loans and whether they were used for marital or non-marital purposes.
    • Do a tax analysis, most often a projected tax reduction method, which considers how person would withdraw funds over time.
  • Defined benefit plans: pension or cash balance plans, funded solely by the employer and paid out based on a formula.
    • Taxed as ordinary income in the year they are paid.
    • Can include survivor benefit.
    • Information on payment options, calculation of benefits are usually contained in the summary plan description.
    • Two methods for determining equitable distribution: immediate offset, a lump sum present value of future benefits; if there aren’t assets to offset, deferred distribution, dividing pension as it is received.
  • There are many factors involved in valuing defined contribution and defined benefit plans.

• Documents needed in valuing retirement benefits include:
  • Summary plan description
  • Quarterly or monthly retirement account statements
  • Most recent Social Security statement and life expectancy data
  • Tax returns to determine taxes owed on potential distributions and after-tax value through the individual’s life expectancy