When is Severance Pay Marital Property?

On behalf of The Marks Law Firm, L.L.C. posted in Divorce, Marital Property, and Severance Pay on Friday, February 21, 2014

It is not uncommon for companies to encourage employee turnover through early retirement – the salary and benefits paid to a newer employee tend to be much less than the continued increase in salary and benefits to long-time employees.  To make these early retirements more palatable to the employee, companies often offer incentives for early retirement – either a generous severance package or a lump sum of stock options.

When parties divorce, it may be difficult if not impossible to know whether one spouse could be forced out of work in the future and given a more generous retirement benefit package than at the time of divorce.  An experienced attorney would conduct thorough discovery on the matter and also consider inserting a provision in a marital settlement agreement to cover such a contingency.

In the absence of an actual settlement agreement that awards a portion of such benefits to the other spouse, that other spouse will have a hard time collecting any of these early retirement packages, as reflected by a case this week from the Eastern District of the Missouri Court of Appeals, Zahn v. Zahn.

In Zahn, husband worked for Ameren at the time of divorce.  The parties reached a settlement agreement that awarded wife a portion of the pension benefits husband would receive upon retirement.  One month after the parties entered the settlement agreement as approved by the court, husband took an early retirement.  Wife responded by filing a motion to divide undisclosed assets, claiming the severance husband received for his early retirement – some $70,000 – should constitute marital property.

The Eastern District applied what our courts call a “replacement analysis” – if the benefits given for taking early retirement are intended to replace the earnings the employee would have received had he or she continued working, the benefits replace future or post-dissolution income and therefore do not constitute marital property.  If, however, the benefits award service over the years to the company, some of the benefits would qualify as marital property.  In this case, the Eastern District found that the severance was compensation for the loss of future income and benefits due to early retirement, rendering such benefits the separate property of husband.  Wife had no legal claim to these funds.

As noted above, the timing of the taking of the early retirement suggests that the husband must have known of the benefits he would receive for taking early retirement.  Had wife’s counsel asked husband about this information in a deposition prior to entering the settlement agreement, husband would have been forced to disclose the coming benefits and his plan to retire, which would have given wife the opportunity to make those benefits part of the settlement agreement.  Notably, had wife made this discovery and instead proceeded to trial, the court could not consider the sums marital property subject to division; however, knowing about the coming benefits likely would have changed wife’s bargaining position during settlement.

Spouses seeking to collect or protect employment related benefits should look carefully at stock options, bonuses and severance, particularly if a matter of contract with the employer, and consider the impact of the wording of such benefits on a future divorce.

If you have questions about division of employment benefits during divorce, contact us – we can help.