October 7, 2020
When a client engages us for help with their divorce, the first thing we do is give the client an extensive list of financial information to provide. This includes items that might not typically be requested such as reward points, accumulated vacation time, seasons tickets and prepaid burial plots. Our goal is to get a complete picture of the couple’s assets and liabilities. In order to be assured the list is complete we will use documents such as wage stubs and tax returns to help uncover missing accounts or undisclosed liabilities. For instance, we might find interest income on the tax return from an investment account that has not been listed. This is especially important when one spouse is not forthcoming with documentation. One of the most common overlooked (or perhaps intentionally ignored?) assets is a deferred compensation plan.
“Deferred Comp” plans are a means for high-income earners to postpone some income now while they are in a high income tax bracket, and elect to defer receipt of this income until they leave the company (whether that be for another job or when retiring.) At that point, the earner assumes they will be in a lower tax bracket. This income is held in an account by the employer and which the employee may or may not have the ability to invest.
Typically, these days there is online access to view the account but no paper statements. Therefore, it is easy to hide such an account from an uninformed or financially clueless spouse. It’s not as if the money was paid to the employee, who then moved it from one bank account to another. The wages were taken out of gross pay so looking at the ‘net pay’ won’t alert one to the fact that there is money unaccounted for. One must know how to read the pay stub.
Deferred comp plans are usually easy to pick up on the stub. Under the Deductions section are listed all the items that come off gross pay, such as medical insurance and 401(k) contributions. Here is where you’ll find a deferred comp deduction, although you may have to figure out how it is titled. Sometimes it shows up as “NQDC”, meaning non-qualified deferred compensation, other times it might be called by the section of the IRS code governing such plan. The employer can use any title they want.
In our experience this is a common account that is sometimes not disclosed in a divorce (do we really believe that the spouse “forgot” about an account worth $140,000? Yet that’s what we’ve been told.)
This issue highlights the need to go over the wage stub carefully and have every item explained. In addition, every item on the year-end W2 should be clarified as well – but that’s another newsletter!
