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What should I know about deferred compensation?

On Behalf of | Dec 20, 2022 | Family Law

Some divorces become complicated because of the complex nature of the assets owned by one or both spouses. Deferred compensation is one such asset. This form of compensation differs from other financial accounts in that a person can collect the money at a later date.

Deferred compensation is not like health insurance or wages. It takes specific conditions for someone to receive the benefits. If your spouse has a deferred compensation package, you may have an entitlement to some of it in a divorce.

How deferred compensation works

U.S. News and World Report explains that typically an employer will take out money from the salary of an employee and place it into a deferred compensation plan. The recipient will make an agreement to remove a specific amount from his or her paycheck. This can also potentially minimize income taxes since the employee has less taxable income.

When deferred compensation pays out

Some retirement accounts such as traditional 401(k)s require the recipient to reach 59 and a half years old before withdrawing the money. Otherwise, penalties will result. However, depending on the account, a deferred compensation recipient may work out a specific date or threshold to withdraw money.

For instance, if your spouse has a deferred compensation package, he or she could condition a withdrawal on reaching a certain age. Alternatively, your spouse may reap benefits after an event such as a child graduating from high school.

Deferred compensation in divorce

A deferred compensation package might be eligible for division in your divorce if the compensation is marital property. Since there are many kinds of deferred compensation, you will need to know what type of account your spouse owns. This can lead to discussions of how to valuate it and the legal method to divide it.