Employee Stock Ownership Plans

A common asset in a marital dissolution proceeding is the Employee Stock Ownership plan (ESOP).  An ESOP is an employment benefit in which the corporate employer makes contributions of either cash or stock to a trust for its participant employees.  The employees are then allocated a pre-determined amount by percentage in direct proportion to the employee participant’s compensation. 

The ESOP contributions are not taxable to the employee/participant until withdrawn by the employee from the ESOP.

There are two main types of pension plans available from corporate employment:  1) Defined Benefit Plan in which the employee is entitled to receive a specific sum upon retirement, either based upon a monthly sum or a percentage of salary; and 2) Defined Contribution Plan in which the employer makes recurring contributions and the employee’s withdrawal entitlement is largely dependent upon performance of the DCP.  DCP’s almost always take the form of Profit Sharing Plans, 401(k) plans, ESOPs and Money Purchased Pension Plans.

When a party to a marital dissolution proceeding is a participant to an ESOP, not only is there a potential community property interest in the ESOP, but if the ESOP pays dividends directly to the participant/party, those dividends can also be income available for support.

In order to properly divide an ESOP or any other DCP or DBP in a divorce, the account should be valued by either an accountant or an actuarial skilled in valuation.  A DCP is not valued the same as a DBP.  If the parties are desirious of awarding the ESOP or other such plan to the employee spouse in exchange for the non-employee spouse receiving other property (called an “in-kind” division), it must be borne in mind that the value on any given statement, does not take into consideration the future tax consequences to the recipient, nor is an account’s value guaranteed in the future.  Thus, pre-tax assets should be valued against other pre-tax assets, and post-tax assets should be valued against other post-tax assets, or adjustments should be made to compensate for the future tax liability. 

If the parties are desirious of dividing the account, a qualified domestic relations order (QDRO – “qua-dro”) will be needed.  A QDRO is a legally binding order that sets forth the non-employee’s interest in the account, usually includes a survivorship provision to protect that non-employee’s interest in the event of the death of the employee spouse, and binds the plan administrator to divide the account as stated in the QDRO.  A QDRO should be prepared by an attorney that is experienced in the drafting of such orders.  Most companies have “model QDRO’s” available in the event of divorce, however blindly following a model QDRO without the drafter knowing the significance of certain provisions can prove disastrous at a later time.

If you are considering a marital dissolution, or have additional questions about dividing ESOPS or other employee benefits in a divorce, please call to schedule a consultation with Robin Huggins at (949)261-7700.