Orange sign depicting deferred compensation.

Deferred Compensation is Not Income

The Colorado Court of Appeals just held that deferred compensation payments from an employer to a non-qualified plan (i.e. it’s not a retirement account under ERISA) do not count as income for purposes of child support. N.J.C.1In re: the Parental Responsibilities of N.J.C., 2019 COA 153.

In the N.J.C. case, the father was a cardiologist, who earned a salary of $150,000/yr, plus another $200,000/yr of deferred compensation which was paid into a non-qualified retirement plan. Father could not access the deferred compensation funds until age 65, and subject to forfeiture if the father left employment before age 65.

His employer’s CEO (who happened to be his brother!) testified that about half of their doctors were employed under an individually-tailored deferred compensation plan.

The mother, who was justifiably unhappy that the “tail was wagging the dog”, and most of the father’s compensation did not count as income, sought to have the deferred compensation included as income, but the trial court declined. The Court of Appeals upheld that decision.

Analogize to Employer 401(k) or Health Contributions

The court analogized the employer contributions to an employer 401(k) matching contribution, which do not count as income for purposes of child support as long as the employee has no right to have the funds paid as salary instead. Mugge.2In re: Marriage of Mugge, 66 P.3d 207 (Colo.App. 2003). Likewise, the court noted that the employer contribution to an employee’s health insurance does not count as income. Davis.3In re: Marriage of Davis, 252 P.3d 530 (Colo.App. 2011).

(For a discussion of the Mugge decision, see the Child Support & Alimony After Retirement article in the Colorado Family Law Guide).

Moreover, the court noted a recent Court of Appeals decision finding that the GI Bill tuition assistance was not income for child support purposes based upon the same rationale – the money paid to the school was not available to the parent for ordinary living expenses, but was earmarked for that purpose alone. In other words, if a parent had no right to cash in lieu of the benefit, the benefit would not count as income if it did not reduce daily living expenses. Tooker.4In re: Marriage of Tooker, 2019 COA 83. For a complete discussion of the Tooker decision, see our recent blog GI Bill Tuition Not Income in a Colorado Divorce.

The court then looked at decisions in other states which found that deferred compensation is not available to a parent, and therefore does not count as income for child support purposes. The court further distinguished out-of-state cases finding voluntary deferrals of income into a deferred compensation plan to be income, because in the present case, the father has no right to receive payment instead, he could not invade the account and withdraw funds, and there is no evidence that he specifically asked to be in the deferred compensation plan in lieu of receiving a higher salary.

The moral of this case – a savvy employee may well have an incentive to negotiate for deferred compensation instead of present salary, and thereby reduce child support or maintenance payments.

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