Retirement Incentives and Severance Pay Definition: Compensation paid by a company to an employee upon termination. This is commonly referred to as a "severance package" which is offered to employees in case of layoffs or corporate downsizing.

General Discussion: Many states have not addressed the issue of severance pay as it relates to division of property incident in divorce. However, those states that have addressed this issue find that the cornerstone of classifying severance pay as marital property relates to whether or not such compensation is designed to compensate the employee for future loss of employment, thereby replacing future earnings, or is intended to compensate the employee for efforts made while employed during the period of marriage.

Classification: The argument that most states that have examined this issue find compelling is that severance pay is a form of compensation for future economic hardship due to loss of employment. Severance pay is designed to ease the financial conditions during an employment transition and to compensate the employee for the losses attributable to an untimely dismissal. Therefore, the very nature of severance pay as replacement for wages that would have been earned by the employee after the marriage supports a classification as separate property.

Further, although at times a severance package may be based upon the length of service an employee had with the company, receipt of such package is conditioned upon termination of employment. Therefore, it can be considered a mere expectancy that has no value until termination of employment. Many courts have established that when termination does not occur during the marital partnership and the right to severance pay is not established during the marriage, severance pay is separate property.

Opponents to this argument reason that severance pay is marital property where the amount is based on the employee’s past services to the employer and can be quantified as compensation for past labor.

Further, it is argued that severance pay that is considered compensation for past labor, rather than replacement for future earnings, and was acquired during the marriage is a marital asset subject to equitable distribution, even if it is obtained after filing of divorce complaint.

Valuation: Unless the employee has been terminated and offered a severance package, it is impossible to place a value on such benefits. As stated earlier, the possibility of receiving a severance package does not have any value unless the package itself is received by the employee. Once a severance package is offered, the value may be apparent, as is common with a one time lump sum payment (ex.: $50,000.00) or may be calculated using the methods developed for determining present value, as is common with an annuitized payment schedule (ex.: $1,000.00 a month for 24 months).

Distribution: The only appropriate method of distributing a severance package is by using the deferred distribution method. This will ensure that the nonemployee spouse does not receive compensation upon divorce for property that is never technically earned or received by the employee.

State Case Law

The following is a summary of case laws we have come across in our research of this topic. If nothing is listed under a particular state it is because we have not found any pertinent cases relative to this topic. If you know of a case that relates to this topic, and do not find it listed here, please e-mail us the citation so that we can include it in this section.
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ALABAMA

ALASKA

ARIZONA

In re Marriage of Crawford, 884 P.2d 210 (Ariz. Ct. App. 1994)
Special Separation Benefits (SSB) offered by the military are marital property.

ARKANSAS

Dillard, 772 S.W. 2d 355 (1989)
To the extent the termination benefits are additional compensation for prior services or a replacement for lost marital pension rights, the benefits are marital property. Severance pay earned through employment during marriage is marital property even if received after divorce.

Lawyer, 702 S.W.2d 790 (1986)
Payments that salesman/husband would receive upon termination of his employment contract with an insurance company were intended to compensate for lost future earnings rather than past services and thus were not marital property.

CALIFORNIA

In re Marriage of Gram, 25 Cal. App. 4th 859, (1994)
When applying the time rule any supposed years of service credited to the employee spouse must be added to the total length of the employee’s service. Such supposed years of service are not supplied by the employee but are merely a means of enhancing the pension benefit, the court reasoned.

In re Marriage of Lehman, - Cal. 4th 955 P.2d 451 (1998)
The court held that a nonemployee spouse who owns a community property interest in an employee spouse’s benefits under a defined benefit pension plan owns a community property interest in the employee’s retirement benefits as enhanced after marriage dissolution.

In re DeShurley, 207 Cal. App. 3d 992 (1989)
The court held that severance pay received by a husband pursuant to a bankruptcy court order was compensation for electing to forego future employment and not deferred compensation and thus separate property.

In re Frahm, 53 Cal. Rptr. 2d 31 (Cal. Ct. App. 1996)
Post-separation severance pay not divisible.

In re Marriage of Skaden, 566 P.2d 249 (1977)
Termination benefits, including percentage of premiums collected on insurance policies, constituted deferred compensation to be included in marital estate.

In re Marriage of Kuzmiak, 176 Cal. App. 3d 1152,(1986)
Court held that separation pay received upon a postdissolution involuntary discharge from military service is the service member’s separate property. Separation pay is intended to ease the transition into civilian life, not as compensation for past services, the court found. If the service member is married at the time of discharge, the loss of employment is a community loss, and separation pay helps the couple adjust to the loss of employment, the court noted, but if the service member is not married at the time of discharge, the adjustment to civilian life is his alone to make, and the separation pay is his separate property.

In re Marriage of Lawson, 208 Cal. App. 3d 446 (1989)
The court held that a husband’s severance pay was separate property because it did not involve a contractual right and instead constituted a voluntary noncontractual payment that was intended as future compensation during husband’s transition period.

In re Marriage of Horn (1986) 181 Cal.App.3d 540
The chief characteristic in cataloging termination or severance benefits is whether the benefits constitute (a) deferred compensation for past services or (b) present compensation for loss of earnings. If the benefits are deferred compensation for past earnings, the benefits are community property; if they are present compensation for loss of earnings, they are separate property.

COLORADO

In. re Marriage of Holmes, 841 P.2d 388 (Colo. App. 1992)
Husband’s right to severance pay as a substitute for a loss of future wages does not constitute marital property.

In re Marriage of Ifeupel, 936 P.2d 561 (Colo.1997)
Special Separation Benefits (SSB) offered by the military are marital property.

CONNECTICUT

DELAWARE

DISTRICT OF COLUMBIA

FLORIDA

Blevins v. Blevins, 649 So.2d 315 (Dist. Ct. App. Fla. 1995)
If a "temporary" benefit is and has been an integral part of the pension for decades and enables workers to retire early by boosting their benefits until they reach the age of Social Security eligibility. The benefit is only available after 30 years of service and therefore rests, at least in part, on marital efforts and should be included in the marital estate.

Brotman v. Brotman, 528 So. 2d 550 (Fla. DCA 1988)
Severance pay that husband received after separation but before dissolution was a marital asset, since the pay was acquired during marriage.

Lipsitt v. Lipsitt, 580 So. 2d 174 (1991)
To the extent the termination benefits are additional compensation for prior services or a replacement for lost marital pension rights, the benefits are marital property.

Kelson v. Kelson, 647 So. 2d 959 (Fla. Dist. Ct. App. 1994)
Special Separation Benefits (SSB) offered by the military are not marital property.

GEORGIA

HAWAII

Stouffer v. Stouffer, - Haw. App. 867 P.2d 226 (1994)
The court held that the calculation of the husband’s gross retirement benefits under a decree awarding the wife a share of his pension included amounts provided through a special early retirement program, regardless of whether the early retirement program was foreseeable at the time of divorce.

IDAHO

ILLINOIS

INDIANA

In re Marriage of Hodowal, 627 N.E.2d 869 (Ind. Ct. App. 1994)
An early retirement subsidy, that is available only if certain age and service requirements are met, is not marital property subject to division because the subsidy was not a vested right but a contingent option.

IOWA

KANSAS

KENTUCKY

Lykins v. Lykins 34 S.W.3d 816; 2000 Ky. App.
The trial court did not err by determining that appellant’s payments under the military Voluntary Separation Incentive (VSI) program constituted marital property because the payments were more similar to early retirement benefits than severance pay.

LOUISIANA

MAINE

MARYLAND

MASSACHUSETTS

MICHIGAN

Hutchins v. Hutchins, 71 Mich. App. 361, 248 N.W.2d 272 (1976)
Severance pay received during the marriage might be marital property.

MINNESOTA

Mikoda v. Mikoda, 413 N.W.2d 238 (Minn. Ct. App. 1987)
An early retirement bonus received by husband after dissolution was not a benefit which the dissolution court intended for the wife to share, where at the time of the decree the husband had no right to an early retirement bonus and there was no indication that the company offered an early retirement program.

MISSISSIPPI

MISSOURI

Balven, 734 S.W. 2d 909 (1987)
To the extent the termination benefits are additional compensation for prior services or a replacement for lost marital pension rights, the benefits are marital property.

MONTANA

Blair v. Blair, 894 P.2d 958 (Mont. 1995)
Special Separation Benefit (SSB) offered by the military are marital property.

NEBRASKA

Shockley, 560 N.W. 2d 777 (1997)
Early retirement incentives are marital if given during the course of the marriage.

NEVADA

NEW HAMPSHIRE

NEW JERSEY

Reinbold v. Reinbold, 710 A.2d 556 (App. Div. 1998)
The enhanced value of the husband’s pension as increased by early retirement incentives was distributable property under the parties’ property settlement agreement.

Ryan v. Ryan, 619 A.2d 692 (1992)
Severance pay is separate property if it replaces postmarital earnings and marital property if it has some other purpose relating to compensation for labor during the marriage.

NEW MEXICO

Franklin v. Franklin, 116 N.M. 11, 859 P.2d 479 (Ct. App.)
Not marital.

NEW YORK

Olivo, 624 N.E. 2d 151 (1993)
An early retirement incentive package accepted by former spouse after divorce is not marital property, except for portion of package that enhances pension benefits payable to employee.

Tanchick, 190 A.D. 2d 1076 (1993)
Early retirement benefits were compensation for lost postmarital wages, and thus separate property, even though amount was based on length of prior employment.

Biddlecom v. Biddlecom 113 A.D. 2d 66 (1985)
Severance pay and supplemental benefits is husband’s separate property because the right to receive the payout did not exist prior to the commencement of the divorce action.

Harrell v. Harrell, 120 A.D.2d 565 (1986)
To the extent that severance benefits are received before the cutoff date for identifying marital property, the funds have been "acquired" during marriage and thus constitute marital property.

NORTH CAROLINA

Boger v. Boger, 103 N.C. App. 340, 405 S.E.2d 591 (1991)
The pensionholder took advantage of a newly implemented retirement incentive plan which offered a much higher monthly annuity on his retirement plan in return for retiring early. The appeals court held that the increased portion of the payment attributable to the husband’s early retirement election constituted separate property.

NORTH DAKOTA

OHIO

Gultiz v. Gultiz, Ohio Ct. App. Unrptd 1998
A lump sum early retirement incentive was considered marital property.

McClure, 645 N.E. 2d 1260 (1995)
Severance payments intended to compensate for wages lost after the divorce cannot be characterized as marital property.

OKLAHOMA

OREGON

PENNSYLVANIA

Gordon v. Gordon, 436 Pa. Super. 126, 647 A.2d 530 (1994)
Former spouse not entitled to any portion of enhanced pension benefits because former spouse was not required to wait for her share of distribution.

Holland v. Holland, 403 Pa. Super. 116, 588 A.2d 58 (1991)
Former spouse required to wait until she received distribution of pension benefits and therefore permitted to enjoy increases in value occasioned by continued employment of the worker.

Meyer v. Meyer, 749 A.2D 917 SUPREME (2000)
Post-separation early retirement incentive benefits were marital property because they were based upon years of service.

LaBuda, 524 A. 2d 494 (1987)
Early retirement incentive payments were separate property because the right to the payments did not arise until after the parties separated and neither spouse expected prior to separation that husband would receive these payments, but a special lump-sum payment that husband received upon early retirement was marital property since it partially took the place of regular retirement benefits that the spouses expected the husband to receive.

RHODE ISLAND

SOUTH CAROLINA

Fisher v. Fisher, 462 S.E.2d 303 (Ct.App.1995)
Special Separation Benefit (SSB) offered by the military are marital property.

SOUTH DAKOTA

TENNESSEE

TEXAS

Whorrall v. Whorrall, 691 S.W.2d 32 (Tex. Ct. App.1985)
The court decided that a lump-sum payment made on the husband’s early retirement was his separate property. The fact that the payment was purely discretionary showed that it was not earned over the employee’s entire tenure or as a reward for years of service, but instead was a way to obtain retirement of highly ranked, unproductive empioyees. Moreover, the company’s special payment practice did not apply to all employees on an equal basis, and the decision whetherto induce early retirement was made on an individual basis.

Perez v. Perez, 587 S.W.2d 671 (Tex. 1979)
Military readjustment benefits are analogous to military retirement benefits. Readjustment benefits are a property right earned during active service and, like retirement benefits earned during marriage, constitute community property.

UTAH

VERMONT

VIRGINIA

Luczkovich, 496 S.E. 2D 157 (1998)
Severance package negotiated two years after retirement is not divisible.

WASHINGTON

In re Marriage of Bishop, 46 Wash. App. 198, 729 P.2d CA7, 649 (1986)
Court held that severance pay received when the husband’s employment was terminated shortly after the parties’ divorce belonged entirely to him, even though length of service was a factor in the calculation of the benefits.

WEST VIRGINIA

WISCONSIN

WYOMING

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