Some executives, directors, partners, and other highly compensated employees receive deferred compensation through a nonqualified employer-sponsored arrangement commonly called a “top-hat” plan. Its treatment in divorce depends on how and when the particular benefit was acquired.

A Top-Hat Plan Is Not an Ordinary Retirement Account

A top-hat plan is generally designed to provide deferred compensation to a select group of management or highly compensated employees. It is not necessarily governed by all the same rules that apply to conventional qualified retirement plans.

The plan’s label does not establish whether the benefit is community or separate property. The court must examine the actual plan terms and the employment events that created the right to payment.

The Acquisition Date Can Be Critical

A benefit acquired through employment during marriage may contain a community interest. A stand-alone benefit acquired after separation, however, may be the employee spouse’s separate property even if that person participated in other retirement arrangements during the marriage.

The analysis focuses on the source of the particular payment. A benefit created by obtaining a new position or partnership interest after separation should not automatically be treated as an enhancement of compensation earned during marriage.

Plan Documents Must Be Reviewed Separately

Important records may include the plan agreement, employment and partnership documents, benefit statements, vesting provisions, separation or retirement materials, and communications explaining the payment.

The parties should determine what event created the right, whether the benefit was contingent on future employment, and whether it derives from service performed during the marital period. A lump-sum payment date alone may not answer those questions.

Characterization Depends on the Specific Benefit

One executive may participate in several compensation programs with different acquisition and vesting rules. A qualified pension, bonus, equity award, and top-hat benefit should not be grouped together merely because they all came from the same employer.

The court’s determination is fact-specific. A plan may be entirely separate, entirely community, or contain interests requiring further analysis depending on its terms and employment history.

A California property-division attorney can obtain the governing plan documents, trace the benefit to the employment event that created it, and work with a financial professional when valuation or apportionment is disputed.