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Divorce: The Impact on Equity Awards – Part 1

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October 31, 2019 | Jennifer Namazi

Divorce: The Impact on Equity Awards – Part 1

In a session at this year’s NASPP Annual Conference (“Divorce, Death and the Impact on Equity Awards”), divorce was the topic of the hour. In listening to panelists Derek Windham (Hewlett Packard Enterprise), Josh Schaeffer (Equity Methods), Justin Ho (Orrick Herrington & Sutcliffe LLP), and Raenelle James (Equity Methods) discuss the landscape around how companies are handling this common life scenario, I found myself surprised that the majority of companies don’t have a formal transfer policy in place for these situations. It seems like the perfect time to identify recommended approaches and considerations in handling employee divorce relative to equity plans.

In the first of a two part series, we’ll cover why companies should consider transfer policies for divorce. The second part (next week) will deep dive into some of the considerations around allowing actual transfers of shares versus having the employee retain their plan awards/options/shares and transfer only the economic interest in their stock plan holdings.

Should Companies Have a Transfer Policy for Divorce?

According to the panel, the answer to this question is yes. Before you skip ahead, thinking that you may already have policy language within your plan, the policy we are talking about is more than just the blanket “transfers are prohibited” paragraph found in some stock plans. I’ll get into that nuance, but let’s first understand why a transfer policy for stock plans is recommended.

First, other voluntary company benefit plans that hold assets, such as a 401k retirement plan, are likely covered under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA is a federal law that sets minimum standards to protect employee participants in voluntary retirement and health plans. As such, when a divorce occurs and assets under a plan subject to ERISA are affected, a divorcing party may obtain a Qualified Domestic Relations Order (QDRO), which is a specific type of court order that recognizes the right of an “alternate payee” to receive all or part of a retirement or pension plan that belongs to another person. So if a non-employee spouse presents a QDRO to the company’s 401k sponsor, then the 401k sponsor would typically be obligated to comply with the order to divide and distribute the assets in the 401k plan.

In the case of equity plans, they are not subject to ERISA, and the same plan sponsor obligation to comply with a QDRO would not apply. Essentially, the company is not obligated to transfer shares underlying or issued in connection with equity awards. This absence of a clear path to settling/distributing domestic claims related to stock plan awards/shares drives the recommendation that divorce oriented plan language is needed for stock plans.

We’ve established that a policy to define how a company will handle divorce scenarios is recommended. Let’s go back to the fact that some stock plans do already contain general language that prohibits transfers – which sounds like a good approach towards nudging employees to solve distribution of their assets in another means besides transfer (for example, by the transfer of economic value of the shares instead of the actual transfer of shares).  Is this the same as having a transfer policy? Prohibitive language around transfers in the plan sounds ideal at surface evaluation, but our panel points out that there are concerns with reliance on such general language to address divorce transfers. For one thing, courts may tend to narrowly interpret language that prohibits transfers. A plausible scenario is that a court interprets divorce related transfers to be involuntary, and in turn regards general language prohibiting transfers as non-enforceable by the company. Having a clearly defined policy, including who is covered and what types of transfers are permitted, will prevent such a scenario.

Who Should be Covered in a Transfer Policy?

While it might seem reasonable to allow transfers to occur only by certain individuals (executives, for example), the panel’s suggestion as a best practice is that if a company allows a transfer for anyone, it should allow transfers for their entire stock plan population.

In our next installment of this series, I’ll cover the two types of options for dividing stock plan assets in a divorce and considerations around both.

In the meantime, for more information on this topic, the audio recording of this session (“Divorce, Death and the Impact on Equity Awards”) is available on our NASPP website.
-Jennifer
 
 

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