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A number of companies offer stock options as either a benefit or as a retirement option for their employees – sometimes referring to the benefit as deferred compensation. The diligent family law practitioner will ensure that discovery is done as to all possible benefits accrued during the marriage. Stock options are contingent rights given to employees of a company to purchase stock of the company at a price set at the time the option is created. If the stock increases in value by a specified future time, the option can be “exercised” to buy it at the price set, and sell it at the then-current price (or keep it into the future). If the stock has not increased in value, an employee is not required to exercise the option so the right has no element of downside risk. The employee does not have to put up any money for an option until the time that it is exercised.

Typically the employee does not have a vested interest in the stock until some set time period or periods have run. If an employee with options leaves the company prior to a stated time period, the right to exercise some or all of the options is lost in most option contracts. The conceptual approach is that employees will have incentive to work hard for the company to increase the value of the stock and will stay employed with the company in order to be able to purchase the stock. The latter concept is often referred to as “golden handcuffs.”

In startup companies in particular, options are a way of having key employees work for less than a market salary in the hope of bigger rewards from the increase in value of the stock.

Stock options can be granted with either immediate vesting or vesting over time. In the first instance, the participant is awarded the right to purchase stock at a certain price – usually discounted off the market price at the time of the award – for any period into the future. It then becomes the participant’s decision on whether and when to “exercise” that option. Obviously, if stock options

See NRS 286.301, 286.303, 286.365, 286.479, 286.510(2).

are granted to a participant during the marriage for work performed during the marriage, the options would be considered community property.227

In the second instance, the stock options may be granted during the marriage, but not vest until some time in the future – and often only if the employee is still employed with the company. This situation raises the question whether an option granted during marriage, but not vested until after divorce, is separate or community property.

The legal question has not been directly litigated in Nevada, but has been extensively litigated elsewhere, specifically in California. In the leading case, Marriage of Hug, Justice King set forth228

basic principles for division of stock options that have been cited and followed in most subsequent cases:

1) Section 5118 of the Civil Code (now Family Code 772) applies to stock options. Post separation earnings of a spouse are the separate property of that spouse and options are earnings.

2) Trial courts have broad discretion to select an equitable method of allocating community and separate property interests in stock options granted prior to separation and not fully exercisable until after separation. The purpose of any method of division is to achieve substantial justice between the parties considering all of the facts and circumstances of the case.

3) Time rules for division of options are appropriate. No single formula is required or approved. A single formula would be promotive of settlement but “to do so would be to follow the recent tendency of appellate courts and the Legislature, which we decry, to adopt rules which on the surface are easy to apply and foster consistency yet, as applied, too often achieve inequitable results.”

4) It is appropriate to award each spouse a portion of benefits as they are paid.

In other words and simply, if the grant occurs during the marriage, it does not matter if the vesting occurs after the divorce, the options are generally community property to be divided between the parties, but the specific terms and conditions of the options in question can alter what division of the benefit is most fair.

Options may be qualified or non-qualified under federal tax law. Qualified options receive favorable tax treatment and do not result in any tax consequence to the grantee of the option until and unless the option is exercised. The difference does not affect ownership of the options but can affect valuation if the options are not divided in kind. More on qualified and unqualified benefits follows in the next section.

Of Course, if there are any restrictions created by a premarital agreement or other contract between the

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parties that characterize the benefit as sole and separate property, that would apply over and above the presumption of it being a community asset.

54 C.A.3d 780, 201 Cal. Rptr. 676(1984).

I. Non-Qualified Plans

ERISA requires most retirement plans to be funded, with the assets held in trust. Such plans, and the related trusts, are subject to the fiduciary responsibility rules of Title I of ERISA, which include numerous rules designed to ensure the fairness of plans and the safety of the promised retirement benefits. Exceptions to these rules are made for some plans, most notably “Top Hat” plans (unfunded plans of deferred compensation for a select group of management or highly compensated employees), unfunded “excess benefit” plans, and government plans. Top Hat plans are subject229

only to ERISA reporting and disclosure obligations, and claims regulation. Government and unfunded excess benefit plans are exempted from ERISA coverage entirely.

Plans are not required to honor “QDROs” for distribution of such plan benefits because the plans are not tax-qualified; the orders can therefore never be “qualified,” either. Nevertheless, many non- qualified plans will honor court orders dividing plan benefits; others will not. It is critical for counsel to figure out what benefits are actually involved in a case, and what is required to divide them. Where the plan benefits are not directly divisible, counsel may be required to find more creative solutions such as offsets, constructive trusts, or other means of achieving equitable distribution under community property rules.