In its April 29, 2015 decision in Dickson v. Dickson, the Appellate Division, Second Department, reversed Westchester County Supreme Court Justice John P. Colangelo to solve a practical problem resulting from a mistaken assumption in a couple’s divorce settlement agreement.
That agreement provided that the wife would receive one half of the husband’s Time Warner Deferred Compensation Plan benefits. The transfer of the wife’s interest was expressly to be effectuated pursuant to a Qualified Domestic Relations Order (hereinafter QDRO) or a Domestic Relations Order (hereinafter DRO).
What is a Domestic Relations Order? It is common for employers to provide retirement or deferred compensation benefits to their employees. With appropriate plans, there are no income taxes paid by the employee now at time of the employer’s current contributions. Indeed, the employee may also contribute to such plans using “pre-tax” dollars. Income taxes will not be paid on the employer’s or employee’s contributions, or the growth thereon, until the employee withdraws funds from the plan, usually upon retirement.
Incident to a divorce, a share of such plan benefits is often to be paid over, now, to the employee’s spouse. Were that to be accomplished by the employee withdrawing the spouse’s share and paying over the funds withdrawn to the spouse, such could constitute a current invasion of the plan, a withdrawal from the fund subjecting the employee, now, to income taxes, if not early withdrawal penalties, as well.
A Domestic Relations Order is a court decree recognized by the Internal Revenue Service that allows the division of retirement plan benefits incident to a divorce, without triggering current income taxation or early withdrawal penalties. Rather, the employee’s spouse will be subjected to income taxes only when the spouse accesses that share when, as and if withdrawals are made (or if the share is not properly rolled over into an appropriate tax-deferred account of the spouse).
That is precisely what the Dicksons contemplated here. The wife was to receive half of the husband’s Time Warner Deferred Compensation Plan. A Domestic Relations Order was to be used to prevent the transfer to the wife being a taxable event. Rather, the wife would pay income taxes on the amounts she received when, as and if she did so.
However, in this instance the Time Warner Deferred Compensation Plan was not the type of benefit plan that could be made the subject of a Domestic Relations Order. Instead, for the husband to pay over to the wife her 50% share, such would be treated as a current invasion. The husband would, now, be subjected to income taxes on the amount withdrawn and paid over to the wife.
When the wife learned that no DRO was available, she moved for an order directing that the Husband distribute to her 50% of the gross amount in that account (leaving the husband to pay the taxes on the amount distributed to her). The husband opposed the motion, and cross-moved to reform that provision of the settlement agreement based upon mutual mistake. He argued that 50% of the net value of the account should be distributed to the defendant, after payment of taxes, rather than 50% of the pre-tax, gross amount.
Westchester County Supreme Court Justice John P. Colangelo granted the wife’s motion and the husband appeled. The Second Department reversed.
A court may not write into a contract conditions the parties did not insert or, under the guise of construction, add or excise terms, and it may not construe the language in such a way as would distort the apparent meaning.
Here, the provision in question stated:
The Husband . . . maintains solely the following qualified marital retirement-related accounts and plans . . . The Wife shall be, and is, entitled to fifty (50%) percent of the balance contained in the said account as of the aforesaid dates, together with fifty (50%) percent of any gains and/or losses thereon to on or about the date of the transfer of the Wife’s interest to her. The transfer to the Wife of her said interest shall be effected pursuant to a Qualified Domestic Relations Order . . . or Domestic Relations Order.
The Second Department recognized that since the parties agreed that the subject account was not one which could be divided through a QDRO or DRO, the obligations could not be performed in the manner envisioned by this provision.
By specifying that the division was to be accomplished by Domestic Relations Order, the parties contemplated that the husband would not be subjected to such income taxes. Moreover, separating the description of the subject account as a “qualified marital retirement-related account or plan” and the provision requiring transfer by QDRO or DRO from the remainder of the provision’s obligations would distort the paragraph’s apparent meaning.
Thus, since it was impossible to distribute the account by the means specified and the parties did not consider how to treat this asset were it determined to be unqualified, the mistake was of a nature that there was no meeting of the minds as to this provision.
Accordingly, the Supreme Court erred in granting the wife’s motion to transfer 50% of the account’s pre-tax, gross funds and denying the plaintiff’s cross motion to reform the agreement. The Second Department ordered that the parties each receive a 50% distribution of the net proceeds of the Time Warner Deferred Compensation Plan after payment of the income taxes.
It’s now up to the parties to best implement the division. Obviously, the husband should not have to withdraw his own share to pay the wife her share. Assuming such was authorized by The Plan, the most direct plan would be for the husband to withdraw one half of the gross amount (as of the appropriate date, plus or minus gains or losses), compute the taxes on the amount withdrawn by preparing alternative tax returns with and without the withdrawn amount; pay the taxes out of the withdrawn proceeds and pay over the net to the former wife.
Mitchell P. Lieberman, of Lieberman & LeBovit, of Yorktown Heights, represented the wife. The husband represented himself.