Opinion ID: 1057654
Heading Depth: 3
Heading Rank: 1

Heading: 401(k)s as Retirement or Other Fringe Benefit Rights Relating to Employment

Text: We begin by noting the significance of a party's claim that the disputed property is an employment-related pension, stock option right, or retirement benefit. As set forth above, Tennessee Code Annotated section 36-4-121(b)(1)(B) contains two independent definitions of marital property. The first clause refers to income from and appreciation on separate property that accrues during the marriage where each party substantially contributed to [the separate property's] preservation and appreciation. Tenn.Code Ann. § 36-4-121(b)(1)(B). The second clause refers to the value of vested and unvested pension, vested and unvested stock option rights, retirement or other fringe benefit rights relating to employment that accrued during the period of the marriage. If the property at issue is deemed to fit within this second clause, then it is marital property without regard to substantial contributions by either spouse. See Batson v. Batson, 769 S.W.2d 849, 857 (Tenn.Ct.App. 1988) (recognizing that [t]he pension provision is not modified by the `substantial contribution' requirement preceding it and that pension benefits earned by a spouse during the marriage are marital property even though the other spouse did not contribute directly to their preservation or appreciation). Once the property is determined to be a pension, stock option, retirement or other fringe benefit right relating to employment, the issue becomes one of determining the value of that benefit that accrued during the marriage. [7] In Umstot v. Umstot, 968 S.W.2d 819 (Tenn.Ct.App. 1997), our Court of Appeals considered an argument similar to the one being made by Husband in this case. In Umstot , the husband had a retirement plan that held a balance of $4,437 at the time of marriage. The plan grew by $154,106 during the marriage. The husband argued that both the premarital balance and the growth attributable to that amount should have been deemed his separate property. The Court of Appeals disagreed, stating that the critical determination is whether the value `accrued' during the marriage. Id. at 822. The court held that all of Husband's retirement plan, except $4,437.00, accrued during the marriage. Id. Accordingly, the entire balance of the husband's retirement plan was marital property except for the premarital balance of $4,437. Id. We agree with this reasoning. If a contested piece of property fits within the second clause of (b)(1)(B), then the entire net increase in value of that property that accrues during the marriage, through whatever means or methods, is deemed marital, even if the property contains an element of separate property. [8] See Franklin v. Franklin, C/A No. 03A01-9410-CV-00364, 1995 WL 371573, at  (Tenn.Ct.App. June 21, 1995) (holding that everything in Husband's thrift and profit sharing plan, save the $5,091 in there at the time of the marriage, `accrued' after the marriage and was therefore marital property because [t]his code section does not differentiate between value added by `passive income' and value added by additional contributions during the marriage); see also McKee v. McKee, No. M1997-00204-COA-R3-CV, 2000 WL 666363, at  (Tenn.Ct.App. May 23, 2000) (recognizing that marital property includes any increase during the marriage in the value of retirement or pension rights, whether through passive growth or through either party's direct or indirect contribution). If, however, the property at issue does not fit within this second clause and is otherwise deemed to be separate, any income from or appreciation of the property will remain separate unless a court finds sufficient evidence to support a theory of substantial contribution, commingling, transmutation, gift to the marital estate, or some other theory by which otherwise separate property may be deemed marital. In this case of first impression, we address whether an employer's 401(k) plan, and its employees' individual 401(k) accounts, constitute a retirement or other fringe benefit right under the second clause.
A 401(k) plan is structured under the Employment Retirement Income Security Act (ERISA) [9] and the federal tax laws to encourage employees to use it as a vehicle to defer current compensation and save for retirement. According to one knowledgeable practitioner, A 401(k) plan, technically known as a CODA (Cash or Deferred Arrangement), is an arrangement whereby an employer allows an eligible employee to choose between receiving a portion of his or her paycheck in cash or having that portion contributed to a retirement plan on his or her behalf (the deferred arrangement). The term 401(k) refers to the section of the Internal Revenue Code of 1986, as amended (the Code)[,] where the tax-qualification requirements for this type of plan are found. Andrew L. Gaines, An Introduction to Defined Contribution Plans, in Understanding ERISA 2008, at 136, 143 (PLI Tax Law & Estate Planning, Course Handbook Series No. 14479, 2008) (emphases added). And, according to the Internal Revenue Service, [a] 401(k) plan is a qualified (i.e., meets the standards set forth in the Internal Revenue Code (IRC) for tax-favored status) ... plan under which an employee can elect to have the employer contribute a portion of the employee's cash wages to the plan on a pre-tax basis. These deferred wages (elective deferrals) are not subject to federal income tax withholding at the time of deferral, and they are not reflected as taxable income on the employee's Form 1040, U.S. Individual Income Tax Return. 401(k) Resource Guide-Plan Sponsors-401(k) Plan Overview, http://www.irs.gov/ retirement/sponsor/article/0,,id=151800,00. html (last visited Aug. 17, 2009) (emphases added). The deferred taxation feature of a 401(k) plan creates an incentive for employees to participate. See Steven J. Franz et al., 401(k) Answer Book, Q 1:9, at 1-6 (Aspen Publishers 2009). Because an employee will generally have to pay federal income taxes plus an additional penalty tax of 10% on money withdrawn prior to reaching age 59½, 26 U.S.C.A. § 72(t) (West Supp.2008), there is also an incentive to leave the deferred compensation in the account until an employee reaches (or approaches) his or her retirement years. 401(k) plans are also referred to as defined contribution plans, see 29 U.S.C.A. § 1002(34) (West 2008), described by the United States Department of Labor as a plan which does not promise a specific amount of benefits at retirement. Retirement Plans, Benefits & Savings  Types of Retirement Plans, http://www.dol.gov/dol/ topic/retirement/typesofplans.htm (last visited Aug. 17, 2009). 401(k)s therefore contrast with defined benefit plans, which are a type of pension plan that promises a specified monthly benefit at retirement. Id. Instead, defined contribution plans involve monies contributed to the employee's account which are then invested on the employee's behalf. Id. Ultimately, the employee receives the balance in her account, which consists of contributions plus or minus investment gains or losses. Id. These gains and losses are an integral part of the account. The value of the account will fluctuate due to the changes in the value of the investments. Id. An employee participating in a 401(k) plan typically designates a portion of her wages to be withheld from her paycheck and deposited directly into her 401(k) account. Id. As an incentive for its employees to participate (indeed, often as an incentive for applicants to accept employment), an employer has the option of making contributions on behalf of all participants, making matching contributions based on employees' elective deferrals, or both. These employer contributions can be subject to a vesting schedule which provides that an employee's right to employer contributions becomes nonforfeitable only after a period of time, or be immediately vested. 401(k) Resource Guide-Plan Sponsors-401(k) Plan Overview, http://www.irs.gov/ retirement/sponsor/article/0,,id=151800,00. html (last visited Aug. 17, 2009). Thus, by electing to participate in an employer's 401(k) plan, an employee may become entitled to additional compensation. An employer providing a 401(k) plan generally is required to have a plan trustee whose duty it is to handle contributions, plan investments, and distributions. See 29 U.S.C.A. § 1103 (West 2009). The monies placed in a 401(k) account are typically invested in one or more investment vehicles offered by the employer. These vehicles may consist of shares of the employer's stock, mutual funds, or some other forms of investments. See Franz, 401(k) Answer Book, Q 6:10, at 6-5. The employee may have the choice of which available vehicles to use. See id., Q 7:1, at 7-2. Over time, the value of the vehicles in which the monies are invested are expected (or at least hoped) to grow through appreciation together with reinvested interest and/or dividends. Significantly to the issue before us, individuals may participate in a 401(k) plan only through their employment. See 26 U.S.C.A. § 401 (West 2002). A 401(k) account is therefore distinct from an Individual Retirement Account (IRA), a tax-deferred and age-sensitive savings vehicle available to individuals outside of their employment. See generally 26 U.S.C.A. § 408 (West 2002). Additionally, an employee may possess only one 401(k) account per employer. [10] An employee may not, for example, open a new account at the time of marriage in order to segregate pre- and post-marital contributions and gains.