When the payor spouse receives fluctuating bonuses, a support order must be carefully drafted. Let’s take a look at a relatively common situation in support order cases. Husband is the high income earner and receives a base salary plus bonus or commission pay which fluctuates based on performance. This is commonly addressed using a percentage or Ostler-Smith order wherein a support order includes a base order plus a percentage of any bonus pay or commission above the salary. This sounds like a simple method for handling a variable income situation. However, such an order raises several issues and can be interpreted differently unless “bonus” income is clearly defined.
In Re Marriage of Minkin (2017) addressed this very issue. In Minkin, the parties stipulated to a spousal support order which stated that husband was to pay wife a base amount of support plus 41% of his “annual bonuses” as additional spousal support. The order did not define what “annual bonuses” meant. Several years later husband filed a motion to modify the order. It was at this time that the parties discovered that they had interpreted the order differently. Wife understood the order to mean that bonus income included any amount he earned above his base salary. Husband alleged that not all income he received above his base salary was “bonus” income. Husband’s compensation plan included several types of income in addition to his base salary:
- Senior management incentive plan;
- 457(b) deferred compensation plan;
- 457 (f) long-term incentive plan; and
- Change of control agreement.
Husband argued that the only component of his additional pay that was “bonus” income was his senior management incentive plan. Wife maintained her position that any income husband received above his base salary was “bonus” income for the purpose of the Ostler-Smith Order. Both parties hired experts to testify about the term “annual bonuses.” The trial court agreed with husband’s expert that the senior management incentive plan was husband’s bonuses because they were discretionary and based on performance. The court also determined that a portion of the payments received under the 457(f) long-term incentive plan were tied to his senior management incentive plan. Based on the Court’s determination of “bonus” income, it turned out that husband had actually overpaid wife under the Ostler-Smith percentage order.
The take away from Minkin is to be sure to define “bonus” income whenever drafting an Ostler-Smith order. There are other issues that should also be considered which were not addressed in Minkin:
Marital Standard of Living:
Spousal support is based on the standard of living of the parties during marriage. The support spouse is not entitled to an increase in the payor spouse’s income after the date of separation. Therefore, there should be a cap on the amount of bonus income that is to be paid as additional spousal support. One common method used when determining the marital standard of living in a fluctuating income situation is to average the three years. Keep in mind that when dealing with both a percentage order for child support and spousal support, that the child support order is not capped at the marital standard of living.
Reverse Ostler-Smith Order:
This is less common in percentage orders. But the issue arises when the supported party’s income also fluctuates. This arises for example with nurses who work overtime and/or receive periodic raises. It follows that an increase in the receiving spouse’s income will affect the amount of support that spouse should receive. This can be accomplished by calculating the percentage the support order should be reduced for any income earned about the supported spouse’s base salary. Such a support order will generally include a provision that the parties will exchange W-2(s) at the end of each year and settle up on any difference in the percentage orders. If this issue is not addressed then the receiving spouse could end up receiving child support payments above the guideline order and spousal support above the standard of living during marriage.
In summary, percentage orders require careful drafting and a clear understanding by both parties as to what constitutes additional or “bonus” income and which income is not characterized as such.
If you want to hear more about the latest information about dividing a support order in divorce, please contact our office. The Law Office of Bawden and Kochis handles cases with family law issues regarding adoption, annulment, mediation, domestic violence, pensions, child custody, child and spousal support as well as pre-marital and post-marital agreements. Telephone (909)792-0222, or email us at [email protected]