401 (k) Contributions & Child Support

In order to determine child support in any divorce case, we are compelled to use the Child Support Guidelines promulgated by the Rules Governing the Courts of the State of New Jersey. Under these Guidelines, we must determine the income of both parents in order to calculate the appropriate amount of child support.

Income is not just earned income. For purposes of using the Guidelines, gross income also includes tips, commissions, interest, dividends, bonuses, royalties, gains derived from dealings in property, rents, annuities, distributions from government and private retirement plans, including Social Security, Veterans Administration, Railroad Retirement Board, deferred compensation, Keoughs and IRAs.

The list goes on and on and it is easy to see that any type of income will be included in the calculation. From this income, certain deductions are taken such as federal, state and Social Security taxes. But, how do we handle the other deductions from income such as retirement contributions?

In a recent case, the question became whether contributions to the father’s voluntary 401(k) plan, as well as any income generated by that plan should be considered as income for purposes of child support. The Court broke down the contributions into those made by the employer for the benefit of the Defendant/Father and those made by the Defendant/Father voluntarily to his own plan. Arguably, an employer’s contribution to a 401(k) plan could be considered income for child support purposes because the contribution is compensation for services. In addition, the increase in the plan corpus could constitute both “an interest in a trust” and “gains derived from dealings in property,” two categories of income defined by the Child Support Guidelines.

Yet, the Guidelines limit gross income to “all earned and unearned income that is recurring or will increase the income available to the recipient over an extended period of time. When determining whether an income source should be included in the Child Support Guidelines’ calculation, the Court should consider if it would have been available to pay expenses related to the child if the family would have remained in tact.”

It was noted by the Court that once money was deposited into a 401(k) plan, those funds may not be removed without substantial penalties and taxes. In addition to the tax required to be paid, an early distribution is subject to an additional tax of 10% of the amount distributed. Therefore, the Court determined that it should not consider either the employer’s contribution to the 401(k) plan or the increase of the Plan corpus’ income, explaining that “requiring the income that is generated through the sheltered program to become part of a child support award would punish the father for investing wisely to secure a stable retirement . . . .”

It was noted that assets in a 401(k) plan only become available, even to an intact family, in the event of extreme financial distress. Therefore, income from that asset would not have been available within the meaning of the Guidelines. Because of the heavy tax burden imposed on early withdrawal, a withdraw would be an unlikely occurrence. Therefore, it is not income available to the Defendant over an extended period of time for the payment of child support.

The Court also noted that the philosophy of the Child Support Guidelines is to allow the children “to share in the current income of both parents” and to prevent them from becoming “the economic victims of divorce.” Children of divorce should be afforded the same opportunities available to children of intact families with parents of similar financial means. Since the Guidelines were never intended to allow children of divorced parents a greater share of combined parental income than would have been available for them had there been no divorce, it was held that neither the contributions made by an employer to a 401(k), nor the increase in value of the plan due to employer contributions, should be looked at as income for purposes of child support.

However, any monies voluntarily contributed to an employee’s 401(k) plan by the employee will be considered income for child support purposes since it is a voluntary contribution made by a parent. The choice to place money into a retirement fund does not absolve a parent of his obligation to utilize that income for his children.