Bonuses
Are bonuses considered as income for support purposes? The Pennsylvania support laws presume that a parent’s historical income is the most reliable predictor of his or her future income. That is why the support guidelines look to the past six months’ income to calculate a parent’s income at the time of a hearing. Bonuses are included as part of a parent’s income if the parent received a bonus in the past, the amount and frequency of which are generally based upon the prior year’s experience, if no contrary evidence is adduced. In other words, if a parent received a bonus in the recent past, the divorce court is likely to assume that this will continue. Yet, in a case where historical bonuses were not guaranteed and had been discontinued for other employees prior to the hearing, the trial court was not obligated to impute bonuses into the future.
What if bonuses are not guaranteed? In cases where bonuses are an element of a parent’s income, it is important to understand the criteria for receiving a bonus. In large corporations, there may be a plan or policy that defines who is eligible for bonuses, how bonuses are computed, and by whom they are computed. Some companies have compensation committees, for instance. Some bonuses are calculated under a formula, which may be based upon individual job performance and/or financial performance of the company or a division. Other bonuses are entirely discretionary and must be scrutinized more carefully. Many bonus plans combine computational and discretionary elements.
What about annual bonuses? Some spouses receive an annual bonus, generally paid in the first quarter of each year, based upon the prior year’s performance or financial results, which comprises a substantial component of the parent’s compensation package. Two additional issues arise in these cases: timing and double-dipping. If the support court annualizes the bonus (treating it as though it were paid in 12 monthly installments), then the spouse may not be able to pay the entire support order from his or her base salary. Instead he or she will have to save the bonus and withdraw it slowly to meet the support obligation. The wage attachment issued by the court in those cases might consume up to 60% of the spouse’s regular salary, creating a cash flow problem. Another issue is double dipping. If the bonus was earned prior to separation, then it may be treated as marital property. The bonus may be treated marital property or income, but not both. These issues require divorce lawyers to develop effective strategies.