Fringe Benefits as Income Under TN Child Support Guidelines

Are fringe benefits included in gross income under Tennessee’s child support guidelines? Could you pay more child support now because you drive a company car? Yes, to both questions. And the answer is the same for most child support jurisdictions, not just in Tennessee.

Fringe benefits as income under Tennessee Child Support Guidelines

When parents pull out the child support worksheets and start calculating gross incomes, they must include certain fringe benefits provided by their respective employers. This is because the Tennessee Child Support Guidelines consider fringe benefits to be employment compensation and include it in gross income along with income received from all other sources.

There is much parents should know about permanent parenting plans and child support worksheets. For an excellent parents’ resource, obtain the book on Tennessee Parenting Plans and Child Support Worksheets: Building a Constructive Future for Your Family, by divorce attorney Miles Mason, Sr.

Child Support Calculations Are Not Income Tax Preparations

Child support calculations are not the same as income tax preparations. Whatever creative form employment perquisites take, the Guidelines define them as income in-kind. Fringe benefits may or may not be in cash, but they are quantifiable. In almost every case adding fringe benefits, or perquisites (“perks”), to the employee-parent’s gross income will substantially increase the amount of child support to be paid monthly.

For most people, fringe benefits are a sought-after component of employment simply because perks have value. Along with other employment compensation, fringe benefits are something every potential job applicant should consider before tendering a résumé.

Take a minute to reflect on this. Think about the way we use technology today. How much money would you save each month with a company-issued smartphone and 24/7/365 pre-paid plan? What if your employer provided a laptop or notebook for you to use anywhere, anytime? What if your boss paid for your cable-internet-phone service so you could work from home on evenings and weekends? Not having to pay out-of-pocket for these items would save you money and, presumably, improve your lifestyle. Well, the amount of money these freebies represent has not gone unnoticed by the Tennessee Assembly and Department of Human Services.

Perks to Die For

Some companies really know how to keep their employees happy by providing extraordinary fringe benefits. Just check out Google, Costco, Facebook, Adobe, Intuit, and a few others. They offer job-related perks from three free meals per day and fully stocked kitchens; to money for education and weekend travel; to free massages and fitness reimbursement; all the way to onsite healthcare providers and days off for pro-bono community service. Whether fresh out of college or slaving away in the trenches for decades, many people would describe these fringe benefits as “to die for.”

It’s no secret that employers use incentive plans to entice talent, foster firm culture, and improve employee retention. Not every company will go to the extent of Google or Facebook to foster firm culture, but most employers do offer more traditional fringe benefits in the way of deferred compensation (discussed later). In other words, be ready to include all benefits in your gross income calculations for the child support case. When ready to begin completing the child support worksheets, talk to your lawyer specifically about any compensation you or the other parent receives.

Every company’s incentive plan is based upon a combination of internal and external financial factors. Internal factors include things like equity in pay and benefits among similarly situated employees within the organization. External financial factors that influence incentive plans include compensation (pay and benefits) compared to what other employers provide to their employees of the same experience, job description, skill level, and so on.

When an employee believes he or she is under-compensated based upon external financial factors, studies have shown the person is far more likely to quit and seek employment elsewhere where the grass is greener, hiring in with a new company that offers a more desirable pay and benefit package. ‘Keeping up with the Joneses’ isn’t just about competing neighbors. To attract and retain talented employees, businesses must carefully analyze what those workers could get in terms of compensation if hired elsewhere.

Here is a very simple example comparing incentive plans between three fictional business organizations. Adamsapple, Inc., matches 50% of Hannah’s 401(k) contributions. However, Betasimple, Inc., matches 100% of its employee 401(k) contributions and Corpmagic, Inc., matches 75% of its employee 401(k) contributions plus another matching 25% in annual bonuses. Hannah quits her job with Adamsapple because her compensation package pales compared to what her counterparts at Corpmagic and Betasimple receive, all else being equal. Among the three, Adamsapple’s incentive plan did not adequately consider basic external financial factors – that is, what the competition offers its employees.

Tennessee Child Support Guidelines

Child support will be determined in every child custody case involving an underage, unemancipated son or daughter. Why? Because all parents have a legal duty to support their minor children. Less frequently, parents may be ordered to support their severely disabled adult children. The Guidelines are the rules attorneys, judges, and parents must follow in determining how much support should be ordered.

The Guidelines – complete with formulas for calculating financial support obligations for both parents – are put out by the Child Support Division of Tennessee’s Department of Human Services and may be modified every few years. Although temporary support may be ordered because the parents have already separated, divorce triggers court orders establishing permanent child support. When preparing child support worksheets, be certain to use the current version of the Guidelines before running the numbers.

Why are certain fringe benefits included as income? Because the Guidelines say so. Tennessee’s child support guidelines do not use net income (or after tax income) to calculate a parent’s monthly child support payment. Do have ready the past three to five years of tax filings, but those are only the starting point. The court will add up all the moneys to be considered part of gross income for the purpose of calculating child support.

This is what the Guidelines tell us must be included in each parent’s gross income:

• Wages, salaries, commissions, bonuses, fees, tips;
• Income from self-employment;
• Fringe benefits;
• Severance pay;
• Pensions and retirement plans (Social Security, VA, Railroad Retirement Board, Keoghs, IRAs);
• Interest, dividend, and trust income;
• Annuities;
• Capital gains;
• SSA disability or retirement benefits paid to a parent or paid to the child based on the parent’s account;
• Workers’ compensation, unemployment insurance benefits;
• Awards from civil lawsuits and personal injury judgments;
• Gifts of cash, liquid instruments convertible to cash, prizes, lottery winnings;
• And alimony and maintenance received from third parties.

With a military divorce, BAH and BAS benefits are considered income for child support calculations.

What are fringe benefits, specifically? Again, look to the Guidelines and talk to an experience divorce attorney. Rule 1240-2-4-.04(3)(a)(4) broadly describes fringe benefits as follows:

• Fringe benefits for inclusion as income or “in-kind” remuneration received by a parent in the course of employment, or operation of a trade or business, shall be counted as income if they reduce personal living expenses.
• Such fringe benefits might include, but are not limited to, company car, housing, or room and board.
• Basic Allowance for Housing (BAH), Basic Allowance for Subsistence (BAS), and Variable Housing Allowances (VHA) for service members are considered income for the purposes of determining child support.
• Fringe benefits do not include employee benefits that are typically added to the salary, wage, or other compensation that a parent may receive as a standard added benefit (e.g., employer-paid portions of health insurance premiums or employer contributions to a retirement or pension plan).

Standard benefits such as health care insurance premiums paid by the employer are not fringe benefits. The rule above does not say, however, that only taxable fringe benefits are income for child support purposes. Au contraire! The rule is child support calculations include income from all sources, taxable or not.

Furthermore, with a military divorce the parent’s BAH and BAS benefits are considered income for child support calculations. It does not matter that the service member does not receive this amount in his or her military pay.

Over the years, the Tennessee Court of Appeals has interpreted the Guidelines to include disability benefits, withdrawal from trust principal, and deferred compensation as income when calculating child support, too.

Deferred Compensation: Qualified and Non-Qualified Plans

Generally, deferred compensation refers to the employee’s earnings which are not paid by the employer until some future date, such as retirement from the company. Examples include pension plans, retirement plans, and stock-option plans. When talking about income taxes, these deferred compensation plans are either qualified (as are 401(k) plans) or non-qualified (as are 409(a) plans).

More specifically, in the child support modification case of Huntley v. Huntley, 61 S.W.3d 329 (Tenn. Ct. App. 2001), the father’s deferred compensation as a stockbroker employed by Merrill Lynch was prorated and included as income to calculate how much child support should be paid. The Tennessee Court of Appeals held:

“[T]hat the Trial Court did not err in using a pro-rata share of Defendant’s FCCAAP income and Defendant’s average net income for 1998-2000 as the bases for increasing Defendant’s child support obligation. As discussed, the Guidelines provide a broad definition of income that includes ‘income from any source … [including] commissions, bonuses….’ Tenn. Comp. R. & Regs., ch. 1240-2-4-.03(3)(a). From the proof contained in the record, it appears that the FCCAAP is a deferred compensation program and that the FCCAAP money received by Defendant shows as income on his W-2 in the year that it is received.” [Emphasis added.]

The Guidelines have been revised since the Huntley case, but the result should be the same today. Be mindful that, whenever there is income uncertainty, most Tennessee judges would rather err on the side of inclusiveness.

Is a Parent Receiving Fringe Benefits?

Fringe benefits are income or in-kind payments in exchange for work if the benefit reduces personal living expenses. Does the fringe benefit have a value that can be quantified?

Consider this example: A parent’s employer provides him with a company car. He has transportation without the burden of paying a lease or making installment loan payments, without the cost of automobile insurance, without the cost of repairs, and frequently without need to pay for fuel. It may not be a paycheck, but the company car has value for the employee and his family.

The difficulty of determining the precise value of a given fringe benefit would depend upon the specific facts. Money not spent on necessaries, not spent on meals, not spent on housing, or not spent on transportation is, in a nutshell, money in the bank.

Do not misunderstand. The parent may still need a personal vehicle in addition to the company car, but the company vehicle as a fringe benefit has value. This in-kind remuneration should be quantified and included in the employee-parent’s gross income. And it does not change anything if the parent did not request or even need the fringe benefit. If the parent receives perks, then those may be imputed as income by the court.

This may be ancient history to some, but it is a long-established common law rule in Tennessee that a parent must provide child support “in a manner commensurate with [the parent’s] means and station in life.” Evans v. Evans, 125 Tenn. 113, 119 (Tenn. 1911). Fringe benefits improve the employee-parent’s means and station in life and the lifestyle the family enjoys. The child should benefit from the parent’s financial success even after the divorce. Including in-kind remuneration in gross income when calculating child support obligations is one way the court implements this fundamental philosophy.