Premarital Balances, But Not Gains, in Retirement Accounts Were Separate Property

Snodgrass v. Snodgrass, 295 S.W.3d 240 (Tenn. 2009).

Premarital Balances, But Not Gains, in Retirement Accounts Were Separate Property

In this 2009 case, the Tennessee Supreme Court attempted to clarify and distinguish its decision in Langschmidt v. Langschmidt, 81 S.W.3d 741 (Tenn. 2002). Once salaried employees with Alcoa, Mr. and Mrs. Snodgrass were married for about 23 years.  Both participated in employer-provided 401(k) plans. Before their wedding day, his 401(k) was valued at $54,000.00; hers was valued at $17,000.00. The spouses stipulated that an equitable division of their marital property would be an equal one. Retired when they divorced, his 401(k) was valued at $2,301,000.00; hers at $691,000.00.

The trial court awarded each spouse the premarital balance of his and her 401(k) as separate property. It classified all gains accrued during the marriage as marital property and divided it as marital deferred compensation. Mr. Snodgrass appealed.

The Court of Appeals held the trial court erred in ruling that all marital growth on the plans was divisible marital deferred compensation). The Supreme Court affirmed the trial court and reversed the appeals court, holding the account values at the time of the wedding were separate property. Net gains on both 401(k)s during the marriage were marital property.

The Supreme Court honed in on the first and second clause of T.C.A. § 36-4-121(b)(1)(B). The Snodgrass analysis went something like this: Was a fringe benefit, stock option, pension, or retirement plan related to employment during the marriage? If “No” as in Langschmidt (IRAs funded in individual capacity entirely with premarital funds before the marriage), then apply the first clause. If “Yes” as in Snodgrass (employer-employee 401(k)s funded before and after marriage), then apply the second clause to all post-marital gains. When funded during the marriage through employment, the net increased value of the 401(k) that accrued during the marriage is marital property. The statute at that time did not distinguish between value added passively and value added by direct or indirect additional contributions during the marriage.

Here’s how the Tennessee Supreme Court summed it up:

We clarify today that 401(k) accounts held through a spouse’s employer are ‘retirement or other fringe benefit rights relating to employment.’ Accordingly, net gains from any source accruing in such accounts during a marriage are all marital property within the meaning of the second clause of § 36-4-121(b)(1)(B), and it is not necessary to consider the relative contributions of the parties to the increase in value. Also, we agree with the parties that the balances that existed in each of their 401(k) accounts as of the date of their marriage remain their separate property.  Id. at 255.

The holding in Snodgrass was effectively overruled by the legislature in 2015 when T.C.A. § 36-4-121(b)(1)(B) was amended.   Separate property now includes any “account balance, accrued benefit, or other value of vested and unvested pension benefits, … stock options rights, retirement, and other fringe benefits” that accrued before the marriage along with any “appreciation of value” on that benefit. The exception being if each spouse substantially contributed to the retirement’s or fringe benefit’s preservation and appreciation during the marriage (rendering appreciation a divisible marital asset).

This post is part of a series, Appreciation of Separate Property: The Forensic Accountant’s Full Employment Act.