On September 26, 2018, the LA County Bar Association’s Daily eBrief included the case of Launa Morton, Appellant vs. David Morton, Respondent. This was a significant case for forensic accountants because it gave case authority to include 401(k) contributions when calculating spousal and child support.
The following excerpts are taken from the opinion filed by the Court of Appeal Fifth Appellate District that are significant from a forensic accounting perspective.
Launa Morton appealed from a judgment entered in their marriage dissolution contending that David Morton’s gross monthly income was improperly reduced by his nontaxable, voluntary contributions to a 401(k) plan. Launa interpreted the trial court’s written decision as stating David’s contributions to the 401(k) were income available for support and contended that the court acted contrary to its statement when it failed to include the contributions in calculating David’s net monthly after-tax income. The court noted that the determination of income available for support also included the 401(k) deduction, which was made from David’s check each month. Launa interpreted this statement as an expression of the court’s intention to include David’s contributions to the 401(k). In addition, Launa contended that the court’s DissoMaster calculations failed to implement this intent because it factually did not include the contribution as part of David’s income available for support.
Appeals Court Conclusions
The Appeals Court panel concluded that, as a general rule, VOLUNTARY contributions to a 401(k) plan are properly included in NET disposable income for purposes of calculating spousal and child support. These contributions, when they are voluntary, represent funds available to the contributing parent to spend as he or she desires. The Appeals Court further stated that when a trial court excludes voluntary contributions to a 401(k) plan from the calculation of a parent’s net disposable income, a rationale for deviating from the general rule should be set forth in the record.
According to the Appeals Court’s opinion, it was sufficient for their analysis that the record showed David’s contributions to the 401(k) plan were not included in the calculations of his net disposable income available for child support and the trial court did not explain the exclusion of the contributions. Accordingly, on remand, the trial court is to include the 401(k) plan contributions in calculating David’s income available for child support or alternatively provide findings that justify the exclusion of all or part of those contributions. The Appeals Court noted that those contributions do not qualify for the mandatory deduction set forth in subdivision (c) of section 4059, which relates to retirement contributions that are required as a condition of employment. The record contained no evidence that David’s employment was conditioned on his participation in the 401(k) plan.
Additionally, it was the opinion of the Appeals Court that the contributions to the 401(k) plan were relevant to the standard of living of David and Launa during their marriage and their respective standards of living after their dissolution. Contributions to a 401(k) plan are considered a specific type of savings and, as such, are part of the parties’ standard of living during the marriage.
The Appeals Court also stated that in remand, the trial court’s determination of David’s income available for spousal support is to include David’s voluntary contributions to the 401(k) plan. Furthermore, the trial court’s evaluation of the parties’ standard of living would need to consider whether the permanent spousal support ordered provided an amount sufficient to enable Launa to continue saving at the level attained during their marriage.
Finally, like voluntary contributions to a 401(k) plan, voluntary contributions to a medical savings account, such as an HSA, should be considered in determining a party’s ability to pay spousal support. Therefore, on remand, the trial court’s redetermination of David’s income available for spousal support would also include David’s voluntary contributions to his HSA.
My firm has always taken into account the 401(k) and can now rely on these findings in future forensic accounting matters that relate to the Appeal Court’s opinion on this case.