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How the SJC decision in Cavanagh v. Cavanagh Could Impact a Payor in the Middle Class

Issue March/April 2023 April 2023 By Julie K. Murphy and Rocco Iannaci
Family Law Section Review
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From left: Julie K. Murphy and Rocco Iannaci

In Michael D. Cavanagh vs. Lynn A. Cavanagh, SJC-13222,1 the Supreme Judicial Court (SJC) addressed an issue of first impression in the Commonwealth of Massachusetts and ruled that employer contributions to a child support payor’s retirement account is income and should be included in child support calculations.2 The SJC further ruled that the trial court judge abused her discretion in excluding income and capital gains on the payor’s savings and 401(k) plan for the purposes of calculating child support.3 In addition, the SJC held that health savings accounts4 as well as second jobs are to be included in child support calculations. The SJC’s decision could have a disparate impact on the lower middle-class payors.

In reaching its judgment, the SJC reiterated two principles known to family law practitioners in Massachusetts: 1) children are to be fully supported and 2) parents cannot bargain away their children’s right to be supported. White v. Laingor, 434 Mass 64 (2001). The White v. Laingor court quoted C.P. Kindregan Jr., M.L. Inker, Family Law and Practice § 39.10, at 701 (2d ed. 1996), and Knox v. Remick, 371 Mass. 433, 437 (1976), in which the SJC stated that while Massachusetts courts encourage parties to reach their own resolutions in a matter, “[p]arents may not bargain away the rights of their children to support,” Knox v. Remick, 371 Mass at 437, and it is public policy to ensure children are “supported as completely as possible from parental resources [which] will take precedence over the freedom of the parties to enter into a binding contract.” White v. Laingor, 434 Mass. at 66, quoting C.P. Kindregan Jr., M.L. Inker, Family Law and Practice § 39.11 at 705. 

The SJC also looked to the Massachusetts Child Support Guidelines, whose definition of income includes all sources of income, regardless of whether said income is defined as such by the Internal Revenue Code, the Massachusetts Department of Revenue or other taxing authority.5 In determining that employer contributions to a retirement account counted as income, the SJC looked to the Superior Court of Pennsylvania, which addressed this issue for the first time in Portugal v. Portugal, 798 A.2d 246 (Pa. Super. Ct. 2002). The Pennsylvania court, when faced with the same question as Massachusetts as to the issue of including employer-contributed funds in child support calculations, looked to two North Dakota cases in which similar issues were addressed. The Supreme Court of North Dakota in Shipley v. Shipley, 509 N.W.2d 49 (N.D. 1993), examined its own statues, which stated that child support included “income from any source ….” and included employer pension contributions, holding that the pension contributions along with health insurance premiums was “income from any source” under the broad definition of “gross income ….” Id. at 52. In the second North Dakota case, the North Dakota Supreme Court determined in Shaver v. Kopp, 545 N.W.2d 170, 175 (N.D. 1996), that an employer’s contribution to a tax-deferred savings plan qualified as gross income under the guidelines because the employee was able to “withdraw his employer’s contributions, as well as his own, at any time, subject to taxes and penalties.” Id. at 175. The Pennsylvania court agreed that this determination was proper since “children cannot wait for support ... [and] obligors should not be allowed the option of deferring income until the child reaches adulthood and no support obligation remains ….” Portugal v. Portugal, 798 A.2d 246 (Pa. Super. Ct. 2002). The Pennsylvania cases that came after Portugal v. Portugal continued to a ffirm the premise that employer contributions should be included in child support calculations, and one court held “. . . children cannot wait for support that is deferred to retirement ….” Hanrahan v. Bakker, 186 A.3rd 958 (Pa. 2018). The SJC found “persuasive the conclusion of the Superior Court of Pennsylvania that ‘if we were to determine that an employer’s matching contributions are not income, it would be possible for an employee to enter into an agreement with his employer to take less wages in exchange for a heightened matching contribution. This would effectively permit an employee to shield his income in an effort to reduce his child support obligation.’” Cavanagh v. Cavanagh, SJC-13222 (Mass. Aug 8, 2022) quoting Portugal v. Portugal, 798 A.2d 246, 253 (Pa. Super. Ct 2022).

While these various state courts focused on high-wage earners hiding available income for child support purposes, by negotiating lower wages and higher employer contributions, we do not know how this ruling will affect lower- to middle-class income earners in Massachusetts who have a child support obligation. There are many lower- to middle-class income earners who contribute little or nothing to retirement plans but may work for employers who make contributions on an employee’s behalf. That is not money the employee has immediate access to, and if they were willing to make an early withdrawal and accept penalties and potential tax increases to meet their needs, there are limits on what an employee can access. 

In assessing how this ruling may affect the lower- to middle-income class in Massachusetts, it is important to understand who falls into this category. The following salaries represent a breakdown of economic class for a family of three:

  1. Poor or near poor: $32,048 or less.

  2. Lower Middle Class: $32,048 through $53,413.

  3. Middle Class: $53,413 through $106,827.

  4. Upper Middle Class: $106,827 through $373,894.

  5. Rich: $373,894 and above.

Including employer contributions to a retirement account in the gross income of a payor may not significantly affect the ability to pay the support of a payor on the high end of the “middle class” definition or those above it; however, it could be financially debilitating to someone on the lower end of the middle class. The retirement contribution does not represent expendable and surplus cash. It in part represents contributions that a company is making as well as possible contributions of the employee. This increased “available income” for the child support calculation is a mirage that has the potential to financially impair the payor whose economic responsibilities are now spread even thinner than before due to current inflation and being split among two households. 

To see how this could affect a family in the lower middle class, consider the example of a divorced family where the recipient is a homemaker and has the two children two-thirds of the time and the payor has one-third parenting time. In the following scenario:

A payor earns $50,000 ($961.53 per week) gross per year and pays $100 per week for medical insurance and $7 for dental insurance and vision insurance. The payor’s child support, based on gross wages, is $262 per week. Now assume the employer contributes 5% of the employee’s salary to a 401(k) for the benefit of the payor, in the amount of $2,500 per year. Adding the $2,500 into the payor’s income would increase child support to $276 per week. This is an increase of $728 per year being paid from after-tax income, which does not include access to the $2,500 per year from the employer. To a payor in the lower middle class, this number could affect an ability to make ends meet. 

The point here is not that the children should not receive support or that the support of $262 per week is sufficient to meet their needs. The focus of the example is that the payor is increasing the support payment on income that they will not have access to until retirement. This example is more marked if you assume that the salary of $50,000 (also assume one child as deduction and no personal contribution to a retirement plan) results in an average net income after taxes of $35,189. This $35,1898 will pay $14,352 per year in child support, leaving the payor with $20,837 per year for self-support. 

The North Dakota court rationalized the inclusion of employer contributions to retirement in child support calculations by stating that a payor can access the employer contributions subject to a penalty. See Shaver v. Kopp, 545 N.W.2d 170, 175 (N.D. 1996). However, the ability to access the retirement funds early is not absolute and is subject to rules established by the Employee Retirement Income Security Act of 1974, with limits on an employee’s option to make withdrawals. Moreover, the ability to make withdrawals on retirement accounts is more limited when accessing a current employment retirement account versus making withdrawals from accounts that have been rolled over from former employment or investments in non-employer-sponsored retirement plans. 

In analyzing the options that may be available for the payor paying higher child support due to a retirement contribution by the employer, the first consideration is whether the employee can take a loan from his retirement plan to have access to more cash to pay child support. The first question is if an employee’s plan would allow an employee to take a loan.9 These types of loans are not taxable if they meet specific criteria. Some contributors are able to borrow up to 50% of their vested account balance with a maximum loan of $50,000. This loan must be repaid in equal, regular payments within a five-year period.10 This option may not be practicable for a payor in the lower middle class, as the repayments of the loan would only increase monthly debt and decrease available net pay the payor has at his or her disposal. 

A second potential option for accessing retirement funds for immediate cash exists in seeking a hardship distribution. The distribution is limited to the distributable amount, which is equal to total elective deferrals.11 In order to qualify for a hardship distribution, the contributor must show there is an immediate and heavy financial need to the employee and the distribution is necessary to satisfy that financial need.12 The following scenarios qualify as an immediate and heavy financial need allowing for a distribution:13

  1. Expenses for medical care previously incurred by the employee, the employee’s spouse, or any dependents of the employee, or that are necessary for these persons to obtain medical care;

  2. Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);

  3. Payment of tuition-related educational fees, and room and board expenses, for the next 12 months of postsecondary education for the employee, or the employee’s spouse, children or dependents;

  4. Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence;

  5. Funeral expenses; and

  6. Certain expenses relating to the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under IRC § 165.

Child support is not included as an immediate and hardship need. In order to obtain the funds, one of the above reasons must be present. If a child support payor has retirement accounts that are not employer-sponsored or were rolled over from a former employer into a retirement account that is invested, the payor could likely make a withdrawal from those funds. If the payor is under 59 1/2 years old, that payor is subject to a 10% penalty withdrawal and will be taxed on the funds at their current tax rate. In order to avoid a 10% penalty, the withdrawal would have to be for medical expenses (IRA, SEP, SIMPLE IRA and SARSEPs), first-time purchase of a home (IRA, SEP, SIMPLE IRA and SARSEPs), higher education (IRA, SEP, SIMPLE IRA and SARSEPs), or total and permanent disability of the participant payor.14 In order to access the retirement accounts, the payor would need to use his or her available net income to pay the child support but have one of the above needs to access retirement funds to meet these other expenses. 

In addition to the above considerations, a payor participant also needs to take into consideration whether early withdrawals, if available, would further increase the payor’s income for child support calculations. In looking at Pennsylvania cases that came after Portugal v. Portugal, the court upheld in Barnes v. Barnes (Pa. Super. Ct. 2015) a nonprecedential decision, the lower court’s including as income for child support calculations the payor’s early withdrawal of his IRA and self-employment pension. See Barnes v. Barnes, (Pa. Super. Ct. 2015 (page 7). 

The payor who chooses to make a withdrawal that incurs the penalty now appears to be faced with limited choices when it comes to seeking relief from a child support order that is attributing income based on their employer contributions to retirement. In this instance, the family law practitioner may want to look at cases decided in Pennsylvania after the Portugal v. Portugal case for guidance. One avenue explored after Portugal v. Portugal was where a penalty was incurred for making a withdrawal to pay support. In the Pennsylvania case, Murphy v. McDermott, 979 A.2d 373, 2009 PA Super 151 (Pa. Super. Ct. 2009), the payor argued that the court had miscalculated his income for child support by using the gross amount of his employer’s contributions to his 401(k). That court found that the payor was entitled to relief and that the trial court had erred by not accounting for the withdrawal penalty. That court concluded, “the trial court erred by not accounting for the withdrawal penalty when it included the employer’s gross contributions to Father’ 401(k) and stock accounts. See id. The Portugal Court established that in calculating income, the court shall include the amount of any employer’s 401(k) and stock contributions minus any penalties incurred for withdrawal.” Murphy v. McDermott, 979 A.2d 373, 2009 PA Super 151 (Pa. Super. Ct. 2009).

Of further consideration, but not discussed in depth here, is that should the payor choose to obtain a second job to meet these expenses, the second job will likely be increasing the child support obligation. The SJC found that as second jobs fall under the definition of child support because they generate wages, a second job will likely be included in a child support calculation, and as in Cavanagh v. Cavanagh, to not do so could be considered an abuse of discretion by the court.15 

The SJC, in deciding Cavanagh v. Cavanagh, emphasized that children need to be fully supported, and a payor should not be able to defer income necessary to support their children. The focus is on high-wage earners; however, this decision could have significant financial consequences on a payor who is in the lower middle class. 

Julie K. Murphy is a partner of Rico, Murphy, Diamond & Bean LLP in Natick. She concentrates her practice in the Massachusetts Probate and Family Court, where she focuses on divorce, paternity, custody disputes, high-net-worth asset division, support matters and prenuptial/postnuptial agreements. Murphy is also certified as a mediator, parent coordinator and collaborate lawyer.

Rocco Iannaci is of counsel with the law firm of Rico, Murphy, Diamond & Bean LLP. He focuses his practice in the Massachusetts Juvenile and Probate and Family courts, where he is regularly appointed as education guardian ad litem in the juvenile courts. In the family and probate courts, Iannaci’s practice encompasses all aspects of family law, including litigation, negotiation and prenuptial/postnuptial cases.

1. Michael D. Cavanagh vs. Lynn A. Cavanagh, Hampden. April 4, 2022.-Aug. 8, 2022, Slip Opinion.

2. Id. at U.S. Page 45.

3. Id. at U.S. Pages 42-43.

4. Id. at U.S. Pages 46 and 43.

5. See Massachusetts 2018 Child Support Guidelines, Section I: Income Definition.

6. Page 45.

7. Kerr, Emma, Snider, Susannah (2021). Retrieved Aug. 14, 2022, from “Where Do I Fall in the American Economic Class System?” (usnews.com).

8. Estimated federal and Massachusetts taxes.

9. “401(k) Resource Guide Plan Participants General Distribution Rules | Internal Revenue Service.” Accessed on Aug. 14, 2022. Retrieved from irs.gov.

10. Id.

11. Id.

12. Id.

13. Id. 

14. Retirement Topics: Tax on Early Distributions | Internal Revenue Service (irs.gov).

15. Michael D. Cavanagh vs. Lynn A. Cavanagh, Hampden. April 4, 2022.-Aug. 8, 2022, Slip Opinion (page 43).