Dividing a business: Health insurance, 401(k), and business valuation

In my previous article, I provided a quick overview of the financial implications of business-owning husbands who must settle—and “divide” the business—in the advent of divorce.

In this article, I want to dive into two specifics which I’d only had time to hint at in the previous article.

Specific 1: Health insurance and 401(k)

In many cases, even if the wife doesn’t work in the business itself, she still collects a salary from it; this way, she has an income that can go toward a 401(k) retirement plan. So at the end of the year, the husband’s business funds the wife’s 401(k), typically with a matching contribution.

How do you calculate that when, say, the divorce will be settled in July?

Spoiler alert: You contact a professional like me! I’m a CPA, a CERTIFIED FINANCIAL PLANNER^® professional, and a Certified Divorce Financial Analyst^®. I’m an expert at helping you tease out the proper numbers to negotiate an equitable settlement.

I’m not done. There’s also health insurance. This is huge. The business often pays the health insurance for the family. If the wife isn’t the owner or an employee, she can’t get health insurance from the business anymore, once she’s divorced.

Sure, she may qualify for COBRA benefits (to effectively purchase, on her own, what she had been getting), but this gets sticky:

If you lose your health insurance due to divorce, you qualify for 36 months of COBRA benefits. But if you lose your health insurance simply due to “terminated employment,” you only get 18 months.

Example: If it’s the husband’s insurance, and he’d elected for “family” coverage, then she’s the spouse, and, as a divorcée, would qualify for 36 months. But if she’s covered separately as an “employee,” then she’s “terminated” (no-thanks to the divorce), and the 18-month limit kicks in. All because of one check-box which the husband had selected, possibly ages ago.

In other words, the husband may need to keep the wife on the payroll to satisfy the requirements for more-generous COBRA. You need to play by the insurance company’s rules, but this may require some deft negotiation with them, too. Let me help.

Specific 2: Business valuation

I’ve worked with plenty of business-valuation experts, and by and large, I’ve found them to be real pros who are very good at what they do.

That said, it’s kind of a “GIGO” situation. Remember that computer-ese acronym? It stands for “garbage in, garbage out.” These BV experts are only as good as the input they’re given.

I recently worked case (which I’d alluded to in my previous article) in which the husband was part owner of a business. And that’s all the business-valuation expert was told. “He owns a third of a $30 million business.”

Wrong. He was a minority-stake owner in a $30 million business. So he lacked control over operations; he couldn’t sell or liquidate without the other partners’ permission; and so on. This all boiled down to calculating a discount on the cash-equivalent of his share in the business—a crucial factor in the divorce settlement.

Everyone in the room had missed this detail. Except for me. It stood out like a sore thumb. Fortunately, I was able to point it out to the BV expert in time, and she—to her credit—was gracious about effectively starting over, working up new calculations that would more accurately reflect the actual business value to divide and negotiate.

Here’s another: I worked on a case where the BV expert had requested lots of info from the business-owning husband, and then did his work accordingly. But again, when I pored through all the paperwork, I saw that the BV expert had requested “retirement statements.” The husband had a bunch of paperwork pertaining to “deferred compensation”—which is technically different, right?

But it still should’ve been included in the BV expert’s purview. I got it added, and guess what? It amounted to an extra $200k to my attorney’s divorcing-woman client in the case! You don’t want your client to miss something like this—or, heaven forbid, learn about it after it’s too late.

Contact me and let’s work together to help your clients, and lubricate your case load.