QDRO's

Pension Evaluators/QDRO Consultants has pioneered several methods of tracing the passive growth of pre-marital account balances for defined contribution plans. These tracings are jointly performed by our CPA and a present value expert.

Keep in mind that the account value of a defined contribution plan is the present value. What you see is what you get. There are many kinds of defined contribution plans including 401 (k) plans, profit sharing plans, thrift and savings plans, employee stock ownership plans (ESOPs), individual retirement accounts (IRAs), Keoghs (HR 10s), money purchase plans, stock bonus, target plans, simplified employee pension plans as well as 403 (b)s.

Determining the amount of the plan available for equitable distribution becomes more complicated when a balance already exists at the time of the marriage. Most states have code sections like this one from Ohio providing that the “passive income and appreciation acquired from separate property by one spouse during the marriage” is separate property [ORC Section 3105.17.1(A)(6)(a)(iii)].

Tracing the passive growth of separate property can be done in a number of ways. If the investment vehicles are mutual funds and the record of exchanges and transfers is clear, we find tracing the growth of the pre-marital account balance with Morningstar’s Principia Pro software program to be a straightforward process. At other times the company may offer yearly rates of return for various non-mutual fund investments in addition to a detailed record of the money movement. This process is not nearly as accurate as tracing monthly transfers but it is frequently a reasonable alternative.

Sometimes, however, tracing passive growth can be as challenging and frustrating as following a strand of spaghetti across a plate. For the difficult cases or those where we only have periodic plan statements we employ the following three-step process:

The account balance on the date of the marriage is determined – typically by interpolation.
That separate property is then “grown” by an annualized factor. This is determined by subtracting the opening balance from the closing balance for the time period involved. The difference between the account balances is comprised of two elements: contributions and growth (or losses!). Next, all contributions, both employer and employee, are subtracted from the result. The difference, of course, is the growth for the intervening period. Dividing the sum representing growth by the opening balance yields a growth rate that is then applied to that nonmarital account balance. The step is then repeated for each statement period using the newly derived account balance for the beginning of that period.
The final marital and nonmarital account balances must then be adjusted downward to reflect that the “grown” account balances are invariably too large. This stems from the fact that the growth factor overstates the actual statement growth. This refinement is accomplished by allocating the actual statement balance into marital and nonmarital components in the same percentages as the derived account balances.