Forman v. Forman, 3rd Dist. Marion No. 9-13-367, 2014-Ohio-3545 (August 18, 2014)

Issue: Did the trial court abuse its discretion by accepting the expert witness’ opinion that using the Pension Benefit Guaranty Corporation (PBGC) market-based approach was the most equitable method to value pension benefits?

Decision: The Third District Court of Appeals held that the trial court did not abuse its discretion. In determining the present value of a defined benefit plan, or other benefits that are similar to a defined benefit plan such as social security, there are two commonly accepted methods. One method is referred to as the “Internal Revenue Code” or “IRC method.” This method values benefits using the minimum lump sum cash out that a participant can receive, pursuant to the provisions of the Internal Revenue Code, from the plan at the time of divorce.

The second method of determining the present value of a defined retirement benefit is referred to as the “PBGC method.” The PBGC, a government entity that oversees and guarantees a certain level of benefits of qualified defined benefit plans, commissions a life insurance council to check for the market values of annuities with dozens of insurance companies. The purpose of this review is to assess a market value for replacing defined retirement benefits. Under the PBGC method, the present value of the retirement benefit is determined by using the PBGC data to assess what it would cost to receive a similar benefit through an annuity in the market.

In this case, at the trial court, Dave Kelley from our office testified that the PBGC method should be used to value the defined benefit plan and the social security benefits at issue. The opposing witness advocated for the IRC method. As was explained to the trial court, the IRC method always results in a lower present value. As such, it results in a lower benefit to the alternate payee. In this case, the difference in the valuation was approximately $220,000. The trial court accepted Mr. Kelley’s recommendation and used the PBGC method to value the benefits at issue as it found said method was the most equitable method of valuation for the case.

On appeal, it was argued that the trial court abused its discretion in accepting Mr. Kelley’s opinion. In response, the Third District stated, in part:

We conclude that the trial court did not abuse its discretion in determining that Kelley’s valuation of [Defendant’s and Plaintiff’s] pension and retirement benefits was the most equitable. The trial court heard the testimony of Kelley and [William] Napoli [the other expert witness] regarding the PBGC and IRC valuation methods used to calculate the present value of [Defendant’s] STRS pension benefits. . . . The fact that Kelley’s valuation of [the] STRS retirement benefits resulted in a larger amount than Napoli’s valuation does not amount to an abuse of discretion.

Observation: Be aware of what valuation method is used to determine a present value of a defined benefit retirement plan or a similar benefit. The difference between the PBGC method and the IRC method can be significant.

How we can help: We have been calculating the present value of defined benefit plans for over 30 years. As demonstrated in this case, if our valuations are questioned, we are always willing to back up or valuations in court through expert testimony.