Defined Contribution Account Tracing
There are many kinds of defined contribution plans. Some of the most common are 401(k) plans, 403(b) plans, profit sharing plans, thrift and savings plans, employee stock ownership plans (ESOPs) and money purchase plans. These are plans that have individual account balances made up of employee contributions, matching employer contributions (if applicable) and investment gains/losses on those monies. At any point, the total present value of this type of account is the current total account balance. Determining the marital portion of an account can be simple in some cases but most often requires a more involved analysis.
If all contributions made to the account were made during the marriage then the account balance on the date of divorce is the marital value. Often a QDRO is simply prepared to assign to the former spouse 50% of the total account balance as of the date of divorce plus or minus any investment gains/losses.
When the account existed prior to the marriage, the determination of the marital portion becomes more complex. Most plan administrators (or more accurately their record keepers) will not perform calculations to determine the investment gains on the pre-marital portion of the plan. Instead they require you to specify a dollar amount or percentage of the account to be assigned to the former spouse.
Many states have codes that specify that passive income and appreciation acquired from separate property by one spouse during the marriage is separate property. In order to comply with such statutes, it is necessary to trace the passive growth.
How to Trace the Passive Growth of Separate Property
We have pioneered methods of tracing the passive growth of pre-marital account balances for defined contribution plans. The preferred process examines the account statements (annual, quarterly or monthly) to allocate contributions, withdrawals, loans and investment experience (gains or losses), between marital and non-marital amounts for each period of time from the date of marriage to the date of the most current statement available, or an earlier date if requested. The balance or receipts and disbursements for the initial period which includes the marriage, or the period which includes the divorce, are either directly classified as marital or separate by date recorded by the plan or prorated based on the relative length of time against the total period of the statement. The experience for each period is allocated using the relative size of the marital or separate balance to the full balance of the fund, using the prior period as the base.
Below is a simplified example of a passive growth calculation:
Passive growth tracings can vary dramatically from one to another due to a number of reasons. Some may cover long periods but be relatively easy if there has only been one recordkeeper who produces clear statements. Others may not span as many years but require significantly more work due to changes in recordkeepers or if statements are difficult to interpret. There are also other issues that can arise which require an evaluator to make assumptions.
Missing information about contributions or other actions controlled by the participant can be inferred or estimated based on the information from other statements before and after the point of the missing statement(s).
Statements from the Date of Marriage Not Available
The opening balance for the first available statement can be allocated to marital and non-marital property using a time-based coverture fraction from the date of participation. The statements for the remaining period are then used to perform the tracing analysis from that period forward.
Withdrawal Taken During the Marriage Reducing Non-Marital Interest
If the attorney advises that a loan or withdrawal is to be treated as non-marital, we can do so up to the limit of the calculated non-marital balance at the time of the loan or withdrawal.
Loan or Withdrawal Taken During the Marriage that is Larger Than the Marital Balance at the Time of the Loan or Withdrawal
If the attorney advises that a loan or withdrawal is to be treated as marital but there are not sufficient funds in the marital amount, we can do so up to the limit of the calculated marital balance at the time of the loan or withdrawal with the excess of the amount being taken from the non-marital balance.
Rollovers or Other Large One-Time Deposits
Rollovers are treated with the same identification as the prior fund. That is, any funds that were considered marital in the prior account are received as marital and any funds that were non-marital in the prior account are received as non-marital. This may mean that a separate analysis of the prior account is necessary before the receiving account can be fully analyzed.
For a large deposit not representing a rollover contribution, the attorney must direct how the funds are to be considered, usually based on the original nature of the funds.
Desire to Isolate High Performing Assets
For example, a participant may have a different defined contribution account for each employer, all administered by the same recordkeeper and summarized on one periodic statement. Unless directed otherwise, we lump all accounts and activity together into one “plan” or “holding” for the purpose of our analysis. If one of these accounts out performs the plan as a whole, the participant may wish to isolate its growth from the rest of the accounts. This would require at least two separate tracing calculations depending on the specifics of the accounts and duration of the marriage.
Statements that Show Loans as Account Asset
Our analyses are based on balances which exclude plan loans, often referred to as “walk-away balances.” If the nature of the statement reporting makes it impossible to exclude the outstanding loans, we will use the statement information with the caveat that the balances do not represent the actual dollars available in the fund at some, or all, periods listed.
Treating a Distribution as if it Never Occurred
This is really not possible. Though we have performed a few analyses attempting to approximate this type of hypothetical calculation, we do not recommend utilizing this approach. There is no established method for performing this calculation, which is why it is so difficult to find an evaluator willing or able to perform it. It is also unlikely that plan or QDRO administrators will perform such a calculation. They normally limit any calculation or division to before or after consideration of an outstanding loan balance. A tracing calculation where the assumption is that any distribution simply reduces the non-marital portion, as opposed to assuming that they never occurred, can result in a very similar marital portion or award, depending on the circumstances and timing of the analysis.