Picking a Valuation Date
Every order dividing a retirement account or pension plan needs a valuation date. For accounts such as 401k, 403, 401a, etc., the valuation date tells the plan as of which date to apply the award to the former spouse. If earnings, gains, and losses are included in the former spouse’s award, as of when to begin that calculation.
When picking the valuation date for one of these types of accounts things to consider are:
Is the date selected one in which there will be a value? Many plans only value the accounts on business days. So, it may be convenient to say the end of the month in which the Agreement is signed or divorce is entered. If the last day of that month happens to be a Sunday, then the parties may have to agree to the prior Friday, or the following Monday. While this small change seems trivial in a vacuum there could be larger implications. Specifically, if one party is paid on the following Monday, those new contributions would be included in the division, whereas if the valuation date was the Sunday the new contributions would not be included.
Is the account actively being funded by a current employer (or by personal IRA contributions)? If yes, then the valuation date will impact whether new contributions from the employer are included. An employer cannot stop making contributions, however, by picking a valuation date, future contributions can be excluded from an equalization calculation.
If no, then the valuation date has less of an impact. This is because there will not be any new funds being added to the account. The only way the account’s value will change is by gains and losses from the investments within the account. If the account is invested in cash-like stable funds, the balance will likely not change by much. If, however, the account is invested in stocks, then the balance may change dramatically with the performance of those stocks.
Are gains and losses to be included in the transfer amount? If yes, then for accounts that are not receiving contributions, it is easiest to reduce the transfer amount to a percent as of the date of transfer. For example, “the Alternate Payee will receive 20% of the Participant’s vested account balance as of the date of transfer to the Alternate Payee.” A growing trend is that financial institutions and retirement plans will not calculate gains and losses on a transfer amount. Therefore, reducing the amount to a percent as of the date of transfer will allow for the Alternate payee to receive the gains and losses without making the financial institution or plan run the calculation.
If, however, the plan is actively receiving contributions, then reducing the transfer amount to a percent as of the date of transfer will also include future contributions made between the date the percent is determined (likely while negotiating the agreement) and the date the transfer is made (likely a few weeks later, after the divorce is entered and the QDRO is processed by the plan). Such a description of the transfer amount may provide greater benefits to the former spouse than agreed upon.
If there is only the one account available to fund the transfer and it is receiving contributions AND the QDRO processer will not calculation gains and losses, the attorney drafting the QDRO should advise their client that the agreement cannot be implemented exactly. If appropriate based on the QDRO attorney’s retainer, they may suggest alternative ideas to get as close as possible to the parties’ agreement.
Is the valuation date in the future? If so, to protect both parties, it is best to include language in the agreement to prohibit the parties from taking a loan or withdrawal from their account(s) until the transfer is complete. If a party is to take a loan or withdrawal, it could substantially skew the calculation, resulting in a transfer amount that is different than intended. In fact, this language is good in all situations, even ones where the valuation date is in the past. If a participant withdraws funds from the account that is supposed to transfer the funds to the former spouse, they may withdraw too much, thereby frustrating the transfer.
If you have a QDRO need, contact us at 240-396-4373 to schedule a consultation. We have attorneys who focus their practice on the division of retirement and preparation of QDROs who can help resolve these issues.
