When drafting a QDRO to divide a Defined Contribution Plan – such as a 401(k) – one of the most significant issues that arises is whether or not market fluctuations (or “gains and losses”) will apply to the amount being transferred. Despite the impact gains and losses can have on the overall division of the account, we have found that parties and courts don’t always address this issue. If the marital settlement agreement or the divorce decree do not address whether gains and losses apply, the amount being divided will almost certainly be subject to the default terms of the retirement plan at issue – regardless of whether it reflects the intent of the parties. As you can imagine, failing to address the issue can therefore have a profound effect on the amount being divided.

Assume, for example, that your divorce decree provides that the Alternate Payee will receive 50% of the Participant’s interest in the ABC Corp. 401(k) Plan as of February 19, 2020. On that date, the total value of the plan was $100,000. In our scenario, the QDRO was submitted to the Plan Administrator for processing on March 23, 2020. Due to the onset of the COVID-19 pandemic, on March 23, 2020, the Dow Jones Industrial Average had fallen approximately 37% from February 19, 2020, and the total account balance had dropped to $63,000. Does the Alternate Payee receive 50% of the Participant’s account value as of February 19, 2020 ($50,000)? Or, does the Alternate Payee receive 50% of the value of the account on the date that it was actually divided ($31,500)?

Consider the reverse scenario, where our hypothetical stock market INCREASED by 37% to $137,000. Does the Alternate Payee still receive 50% of the Participant’s account value as of February 19, 2020 ($50,000)? Or, does the Alternate Payee receive 50% of the value of the account on the date that it was actually divided ($68,500)?

Many Defined Contribution Plans adhere to a “default interpretation” regarding the application of gains and losses when processing QDROs. If your marital settlement agreement or divorce decree do not clearly state your intent with respect to gains and losses, you will likely be subject to the default interpretation – for better or for worse. In most cases, the Plan Administrator interprets gains and losses as applying, but in some cases, the default interpretation is not to apply gains and losses. To discover the plan’s rules regarding the default interpretation about gains and losses, contact the Plan Administrator.

As you can see, it is critical to understand the terms of the plan you are trying to divide and to clearly state whether gains and losses will apply in either the marital settlement agreement or the divorce decree.