QDRO Corner: The Importance of Addressing Earnings, Gains, and Losses
Earnings, gains, and losses is the phrase used to describe the investment experience of the funds within a defined contribution account (401k, 403b, 457, TSP, etc.). In dividing a defined contribution account, the parties have the option of including earnings, gains, and losses on the amount to be transferred, or not. One must select a valuation date from which to apply the earnings gains and losses.
Division of the earnings, gains, and losses protects against surprises in the market.
Let’s say Spouse A is to receive 50% of Spouse B’s old 401k as of December 31, 2019, with earnings, gains, and losses applied thereon (Spouse B and the employer are no longer contributing to the 401k). At the time, $100,000 was in the account. Due to market fluctuations, at the time the account was to be divided, only $80,000 was in the account. Therefore, each party received $40,000 upon division.
Assume the same facts as above, but this time with no earnings, gains, and losses applied. Spouse A will receive $50,000 and Spouse B will retain $30,000.
Continue to assume the same facts, but this time due to market fluctuations only $40,000 remained in the account at the time it was to be divided. Without earnings, gains, and losses Spouse A would receive all $40,000 (even though Spouse A should have received $50,000), Spouse B would be left with $0, and the plan would consider its obligation satisfied.
Earnings, gains, and losses in an account can be quite substantial in certain circumstances. If you are uncertain how to discuss this issue with your client give us a call.