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Not true. The security issue at the time the loan is issued.

I can't cite anything other then the instructions say you must attach the auditors report. So I think failing to do so means you have not filed a complete Form 5500. Which means I think they could be fined as if they had not filed one until the auditors opinion is filed.

It's not too late to have a DRO drafted and ordered by the court.

Now with more details I agree with masteff and retract the idea there has been an error. I would also say that the OP doesn't describe it correctly. The outstanding loan balance isn't larger then their account balance. For example in this case the husband's loan balance is: $33,000 which is made up of $13k in investments and $20k in loan. That seems to be part of the issue here. The loan is part of their account balance so their loan can't be larger then their account balance. At most it can be 100% of their account balance if they took 100% of their cash as an in-service. In this case the other participants aren't at risk of not being paid.