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I suspect in many cases they might show up at the asset house as a 'contribution', but they are still earnings

Sad or not, I don't think it satisfies the safe-harbor definition. If things are as they say, it should be a simple matter to have a QDRO prepared that accomplishes what they want.

It depends. If the loan repayment would increase the "hardship" then the loan doesn't have to be taken first. See, for example, 1.401((k)-1(d)(3)(iv)(D).

Wouldn't the participant have had to exhaust all loan possibilities from the plan (or any other plan of the employer) before even considering a hardship distribution?

To some degree you have to be careful on what you recommend but I don't see why the two people don't get a QDRO. I remember when my parents were getting a divorce decades ago my father who had a high income was more interested in preserving retirement plans (he figured he could get a mortgage on a new home if he had to) and my mom having kids in the house and lower income valued the home that was mostly paid for. So when splitting the assets dad got 100% of the retirement funds and mom got 100% of the house. Nothing in the rules require a QDRO to split things 50/50. If he wants the house and she wants cash a divorce decree and QDRO could be written to do that. I suppose the ex-spouse doesn't want to be the one to pay taxes if they got the QDRO proceeds. Then again the QDRO amount can be grossed up for taxes. Like so much in life it is all negotiable.

Agreed. Earning are earnings.

Make up contributions (failure to withhold) could be a QNEC, but earnings are earnings.

I agree with you, Mike, except for the part where you put a QDRO and "a simple matter" in the same sentence.