Qdro - Participant Loan Issue

[lkpittman]

Participant would like QDRO to allocate 50% of the balance of the outstanding loan to the Alternate Payee. P would also like the QDRO to be structured so that the payment of the amount due to the AP would be offset by the balance of the loan attributable to the AP. Plan document does provide for distribution in cash or in kind. Plan document also allows for immediate distribution to AP. Does anyone see any problems with this?

[Mike Preston]

Sort of. But maybe not. First, check the loan policy and the note itself. Does the plan require repayment through payroll reductions? That is, if someone terminates employment does the loan have to be repaid in the absence of an immediate rollover to another plan that will accept the loan? In the absence of repayment or rollover does the plan force a deemed distribution (offset to the account balance)? If so, then I would think the DRO would violate the terms of the plan in that the participant is not eligible to have a loan repaid through means other than payroll withholding, so the plan needn't offer this to the alternate payee.

Of course, maybe somebody can come up with an explanation of why the plan would need to offer this, even though it looks to me like a violation of 414(p).

Second, the collateral for the loan is probably the participant's account balance. The DRO would have to specify that the AP's surviving loan is collateralized by the AP's share. That may not be something that the Plan Administrator will be happy with.

Third, if changes are made to the collateral, as in #2, does that constitute a renegotiation? I wouldn't think so, especially considering the IRS' PLR position on changing loan provisions to enable continued loans in spinoff and merger situations, but one never knows. As the Plan Administrator I'm not sure I'd be willing to underwrite it and it probably doesn't make sense to apply for a PLR.

All in all, I'd see if there isn't some other way to skin this cat.

But, if the loan doesn't require payments through payroll withholding and the AP account balance is more than sufficient to feel comfortable with the collateralization, and the amount of the loan to the participant that remained could be safely taken had the participant chosen to repay the loan first without triggering a violation of 72(p), then it just may fly under the radar.

[Guest b2kates]

If I were AP's counsel I would not go for this arrangement. It seems to easy for P to default and leave AP short of cash, further triggering income to AP on a deemed distrtibution.