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Outstanding Loans & QDRO


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This has been asked before, but I can't understand the answers.

How do you handle outstanding loan issues when a QDRO is received? Example: Participant's total balance is $50,000, $10,000 of that is a loan. QDRO specifies 50% to the alternate payee. It seems to me the alternate payee is entitled to $25,000 in liquid assets. The participant's balance is then $25,000, $10,000 of that is still the loan. Is this correct?

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That is usually the result and would be a reasonable interpretation of the order. However, the plan could have policies and procedures for interpretation and administration that produce a different result. A plan is required to have written procedures for dealing with QDROs and good procedures will cover this issue. The order must be read very carefully to understand what it may say about the issue. Finally, it would be proper to refuse to qualify the order unless the order itself spoke to the details, but I would not recommend that hard line approach.

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I disagree slightly with QDROphile.

If the divorce is particularly nasty and the parties are prone to litigation, I would recommend that the plan require that the QDRO be revised to clarify this point.

The plan can't get in trouble for asking for clarification of an ambiguous, but the plan could get sued due to its interpretation of an ambigous QDRO.

I mention that because about 15 years ago, I got involved in what may have been the most expensive QDRO in the country. My fees were $50,000, and the other side undoubtedly incurred even more fees.

Kirk Maldonado

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I think you can get the comfort that Mr. Maldonado wants in an efficient mannner.

The plan issues a determination that is conditioned on interpretation of the order as set forth in the notice of qualification The notice includes a description of how you arrived at the alternate payee's interest, the dollars allocated to the alternate payee and where the loan ends up (with the participant).

All QDRO determinations should have some reasonable period between the notice and any actual effect and state it in the notice. The period allows either the alternate payee or the participant to dispute the determination or interpretation before any money gets moved.

If the expectation of both is the usual expectation described above, once that period has expired without objection, you put the determination into effect and proceed. For example, you would then allow distribution to the alternate payee if the order provides for it. If either of them object, then you respond by saying that the order is not qualified because the interpretation was incorrect (at least in someone's view) and the order fails to adequately specify the award to the alternate payee becuase it does not address the disposition of the loan. Odds are in favor of acceptance of the original interpretation and you have saved time and work if you win.

It helps if you have QDRO procedures that deal with the issue. The participant and alternate payee will have a hard time with any quarrel with the plan administrator if they don't take into account the procedures before they draft the order.

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I agree that QDROphile's procedure works.

It is only more efficient, though, if both parties agree with the determination that is made by the plan.

If one or both of the parties disagree with the determination, then I think that QDROphile's procedure is actually slightly less efficient. However, I must concede that it is probably more consistent with the statutory language.

Kirk Maldonado

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All good suggestions. In this particular case the DRO hasn't been issued yet. The participant and her attorney have been informed of the interpretation as I understand it (as set forth in my initial post.) Participant was advised that the loan issue should be considered in drafting the DRO.

Assuming the DRO is in good order, I probably follow QDROphile's suggestion of issuing the conditional determination letter just as an additional precaution.

Thanks for all you input.

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A discussion of an alternate payee's interest in a loan is beyond the scope of this thread, but it is good to be aware that many issues arise if the AP has an interest in the loan.

Many of the big systems, like Fidelity do not even allow for an alternate payee to have an interest in a loan, except maybe the entire interest. The Fidelity system is not compliant with what the law would require. Even if a system can "split" a loan, there are many subtle issues to consider. For example, although the alternate payee could be allowed to make loan payments, I think that the participant must remain liable for the payments if the alternate payee misses any and that the payroll deduction feature needs to stay in place to cover the back up obligation. I think it would be a fiduciary breach to give up the support of an original obligor on the loan because loss of that support increases chances of default. I dodn't expect universal agreement with my proposition and I don't intend to explain or debate any issue. The point is that granting an alternate payee an interest in a loan is tricky and won't be appreciated by the persons who think it is a good idea in the first place.

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