QDRO: Participant has an outstanding loan

[Guest mmc]

The QDRO states that the Alternate Payee receives 50% of the accrued account balance. The participant is 100% vested and his balance includes an outstanding loan of $8,000. How does the loan balance apply in calculating the distribution? 50% of the account balance is $11,000. I think the distribution is $11,000 and the total loan balance stays in the plan to be repaid by the participant.

Has anyone encountered a QDRO where the participant has an outstanding loan?

[Guest Grabitquick]

I think a lot of us have encountered QDRO situations where the participant has an outstanding loan. Ideally, the QDRO itself should address how this is handled, but this is how it ordinarily would be done. It appears that the participant's total account balance is $22,000 and that includes the outstanding loan balance of $8,000, which is just an earmarked investment of the participant's account. If these numbers are correct, then 50% of the total account balance is $11,000. The entire outstanding loan balance is allocated to the participant's remaining share, and the alternate payee's $11,000 award is paid entirely from other assets in the participant's account. In addition, if the date of division of the account for purposes of determining the alternate payee's 50% share is the parties' date of separation or some other date in the past, and the alternate payee's share is to include (for example) actual investment gains and losses on the participant's account since the date of division, the QDRO ideally should state whether the earnings attributable to the interest that the participant is paying on the loan should be included in determining the resulting benefit to the alternate payee.

The foregoing is probably an over-simplification, but this is generally how QDROs that I have seen with an outstanding loan at issue have been structured. If the QDRO in your case is silent on how this is to be done, then you might at least want to get a signed letter agreement from the parties about how the alternate payee's share is to be calculated.

[QDROphile]

No letter agreements. Terms are either in the order, determined by the terms of the plan or written QDRO procedures as a default, or determined by interpretation of the responsible fiduciary. If eyes get opened by the interpretation and the parties don't like the interpretation they can get an amended order.

Otherwise I agree generally with the description. If the plan tracks investment earnings to assets, then the loan interest is earnings on the loan and is credited to the participant.

Many systems (e.g Fidelity) do not allow alternate payees to have an interest in a loan. A QDRO can give an alternate payee an interst in a loan, but it is more complicated than it first appears if done correctly.