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satisfying court division order with a loan


Guest PatriciaT

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Guest PatriciaT

My employer client has a divorce decree that has their employee giving half of his 401(k) to ex-wife. Employee wants to obtain a loan from his account, give the money to the ex-wife, and be done with it. I see some issues, but wonder if anyone has considered/done this. Employee's main reason is that he can get this done quicker via this route than by dealing with a QDRO. Any thoughts? Thanks in advance.

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My employer client has a divorce decree that has their employee giving half of his 401(k) to ex-wife. Employee wants to obtain a loan from his account, give the money to the ex-wife, and be done with it. I see some issues, but wonder if anyone has considered/done this. Employee's main reason is that he can get this done quicker via this route than by dealing with a QDRO. Any thoughts? Thanks in advance.

The primary (and actually the only real issue) is that the 401K is tax deferred. If she receives the sum she is due from the 401K, however the employee obtains the money to give her, the tax implications are uncertain. If she receives an actual division of the 401K she does not have to pay taxes on that separation as long as the money remains in the separated 401K or is rolled over into some other tax deferred vehicle such as an IRA. She needs to consult with a tax professional to determine how the payment could be or would be treated.

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My employer client has a divorce decree that has their employee giving half of his 401(k) to ex-wife. Employee wants to obtain a loan from his account, give the money to the ex-wife, and be done with it.
I see a violation of the QDRO.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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If the court order already includes a DRO and he gives her loan proceeds instead, I can see problems down the road. For example, what if she comes back years later and says she never got her DRO amout? The plan administrator's records would confirm that. The loan proceeds could be interpreted to be a gift rather than the satisfaction of the DRO.

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Unless of course they advise the EE to get a proper receipt and acknowledgement, which even if drafted by an atty would be cheaper/faster than having the atty draft a qdro.

Note: to state it a bit more clearly than above, the biggest incentive to the ee for doing an account split via a qdro vs a plan loan as proposed is that a qdro shifts the tax burden to the alternate payee. With a plan loan, the ee ultimately bears the tax burden.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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I see a violation of the QDRO.

That, and probably the plan's QDRO procedures which probably stipulate that during a review of the DRO, there can't be any distributions or loans.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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Or to be a little less trusting.

What if he takes the loan out and the QDRO comes in saying she gets 100% of the benefit. The trustee would have a real problem.

Are you sure they can trust their employee? I have seen people do worse in a divorce then what I have just described.

I would never recommend the client doing this deal.

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Side issue: Does the plan document allow for such a loan, and if so, is the amount available for a loan sufficient?

And in any case, for all the reasons listed above and more, the plan administrator cannot consider the idea until the divorce decree is changed to eliminate the 401(k) DRO part.

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