QDRO Corner: Defined Contribution Plan Loans

Loans from defined contribution plans are easy to overlook when reviewing a statement for the current balance. However, if there is an outstanding loan, whether the outstanding loan balance is included or excluded from the account balance can dramatically alter the amount a spouse receives when dividing the account.

If the outstanding loan balance is “included” or “taken into account” then the loan balance will reduce the account balance before account is divided. For example, say the parties to a settlement decide that the defined contribution account shall be divided equally, the account has a total value of $20,000, and there’s an outstanding loan balance of $5,000 that shall be taken into account. The math to divide the account is as follows:

$20,000 (total account value)
- $5,000 (outstanding loan balance)
$15,000 (account balance to be divided between the parties)

$15,000 (account balance to be divided between the parties)
÷ 2 (for equal division between the parties)
$7,500 (total funds to be transferred to spouse)

If, however, the outstanding loan balance is to be “disregarded” or “excluded,” the spouse receives a different amount. Using the same numbers as above, if disregarding the loan balance, the math is as follows:

$20,000 (total account value)
÷ 2 (for equal division between the parties)
$10,000 (total funds to be transferred to spouse)

If you are unsure whether a plan participant has taken out loan, let the person preparing the QDRO know so she can investigate and make sure the division will be as the parties intended.