W. Stephen Hernsberger
Attorney at Law

16238 Highway 620
Suite F-171
Austin, TX 78717
512-607-6336

401K Loan in Divorce

This Issue Only Applies to 401Ks, 403Bs, etc. . . .

You only need to worry about a 401k loan in a defined contribution plan.

If your retirement plan is a defined benefit pension plan, you can skip this section. There are no loans against defined benefit pension plans.

But if you have a 401k, 403b, or similar type plan, read on . . .

The Employee-Spouse may have taken loans against the plan.

But even if there are no loans, many plan administrators will require the QDRO to state how loans are to be handled.

So don't skip this section just because there are no loans.

Deduct from the Participant's Share . . .

Information Form Instructions: If the Employee-Spouse is to bear the entire burden of the loan, click "Deduct 100% From the Participant's Share."

Here's what will happen.

The plan administrator will divide the entire 401K as if there were no loans, then subtract the value of the 401k loan from the Employee-Spouse's share.

An example should make it clearer.

Suppose the 401K is worth $100,000. And suppose the Employee-Spouse took out a loan against the 401K and there is still $20,000 owed on the loan. Finally, suppose the parties agree that they will divide the 401K in half, and the Employee-Spouse will bear the entire burden of the loan.

The plan administrator will divide the entire 401K in half as if there were no loans. $50,000 would be placed in the Employee-Spouse's share. And $50,000 would be placed in the non-Employee-Spouse's share.

Then the plan administrator will subtract the value of the 401k loan ($20,000) from the Employee-Spouse's share,.

So the non-Employee-Spouse's share will be worth $50,000, and the Employee-Spouse's share will be worth $30,000 ($50,000 - $20,000). And the Employee-Spouse will continue to repay the loan.

Deduct from the Alternate Payee's Share . . .

Information Form Instructions: If the non-Employee-Spouse is to bear the entire burden of the loan, click "Deduct 100% From the Alternate Payee's Share."

Here's what will happen.

The plan administrator will divide the entire 401K as if there were no loans, then subtract the value of the 401k loan from the non-Employee-Spouse's share.

An example should make it clearer.

Suppose the 401K is worth $100,000. And suppose the Employee-Spouse took out a loan against the 401K and there is still $20,000 owed on the loan. Finally, suppose the parties agree that they will divide the 401K in half, and the non-Employee-Spouse will bear the entire burden of the loan.

The plan administrator will divide the entire 401K in half as if there were no loans. $50,000 would be placed in the Employee-Spouse's share. And $50,000 would be placed in the non-Employee-Spouse's share.

Then the plan administrator will subtract the value of the 401k loan ($20,000) from the non-Employee-Spouse's share.

So the non-Employee-Spouse's share will be worth $30,000 ($50,000 - $20,000), and the Employee-Spouse's share will be worth $50,000. And the Employee-Spouse will continue to repay the loan.

Deduct One-Half From Each Party . . .

Information Form Instructions: If the spouses are to each bear 1/2 of burden of the loan, click "Deduct One-Half From Each Party."

Here's what will happen.

The plan administrator will first subtract the value of the loans from the entire value of the 401k, then divide the balance between the spouses..

An example should make it clearer.

Suppose the 401K is worth $100,000. And suppose the Employee-Spouse took out a loan against the 401K and there is still $20,000 owed on the loan. Finally, suppose the parties agree that they will divide the 401K in half, and the parties will each bear one-half the value of the loan.

The plan administrator will subtract the value of the 401k loan from the value of the entire 401K, leaving a balance of $80,000. ($100,000 - $20,000). The plan administrator will then divide the 401K..$40,000 will be placed in the Employee-Spouse's share. And $40,000 will be placed in the spouse's share.

And the Employee-Spouse will continue to repay the loan.

Call or Email if you have a question . . .

Call me at 512-607-6336 or Email me anytime.

And thanks for visiting my website.

W. Stephen Hernsberger

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