QDRO Law Experts for Your Law Firm
Who’s on First? UNDERSTANDING THE TERMS ‘INCLUDED’ AND ‘EXCLUDED’ IN THE QDRO
“Why does the QDRO say the loans are to be included?”
Last year, he borrowed $20,000 from the account. Immediately, a new asset worth $20,000 was created that we’ll call the “loan asset.” To fund the loan, the 401(k) account took $20,000 from the “investment asset” and loaned it to the husband. As a result, the value of the investment asset went down from $100,000 to $80,000.
We recently prepared a 401(k) QDRO for a family law attorney in Houston. Five minutes after we emailed her the draft, she called me on my personal cellphone number, which I provide to all of our attorney clients. “My client will go ballistic when she sees this. Instead of going to the medical conference in Phoenix, that SOB pulled money from his 401(k) and took a nurse to the ARIA in Vegas for a week. There’s no way she’ll pay for any of that loan!” The attorney incorrectly believed that the language “including the loan in the QDRO” meant that the nonemployee spouse was being ordered to repay all or a portion of the loan.
After the loan, it looked like this:
Total 401K Account = [investment asset $80,000] + [Loan Asset $20,000]
“The Decree should state whether loans are to be INCLUDED or EXCLUDED.”
Shortly thereafter, the parties decided to get a divorce and agreed that the wife would receive 50% of the 401(k). But what does that mean?
Is the wife to receive 50% of the total 401(k) account (which INCLUDES both the investment asset and the loan asset)? If so, then the QDRO should INCLUDE the value of the loan. In our example, if the loan asset is included in the calculation, the plan will divide $100,000. The wife would receive $50,000 from the investment asset, and the husband would keep $30,000 from the investment asset plus the $20,000 loan asset. The husband would continue to repay the loan by payroll deduction. As he did so, the value of his investment asset would increase and the value of the loan asset would decrease. Are the parties to be equally responsible for the loan? If so, then the QDRO should divide only the investment asset. The loan asset should be EXCLUDED from the calculation. In our example, if the loan value is excluded in the calculation, the plan will divide $80,000 (just the investment asset). The wife would receive $40,000 from the investment asset. The husband would keep $40,000 from the investment asset and continue to repay the $20,000 loan by payroll deduction. However, notice that his soon-to-be ex-wife has contributed to the repayment of the loan by taking $10,000 less from the investment asset.
It’s counterintuitive, but just the opposite is true.
I tried to explain to her that “including” the loan is how we ensure that her client does not pay for the loan. “I just don’t get it,” she said after my third attempt. “You sound like Abbott and Costello. Who’s on first?”
So, I’ll try again.
The husband has a 401(k) with a total value of $100,000. Until last year, all of the money was invested in various mutual funds, and the account value fluctuated daily with the market. For our purposes, we’ll call that the “investment asset.”
I hope this clears up the language used in the QDRO.
–Judge Stephen Hernsberger
It looked like this:
Total 401K Account = [investment asset $100,000]
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