Contributing Author: Kristine Custodio Suero, Advanced Certified Paralegal

Dividing retirement accounts in a divorce can be one of the most complex aspects of property division. When a qualified retirement plan is involved, a Qualified Domestic Relations Order (QDRO) is necessary to legally allocate plan benefits to an alternate payee—typically the non-employee spouse. But what happens when there's an outstanding loan on the account?

Here's what family law attorneys and divorcing clients need to know when dealing with QDROs and plan loans.

What is a QDRO?

A Qualified Domestic Relations Order (QDRO) is a legal order entered as part of a divorce or legal separation that:

• Recognizes the right of an alternate payee (typically a former spouse) to receive all or a portion of the retirement benefits payable to a participant under a qualified retirement plan.
• Must meet the requirements under the Employee Retirement Income Security Act of 1974 (ERISA) and Internal Revenue Code § 414(p).
• Must be accepted by the plan administrator before any distributions are made.

Key Consideration: Plans Accounts with Outstanding Loans

Many plan accounts have outstanding loans at the time of divorce. Here's how they can affect the division of retirement assets:

1. Loans Reduce the Account's Net Value

• The loan balance is subtracted from the total account value when determining how much is subject to division.
• Example: If the account has $100,000 but a $20,000 loan, the divisible value is typically $80,000.

2. Who is Responsible for the Loan?

• Plan loans are non-transferrable and must remain the obligation of the plan participant.
• Plan rules usually do not permit alternate payees to assume or repay the loan directly.
• Family law attorneys should clearly assign the responsibility for loan repayment in the marital settlement agreement or ensure it is addressed in the judgment.

3. Distributing the Loan in a QDRO

• Some parties agree to “equalize” the value by offsetting the loan from the alternate payee's share.
• Others may treat the loan as a marital debt, not tied to the plan account's value
• Importantly, the plan administrator does not interpret divorce decrees—only what is stated in the QDRO matters.

Best Practice: Spell out the treatment of the loan explicitly in the QDRO to avoid disputes and delays in processing.

Common Mistakes to Avoid

• Assuming loans are shared: Only the participant has access to or responsibility for the loan.
• Ignoring loan impact on valuation: Always clarify whether the division is before or after subtracting the loan balance.
• Using outdated plan information: Loan balances and account values can change quickly. Get a current statement before drafting the QDRO.

Best Practices for Family Law Attorneys

• Engage a QDRO attorney early: QDROs should not be afterthoughts—plan ahead and use a specialist.
• Request current plan statements: Know the exact loan amount and plan terms before negotiating.
• Clarify the treatment of loans in both the judgment and the QDRO.
• Educate clients: Make sure divorcing spouses understand that outstanding loans can significantly impact their share.

A loan taken from account subject to a QDRO can materially alter the value of the account. Family law attorneys and divorcing parties should work with experienced QDRO counsel to ensure retirement benefits are divided properly and efficiently. Clear drafting and proactive planning can prevent costly mistakes and preserve the intent of the divorce settlement.

Need Help with QDROs?

Our firm specializes in preparing QDROs for all types of retirement plans. Contact us for a consultation to ensure your order complies with ERISA and protects your client's interests. Our experienced ERISA attorneys are here to guide you every step of the way. 

*Nothing stated herein is to be construed as legal or tax advice and shall not form any attorney-client relationship. Each individual situation is unique. Please contact us and speak with one of our attorneys regarding your individual situation.