Aug / Sept 2016 : Tax Affecting Plan Loans – Should the Participant Receive a Credit Against Future Tax for Loans Drawn and Used During Marriage?

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Consider the following example:

1. Parties – A and B – were married on 7/1/96 and divorced 20 years later on 6/30/16
2. B has been a participant in her employer’s 401(k) plan since before marriage. At marriage, the account balance was $30,000.
3. B had no plan loan balance at time of marriage, but she drew a $50,000 loan from the plan during marriage to provide funds for a family vacation home in northern Michigan.
4. At divorce, the 401(k) account consisted of $100,000 in investments and a remaining loan balance of $20,000.
5. Since the loan funds were used for marital purposes, the unpaid plan loan is a marital debt.
6. Based on these facts, A and B will divide the $70,000 net increase in the account during marriage. A’s $35,000 will be paid from non-loan plan assets.
7. B will also receive $35,000 of non-loan assets as well as the $20,000 plan loan receivable for which she is responsible to repay (essentially, to herself).
8. The following presents the division of the account value, including the plan loan receivable.

……

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)