plan loan

[stevena]

My post is not going so well on the distributions board

so I thought I would give this board a shot....

Does anyone know how to fix a 401(k) plan loan that inadvertently did not obtain spousal consent?

In addition, the plan provides for loans only for certain reasons, this participant said he was buying a home, apparantly is not purchasing a home.

Basically the check was sent by mistake before the trustee got the promissory note or the copy of the purchase and sale, which is normal procedure.

The participant refuses to return funds to the plan.

Any cites would be helpful

thanks a lot

[bzorc]

Are loan repayments being taken through payroll deductions? If not, they should be. Short of that, you should try to obtain spousal consent now to cover yourself.

[stevena]

Hmm I did not mention some important facts.....

the spouse is now having a fit because they are in the midst of obtaining a divorce (relevant fact that I did not post.....)

We are not taking payroll deductions yet because we were trying to figure out what to do....basically whether we should 1099 the guy or what....

[Belgarath]

There are several items to consider - among them:

1. Is this plan subject to QJSA requirements? If not, and if the plan document does not specify that spousal consent is required, then no spousal consent violation has occurred.

2. Does the plan have a "cure" period for late payments? If so, no deemed distribution has occurred until the "cure" period has been violated.

3. If everything turns out rotten re the above, you have an operational error, which can be corrected under EPCRS. Details are very plan/situation specific, so you'd need to look at the proper EPCRS correction very carefully.

[Belgarath]

Sorry - I forgot to mention the fact that the loan apparently violates the plan document due to no purchase of the house. Again, this is an operational error which can be corrected under EPCRS.

[Kirk Maldonado]

Some people believe that theres is a breach of fiduciary duty every time that there is a loan without payroll deduction repayments.

[Belgarath]

Kirk - interesting interpretation. Personally, I'd say that it's a bit of a stretch. I'm not aware of any regulations, enforcement actions, etc., that have taken this approach. Do you know of any?

Did the IRS or DOL ever float any trial balloons on this? Thanks.

[Kirk Maldonado]

I'm not sure that I believe it either, that why I phrased my prior posting in the way that I did.

I'm not aware of any formal or informal agency positions supporting that posture. I think that if they truly believed that payroll withholding were required, they would have announced in one forum or another.

Nevertheless, the fact that some private practitioiners hold this viewpoint could pose trouble, should such an attorney be advising another company that is looking at acquiring the company with the problem loan. They can make it very uncomfortable for the target company and its third party adviser.