Correcting failure to obtain spousal consent for 401(k) loan

[Guest alliketchum]

How can a 401(k) plan correct the failure to obtain spousal consent for a loan to a participant where the plan requires spousal consent? Rev. Proc. 2003-44 provides that a plan can obtain spousal consent after the fact in order to correct a failure to obtain spousal consent for a distribution from a 401(k); however, the Rev. Proc. does not address correcting such failures with respect to loans from a 401(k). Will obtaining spousal consent after the fact suffice to correct the failure to get spousal consent for the loan, or does the plan have to treat the loan as taxable to correct the mistake? Treating the loan as taxable doesn't seem fair to the participant if it was the plan's mistake.

[Blinky the 3-eyed Fish]

Keep in mind that the IRS is interested in protecting participants, NHCE's in general, from plan administration errors. Without looking up anything, I can tell you that obtaining spousal consent now would be the way to go, as that would make everything all better, like mommy kissing a boo-boo.

Making the loan taxable is out of leftfield as a solution and would only cause the participants harm and open up more potential problems.

[Guest alliketchum]

I agree with you. However, I spoke to someone at the IRS who specializes in corrections through voluntary compliance and he said the only way to correct the failure is to treat it as taxable. I also think it sounds like an illogical solution. Has anyone else had to deal with this issue?

[Harwood]

In many ways a loan is a distribution. Can't this be corrected under the RP 2003-44 methodologies?

[Guest alliketchum]

That's what I was hoping, but the IRS agent I spoke to said the Rev. Proc. does not provide for correction of failure to get spousal consent for a loan.

[Harwood]

Might be a long shot, but I would try speaking to another IRS agent. Get a second opinion.

[Belgarath]

I've got a dumb question - does the plan really require spousal consent? Many 401(k) plans do not, as if the plan is not subject to QJSA rules, the spousal consent is not necessarily required. Ditto for loans of less than 5,000. Assuming your plan language and situation does require spousal consent, I believe the IRS rep is incorrect if QJSA requirements wouldn't apply but for the plan language. In that case, I think you can correct under the voluntary compliance program - I think this would be an operational failure. Just because 2003-44 doesn't specifically list this situation or give a specific fix under Appendix A or B doesn't mean that a 2003-44 correction is not allowed.

Of course, you can be right and still have to fight with the Service, and maybe lose. Possibly worth trying VCP instead of SCP?

[Belgarath]

P.S. just an addition to my previous post - I grabbed a 401(k) document to look at some "standard" spousal consent language, and it starts like this..."A Participant must obtain the consent of his or her Spouse, if any, to use an Accrued Benefit which is a QJSA Benefit as security for a loan...."