Multiple types of 401(k) plans exist, each with its own set of rules regarding contributions and distributions. While all plans must follow established guidelines for federal tax purposes, many features are optional and at the discretion of the plan sponsor. Requiring an employee's spouse to sign a consent form before a loan is issued is one such provision.
401(k) Loan Basics
Most 401(k) plans contain provisions allowing participants to borrow a portion of the money accumulated within their account. IRS regulations restrict 401(k) loans to a maximum of half of the vested account balance or $50,000, whichever is less. The loan must be repaid within five years, unless you're using the loan to purchase your home. 401(k) loans do not result in additional taxable liability, and early withdrawal penalties are not imposed for these distributions. If you do not pay back your loan, though, the loan is considered taxable income. Some 401(k) plans allow for hardship withdrawals, which could be a good alternative if you suspect you may have trouble paying back the loan. Hardship withdrawals may require spousal consent as well.
A number of 401(k) plan providers require an employee's spouse to acknowledge their partner's request for a loan. Part of the loan application is a spousal waiver that must be signed and notarized before a loan request will be granted. Applications submitted by married employees that do not contain a properly executed spousal waiver are denied or delayed until a waiver is delivered.
Rationale for Requiring Spousal Consent
401(k) assets are often included in the equitable distribution of property in case of divorce. A state court can award all or part of a retirement fund to a spouse. Assets also can go to a spouse upon the death of the plan participant. Because a loan against a 401(k) therefore means a potential loss of funds in which the spouse has a financial stake, many providers require a spouse's signature before granting an employee's request for a 401(k) loan.
IRS Position on Spousal Waivers
The IRS has not established any provisions mandating a spouse's acknowledgement or permission for loans from an employee's 401(k). However, the general distribution rules described in the 401(k) Resource Guide for Plan Sponsors mentions that "the plan may also require the consent of the participant’s spouse before making a distribution." Each plan may contain different rules provided they adhere to existing legislation, and obtaining spousal consent for loans is an optional provision.
Gregory Gambone is senior vice president of a small New Jersey insurance brokerage. His expertise is insurance and employee benefits. He has been writing since 1997. Gambone released his first book, "Financial Planning Basics," in 2007 and continues to work on his next industry publication. He earned a Bachelor of Science in psychology from Fairleigh Dickinson University.