Is spousal consent required for 401k loan?

If your 401(k) plan allows 401(k) loans, you can borrow against your retirement savings to meet your urgent financial needs. You can borrow to settle medical bills, pay college expenses, or pay down payment for your primary residence. 401(k) plans are required to follow guidelines issued by the IRS, but they have the freedom to create their own rules that are within the established IRS framework.

Some 401(k) plans may require married employees to get spousal consent when taking a 401(k) loan. However, spousal consent is not mandatory, and some plans may not require spousal consent to approve a loan. Usually, if a plan requires spousal consent, it will include a spousal consent form as part of the loan application documentation. The form must be signed and notarized before the plan grants the loan. If the spouse declines to sign the spousal consent form, the loan may be denied or delayed until the consent form is properly signed and delivered.

401(k) loan basics

When you need cash for a short-term need, a 401(k) loan could be one of the first options you consider. Generally, a 401(k) loan could be better than a personal loan, since it has quick approval, flexible repayment period, and low interest rates. Also, a 401(k) loan has no impact on your credit rating, and you may be approved even with a poor credit score.

If your employer allows 401(k) loans, you can borrow half of your vested balance up to a maximum of $50,000. If your plan allows, you could take multiple loans as long as the total loan amount does not exceed the maximum loan limit. The loan repayments are spread out over a five-year period, or longer if you are borrowing to buy your primary residence. If you are unable to pay the 401(k) loan, the unpaid loan could be considered a distribution, and you will owe income taxes. If you are below age 59 ½, you may be required to pay an additional 10% early withdrawal penalty. 

What is spousal consent in 401(k) loans?

Some 401(k) plans may require an employee to get spousal consent before getting approved for a 401(k) loan. Typically, the employer will provide a spousal consent form along with the loan documentation, and it must be filled and signed by your spouse. You may also be required to notarize the spousal consent form to validate the spouse’s details and signature.

Usually, a 401(k) is considered a marital asset and may be subject to distribution if you were to get divorced. Therefore, if there are outstanding loans in the 401(k), these liabilities will also be shared during the divorce. Therefore, any 401(k) loans could be a potential loss of the retirement assets, and the spouse must agree to the loan before the 401(k) plan approves the loan request. If the spouse refuses to sign the consent form, the plan may deny or reject the loan request.

How 401(k) Loan is treated in Divorce

If you are going through a divorce, any 401(k) assets you own are considered marital assets and will be shared among the partners. In equitable distribution states, the law requires that any assets and liabilities in the 401(k) must be shared equitably and fairly. This means that any outstanding loans may be shared equally between the couples.

Some 401(k) loans do not require spousal consent, but this does not mean any liabilities in the 401(k) account are not marital debts. However, if the 401(k) loan was taken during the separation period, the spouse can contest the liability if they did not consent to it.

IRS position on spousal consent in 401(k) loans?

The IRS does not require 401(k) plans to ask for spousal consent when providing 401(k) loans to their participants. However, the 401(k) resource guide for plan sponsors includes a clause that allows 401(k) plans to ask for spousal consent when a participant requests a distribution. This clause is an optional provision that 401(k) plans can adopt. Therefore, a 401(k) plan may decide to adopt or drop the provision when providing 401(k) loans to participants.

Other Instances When Spousal Consent is Required in 401(k)

Distributions

The Retirement Equity Act (REA) of 1984 requires plan participants to require spousal consent when requesting a distribution in a form other than the Qualified Joint and Survivor Annuity (QJSA). Therefore, spousal consent is required when a participant requests a hardship withdrawal or in-service withdrawal. However, if the plan includes a safe harbor future, spousal consent may not be required. 

Change of beneficiaries

The REA also protects the spouses of married participants by giving them the role of the primary beneficiary of the employee's retirement asses. If the employee decides to name another person other than the spouse as the primary beneficiary, he/she must obtain written spousal consent to confirm the change. The plan administrator may require spousal consent for every instance of a beneficiary change or election to ensure it complies with REA's spouse beneficiary rules.