Issue Snapshot - Spousal Consent Period to Use an Accrued Benefit As Security for Loans

This issue snapshot will focus on the proposed regulations impacting the spousal consent period under 417(a)(4) and whether the 180-day consent period applies to spousal consent to use a participant’s accrued benefits as security for loans.

IRC Section and Treas. Regulation

IRC Section 417(a)(4) and Treas. Reg. Section 1.401(a)-20, A-24(a)(1)

Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)

73 F.R. 59575-59579, 2008-45 IRB 1131

Analysis

Section 417(a)(4) requires that qualified plans with a qualified joint and survivor annuity (“QJSA”) obtain the consent of a participant’s spouse prior to the participant’s use of plan assets as security for a loan. Specifically, Section 417(a)(4) states that for plan participants subject to Section 401(a)(11), plans shall provide that no portion of the participant’s accrued benefit may be used as security for a loan unless the spouse of the participant consents in writing to such use during the 90-day period ending on the date on which the loan is to be so secured. Treas. Reg. Section 1.401(a)-20, A-24(a)(1) also provides for a 90-day spousal consent period for using accrued benefits as security for loans.

However, after the Pension Protection Act of 2006 amended the Code to change certain other time periods related to qualified plans from 90 days to 180 days, the Department of Treasury issued proposed regulations which included an expansion of the spousal consent period for using accrued benefits as security for loans to 180 days.

Section 1102(a)(1)(A) of the Pension Protection Act of 2006, Pub. L. No. 109-280, 120 Stat. 780, 1056 (“PPA”), changed various time periods in the Code for qualified plans from 90 days to 180 days, but it did not amend I.R.C. Section 417(a)(4). Section 1102(a)(1)(A) of the PPA amended IRC Section 417(a)(6)(A) by replacing “90-day” with “180-day”. This change extended the applicable election period for waiving the QJSA and obtaining the required spousal consent to do so from 90 days before the annuity starting date to 180 days before the annuity starting date.

Section 1102(a)(1)(B) of the PPA also directed the Department of the Treasury to modify the regulations under Code Sections 402(f), 411(a)(11), and 417 by substituting “180 days” for “90 days” each place it appears in Section 1.402(f)-1, 1.411(a)-11(c), and 1.417(e)-1(b). The three aforementioned regulations relate to the timing of certain notices about the taxability of plan distributions, the timing for notices and consents for immediate distributions, and the timing for spousal and participant consents and notices for distributions other than a QJSA, respectively. The three aforementioned regulations do not concern spousal consent for using accrued benefits as security for loans, except that Section 1.411(a)-11(c)(2)(v) contains a cross reference to Section 1.401(a)-20, A-24 for “a special rule applicable to consents to plan loans.”

The final part of Section 1102 of the PPA is Section 1102(b), which directed the Department of the Treasury to modify the regulation under IRC Section 411(a)(11) to include a requirement that a notice to a plan participant concerning the right to defer receipt of a distribution must describe the consequences of the failure to defer the distribution. No part of Section 1102(b) of the PPA mentions loans.

The Department of the Treasury issued proposed regulations pursuant to Section 1102 of the PPA in a Notice of Proposed Rulemaking in 2008. Notice to Participants of Consequences of Failing to Defer Receipt of Qualified Retirement Plan Distributions; Expansion of Applicable Election Period and Period for Notices, 73 Fed. Reg. 59575, 2008-45 I.R.B. 1131 (proposed Oct. 9, 2008) (to be codified at 26 C.F.R pt. 1). These proposed regulations change the spousal consent period for obtaining spousal consent to the use of accrued benefits as security for loans from 90 days to 180 days by modifying Treas. Reg. Section 1.401(a)-20, A-24(a)(1). The preamble to the proposed regulations does not discuss spousal consent for plan loans but only notice of the consequences of failing to defer a distribution, the timing of certain notices about the taxability of plan distributions, the timing for notices and consents to immediate distributions, and the timing for spousal and participant consent and notices for distributions other than a QJSA. A chart within the proposed regulations indexes all references where 90 days is changed to 180 days and Treas. Reg. Section 1.401(a)-20, A-24(a)(1), fifth sentence, is one such proposed change. Thus, the proposed regulations change the 90-day period for loan spousal consents under I.R.C. Section417(a)(4) to a 180-day period.

The preamble to the proposed regulations says plans may rely on the proposed regulations as follows:

With respect to the proposed regulations relating to the expanded applicable election period and the expanded period for notices, plans may rely on these proposed regulations for notices provided (and election periods beginning) during the period beginning on the first day of the first plan year beginning on or after January 1, 2007 and ending on the effective date of final regulations.

The final regulation at Section 1.401(a)-20 and the statute itself continue to reflect a 90-day period for obtaining spousal consent to the use of accrued benefits as security for loans.

Chief Counsel Directives Manual Section 32.1.1.2.2(2) states that taxpayers may rely on proposed regulations where there are applicable final regulations in force if the proposed regulations contain an express statement permitting taxpayers to rely on them currently.

Although the final regulation at Treas. Reg. Section 1.401(a)-20, A-24(a)(1) and the statute itself continue to reflect a 90-day period, plans may use a 180-day period for spousal consent to the use of accrued benefits as security for a plan loan and still meet the requirements of Section 417(a)(4) because the 2008 proposed regulations contain an explicit statement that taxpayers may rely on them. This conclusion is consistent with the IRS’s position on taxpayer reliance on proposed regulations, which allows taxpayers to rely on proposed regulations where final regulations are in force if the proposed regulations contain an explicit statement allowing such reliance. The 2008 proposed regulations have such an explicit statement. Although the reliance statement itself does not mention loans, from the context of the proposed regulations as a whole, there is no indication that the drafters intended to exclude the loan spousal consent provision from taxpayer reliance.

Second, because the statute and the final regulation provide for a 90-day period, plans may also use a 90-day period for spousal consent to the use of accrued benefits as security for a plan loan and still meet the requirements of Section 417(a)(4).

Plans may provide for a spousal consent period no longer than 180 days prior to the date a loan is secured by a participant’s accrued benefits. Therefore, both a 180-day period and a 90-day period for obtaining spousal consent are allowable plan provisions which currently result in compliance with IRC Section 417(a)(4). In either situation, a plan must be operated in accordance with its written terms.