Senate bill aims to stem pre-retirement 401(k) “leakage.”

On May 19, Senators Herb Kohl (D-WI) and Mike Enzi (R-WY) introduced legislation to help ensure that retirement savings in defined contribution plans last throughout retirement. The bill, called the “Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011” (the SEAL Act), was introduced following a hearing on the topic that Kohl held as Chairman of the Senate Special Committee on Aging. The SEAL Act aims to stem the phenomenon of more and more Americans using retirement accounts as rainy day funds by taking out withdrawals and loans from their employer-sponsored 401(k)s and then being unable to pay themselves back (commonly called 401(k) “leakage”). The bill's sponsors cited a recent study finding that about 28% of active participants in defined contribution plans had an outstanding loan.

The bill would:

... Extend the rollover period for plan loan amounts, to help terminated workers who often face the tough choice between defaulting on an outstanding loan and incurring tax penalties or immediately repaying the entire outstanding loan balance. Effective for transfers made after the enactment date, the SEAL Act would allow such taxpayers to avoid tax and penalties by contributing the amount outstanding on their loans (the qualified plan loan offset amount) to an IRA by the time they file their taxes for the year in which the amount is treated as a distribution from a qualified employer plan. “Paying back a loan after just losing your job can be difficult so our bill would give people more time to pay themselves back,” Kohl said.

... Direct IRS to modify the hardship distribution regs, within a year after the enactment date, to allow 401(k) participants to continue to make elective contributions during the six months following a hardship withdrawal. Current regs bar elective contributions for the six-month period after an employee receives a hardship withdrawal from a 401(k) plan. Also, IRS is to make other modifications necessary to carry out the purposes of Code Sec. 401(k)(2)(B)(i)(IV) (relating to hardship distributions).

... Modify the plan loan rules so that the overall number of loans that participants can take would be limited to three at a time, effective for loans made after the date which is one year after the enactment date.

... Ban plan loans that are made through a credit card or any other similar arrangement, effective for plans years beginning after the date which is 60 days after the enactment date. The bill's sponsors products say that such 401(k) debit cards promote “leakage,“ and often accrue large fees in the process.

112TH CONGRESS

1ST SESSION S. ll

To amend the Internal Revenue Code of 1986 to modify the rules relating

to loans made from a qualified employer plan, and for other purposes.

IN THE SENATE OF THE UNITED STATES

llllllllll

Mr. KOHL introduced the following bill; which was read twice and referred to

the Committee on llllllllll

A BILL

To amend the Internal Revenue Code of 1986 to modify

the rules relating to loans made from a qualified employer

plan, and for other purposes.

1 Be it enacted by the Senate and House of Representa2

tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Savings Enhancement

5 by Alleviating Leakage in 401(k) Savings Act of 2011’’

6 or the ‘‘SEAL 401(k) Savings Act’’.

2

OTT11142 S.L.C.

1 SEC. 2. EXTENDED ROLLOVER PERIOD FOR THE ROLLOVER

2 OF PLAN LOAN OFFSET AMOUNTS IN CER3

TAIN CASES.

4 (a) IN GENERAL.—Paragraph (3) of section 402(c)

5 of the Internal Revenue Code of 1986 is amended by add6

ing at the end the following new subparagraph:

7 ‘‘(C) ROLLOVER OF CERTAIN PLAN LOAN

8 OFFSET AMOUNTS.—

9 ‘‘(i) IN GENERAL.—In the case of a

10 qualified plan loan offset amount, para11

graph (1) shall not apply to any transfer

12 of such amount made after the due date

13 (including extensions) for filing the return

14 of tax for the taxable year in which such

15 amount is treated as distributed from a

16 qualified employer plan.

17 ‘‘(ii) QUALIFIED PLAN LOAN OFFSET

18 AMOUNT.—For purposes of this subpara19

graph, the term ‘qualified plan loan offset

20 amount’ means a plan loan offset amount

21 which is treated as distributed from a

22 qualified employer plan to a participant or

23 beneficiary solely by reason of—

24 ‘‘(I) the termination of the quali25

fied employer plan, or

3

OTT11142 S.L.C.

1 ‘‘(II) the failure to meet the re2

payment terms of the loan from such

3 plan because of the separation from

4 service of the participant (whether

5 due to layoff, cessation of business,

6 termination of employment, or other7

wise).

8 ‘‘(iii) PLAN LOAN OFFSET AMOUNT.—

9 For purposes of clause (ii), the term ‘plan

10 loan offset amount’ means the amount by

11 which the participant’s accrued benefit

12 under the plan is reduced in order to repay

13 a loan from the plan.

14 ‘‘(iv) LIMITATION.—This subpara15

graph shall not apply to any plan loan off16

set amount unless such plan loan offset

17 amount relates to a loan to which section

18 72(p)(1) does not apply by reason of sec19

tion 72(p)(2).

20 ‘‘(v) QUALIFIED EMPLOYER PLAN.—

21 For purposes of this subsection, the term

22 ‘qualified employer plan’ has the meaning

23 given such term by section 72(p)(4).’’.

24 (b) CONFORMING AMENDMENT.—Subparagraph (A)

25 of section 402(c)(3) of the Internal Revenue Code of 1986

4

OTT11142 S.L.C.

1 is amended by striking ‘‘subparagraph (B)’’ and inserting

2 ‘‘subparagraphs (B) and (C)’’.

3 (c) EFFECTIVE DATE.—The amendments made by

4 this section shall apply to transfers made after the date

5 of the enactment of this Act.

6 SEC. 3. MODIFICATION OF RULES GOVERNING HARDSHIP

7 DISTRIBUTIONS.

8 Not later than 1 year after the date of the enactment

9 of this Act, the Secretary of the Treasury shall modify

10 Treasury Regulation section 1.401(k)-1(d)(3)(iv)(E) to—

11 (1) delete the prohibition imposed by paragraph

12 (2) thereof, and

13 (2) to make any other modifications necessary

14 to carry out the purposes of section

15 401(k)(2)(B)(i)(IV) of the Internal Revenue Code of

16 1986.

17 SEC. 4. QUALIFIED EMPLOYER PLANS PROHIBITED FROM

18 MAKING LOANS THROUGH CREDIT CARDS

19 AND OTHER SIMILAR ARRANGEMENTS.

20 (a) IN GENERAL.—Paragraph (2) of section 72(p) of

21 the Internal Revenue Code of 1986 is amended by redesig22

nating subparagraph (D) as subparagraph (E) and by in23

serting after subparagraph (C) the following new subpara24

graph:

5

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1 ‘‘(D) PROHIBITION OF LOANS THROUGH

2 CREDIT CARDS AND OTHER SIMILAR ARRANGE3

MENTS.—Subparagraph (A) shall not apply to

4 any loan which is made through the use of any

5 credit card or any other similar arrangement.’’

6 (b) EFFECTIVE DATE.—The amendments made by

7 this section shall apply to plan years beginning after the

8 date which is 60 days after the date of the enactment of

9 this Act.

10 SEC. 5. LIMITATION ON NUMBER OF LOANS FROM QUALI11

FIED EMPLOYER PLANS WHICH MAY BE OUT12

STANDING WITH RESPECT TO ANY PARTICI13

PANT OR BENEFICIARY.

14 (a) IN GENERAL.—Paragraph (2) of section 72(p) of

15 the Internal Revenue Code of 1986, as amended by section

16 4, is amended by redesignating subparagraph (E) as sub17

paragraph (F) and by inserting after subparagraph (D)

18 the following new subparagraph:

19 ‘‘(E) EXCEPTION ONLY TO APPLY TO 3

20 LOANS.—Subparagraph (A) shall not apply to

21 any loan made after the date of the enactment

22 of this subparagraph if, immediately after such

23 loan is made, the number of outstanding loans

24 from the plan to the participant or beneficiary

25 exceeds 3.’’.

6

OTT11142 S.L.C.

1 (b) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to loans made after the date which

3 is 1 year after the date of the enactment of this Act

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