Sens. Kohl, Enzi Float Bill to Limit 401(k) Loans

SEAL Act also would give employees more time to pay back a loan, and ban 401(k) debit cards

Senators Herb Kohl, D-Wis., and Mike Enzi, R-Wyo., on Wednesday introduced legislation that would reduce the number of loans that participants could take out of their 401(k)s as well as giving employees more time to pay back a loan.

In introducing the bill, the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011, or the SEAL Act, Kohl, chairman of the Senate Special Committee on Aging, said that “because of the difficult economic times, more and more Americans are treating their retirement accounts as rainy day funds by taking out withdrawals and loans from their employer sponsored 401(k)s and then are unable to pay themselves back,” which he said is commonly referred to as “401(k) leakage.”

While having access to a loan in an emergency “is an important feature for many participants, a 401(k) savings account should not be used as a piggy bank,” Kohl said.

Enzi added that “While our nation’s 401(k) retirement system is providing greater opportunities for individuals to save, there is still room for improvement. Recent studies have shown that money saved in retirement accounts sometimes 'leaks' out of the system and is never put back.”

The SEAL Act would do the following:

Extends rollover period for plan loan amounts.

The SEAL Act allows an employee to contribute the amount outstanding on their loan to an IRA by the time they file their taxes for that year.

“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.

Allows 401(k) participants to continue to make elective contributions during the six months following a hardship withdrawal.

Currently, Kohl and Enzi said, after an employee receives a hardship withdrawal from a 401(k) plan, "she or he is prohibited from making elective contributions to their retirement account for at least six months." The SEAL Act allows participants to continue to make contributions during the six months following a hardship withdrawal.

Reduces the overall number of loans that participants can take at one time.

While it is important for participants to have access to their savings in times of need, the administrative burden of managing multiple loans for a few individuals can increase the costs for all workers in a plan. The SEAL Act reduces the overall number of loans that participants can take to three at one time.

Bans products that promote leakage, such as the 401(k) debit card.

“Certain products actively encourage participants to tap into their savings before retirement, often accruing large fees in the process. One such product is a debit card linked directly to one’s 401(k) savings account,” Kohl said. In 2008, Sens. Kohl and Charles Schumer, D-NY, introduced a bill barring companies from offering 401(k) debit cards. Said Kohl: “Although 401k debit cards are not currently prevalent, a number of different companies have offered them in the past and some companies continue to market these cards online.”

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