Senators’ SEAL Act Would Ease 401(k) Loan Paybacks

Sens. Nelson and Enzi reintroduce Shrinking Emergency Account Losses (SEAL) Act

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Two senators reintroduced legislation Tuesday that would give those who borrow against their 401(k) plans more time to replenish their accounts after leaving a job.

The bipartisan proposal, the Shrinking Emergency Account Losses (SEAL) Act, sponsored by Sens. Bill Nelson, D-Fla. and Mike Enzi, R-Wyo., would give workers who leave their jobs up until they file their federal taxes to repay money they’ve taken out of their company’s retirement plan.

Under current law, workers have 60 days to repay any loans or withdrawals following their separation to avoid paying tax penalties. According to a 2011 study by the consulting firm Aon Hewitt, nearly 70% of employees default on outstanding retirement account loans after leaving a job, the senators said in reintroducing the bill.

“We need to give folks more incentives to continue saving for their retirement,” said Nelson, who chairs the U.S. Senate Special Committee on Aging, in a statement. “Giving them extra time to restore money owed to their 401(k)s is one way we can help cut down on lost retirement savings.”

Enzi added in the same statement that “A secure retirement is a secure future. By giving people greater flexibility in repaying money they borrowed from their 401(k) accounts, we can help promote responsible savings and a better retirement for today’s workers.”

The bill would also allow employees to continue to contribute to their 401(k) plans during the six months following a hardship withdrawal, a practice currently prohibited. Letting workers fund their accounts after a withdrawal would allow them to receive a company’s matching contributions.

Brian Graff, CEO of the American Society of Pension Professionals and Actuaries (ASPPA), said in a statement that more Americans save at work through an employer sponsored retirement plan than in any other way.

“The power of their compounding retirement savings is weakened when the individual takes a hardship withdrawal from retirement savings or does not repay a loan from a 401(k) plan because it came due when employment was terminated,” Graff said. “We are mindful that some employees have serious immediate financial needs. Therefore, we believe it is important to minimize the harm that comes from accessing retirement funds for nonretirement purposes. The SEAL Act would be an important step toward addressing this problem.”

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