Thursday, May 26, 2011

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 plan years beginning after the date which is 60 days after the enactment date. The bill's sponsors say that such 401(k) debit cards promote “leakage,“ and often accrue large fees in the process.

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