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Guest Article

(From the May 31, 2011 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Senate Bill Targets 401(k) Plan "Leakage"

A Senate bill with bi-partisan support was recently introduced to minimize the leakage from 401(k) plans occurring as a result of plan loans and hardship withdrawals.

Senators Herb Kohl (D-WI) and Mike Enzi (R-WY) introduced S. 1020 to prevent some of the depletion by participants of their 401(k) accounts by slightly modifying certain qualified plan rules. Senator Enzi observed that more and more participants are withdrawing their 401(k) funds through loans and hardship withdrawals and then are unable to pay themselves back. Senator Kohl noted that the gap between what Americans will need in retirement and what they actually have saved is a staggering $6.6 trillion. They cited a recent study that reported that approximately 28 percent of the active participants in defined contribution plans have an outstanding plan loan.

As introduced, their bill — the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011 or the SEAL 401(k) Savings Act— would provide:

More Time to Repay Loans after a Separation from Service. Participants who default on a plan loan because of a separation from service would have an extended period of time — until the due date for filing the tax return (including extensions) for the year the loan is treated as a distribution — to repay the outstanding loan amount (e.g., as a rollover to an individual retirement account).
No Prohibition against Employee Deferrals/Contributions after a Hardship Withdrawal. Treasury regulations now prohibit an employee from making elective and employee contributions "for at least 6 months" after a hardship distribution. This prohibition would be eliminated so participants would not be prohibited from making contributions during that period.
Statutory Maximum Number of Loans. The maximum number of loans a participant could have outstanding at any time would be three. Currently, the maximum number of loans permitted under a plan (if there is any maximum) is set by the plan sponsor. The new limit would be a provision of Code § 72(p) and a loan that failed to comply would be treated as a distribution.
Prohibition against Loans by Debit Card. Plan loans that are provided through credit cards or other similar arrangement would be prohibited. The new prohibition would also be a provision of Code § 72(p) and a loan that failed to comply would be treated as a distribution.

The bill was introduced and referred to the Senate Finance Committee on May 18.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact:

Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.