[Congressional Record Volume 157, Number 69 (Wednesday, May 18, 2011)]
[Senate]
[Pages S3108-S3109]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
By Mr. KOHL (for himself and Mr. Enzi):
S. 1020. 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; to the Committee on Finance.
Mr. KOHL. Mr. President, today I am introducing the Savings
Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011,
otherwise known as the SEAL 401(k) Savings Act. This bill, which I
introduce together with my friend Senator Mike Enzi, will reduce
leakage from retirement plans and help ensure that retirement savings
in defined contribution plans last throughout retirement.
With the recent shift from defined benefit retirement savings plans
to 401(k)-type defined contribution plans, many Americans are now
responsible for making the proactive decision to save for their
retirement. These decisions include how much to save and where to
invest their savings. Meanwhile, they also must resist the urge to tap
into their savings in times of hardship through withdrawals and loans.
During these difficult economic times, we are increasingly seeing
401(k) funds being treated as rainy day funds, as participants take out
withdrawals and loans. According to a recent study by Aon Hewitt, as of
the end of 2010, about 28 percent of active participants in defined
contribution plans had an outstanding loan. This is a record high.
Withdrawals from defined contribution plans also have increased since
the 2008 financial crisis. This leakage from these plans can
significantly reduce workers' savings and put their retirement security
at risk.
To determine how to best tackle the issue of leakage from retirement
plans, the Special Committee on Aging, of which I chair, held a hearing
in July 2008 entitled, ``Saving Smartly for Retirement: Are Americans
Being Encouraged to Break Open the Piggy Bank?.'' The Committee also
requested a GAO report entitled, ``401(k) Plans: Policy Changes Could
Reduce the Long-term Effects of Leakage on Workers' Retirement
Savings,'' which was released in August 2009.
The SEAL 401(k) Savings Act builds on the recommendations the
Committee received from witnesses during our hearing and from the GAO
and would reduce leakage and increase retirement savings. First, the
bill would extend the time workers have to repay loans. When an
employee with a 401(k) plan loan loses his job, he generally is put to
the choice of defaulting on his outstanding loan and incurring tax
penalties or immediately repaying the entire outstanding loan balance.
Paying back a loan after just losing your job can be difficult so our
bill would give people more time.
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 for revolving loans. Also, 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. Currently
employers determine the number of loans available, and many employers,
like the Federal Thrift Savings Program, have chosen to restrict the
number of loans to reduce leakage and overall cost.
The bill also would allow 401(k) participants to continue to make
additional contributions during the 6 months following a hardship
withdrawal. Currently, after an employee takes a withdrawal from a
401(k) plan due to a hardship, he or she is prohibited from making
contributions to the plan and all other plans maintained by the
employer for at least six months. This loss of both employee
contributions and company matching contributions during this period can
exacerbate the long-term negative effects on retirement savings.
Finally, the bill would ban products that promote leakage, such as
the 401(k) debit card. By offering a 401(k) debit card, plans send the
message that it is okay to use your retirement savings for every day
purchases, despite the fact that the high fees associated with its use
will drastically diminish their savings.
I look forward to working with my colleagues to pass this important
legislation.
Mr. President, I ask unanimous consent that the text of the bill be
printed in the Record.
There being no objection, the text of the bill was ordered to be
printed in the Record, as follows:
S. 1020
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Savings Enhancement by
Alleviating Leakage in 401(k) Savings Act of 2011'' or the
``SEAL 401(k) Savings Act''.
SEC. 2. EXTENDED ROLLOVER PERIOD FOR THE ROLLOVER OF PLAN
LOAN OFFSET AMOUNTS IN CERTAIN CASES.
(a) In General.--Paragraph (3) of section 402(c) of the
Internal Revenue Code of 1986 is amended by adding at the end
the following new subparagraph:
``(C) Rollover of certain plan loan offset amounts.--
``(i) In general.--In the case of a qualified plan loan
offset amount, paragraph (1) shall not apply to any transfer
of such amount made after the due date (including extensions)
for filing the return of tax for the taxable year in which
such amount is treated as distributed from a qualified
employer plan.
``(ii) Qualified plan loan offset amount.--For purposes of
this subparagraph, the term `qualified plan loan offset
amount' means a plan loan offset amount which is treated as
distributed from a qualified employer plan to a participant
or beneficiary solely by reason of--
``(I) the termination of the qualified employer plan, or
``(II) the failure to meet the repayment terms of the loan
from such plan because of the separation from service of the
participant (whether due to layoff, cessation of business,
termination of employment, or otherwise).
``(iii) Plan loan offset amount.--For purposes of clause
(ii), the term `plan loan offset amount' means the amount by
which the participant's accrued benefit under the plan is
reduced in order to repay a loan from the plan.
``(iv) Limitation.--This subparagraph shall not apply to
any plan loan offset amount unless such plan loan offset
amount relates to a loan to which section 72(p)(1) does not
apply by reason of section 72(p)(2).
``(v) Qualified employer plan.--For purposes of this
subsection, the term `qualified employer plan' has the
meaning given such term by section 72(p)(4).''.
(b) Conforming Amendment.--Subparagraph (A) of section
402(c)(3) of the Internal Revenue Code of 1986 is amended by
striking ``subparagraph (B)'' and inserting ``subparagraphs
(B) and (C)''.
(c) Effective Date.--The amendments made by this section
shall apply to transfers made after the date of the enactment
of this Act.
SEC. 3. MODIFICATION OF RULES GOVERNING HARDSHIP
DISTRIBUTIONS.
Not later than 1 year after the date of the enactment of
this Act, the Secretary of the
[[Page S3109]]
Treasury shall modify Treasury Regulation section 1.401(k)--
1(d)(3)(iv)(E) to--
(1) delete the prohibition imposed by paragraph (2)
thereof, and
(2) to make any other modifications necessary to carry out
the purposes of section 401(k)(2)(B)(i)(IV) of the Internal
Revenue Code of 1986.
SEC. 4. QUALIFIED EMPLOYER PLANS PROHIBITED FROM MAKING LOANS
THROUGH CREDIT CARDS AND OTHER SIMILAR
ARRANGEMENTS.
(a) In General.--Paragraph (2) of section 72(p) of the
Internal Revenue Code of 1986 is amended by redesignating
subparagraph (D) as subparagraph (E) and by inserting after
subparagraph (C) the following new subparagraph:
``(D) Prohibition of loans through credit cards and other
similar arrangements.--Subparagraph (A) shall not apply to
any loan which is made through the use of any credit card or
any other similar arrangement.''
(b) Effective Date.--The amendments made by this section
shall apply to plan years beginning after the date which is
60 days after the date of the enactment of this Act.
SEC. 5. LIMITATION ON NUMBER OF LOANS FROM QUALIFIED EMPLOYER
PLANS WHICH MAY BE OUTSTANDING WITH RESPECT TO
ANY PARTICIPANT OR BENEFICIARY.
(a) In General.--Paragraph (2) of section 72(p) of the
Internal Revenue Code of 1986, as amended by section 4, is
amended by redesignating subparagraph (E) as subparagraph (F)
and by inserting after subparagraph (D) the following new
subparagraph:
``(E) Exception only to apply to 3 loans.--Subparagraph (A)
shall not apply to any loan made after the date of the
enactment of this subparagraph if, immediately after such
loan is made, the number of outstanding loans from the plan
to the participant or beneficiary exceeds 3.''.
(b) Effective Date.--The amendments made by this section
shall apply to loans made after the date which is 1 year
after the date of the enactment of this Act.
Mr. ENZI. Mr. President, in February the Committee on Health,
Education, Labor, and Pensions held a hearing on the success of the
automatic enrollment provisions of the Pension Protection Act of 2006
which helped millions of workers and their families access to a 401(k)
retirement savings accounts. Because of the Pension Protection Act, we
greatly expanded retirement savings and individuals ability to put
money away for their golden years.
Just last week, Fidelity Investments released a report that employer-
sponsored retirement plans with an automatic enrollment feature have an
overall participation rate of 82 percent compared with only 56 percent
without automatic enrollment. The Fidelity report also indicated that
average account balances for 401(k) and similar retirement accounts
have reached an all-time high. This is some good news to show that
workers and their families retirement accounts are coming back from the
economic distress of just a few years ago.
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 401(k)
accounts sometimes ``leaks'' out of the system and is never put back.
AonHewitt released a report this week showing that unpaid loans,
withdrawals and cashouts of 401(k) monies, otherwise known as
``leakage,'' can have a substantial effect on how much money ultimately
will be there for retirement. According to the AonHewitt report, an
individual who ceases to make loan repayments during the loan term is
expected to erode future retirement income by 10 to 13 percent. If the
individual has two loans and payments are not made then the reduction
in retirement savings nearly doubles. In the event of a complete
default of the loan, then the monies are permanently gone from the
retirement system.
Today, I join the Chairman of the Senate Aging Committee, Senator
Kohl, in taking the first step in helping to stop leakage in the
retirement system. Chairman Kohl held a hearing on this very issue and
had the Government Accountability Office, GAO, research and come up
with recommendations to stop retirement savings leakage. The bill we
introduce today, The Savings Enhancement by Alleviating Leakage in
401(k) Pension Act also known as the SEAL Act, is based upon those
initial GAO recommendations.
The SEAL Act takes the first steps in helping workers and their
families to pay back loans from 401(k) accounts when a worker leaves a
job. Typically, when a worker separates from an employer any
outstanding 401(k) loan must be paid back immediately or suffer tax
penalties. The SEAL Act would allow for a greater period of time for
the loan to be paid back thereby helping families to pay back the loan
and allowing the monies to be put back into their retirement savings
and avoid the tax penalty.
The bill also would remove the prohibition against individuals from
making contributions to their 401(k) accounts in the following 6 months
after a hardship loan has been made. Situations where hardship loans
are made are some of the most stressful times for individuals and their
families. If they have the ability and means to continue to contribute
to their 401(k) accounts then they should be provided that option. The
bill gives them the option to continue to save for retirement even in
dire circumstances.
Finally, the bill would provide structural changes to 401(k) plans to
help businesses keep down administrative costs and extra fees.
Currently, the Internal Revenue Code permits businesses to structure
retirement plans with an unlimited amount of loans per individual but
an individual cannot take more than 50 percent of their retirement
account balances in loans up to $50,000 for all outstanding loans. The
Federal Government's Thrift Savings Plan has a limit of two outstanding
loans, one personal loan and one loan for the purchase of a house, at
any time. We consulted with retirement experts, mutual funds and
retirement service providers and virtually all agreed that the optimal
number of loans agreed upon was 3 outstanding loans at any time. Some
believed that we should match the Thrift Savings Plan, however, we
believe that businesses need to reduce administrative costs but they
should be able to provide flexibility to their workers. The bill also
would restrict the use of credit and/or debit card loans on 401(k)
accounts. Again, these types of loans pull money out in ``reserve'' so
that individuals can tap the reserve at any time. However, the extra
administrative costs and fees are burdensome to businesses and to their
workers.
Overall, the SEAL bill is the first step in helping to provide
flexibility for individuals and plan structure to help keep retirement
monies in retirement savings accounts. I look forward to working with
Chairman Kohl in moving this important piece of retirement savings
legislation. I also look forward to working with my colleagues to
improve and add other items to help reduce leakage in 401(k) retirement
savings and to help our Nation's workers and their families have their
money there for them at retirement. Each step that we take to stop
leakage will mean that individuals will be more financial secure in
retirement.
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