[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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