Employer groups urge Congress to pass bill to alleviate 401(k) plan “leakage”

In a September 4, 2012 letter, various employer groups urged members of Congress to co-sponsor legislation designed to reduce “leakage” from 401(k) plan loans. The letter signed by the American Benefits Council, the American Society of Pension Professionals & Actuaries (ASPPA), the ERISA Industry Committee (ERIC), and the Plan Sponsor Council of America (PSCA), among others, expressed support for H.R. 3287, the Savings Enhancement by Alleviating Leakage in 401(k) Savings (SEAL) Act, a bipartisan bill introduced by Rep. Sam Johnson (R-TX) and Rep. Richard Neal (D-MA).

Provisions to reduce leakage

“Every year, workers can lose valuable retirement savings when they lose a job or change jobs if they have an outstanding 401(k) plan loan. In addition, under current law their participation in a 401(k) plan will be interrupted if they take a “hardship distribution” from their plan to cover a personal emergency,” according to the letter from the employer groups.

The SEAL bill aims to reduce leakage from 401(k) plans by allowing workers who, through loss of a job, a job change or for any other reason, have terminated their employment and have an outstanding loan from their 401(k) plan to have an extended period of time to roll over the unpaid balance to another savings vehicle. The bill would extend the current law repayment period from 60 days, to the due date for filing the tax return for the tax year in which the distribution occurred, plus extensions (of the time to file returns).

The bill would also allow individuals who take a hardship withdrawal to cover a personal emergency to continue to participate in their employer’s retirement plan. “In today’s economy, the current law prohibition on plan participation placed on individuals who take a hardship distribution is inappropriate,” the letter contended.

CCH Note: Similar legislation was introduced in the Senate in May 2011 by Sen. Herb Kohl (D-WI) and Sen. Mike Enzi (R-WY). The Senate bill would also prohibit plans from making loans through credit cards or other similar arrangements and would put a limit on the number of loans outstanding. These provisions are not contained in the House bill.

Source: September 4, 2012 letter to Congress regarding H.R. 3287.

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For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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