Potential Legislation Introduced
Last week, US Senators Herb Kohl (D-WI) and Mike Enzi (R-WY) introduced legislation in effort to help ensure that retirement savings in defined contribution plans will last throughout retirement for retirees. The bill would make it harder for savers to tap into retirement funds, while making it easier for workers to repay loans from retirement accounts after losing a job. 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 SEAL Act
• Extends rollover period for loan amounts: The SEAL Act allows an employee to contribute the amount outstanding on their loan to an IRA by the time they file their taxes for that year. Currently, employees with an outstanding loan have 60 days to repay their loan after terminating employment. If you can't repay the loan, it is considered defaulted, and you will be taxed on the outstanding balance, including an early withdrawal penalty if you are not at least age 59 ½. This gives employees with an outstanding loan more time to pay themselves back after losing their job.
• Allows 401(k) plan participants to continue to make Elective Contributions during the six months following a Hardship Withdrawal: Currently, after an employee receives a hardship withdrawal from a 401(k) plan, he or she is prohibited from making elective contributions to their retirement account for at least six months. The loss of both employee contributions and potential company contributions during this period has a negative effect on participants' retirement savings. The SEAL Act allows participants to continue to make contributions during the six months following a hardship withdrawal.
• Reduces number of loans a participant can take: 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 already have chosen to limit the number of loans to reduce leakage.
• Bans products that promote leakage, such as the 401(k) debit card: Certain products actively encourage participants to tap into their savings before retirement, often accruing large fees in the process. One such product is a debit card linked directly to one's 401(k) savings account.
Summit Financial will continue to monitor the status of the SEAL Act and will provide any updates on our website. Please contact us with any questions.
The materials created through August 2011 are when the professionals of Summit Financial were with Ogilvie Security Advisors Corp. The professionals of Summit Financial have not been with Ogilvie Security Advisors Corp. since August 31, 2011 and have no further affiliation with that organization.