June 2011

On May 18, 2011, Senators Herb Kohl (D-WI) and Mike Enzi (R-WY) introduced the Savings Enhancement by Alleviating Leakage in 401(k) Savings (SEAL) Act. The intent of the proposed legislation is to protect 401(k) plans by providing flexibility in the repayment of loans and hardship rules, and prohibiting products such as the 401(k)debit card.

Extends Rollover Period for Plan Loan Amounts

When a participant in a 401(k) plan terminates employment, the participant can either immediately repay the loan, or default on the loan and pay taxes on the outstanding loan balance. The SEAL Act would allow terminated participants an extended time period to repay the loan. Participants could contribute the outstanding loan balance to an IRA until the date they file their taxes for that year.

Modify Rules on Hardship Distributions

Currently, if a participant takes a hardship distribution from a 401(k) plan, he or she cannot make elective deferral contributions for at least six months. The SEAL Act directs the Secretary of the Treasury to modify regulations to allow participants to continue to make elective deferral contributions following a hardship withdrawal.

Prohibits 401(k) Debit Cards

Although rarely used, the law currently does not prohibit the use of 401(k) debit cards. This practice encourages participants to make withdraws from the 401(k) plan and often large fees apply. The SEAL Act would prohibit products like the 401(k) debit card.

Next Step

As of May 27th, 2011, the SEAL Act has been amended and reintroduced, removing an original provision restricting the number of loans per 401(k) participant to three. This was deemed redundant since employers currently have the ability to limit the number of loans within their plan. We will continue to keep you informed of any developments.

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