Workers will be limited in tapping their 401(k) plans for loans under legislation two senators planned to introduce Wednesday designed to counter the erosion of retirement assets.
Sen. Herb Kohl, D-Wis., chairman of the Senate Special Committee on Aging, planned to introduce the “SEAL 401(k) Savings Act” with Sen. Mike Enzi, R-Wyo. The bill would reduce the number of loans workers may take from a 401(k) and give participants more time to repay after losing a job. It also will allow savers to contribute to their plan after taking a hardship withdrawal, according to Joe Bonfiglio, a spokesman for the Senate committee.
The Senate bill would limit the number of outstanding loans for each participant to three, Mr. Bonfiglio said. Employers would have the option to reduce the number for their plans. There is no rule right now limiting the number of loans workers may take and it varies by company, he added.
“The big risk with loans is that participants leave their job,” said Alison Borland, head of retirement strategy for Aon Hewitt. Most 401(k) plans require employees to repay loans in full when leaving a job but almost 70% default, Ms. Borland said, so the unpaid funds get counted as taxable income and can add to the burden of a jobless worker.
For workers who lose their jobs before repaying a loan, the bill would let them pay down their balances into an IRA before filing their taxes for that year. That way the saver doesn’t incur a withdrawal tax penalty on those funds, Mr. Bonfiglio said. The IRS and Treasury Department would need to issue guidance on how the process will work, he said.