Bill Aims to Thwart Retirement Plan Leakage

Two senators introduced legislation that would give individuals who take a loan from their retirement accounts more time to repay after leaving a job.

The Shrinking Emergency Account Losses (SEAL) Act, sponsored by Senators Bill Nelson (D-Florida) and Mike Enzi (R-Wyoming), would give workers who leave their jobs up until they file their federal taxes to repay money they have taken out of their company’s retirement plan. Under current law, workers have 60 days to repay any loans or withdrawals following their separation, to avoid paying tax penalties.  

The lawmakers’ bill would also allow employees to continue to contribute to their 401(k) plans during the six months following a hardship withdrawal. Letting workers fund their accounts after a withdrawal would allow them to receive a company’s matching contributions.  

“We need to give folks more incentives to continue saving for their retirement,” said Nelson, who chairs the U.S. Senate Special Committee on Aging. “Giving them extra time to restore money owed to their 401(k)s is one way we can help cut down on lost retirement savings.”  

Brian H. Graff, executive director and chief executive of The American Society of Pension Professionals and Actuaries (ASPPA), issued a statement in support of the legislation. “The power of [an employee’s] compounding retirement savings is weakened when the individual takes a hardship withdrawal from retirement savings or does not repay a loan from a 401(k) plan because it came due when employment was terminated. We are mindful that some employees have serious immediate financial needs. Therefore, we believe it is important to minimize the harm that comes from accessing retirement funds for nonretirement purposes. The SEAL Act would be an important step toward addressing this problem,” Graff said.  

“The SEAL Act proposes simple changes that will lessen the loss of retirement savings when an employee terminates employment with an outstanding loan balance and reduce the long-term impact of hardship withdrawals. Specifically, the bill extends the period that an individual retirement account (IRA) can accept repayment of outstanding loan balances as a rollover from a qualified retirement plan. The bill also includes a provision that would allow participants to continue to make elective contributions during the six months following a hardship withdrawal. These provisions are sensible improvements to current law that will allow many Americans to keep more of their retirement savings working for them,” he added.