The Shrinking Emergency Account Losses (SEAL) Act, sponsored by U.S. Sens. Bill Nelson (D-Fla.) and Mike Enzi (R-Wyo.), is before the Senate again. The bill, originally proposed in 2011, would give 401(k) participants who borrow against their 401(k) retirement plans more time to replenish their accounts after leaving a job.
Specifically, the measure would give workers who leave their jobs up until they file their federal taxes to repay money they’ve 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.
According to a 2011 study by consulting firm Aon Hewitt, nearly 70 percent of employees default on outstanding retirement account loans after leaving a job.
“We need to give folks more incentives to continue saving for their retirement,” Sen. Nelson said in a statement. He 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.”
The SEAL Act would also allow employees to continue to contribute to their 401(k) plans during the six months following a hardship withdrawal, a practice currently prohibited. Letting workers fund their accounts after a withdrawal would allow them to receive a company’s matching contributions.
According to a study released earlier this year by HelloWallet, more than one in four Americans are dipping into their retirement plans to cover expenses unrelated to retirement, amounting to $70 billion in annual withdrawals. “While many Americans have increasingly turned to their 401(k) accounts to pay bills, many experts worry such moves will cause long-term and significant harm to their retirement,” states a press release issued by Sen. Enzi’s office.
The re-introduction of the measure drew immediate praise from Brian Graff, Executive Director and CEO of the American Society of Pension Professionals & Actuaries (ASPPA). “The power of their 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,” Graff said in a statement.
“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 non-retirement purposes,” he added.
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