Within the past few weeks, legislation has been proposed in the U.S. Senate that could potentially change the way participants can access their retirement accounts prior to reaching retirement age. The proposal, known as the Savings Enhancement by Alleviating Leakage Act or SEAL (S. 1020), was introduced by Senators Herb Kohl (D-WI) and Mike Enzi (R-WY) on May 18, 2011. The bill has been referred to the Senate Finance Committee for consideration.
The legislation, if adopted by Congress and signed by the President, would limit the number of loans that a participant can take from their qualified pension plan. The proposal would limit a participant to no more than three loans from their account. Participants in the Ministers’ Retirement Plan are already limited to having no more than two outstanding loans at one time.
Under current law, participants are required to pay back any outstanding loans from their pension plan within sixty (60) days of losing their job. The new proposal would give participants until their tax deadline for that year to repay the loan and it would allow the participant to deduct the early withdrawal penalty from the loan balance.
Also under current law, participants cannot make salary reduction contributions to their retirement account for six months if they take a hardship withdrawal. This contribution ban was previously a year until changed several years ago. The SEAL bill would eliminate the ban entirely, allowing salary reduction contributions to be made immediately after taking a hardship withdrawal if the participant so desired.
According to the research cited by Senators Kohl and Enzi when they introduced the SEAL bill, more than 28% of all pension participants had an outstanding member loan in 2010, up from 22% in 2005. The average loan was for $7800. By comparison, only 11% of the participants in the Ministers’ Retirement Plan had a member loan but the average loan was for over $8900.
We will keep you advised as this legislation advances through Congress.