Senate Bill Would Limit Number of 401(k) Loans

Legislation introduced in the Senate on May 18 would limit the number of loans employees could have outstanding from their 401(k) accounts and other defined contribution plans.

The bill sponsored by Sens. Herb Kohl, D-Wisconsin, and Mike Enzi, R-Wyoming, would limit plan participants to three outstanding loans from their defined contribution accounts. Under current law, there is no limit.

The Internal Revenue Service proposed a limit of two loans per year in 2000, but withdrew the proposed rule in 2002, saying there was no statutory basis for such a restriction.

In a joint news release, the sponsors said they proposed the bill because the administrative burden on employers of managing multiple loans for a few plan participants increases costs for all plan participants.

The Kohl-Enzi bill also would allow employees to continue to contribute to 401(k) plans after taking a hardship withdrawal. Under current law, contributions are barred for six months after a hardship withdrawal.

That inability to make contributions during that six-month period can “exacerbate the long-term effects on retirement savings,” the sponsors said in the release.

In recent years, more employees have been taking loans from 401(k) and other defined contribution plans, according to an Aon Hewitt Inc. survey of 91 employers that sponsor 110 defined contribution plans that was released separately May 18.

As of last year, a record 27.6 percent of plan participants had loans outstanding, up from 25.6 percent at the end of 2009, and 21.8 percent at the end of 2006. But of participants who took a loan from their account, only 2.5 percent had more than two loans outstanding, according to the Aon Hewitt analysis.  

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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