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Looks like Congress is looking at putting additional limits on 401(k) loans, as well as being more flexible with how a 401(k) loan could be repaid if the employee loses their job:

Limiting the number of loans:

The Senate bill would limit the number of outstanding loans for each participant to three. Employers would have the option to reduce the number for their plans, said Joe Bonfiglio, a spokesman for Kohl’s aging committee. There is no rule right now limiting the number of loans workers may take and it varies by company, Bonfiglio said.

More flexible payback:

Most 401(k) plans require employees to repay loans in full when leaving a job, usually within 60 days, said Borland, who’s based in Nashville, Tennessee. Almost 70 percent default, Borland said, so the unpaid funds get counted as taxable income and may 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 individual retirement account before filing their taxes for that year.

Allowing contributions to continue after a hardship withdrawal:

A 401(k) plan’s terms also may let individuals take a hardship withdrawal that doesn’t have to be repaid if the borrower demonstrates a financial need such as medical or funeral expenses. That money generally is included in an employee’s income for tax purposes and may trigger an additional 10 percent tax penalty, according to the IRS. Employees also are generally prohibited from making contributions to their account for at least six months after taking the withdrawal, the IRS said.

The legislation would allow participants to continue to contribute during the six months following a hardship withdrawal because the loss of employee and company matching contributions during that period can further erode retirement savings, according to Kohl’s statement.

Banning 401(k) Debit cards:

The bill also would ban products that promote so-called leakage of savings including 401(k) debit cards, which may carry high fees. While use of 401(k) debit cards is not widespread, they have been offered by companies in the past, Bonfiglio said. Using the card essentially triggers a loan.

One other thing that I found interesting. Many have asserted that "most" plans that offer loans don't allow the employee to continue contributing to the 401(k) plan while the loan is still outstanding. Whenever I have asked for data that supports this assertion, there doesn't seem to be any, just lots of cites of people asserting the same thing. According to this article, most employees actually must actually be allowed to contributing with an outstanding loan, since more than 80% of them do continue to contribute:

Depending on the rules of an employer’s 401(k) plan, workers generally may borrow from their retirement account for any reason and pay the loan back with interest. About 89 percent of participants were in plans offering loans in 2009, according to the Washington-based Employee Benefit Research Institute, which has a database of 21 million 401(k) savers.

Workers generally may borrow as much as 50 percent of their vested account balance up to a maximum of $50,000, according to the Internal Revenue Service. The loan must be repaid within five years, unless the money was used to buy a primary home.

Employees can repay the loan through payroll deductions and can continue to make contributions to their retirement accounts, Borland said. More than 80 percent of those with a loan do continue to save, she said.

“For these workers who take a loan, repay it and continue to save, they haven’t done significant damage to their retirement prospects,” Borland said. “They are at significant risk if they change jobs or lose their job.”

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