To amend the Internal Revenue Code of 1986 to provide for death and disability protection for loans from qualified employer plans.

Summary: Retirement Savings Security Act of 2011 - Amends the Internal Revenue Code to provide for a qualified participant loan protection arrangement to allow a participant or beneficiary who receives any amount as a loan from an eligible retirement plan (i.e., a qualified trust, an annuity plan, or an annuity contract) the option to obtain protection against death and disability through: (1) a group insurance policy issued to the plan for the sole purpose of providing participant and beneficiary loan death and disability insurance, or (2) a debt protection product in which debt protection is provided through appropriate commercial contractual liability insurance.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Retirement Savings Security Act of 
2011''.

SEC. 2. PARTICIPANT LOAN DEATH AND DISABILITY PROTECTION.

    (a) Qualified Participant Loan Protection Arrangement.--Section 414 
of the Internal Revenue Code of 1986 is amended by inserting at the end 
the following new subsection:
    ``(y) Qualified Participant Loan Protection Arrangement.--
            ``(1) In general.--For purposes of this title, the term 
        `qualified participant loan protection arrangement' means an 
        arrangement under which a participant or beneficiary who 
        receives (directly or indirectly) any amount as a loan from an 
        eligible retirement plan described in clause (iii), (iv), or 
        (vi) of section 402(c)(8)(B) has the option to obtain 
        protection against death and disability in the manner described 
        in paragraph (2).
            ``(2) Manner of providing protection.--For purposes of 
        paragraph (1)--
                    ``(A) Manner of protection.--Protection against 
                death and disability described in this paragraph is 
                protection provided through--
                            ``(i) a group insurance policy issued to 
                        the plan for the sole purpose of providing 
                        participant and beneficiary loan death and 
                        disability insurance, or
                            ``(ii) a debt protection product in which 
                        debt protection is provided through appropriate 
                        commercial contractual liability insurance.
                    ``(B) Cost of debt protection.--For purposes of 
                subparagraph (A)(ii), a product shall not be treated as 
                a debt protection product unless the cost of such 
                product is allocated to the accounts of participants or 
                beneficiaries with outstanding loans.
                    ``(C) Reimbursement requirement.--An arrangement 
                shall not be treated as providing protection against 
                death and disability for purposes of paragraph (1) 
                unless under such arrangement--
                            ``(i) the plan, upon death or disability of 
                        the participant or beneficiary, is required to 
                        cancel any outstanding loan balance, and
                            ``(ii) such protection provides for payment 
                        to the plan of--
                                    ``(I) an amount equal to the 
                                outstanding loan balance of the 
                                participant or beneficiary, and
                                    ``(II) the amount taken into 
                                account under section 402(m)(1)(B).
                    ``(D) Election to opt out of coverage.--Protection 
                against death and disability under a qualified 
                participant loan protection arrangement shall apply 
                unless a participant or beneficiary elects in writing 
                to receive a loan without protection against 
                participant death or disability. Any such election 
                shall be irrevocable.
            ``(3) Rate of interest.--A loan described in paragraph (1) 
        shall not be treated as failing to bear a reasonable rate of 
        interest for purposes of any requirement of law solely because 
        the rate of interest under the loan is reduced by the cost of 
        the death and disability protection provided pursuant to this 
        subsection, and such protection may be taken into account in 
        determining whether a loan bears a reasonable rate of interest.
            ``(4) Definitions.--For purpose of this subsection--
                    ``(A) Debt protection product.--The term `debt 
                protection product' means a loan term or contractual 
                arrangement modifying loan terms under which a plan 
                agrees to--
                            ``(i) cancel all or part of a participant's 
                        or beneficiary's obligation to repay an 
                        extension of credit from that plan upon the 
                        occurrence of a specified event; and
                            ``(ii) in the event of a participant's or 
                        beneficiary's death or disability, credit to 
                        the account of such participant or beneficiary 
                        of an additional amount equal to the amount 
                        taken into account under section 402(m)(1)(B).
                Such loan term or contractual arrangement may be 
                separate from or a part of other loan documents.
                    ``(B) Disability.--The term `disability' means an 
                impairment described in section 72(m)(7) that causes a 
                participant to be disabled within the meaning of 
                section 72(m)(7).
            ``(5) Special rule.--A debt protection product used in 
        connection with a qualified participant loan protection 
        arrangement shall not be treated as a swap (as defined by 
        section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47))) 
        or as a security-based swap (as defined by section 3(a)(68) of 
        the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(68))).''.
    (b) Deemed Distribution in Event of Death or Disability.--Paragraph 
(2) of section 72(p) of the Internal Revenue Code of 1986 is amended by 
redesignating subparagraph (D) as subparagraph (E) and by inserting 
after subparagraph (C) the following new subparagraph:
                    ``(D) Qualified participant loan protection 
                arrangement.--In the event of the death or disability 
                of a participant or beneficiary, the amount of any 
                outstanding loan to the participant or beneficiary that 
                is cancelled pursuant to a group insurance policy or 
                debt protection product that was made available under a 
                qualified participant loan protection arrangement 
                described in section 414(y) shall be--
                            ``(i) paid to the plan and credited to the 
                        interest in the plan of the participant or 
                        beneficiary,
                            ``(ii) deemed distributed to such 
                        participant or beneficiary (or his or her 
                        specified beneficiaries) on the date of such 
                        payment, and
                            ``(iii) treated as an amount described in 
                        paragraph (1)(A) on the date of such payment 
                        and not as an amount described in section 
                        61(a)(12).''.
    (c) Exception to Income Inclusion Rules Relating to Purchase of 
Life Insurance Protection.--Subparagraph (B) of section 72(m)(3) of the 
Internal Revenue Code of 1986 is amended by adding at the end the 
following new sentence: ``This subparagraph shall not apply to any 
amount that is a repayment of a loan to a participant or beneficiary by 
a plan described in subparagraph (A)(i) or a trust described in 
subparagraph (A)(ii), if that repayment is applied to the purchase of 
participant and beneficiary loan death and disability protection 
pursuant to a qualified participant loan protection arrangement 
described in section 414(y).''.
    (d) Exclusion From Gross Income for Certain Distributions Pursuant 
to Cancelled Loan.--Section 402 of the Internal Revenue Code of 1986 
(relating to the taxability of beneficiary of employees' trust) is 
amended by inserting at the end the following new subsection:
    ``(m) Certain Distributions Pursuant to Cancelled Loan.--
            ``(1) In general.--In the case of an employee to whom 
        paragraph (2) applies (or the beneficiary of such employee), 
        gross income of such employee (or such beneficiary) does not 
        include any distribution from the eligible retirement plan 
        described in paragraph (2)(A) to the extent that--
                    ``(A) such distribution is made on or before the 
                day prescribed by law (including extensions of time) 
                for filing such employee's or beneficiary's return for 
                the taxable year in which such employee dies or becomes 
                disabled, and
                    ``(B) the aggregate amount of such distributions 
                does not exceed the excess of--
                            ``(i) the proceeds of the group insurance 
                        policy or debt protection product through which 
                        the protection described in paragraph (2)(B) is 
                        provided, over
                            ``(ii) the amount of the deemed 
                        distribution described in paragraph (2)(D).
                For purposes of clause (i), not more than 135 percent 
                of the amount described in clause (ii) shall be taken 
                into account.
            ``(2) Application.--This paragraph shall apply to an 
        employee who--
                    ``(A) receives a loan from an eligible retirement 
                plan described in clause (iii), (iv) or (vi) of 
                subsection (c)(8)(B),
                    ``(B) obtains the protection described in section 
                414(y)(2) pursuant to a qualified participant and 
                beneficiary death and disability protection arrangement 
                described in section 414(y) with respect to such loan,
                    ``(C) dies or becomes disabled, and
                    ``(D) is deemed to receive a distribution pursuant 
                to section 72(p)(2)(D) following such death or 
                disability with respect to such loan.
            ``(3) Distribution.--A distribution described in paragraph 
        (1) shall be treated as not violating the requirements of 
        sections 401(k)(2), 403(b)(7)(A)(ii), and 403(b)(11).
            ``(4) Otherwise distributable amount.--A group insurance 
        policy or debt protection product may provide that the amount 
        that would otherwise be distributable pursuant to this 
        subsection may be paid directly by the issuer of such group 
        insurance policy or debt protection product to the employee. 
        Any such amount shall be treated as paid to the eligible 
        retirement plan and distributed to the employee pursuant to 
        this subsection.''.
    (e) Effective Date.--The amendments made by this section shall be 
take effect with respect to loans made after the one year period 
beginning on the day after the date of enactment of this Act.
    (f) Application of Fiduciary Standards Under Employee Retirement 
Income Security Act of 1974 With Respect to A Qualified Participant 
Loan Protection Arrangement.--No person that, as a fiduciary of an 
eligible retirement plan described in clause (iii), (iv) or (vi) of 
section 402(c)(8)(B) of the Internal Revenue Code of 1986, whether or 
not such person has adopted a qualified participant loan protection 
arrangement (as defined section 414(y) of such Code (added by 
subsection (a) of this section)), shall be deemed to have violated 
section 404 or 406 of the Employee Retirement Income Security Act of 
1974 in connection with adopting or not adopting such an arrangement.