I 

112TH CONGRESS 

1ST SESSION H. R. 3656 

To amend the Internal Revenue Code of 1986 to provide for death and 

disability protection for loans from qualified employer plans. 

IN THE HOUSE OF REPRESENTATIVES 

DECEMBER 13, 2011 

Mr. SESSIONS introduced the following bill; which was referred to the Committee on Ways and Means, and in addition to the Committee on Education and the Workforce, for a period to be subsequently determined by 

the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned 

A BILL 

To amend the Internal Revenue Code of 1986 to provide 

for death and disability protection for loans from qualified employer plans. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Retirement Savings 

5 Security Act of 2011’’. 


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1 SEC. 2. PARTICIPANT LOAN DEATH AND DISABILITY PRO2 TECTION. 

3 (a) QUALIFIED PARTICIPANT LOAN PROTECTION AR4 RANGEMENT.—Section 414 of the Internal Revenue Code 

5 of 1986 is amended by inserting at the end the following 

6 new subsection: 

7 ‘‘(y) QUALIFIED PARTICIPANT LOAN PROTECTION

8 ARRANGEMENT.— 

9 ‘‘(1) IN GENERAL.—For purposes of this title, 

10 the term ‘qualified participant loan protection ar11 rangement’ means an arrangement under which a 

12 participant or beneficiary who receives (directly or 

13 indirectly) any amount as a loan from an eligible re14 tirement plan described in clause (iii), (iv), or (vi) of 

15 section 402(c)(8)(B) has the option to obtain protec16 tion against death and disability in the manner de17 scribed in paragraph (2). 

18 ‘‘(2) MANNER OF PROVIDING PROTECTION.— 

19 For purposes of paragraph (1)— 

20 ‘‘(A) MANNER OF PROTECTION.—Protec21 tion against death and disability described in 

22 this paragraph is protection provided through— 

23 ‘‘(i) a group insurance policy issued to 

24 the plan for the sole purpose of providing 

25 participant and beneficiary loan death and 

26 disability insurance, or 


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1 ‘‘(ii) a debt protection product in 

2 which debt protection is provided through 

3 appropriate commercial contractual liabil4 ity insurance. 

5 ‘‘(B) COST OF DEBT PROTECTION.—For 

6 purposes of subparagraph (A)(ii), a product 

7 shall not be treated as a debt protection prod8 uct unless the cost of such product is allocated 

9 to the accounts of participants or beneficiaries 

10 with outstanding loans. 

11 ‘‘(C) REIMBURSEMENT REQUIREMENT.— 

12 An arrangement shall not be treated as pro13 viding protection against death and disability 

14 for purposes of paragraph (1) unless under 

15 such arrangement— 

16 ‘‘(i) the plan, upon death or disability 

17 of the participant or beneficiary, is re18 quired to cancel any outstanding loan bal19 ance, and 

20 ‘‘(ii) such protection provides for pay21 ment to the plan of— 

22 ‘‘(I) an amount equal to the out23 standing loan balance of the partici24 pant or beneficiary, and 


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1 ‘‘(II) the amount taken into ac2 count under section 402(m)(1)(B). 

3 ‘‘(D) ELECTION TO OPT OUT OF COV4 ERAGE.—Protection against death and dis5 ability under a qualified participant loan protec6 tion arrangement shall apply unless a partici7 pant or beneficiary elects in writing to receive 

8 a loan without protection against participant 

9 death or disability. Any such election shall be 

10 irrevocable. 

11 ‘‘(3) RATE OF INTEREST.—A loan described in 

12 paragraph (1) shall not be treated as failing to bear 

13 a reasonable rate of interest for purposes of any re14 quirement of law solely because the rate of interest 

15 under the loan is reduced by the cost of the death 

16 and disability protection provided pursuant to this 

17 subsection, and such protection may be taken into 

18 account in determining whether a loan bears a rea19 sonable rate of interest. 

20 ‘‘(4) DEFINITIONS.—For purpose of this sub21 section— 

22 ‘‘(A) DEBT PROTECTION PRODUCT.—The 

23 term ‘debt protection product’ means a loan 

24 term or contractual arrangement modifying 

25 loan terms under which a plan agrees to— 


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1 ‘‘(i) cancel all or part of a partici2 pant’s or beneficiary’s obligation to repay 

3 an extension of credit from that plan upon 

4 the occurrence of a specified event; and 

5 ‘‘(ii) in the event of a participant’s or 

6 beneficiary’s death or disability, credit to 

7 the account of such participant or bene8 ficiary of an additional amount equal to 

9 the amount taken into account under sec10 tion 402(m)(1)(B). 

11 Such loan term or contractual arrangement 

12 may be separate from or a part of other loan 

13 documents. 

14 ‘‘(B) DISABILITY.—The term ‘disability’ 

15 means an impairment described in section 

16 72(m)(7) that causes a participant to be dis17 abled within the meaning of section 72(m)(7). 

18 ‘‘(5) SPECIAL RULE.—A debt protection prod19 uct used in connection with a qualified participant 

20 loan protection arrangement shall not be treated as 

21 a swap (as defined by section 1a(47) of the Com22 modity Exchange Act (7 U.S.C. 1a(47))) or as a se23 curity-based swap (as defined by section 3(a)(68) of 

24 the Securities Exchange Act of 1934 (15 U.S.C. 

25 78c(a)(68))).’’. 


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1 (b) DEEMED DISTRIBUTION IN EVENT OF DEATH OR

2 DISABILITY.—Paragraph (2) of section 72(p) of the Inter3 nal Revenue Code of 1986 is amended by redesignating 

4 subparagraph (D) as subparagraph (E) and by inserting 

5 after subparagraph (C) the following new subparagraph: 

6 ‘‘(D) QUALIFIED PARTICIPANT LOAN PRO7 TECTION ARRANGEMENT.—In the event of the 

8 death or disability of a participant or bene9 ficiary, the amount of any outstanding loan to 

10 the participant or beneficiary that is cancelled 

11 pursuant to a group insurance policy or debt 

12 protection product that was made available 

13 under a qualified participant loan protection ar14 rangement described in section 414(y) shall 

15 be— 

16 ‘‘(i) paid to the plan and credited to 

17 the interest in the plan of the participant 

18 or beneficiary, 

19 ‘‘(ii) deemed distributed to such par20 ticipant or beneficiary (or his or her speci21 fied beneficiaries) on the date of such pay22 ment, and 

23 ‘‘(iii) treated as an amount described 

24 in paragraph (1)(A) on the date of such 


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1 payment and not as an amount described 

2 in section 61(a)(12).’’. 

3 (c) EXCEPTION TO INCOME INCLUSION RULES RE4 LATING TO PURCHASE OF LIFE INSURANCE PROTEC5 TION.—Subparagraph (B) of section 72(m)(3) of the In6 ternal Revenue Code of 1986 is amended by adding at the 

7 end the following new sentence: ‘‘This subparagraph shall 

8 not apply to any amount that is a repayment of a loan 

9 to a participant or beneficiary by a plan described in sub10 paragraph (A)(i) or a trust described in subparagraph 

11 (A)(ii), if that repayment is applied to the purchase of 

12 participant and beneficiary loan death and disability pro13 tection pursuant to a qualified participant loan protection 

14 arrangement described in section 414(y).’’. 

15 (d) EXCLUSION FROM GROSS INCOME FOR CERTAIN

16 DISTRIBUTIONS PURSUANT TO CANCELLED LOAN.—Sec17 tion 402 of the Internal Revenue Code of 1986 (relating 

18 to the taxability of beneficiary of employees’ trust) is 

19 amended by inserting at the end the following new sub20 section: 

21 ‘‘(m) CERTAIN DISTRIBUTIONS PURSUANT TO CAN22 CELLED LOAN.— 

23 ‘‘(1) IN GENERAL.—In the case of an employee 

24 to whom paragraph (2) applies (or the beneficiary of 

25 such employee), gross income of such employee (or 


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1 such beneficiary) does not include any distribution 

2 from the eligible retirement plan described in para3 graph (2)(A) to the extent that— 

4 ‘‘(A) such distribution is made on or before 

5 the day prescribed by law (including extensions 

6 of time) for filing such employee’s or bene7 ficiary’s return for the taxable year in which 

8 such employee dies or becomes disabled, and 

9 ‘‘(B) the aggregate amount of such dis10 tributions does not exceed the excess of— 

11 ‘‘(i) the proceeds of the group insur12 ance policy or debt protection product 

13 through which the protection described in 

14 paragraph (2)(B) is provided, over 

15 ‘‘(ii) the amount of the deemed dis16 tribution described in paragraph (2)(D). 

17 For purposes of clause (i), not more than 135 

18 percent of the amount described in clause (ii) 

19 shall be taken into account. 

20 ‘‘(2) APPLICATION.—This paragraph shall 

21 apply to an employee who— 

22 ‘‘(A) receives a loan from an eligible retire23 ment plan described in clause (iii), (iv) or (vi) 

24 of subsection (c)(8)(B), 


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1 ‘‘(B) obtains the protection described in 

2 section 414(y)(2) pursuant to a qualified partic3 ipant and beneficiary death and disability pro4 tection arrangement described in section 414(y) 

5 with respect to such loan, 

6 ‘‘(C) dies or becomes disabled, and 

7 ‘‘(D) is deemed to receive a distribution 

8 pursuant to section 72(p)(2)(D) following such 

9 death or disability with respect to such loan. 

10 ‘‘(3) DISTRIBUTION.—A distribution described 

11 in paragraph (1) shall be treated as not violating the 

12 requirements of sections 401(k)(2), 403(b)(7)(A)(ii), 

13 and 403(b)(11). 

14 ‘‘(4) OTHERWISE DISTRIBUTABLE AMOUNT.—A 

15 group insurance policy or debt protection product 

16 may provide that the amount that would otherwise 

17 be distributable pursuant to this subsection may be 

18 paid directly by the issuer of such group insurance 

19 policy or debt protection product to the employee. 

20 Any such amount shall be treated as paid to the eli21 gible retirement plan and distributed to the em22 ployee pursuant to this subsection.’’. 

23 (e) EFFECTIVE DATE.—The amendments made by 

24 this section shall be take effect with respect to loans made 


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1 after the one year period beginning on the day after the 

2 date of enactment of this Act. 

3 (f) APPLICATION OF FIDUCIARY STANDARDS UNDER

4 EMPLOYEE RETIREMENT INCOME SECURITY ACT OF

5 1974 WITH RESPECT TO A QUALIFIED PARTICIPANT

6 LOAN PROTECTION ARRANGEMENT.—No person that, as 

7 a fiduciary of an eligible retirement plan described in 

8 clause (iii), (iv) or (vi) of section 402(c)(8)(B) of the In9 ternal Revenue Code of 1986, whether or not such person 

10 has adopted a qualified participant loan protection ar11 rangement (as defined section 414(y) of such Code (added 

12 by subsection (a) of this section)), shall be deemed to have 

13 violated section 404 or 406 of the Employee Retirement 

14 Income Security Act of 1974 in connection with adopting 

15 or not adopting such an arrangement. 

Æ 


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