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CCH® PENSION AND BENEFITS — 9/11/08

SEC issues 401(k) debit card precautions

The Securities and Exchange Commission (SEC) has posted on its website a brief list of precautions regarding 401(k) debit cards. These cards provide participants with an alternative way to access loans from their 401(k) plan accounts.

According to the SEC, there are a number of factors that a participant should consider before using a 401(k) debit card:

- When a participant repays a loan made from their 401(k) account, the interest on the loan is also repaid to their account. However, if the loan was made using a 401(k) debit card, the SEC cautions, part of the repayment will be applied to a margin paid to the card vendor, as well as for other fees such as set-up fees, annual fees and cash advance fees.

- Amounts borrowed through 401(k) debit cards are set aside in a money market fund until withdrawn. Money market funds may earn a lower rate of return than other investment options available in 401(k) accounts, the SEC cautions.

- Unlike other 401(k) loans which are automatically repaid by payroll deductions, debit card 401(k) loans must be repaid directly by the employee. As with all 401(k) plan loans, there will be penalties and tax consequences if the loan is not repaid within the permitted time period. Tax will accrue on unpaid loan balances, as will a 10% penalty for participants younger than age 59 1/2.

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