Pension Improvement Act of 1998

Summary: Pension Improvement Act of 1998 - Amends the Internal Revenue Code and the Employee Retirement Income Security Act of 1974 (ERISA) to set separate minimum vesting standards for defined contribution and defined benefit plans. 
(Sec. 3) Amends the Internal Revenue Code to require that plans entitle an employee to elect a rollover distribution to an individual retirement plan within 90 days of separation.  Impose
s a 25
 percent tax on early distributions within 2 years after such a rollover. Exempts such rollovers from withholding. 
(Sec. 4) Allows penalty-free distributions from individual retirement plans of certain unemployed individuals. 
(Sec. 5) Amends the Internal Revenue Code and ERISA to require, if the present value of any nonforfeitable accrued benefit is under a specified dollar amount, that a plan allow a benefit to be immediately distributed only in a trustee-to-trustee transfer to an individual retirement plan. Requires, if the present value of a joint and survivor annuity or preretirement survivor annuity is under a specified dollar amount, that the plan immediately distribute the value only if the participant and the participant's spouse designate one or more individual retirement plans and the distribution is made in a trustee-to-trustee transfer. 
Amends the Internal Revenue Code to require that, in order to be treated as not made available as a result of an election or an involuntary distribution, amounts distributed from a State or local government plan or nonprofit organization plan be distributed in a trustee-to-trustee transfer to an individual retirement account. Impose
s a 25
 percent tax on early distributions within 2 years after such a distribution.  Exempts such distributions from withholding.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Pension Improvement Act of 1998''.

SEC. 2. FASTER VESTING FOR EMPLOYER CONTRIBUTIONS TO DEFINED 
              CONTRIBUTION PLANS.

    (a) Amendments to Internal Revenue Code.--
            (1) In general.--Paragraph (2) of section 411(a) of the 
        Internal Revenue Code of 1986 (relating to minimum vesting 
        standards), as amended by paragraph (2), is amended by adding 
        at the end the following new subparagraph:
                    ``(B) Defined contribution plans.--A defined 
                contribution plan satisfies the requirements of this 
                subparagraph if the plan satisfies the requirements of 
                clause (i) or (ii).
                            ``(i) 3-year vesting.--A plan satisfies the 
                        requirements of this clause if an employee who 
                        has completed at least 3 years of service has a 
                        nonforfeitable right to 100 percent of the 
                        employee's accrued benefit derived from 
                        employer contributions.
                            ``(ii) 5-year vesting.--A plan satisfies 
                        the requirements of this clause if an employee 
                        has a nonforfeitable right to a percentage of 
                        the employee's accrued benefit derived from 
                        employer contributions determined under the 
                        following table:

                                                     The nonforfeitable
``Years of service:                                      percentage is:
    1.............................................                  20 
    2.............................................                  40 
    3.............................................                  60 
    4.............................................                  80 
    5.............................................              100.''.
            (2) Conforming amendments.--Paragraph (2) of section 411(a) 
        of such Code (as in effect before the amendment made by 
        paragraph (1)) is amended--
                    (A) by redesignating subparagraphs (A) and (B) as 
                clauses (i) and (ii),
                    (B) by striking the material preceding clause (i) 
                (as so redesignated) and inserting the following:
            ``(2) Employer contributions.--
                    ``(A) Defined benefit plans.--A defined benefit 
                plan satisfies the requirements of this subparagraph if 
                the plan satisfies the requirements of clause (i) or 
                (ii).'', and
                    (C) in clauses (i) and (ii) (as so redesignated), 
                by striking ``subparagraph'' and inserting ``clause''.
    (b) Amendments to ERISA.--
            (1) In general.--Paragraph (2) of section 203(a) of the 
        Employee Retirement Income Security Act of 1974 (29 U.S.C. 
        1053(a)), as amended by paragraph (2), is amended by adding at 
        the end the following new subparagraph:
            ``(B) A defined contribution plan satisfies the 
        requirements of this subparagraph if the plan satisfies the 
        requirements of clause (i) or (ii).
                    ``(i) A plan satisfies the requirements of this 
                clause if an employee who has completed at least 3 
                years of service has a nonforfeitable right to 100 
                percent of the employee's accrued benefit derived from 
                employer contributions.
                    ``(ii) A plan satisfies the requirements of this 
                clause if an employee has a nonforfeitable right to a 
                percentage of the employee's accrued benefit derived 
                from employer contributions determined under the 
                following table:

                                                     The nonforfeitable
``Years of service:                                      percentage is:
    1.............................................                  20 
    2.............................................                  40 
    3.............................................                  60 
    4.............................................                  80 
    5.............................................              100.''.
            (2) Conforming amendments.--Paragraph (2) of section 203(a) 
        of such Act (as in effect before the amendment made by 
        paragraph (1)) is amended--
                    (A) by redesignating subparagraphs (A) and (B) as 
                clauses (i) and (ii),
                    (B) by striking the material preceding clause (i) 
                (as so redesignated) and inserting the following:
            ``(2)(A) A defined benefit plan satisfies the requirements 
        of this subparagraph if the plan satisfies the requirements of 
        clause (i) or (ii).'', and
                    (C) in clauses (i) and (ii) (as so redesignated), 
                by striking ``subparagraph'' and inserting ``clause''.
    (c) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to contributions 
        for plan years beginning after December 31, 1998.
            (2) Collective bargaining agreements.--In the case of a 
        plan maintained pursuant to 1 or more collective bargaining 
        agreements between employee representatives and 1 or more 
        employers ratified by the date of the enactment of this Act, 
        the amendments made by this section shall not apply to 
        contributions on behalf of employees covered by any such 
        agreement for plan years beginning before the earlier of--
                    (A) the later of--
                            (i) the date on which the last of such 
                        collective bargaining agreements terminates 
                        (determined without regard to any extension 
                        thereof on or after such date of enactment), or
                            (ii) January 1, 1999, or
                    (B) January 1, 2003.

SEC. 3. EMPLOYERS REQUIRED TO PERMIT ROLLOVERS TO INDIVIDUAL RETIREMENT 
              PLANS WITHIN 3 MONTHS AFTER SEPARATION FROM SERVICE.

    (a) In General.--Subsection (a) of section 401 of the Internal 
Revenue Code of 1986 (relating to qualified pension, profit-sharing, 
and stock bonus plans) is amended by inserting after paragraph (34) the 
following new paragraph:
            ``(35) Rollovers required to be permitted after separation 
        from service.--
                    ``(A) In general.--A trust shall not constitute a 
                qualified trust under this section unless the plan of 
                which such trust is a part provides that--
                            ``(i) each employee is entitled to elect 
                        that an eligible rollover distribution be made 
                        to a individual retirement plan during the 90-
                        day period beginning on the date the employee 
                        separates from service with the employer, and
                            ``(ii) if such election is made and the 
                        employee specifies the individual retirement 
                        plan to which such distribution is to be paid 
                        (in such form and at such time as the plan 
                        administrator may prescribe), such plan will 
                        make such distribution during such period.
                    ``(B) Limitation.--Subparagraph (A) shall apply 
                only to the extent that the eligible rollover 
                distribution--
                            ``(i) would be includible in gross income 
                        if not transferred as provided in subparagraph 
                        (A) (determined without regard to sections 
                        402(c) and 403(a)(4)), and
                            ``(ii) consists of not less than 
                        substantially all of the portion of the balance 
                        to the credit of the employee which would be so 
                        includible.''
    (b) 25-Percent Additional Tax on Distributions Within 2 Years After 
Rollover.--Subsection (t) of section 72 of such Code (relating to 10-
percent additional tax on early distributions from qualified retirement 
plans) is amended by adding at the end the following new paragraph:
            ``(9) 25-percent additional tax on distributions within 2 
        years after rollover after separation from service.--In the 
        case of an individual retirement plan to which a rollover 
        described in section 401(a)(35)(A) is made--
                    ``(A) In general.--During the 2-year period 
                beginning on the date that the rollover (referred to in 
                such section) is paid into the plan, paragraph (1) 
                shall be applied by substituting `25 percent' for `10 
                percent'.
                    ``(B) Commingling not permitted.--
                            ``(i) Section 408(d)(3) shall not apply to 
                        any amount received by an individual from such 
                        plan (and no amount transferred from such plan 
                        to another individual retirement plan shall be 
                        excluded from gross income by reason of such 
                        transfer).
                            ``(ii) Such plan shall not be treated as an 
                        individual retirement plan for purposes of 
                        determining whether any other amount is a 
                        rollover contribution.''.
    (c) Exception From Income Tax Withholding.--Paragraph (2) of 
section 3405(c) of such Code is amended by striking ``section 
401(a)(31)(A)'' and inserting ``paragraph (31)(A) or (35)(A) of section 
401(a)''.
    (d) Effective Date.--The amendments made by this section shall 
apply to employees who separate from service after December 31, 1998.

SEC. 4. PENALTY-FREE DISTRIBUTIONS FROM INDIVIDUAL RETIREMENT PLANS TO 
              UNEMPLOYED INDIVIDUALS.

    (a) In General.--Paragraph (2) of section 72(t) of the Internal 
Revenue Code of 1986 is amended by adding at the end the following new 
subparagraph:
                    ``(G) Distributions to unemployed individuals.--A 
                distribution from an individual retirement plan to an 
                individual after separation from employment, if--
                            ``(i) such individual has received 
                        unemployment compensation for 12 consecutive 
                        weeks under any Federal or State unemployment 
                        compensation law by reason of such separation, 
                        and
                            ``(ii) such distributions are made during 
                        any taxable year during which such unemployment 
                        compensation is paid or the succeeding taxable 
                        year.
                To the extent provided in regulations, a self-employed 
                individual shall be treated as meeting the requirements 
                of clause (i) if, under Federal or State law, the 
                individual would have received unemployment 
                compensation but for the fact the individual was self-
                employed.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to distributions after December 31, 1998.

SEC. 5. INVOLUNTARY CASH-OUTS PERMITTED ONLY IF DISTRIBUTION ROLLED TO 
              AN IRA.

    (a) Amendments to Internal Revenue Code.--
            (1) Vesting.--Paragraph (11) of section 411(a) of the 
        Internal Revenue Code of 1986 (relating to restrictions on 
        certain mandatory distributions) is amended by redesignating 
        subparagraphs (B) and (C) as subparagraphs (C) and (D), 
        respectively, and by inserting after subparagraph (A) the 
        following new subparagraph:
                    ``(B) Rollover required if present value of benefit 
                below threshold.--If the present value of any 
                nonforfeitable accrued benefit does not exceed $5,000, 
                a plan meets the requirements of this paragraph only if 
                such plan provides that such benefit (to the extent the 
                distribution of such benefit is otherwise includible in 
                gross income) may be immediately distributed only in a 
                trustee-to-trustee transfer to an individual retirement 
                plan of such individual which is specified by such 
                individual.''.
            (2) Joint and survivor annuities.--The first sentence of 
        section 417(e)(1) of such Code is amended to read as follows: 
        ``If the present value of a qualified joint and survivor 
        annuity or a qualified preretirement survivor annuity under a 
        plan does not exceed the dollar limit under section 
        411(a)(11)(A), the plan may provide that such value (to the 
        extent the distribution of such value is otherwise includible 
        in gross income) will be immediately distributed but only if 
        the participant and the spouse of the participant (or where the 
        participant has died, the surviving spouse) designate 1 or more 
        individual retirement plans of any such individual to receive 
        such distribution and such distribution is made in a trustee-
        to-trustee transfer in accordance with such designation.''.
            (3) Section 457 plans.--Subparagraph (A) of section 
        457(e)(9) of such Code is amended by adding at the end the 
        following new sentence: ``This paragraph shall apply only if 
        the amount (to the extent the distribution of such amount is 
        otherwise includible in gross income) is distributed in a 
        trustee-to-trustee transfer to an individual retirement plan of 
        such individual which is specified by such individual.''.
            (4) 25-percent additional tax on distributions within 2 
        years after cashout rollover.--Subsection (t) of section 72 of 
        such Code (relating to 10-percent additional tax on early 
        distributions from qualified retirement plans) is amended by 
        adding at the end the following new paragraph:
            ``(10) 25-percent additional tax on distributions within 2 
        years after cashout rollover.--
                    ``(A) In general.--In the case of any trustee-to-
                trustee transfer described in section 411(a)(11), 
                417(e)(1), or 457(e)(9) to an individual retirement 
                plan, during the 2-year period beginning on the date 
                that such transfer is made to such plan, paragraph (1) 
                shall be applied by substituting `25 percent' for `10 
                percent'.
                    ``(B) Commingling not permitted.--In the case of a 
                individual retirement plan to which there is a rollover 
described in subparagraph (A)--
                            ``(i) section 408(d)(3) shall not apply to 
                        any amount received by an individual from such 
                        plan (and no amount transferred from such plan 
                        to another individual retirement plan shall be 
                        excluded from gross income by reason of such 
                        transfer), and
                            ``(ii) such plan shall not be treated as an 
                        individual retirement plan for purposes of 
                        determining whether any other amount is a 
                        rollover contribution.''.
            (5) Exception from income tax withholding.--Paragraph (2) 
        of section 3405(c) of such Code is amended by inserting before 
        the period ``or if the distribution is a trustee-to-trustee 
        transfer described in section 411(a)(11), 417(e)(1), or 
        457(e)(9)''.
    (b) Amendments to ERISA.--
            (1) Vesting.--
                    (A) Subsection (e) of section 203 of Employee 
                Retirement Income Security Act of 1974 is amended by 
                redesignating paragraphs (2) and (3) as paragraphs (3) 
                and (4), respectively, and by inserting after paragraph 
                (1) the following new paragraph:
    ``(2) If the present value of any nonforfeitable benefit with 
respect to a participant in a plan does not exceed $5,000, the plan 
shall provide that such benefit (to the extent the distribution of such 
benefit is otherwise includible in gross income) may be immediately 
distributed only in a trustee-to-trustee transfer to an individual 
retirement plan of such individual which is specified by such 
individual.''.
                    (B) Paragraph (3) of section 203(e) of such Act, as 
                redesignated by subparagraph (A), is amended by 
                striking ``paragraph (1)'' and inserting ``paragraphs 
                (1) and (2)''.
            (2) Joint and survivor annuities.--The first sentence of 
        section 205(g)(1) of such Act is amended to read as follows: 
        ``If the present value of a qualified joint and survivor 
        annuity or a qualified preretirement survivor annuity under a 
        plan does not exceed the dollar limit under section 203(e)(1), 
        the plan may provide that such value (to the extent the 
        distribution of such value is otherwise includible in gross 
        income) will be immediately distributed but only if the 
        participant and the spouse of the participant (or where the 
        participant has died, the surviving spouse) designate 1 or more 
        individual retirement plans of any such individual to receive 
        such distribution and such distribution is made in a trustee-
        to-trustee transfer in accordance with such designation.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to plan years beginning after December 31, 1998.