69–010 

Calendar No. 670 

114TH CONGRESS REPORT " ! SENATE 2d Session 114–375 

RETIREMENT ENHANCEMENT AND SAVINGS ACT OF 2016 

NOVEMBER 16, 2016.—Ordered to be printed 

Mr. HATCH, from the Committee on Finance, 

submitted the following 

R E P O R T 

[To accompany S. 3471] 

The Committee on Finance, having considered an original bill, S. 

3471, to amend the Internal Revenue Code of 1986 to encourage retirement savings, and for other purposes, having considered the 

same, reports favorably thereon and recommends that the bill do 

pass. 

CONTENTS 

Page 

I. LEGISLATIVE BACKGROUND .................................................................. 3 

II. EXPLANATION OF PROVISIONS .............................................................. 4 

TITLE I—EXPANDING AND PRESERVING RETIREMENT SAVINGS .......... 4 

A. Multiple-Employer Plans and Pooled Employer and Multiple– 

Employer Plan Reporting (secs. 101–102 of the bill, sec. 413 

of the Code, and secs. 3 and 103–104 of ERISA) ......................... 4 

B. Removal of 10 Percent Cap from Automatic Enrollment Safe 

Harbor After First Plan Year (sec. 103 of the bill and sec. 

401(k) of the Code) ......................................................................... 15 

C. Rules Relating to Election of Safe Harbor 401(k) Status (sec. 

104 of the bill and sec. 401(k) of the Code) .................................. 17 

D. Increase in Credit Limitation for Small Employer Pension Plan 

Start-Up Costs (sec. 105 of the bill and sec. 45E of the Code) ... 20 

E. Small Employer Automatic Enrollment Credit (sec. 106 of the 

bill and new sec. 45S of the Code) ................................................ 21 

F. Certain Taxable Non-Tuition Fellowship and Stipend Payments 

Treated as Compensation for IRA Purposes (sec. 107 of the 

bill and sec. 219 of the Code) ......................................................... 23 

G. Repeal of Maximum Age for Traditional IRA Contributions (sec. 

108 of the bill and sec. 219 of the Code) ....................................... 24 

H. Expansion of IRA Ownership of S Corporation Bank Stock (sec. 

109 of the bill and secs. 1361 and 4975 of the Code) .................. 25 

I. Extended Rollover Period for Plan Loan Offset Amounts (sec. 

110 of the bill and sec. 402(c) of the Code) ................................... 26 


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J. Modification of Rules Relating to Hardship Withdrawals from 

Cash or Deferred Arrangements (sec. 111 of the bill and sec. 

401(k) of the Code) ......................................................................... 28 

K. Qualified Employer Plans Prohibited from Making Loans 

Through Credit Cards and Other Similar Arrangements (sec. 

112 of the bill and sec. 72(p) of the Code) .................................... 30 

L. Portability of Lifetime Income Options (sec. 113 of the bill 

and secs. 401(a), 403(b) and 457(d) of the Code) ......................... 31 

M. Treatment of Custodial Accounts on Termination of Section 

403(b) Plans (sec. 114 of the bill and sec. 403(b) of the Code) .... 34 

N. Clarification of Retirement Income Account Rules Relating to 

Church-Controlled Organizations (sec. 115 of the bill and sec. 

403(b)(9) of the Code) ..................................................................... 36 

TITLE II—ADMINISTRATIVE IMPROVEMENTS ............................................. 38 

A. Plan Adopted by Filing Due Date for Year May Be Treated 

as in Effect as of Close of Year (sec. 201 of the bill and 

sec. 401(b) of the Code) .................................................................. 38 

B. Combined Annual Report for Group of Plans (sec. 202 of the 

bill, sec. 6058 of the Code, and sec. 104 of ERISA) ..................... 39 

C. Disclosure Regarding Lifetime Income (sec. 203 of the bill and 

sec. 105 of ERISA) .......................................................................... 40 

D. Fiduciary Safe Harbor for Selection of Lifetime Income Provider 

(sec. 204 of the bill and sec. 404 of ERISA) .................................. 42 

E. Modification of Nondiscrimination Rules to Protect Older, 

Longer Service Participation (sec. 205 of the bill and sec. 

401(a)(4) of the Code) ..................................................................... 45 

F. Modification of PBGC Premiums for CSEC Plans (sec. 206 of 

the bill and sec. 4006 of ERISA) ................................................... 54 

TITLE III—BENEFITS RELATING TO THE UNITED STATES TAX 

COURT .................................................................................................................. 56 

A. Provisions Relating to Judges of the Tax Court (secs. 301– 

302 of the bill and sec. 7447 of the Code) ..................................... 56 

B. Provisions Relating to Special Trial Judges of the Tax Court 

(secs. 303–305 of the bill and secs. 7443A and new 7443B 

and 7443C of the Code) .................................................................. 59 

TITLE IV—OTHER BENEFITS ............................................................................. 62 

A. Benefits for Volunteer Firefighters and Emergency Medical Responders (sec. 401 of the bill and sec. 139B of the Code) ............ 62 

B. Treatment of Qualified Equity Grants (sec. 402 of the bill and 

secs. 83, 3401 and 6051 of the Code) ............................................ 63 

TITLE V—REVENUE PROVISIONS .................................................................... 71 

A. Modifications to Required Minimum Distribution Rules (sec. 

501 of the bill and sec. 401(a)(9) of the Code) .............................. 71 

B. Increase in Penalty for Failure to File (sec. 502 of the bill 

and sec. 6651(a) of the Code) ......................................................... 79 

C. Increased Penalties for Failure to File Retirement Plan Returns 

(sec. 503 of the bill and sec. 6652(d), (e), and (h) of the Code) ... 81 

D. Modification of User Fee Requirements for Installment Agreements (sec. 504 of the bill and sec. 6159 of the Code) ................. 83 

E. Increase Information Sharing to Administer Excise Taxes (sec. 

505 of the bill and sec. 6103(o) of the Code) ................................ 84 

F. Repeal of Partnership Technical Terminations (sec. 506 of the 

bill and sec. 708(b)(1)(B) of the Code) ........................................... 85 

G. Pension Plan Acceleration of PBGC Premium Payment (sec. 

507 of the bill and sec. 4007 of ERISA) ........................................ 87 

III. BUDGET EFFECTS OF THE BILL ................................................................ 87 

A. Committee Estimates ....................................................................... 87 

B. Budget Authority and Tax Expenditures ........................................ 91 

C. Consultation with Congressional Budget Office ............................. 91 

IV. VOTES OF THE COMMITTEE .................................................................... 91 

V. REGULATORY IMPACT AND OTHER MATTERS ................................... 91 

A. Regulatory Impact ............................................................................ 91 

B. Unfunded Mandates Statement ....................................................... 92 

C. Tax Complexity Analysis .................................................................. 92 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED 92 


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1The report is available at http://www.finance.senate.gov/imo/media/doc/The%20Savings 

%20& %20Investment%20Bipartisan%20Tax%20Working%20Group%20Report.pdf. 

I. LEGISLATIVE BACKGROUND 

The Committee on Finance, having considered S. 3471, the Retirement Enhancement and Savings Act of 2016, a bill to amend 

the Internal Revenue Code of 1986 to encourage retirement savings, and for other purposes, having considered the same, reports 

favorably thereon and recommends that the bill do pass. 

Background and need for legislative action 

Background—Based on a proposal recommended by Chairman 

Hatch, the Committee on Finance marked up original legislation 

(the ‘‘Retirement Enhancement and Savings Act of 2016’’) on September 21, 2016, and, with a majority present, ordered the bill favorably reported. 

Need for legislative action—While many Americans have accumulated significant amounts in tax-favored retirement savings vehicles, studies show that many Americans have little, if any, retirement savings. Workplace retirement plans provide an effective way 

for employees to save for retirement, but not all employees have access to a plan, and, of those who do, some do not participate. Moreover, the shift in recent decades from employer-sponsored defined 

benefit plans, under which the default form of benefits is an annuity, to defined contributions plans, which generally do not offer annuity benefits, creates the risk of employees outliving their retirement savings. The Committee believes that legislation is necessary 

to provide new incentives for employers to adopt retirement plans 

(including ways to reduce the costs associated with having a plan), 

new incentives for workers to contribute to workplace plans and individual retirement arrangements, and other measures to further 

retirement income security. 

Issues relating to retirement savings were the focus of the report 

issued last year by the Committee’s Savings & Investment Working 

Group,1 one of the Committee’s bipartisan Tax Reform Working 

Groups. Various bills, including bills sponsored by Committee 

Members, have included legislative proposals addressing retirement savings issues and other employee benefits issues, such as— 

• S. 1270, 113th Cong., the Secure Annuities for Employee 

(or SAFE) Retirement Act of 2013, sponsored by Senator 

Hatch; 

• S. 1970, 113th Cong., the Retirement Security Act of 2014, 

sponsored by Senators Collins and Nelson; 

• S. 1979, 113th Cong., the USA Retirement Funds Act, 

sponsored by Senators Harkin and Brown; 

• S. 2855, 113th Cong., the Retirement Security Preservation Act of 2014, sponsored by Senators Cardin and Portman; 

• The Retirement Improvements and Savings Enhancements 

(or RISE) Act of 2016, a discussion draft issued by Senator 

Wyden on September 8, 2016; 

• S. 324, 114th Cong., the Shrinking Emergency Account 

Losses (or SEAL) Act of 2015, sponsored by Senators Enzi and 

Nelson; 


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2Sec. 401(a). A qualified annuity plan under section 403(a) is similar to and subject to requirements similar to those applicable to qualified retirement plans. 

• S. 609, 114th Cong., the Volunteer Responder Incentive 

Protection Act of 2015, sponsored by Senators Schumer and 

Collins; • S. 1317, 114th Cong., the Lifetime Income Disclosure Act, 

sponsored by Senators Isakson and Murphy; • S. 3025, 114th Cong., the Graduate Student Savings Act of 

2016, sponsored by Senators Warren and Lee; • S. 3152, 114th Cong., the Empowering Employees through 

Stock Ownership Act, sponsored by Senators Warner and Heller; • S. 3181, 114th Cong., the S Corporation Modernization Act 

of 2016, sponsored by Senators Thune, Cardin and Roberts; 

and • S. 3307, 114th Cong. (an act to avoid duplicative annual 

reporting), sponsored by Senators Warner and Collins. 

In addition, as noted below, the Committee has held hearings at 

which it received testimony regarding retirement savings. These 

legislative proposals and hearings and the Working Group report 

informed the content of this bill. 

Hearings 

On January 28, 2016, the Committee held a hearing on Helping 

Americans Prepare for Retirement: Increasing Access, Participation 

and Coverage in Retirement Savings Plans, which included testimony on various proposals to increase retirement savings and reduce administrative burdens relating to retirement plans. 

On September 16, 2014, the Committee held a hearing on Retirement Savings 2.0: Updating Savings Policy for the Modern Economy, which included testimony on new approaches to increase retirement savings. 

II. EXPLANATION OF PROVISIONS 

TITLE I—EXPANDING AND PRESERVING RETIREMENT 

SAVINGS 

A. MULTIPLE-EMPLOYER PLANS AND POOLED EMPLOYER AND MULTIPLE-EMPLOYER PLAN REPORTING (SECS. 101–102 OF THE BILL, 

SEC. 413 OF THE CODE, AND SECS. 3 AND 103–104 OF ERISA) 

PRESENT LAW

Retirement savings under the Code and ERISA 

Tax-favored arrangements 

The Internal Revenue Code (‘‘Code’’) provides two general vehicles for tax-favored retirement savings: employer-sponsored plans 

and individual retirement arrangements (‘‘IRAs’’). Code provisions 

are generally within the jurisdiction of the Secretary of the Treasury (‘‘Secretary’’), through his or her delegate, the Internal Revenue Service (‘‘IRS’’). 

The most common type of tax-favored employer-sponsored retirement plan is a qualified retirement plan,2 which may be a defined 

contribution plan or a defined benefit plan. Under a defined conVerDate Sep 11 2014 01:13 Nov 24, 2016 Jkt 069010 PO 00000 Frm 00004 Fmt 6659 Sfmt 6602 E:\HR\OC\SR375.XXX SR375

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3 Sec. 414(i). Defined contribution plans generally provide for contributions by employers and 

may include a qualified cash or deferred arrangement under section 401(k) (commonly called 

a ‘‘section 401(k) plan’’), under which employees may elect to contribute to the plan. 4Sec. 414(j). 

5Sec. 403(b). Private and governmental employers that are exempt from tax under section 

501(c)(3), including tax-exempt private schools, may maintain tax-deferred annuity plans. State 

and local governmental employers may maintain another type of tax–favored retirement plan, 

an eligible deferred compensation plan under section 457(b). 6Sections 219, 408 and 408A provide rules for IRAs. Under section 408(a)(2) and (n), only certain entities are permitted to be the trustee of an IRA. The trustee of an IRA generally must 

be a bank, an insured credit union, or a corporation subject to supervision and examination by 

the Commissioner of Banking or other officer in charge of the administration of the banking 

laws of the State in which it is incorporated. Alternatively, an IRA trustee may be another person who demonstrates to the satisfaction of the Secretary that the manner in which the person 

will administer the IRA will be consistent with the IRA requirements. 7Simplified employee pension (‘‘SEP’’) plans under section 408(k) and SIMPLE IRA plans 

under section 408(p) are employer-sponsored retirement plans funded using IRAs for employees. 8Sec. 408(c). 

9 ERISA applies to employee welfare benefit plans, such as health plans, of private employers, 

as well as to employer-sponsored retirement (or pension) plans. Employer-sponsored welfare and 

pension plans are both referred to under ERISA as employee benefit plans. Under ERISA sec. 

4(b)(1) and (2), governmental plans and church plans are generally exempt from ERISA. 10 29 C.F.R. sec. 2510.3–3(b)–(c). 11 29 C.F.R. sec. 2510.3–2(f). 

tribution plan, separate individual accounts are maintained for 

participants, to which accumulated contributions, earnings and 

losses are allocated, and participants’ benefits are based on the 

value of their accounts.3 Defined contribution plans commonly 

allow participants to direct the investment of their accounts, usually by choosing among investment options offered under the plan. 

Under a defined benefit plan, benefits are determined under a plan 

formula and paid from general plan assets, rather than individual 

accounts.4 Besides qualified retirement plans, certain tax-exempt 

employers and public schools may maintain tax-deferred annuity 

plans.5

An IRA is generally established by the individual for whom the 

IRA is maintained.6 However, in some cases, an employer may establish IRAs on behalf of employees and provide retirement contributions to the IRAs.7 In addition, IRA treatment may apply to 

accounts maintained for employees under a trust created by an employer (or an employee association) for the exclusive benefit of employees or their beneficiaries, provided that the trust complies with 

the relevant IRA requirements and separate accounting is maintained for the interest of each employee or beneficiary (referred to 

herein as an ‘‘IRA trust’’).8 In that case, the assets of the trust may 

be held in a common fund for the account of all individuals who 

have an interest in the trust. 

ERISA 

Retirement plans of private employers, including qualified retirement plans and tax-deferred annuity plans, are generally subject to 

requirements under the Employee Retirement Income Security Act 

of 1974 (‘‘ERISA’’).9 A plan covering only business owners (or business owners and their spouses)—that is, it covers no other employees—is exempt from ERISA.10 Thus, a plan covering only self-employed individuals is exempt from ERISA. Tax-deferred annuity 

plans that provide solely for salary reduction contributions by employees may be exempt from ERISA.11 IRAs are generally exempt 

from ERISA. 


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12The provisions of Title I of ERISA are codified at 29 U.S.C 1001–734. Under Title IV of 

ERISA, defined benefit plans of private employers are generally covered by the Pension Benefit 

Guaranty Corporation’s pension insurance program. 13 ERISA sec. 3004. 14 43 Fed. Reg. 47713 (October 17, 1978). 15Secs. 414(b), (c), (m) and (o). 16Sec. 413(c). Multiple-employer status does not apply if the plan is a multiemployer plan, 

defined under sec. 414(f) as a plan maintained pursuant to one or more collective bargaining 

agreements with two or more unrelated employers and to which the employers are required to 

contribute under the collective bargaining agreement(s). Multiemployer plans are also known as 

Taft-Hartley plans. 17 Rev. Proc. 2003–86, 2003–2 C.B. 1211, and Rev. Proc. 2002–21, 2002–1 C.B. 911, address 

the application of the multiple-employer plan rules to qualified defined contribution plans maintained by PEOs 18Sec. 413(c). 

The provisions of Title I of ERISA are under the jurisdiction of 

the Secretary of Labor.12 Many of the requirements under Title I 

of ERISA parallel Code requirements for qualified retirement 

plans. Under ERISA, in carrying out provisions relating to the 

same subject matter, the Secretary (of the Treasury) and the Secretary of Labor are required to consult with each other and develop 

rules, regulations, practices, and forms which, to the extent appropriate for efficient administration, are designed to reduce duplication of effort, duplication of reporting, conflicting or overlapping requirements, and the burden of compliance by plan administrators, 

employers, and participants and beneficiaries.13 In addition, interpretive jurisdiction over parallel Code and ERISA provisions relating to retirement plans is divided between the two Secretaries by 

Executive Order, referred to as the Reorganization Plan No. 4 of 

1978.14

Multiple-employer plans under the Code 

In general 

Qualified retirement plans, either defined contribution or defined 

benefit plans, are categorized as single-employer plans or multipleemployer plans. A single-employer plan is a plan maintained by 

one employer. For this purpose, businesses and organizations that 

are members of a controlled group of corporations, a group under 

common control, or an affiliated service group are treated as one 

employer (referred to as ‘‘aggregation’’).15

A multiple-employer plan generally is a single plan maintained 

by two or more unrelated employers (that is, employers that are 

not treated as a single employer under the aggregation rules).16

Multiple-employer plans are commonly maintained by employers in 

the same industry and are used also by professional employer organizations (‘‘PEOs’’) to provide qualified retirement plan benefits to 

employees working for PEO clients.17

Application of Code requirements to multiple-employer plans 

and EPCRS 

Some requirements are applied to a multiple-employer plan on a 

plan-wide basis.18 For example, all employees covered by the plan 

are treated as employees of all employers participating in the plan 

for purposes of the exclusive benefit rule. Similarly, an employee’s 

service with all participating employers is taken into account in applying the minimum participation and vesting requirements. In applying the limits on contributions and benefits, compensation, contributions and benefits attributable to all employers are taken into 


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19Treas. Reg. sec. 1.415–1(e). 20Treas. Reg. secs. 1.413–2(a)(3)(ii)–(iii) and 1.416–1, G–2. 21Treas. Reg. secs. 1.413–2(a)(3)(iv) and 1.416–1, G–2. 22 Rev. Proc. 2016–51, 2016–42 I.R.B. 465. 23Section 10.11 of Rev. Proc. 2016–51. 

account.19 Other requirements are applied separately, including 

the minimum coverage requirements, nondiscrimination requirements (both the general requirements and the special tests for section 401(k) plans) and the top-heavy rules.20 However, the qualified 

status of the plan as a whole is determined with respect to all employers maintaining the plan, and the failure by one employer (or 

by the plan itself) to satisfy an applicable qualification requirement 

may result in disqualification of the plan with respect to all employers.21

Because of the complexity of the requirements for qualified retirement plans, errors in plan documents, as well as plan operation 

and administration, commonly occur. Under a strict application of 

these requirements, such an error would cause a plan to lose its 

tax-favored status, which would fall most heavily on plan participants because of the resulting current income inclusion of vested 

amounts under the plan. As a practical matter, therefore, the IRS 

rarely disqualifies a plan. Instead, the IRS has established the Employee Plans Compliance Resolution System (‘‘EPCRS’’), a formal 

program under which employers and other plan sponsors can correct compliance failures and continue to provide their employees 

with retirement benefits on a tax-favored basis.22

EPCRS has three components, providing for self-correction, voluntary correction with IRS approval, and correction on audit. The 

Self-Correction Program (‘‘SCP’’) generally permits a plan sponsor 

that has established compliance practices and procedures to correct 

certain insignificant failures at any time (including during an 

audit), and certain significant failures generally within a two-year 

period, without payment of any fee or sanction. The Voluntary Correction Program (‘‘VCP’’) permits an employer, at any time before 

an audit, to pay a limited fee and receive IRS approval of a correction. For a failure that is discovered on audit and corrected, the 

Audit Closing Agreement Program (‘‘Audit CAP’’) provides for a 

sanction that bears a reasonable relationship to the nature, extent, 

and severity of the failure and that takes into account the extent 

to which correction occurred before audit. 

Multiple-employer plans are eligible for EPCRS, and certain special procedures apply.23 A VCP request with respect to a multipleemployer plan must be submitted to the IRS by the plan administrator, rather than an employer maintaining the plan, and must be 

made with respect to the entire plan, rather than a portion of the 

plan affecting any particular employer. In addition, if a failure applies to fewer than all of the employers under the plan, the plan 

administrator may choose to have a VCP compliance fee or audit 

CAP sanction calculated separately for each employer based on the 

participants attributable to that employer, rather than having the 

compliance fee calculated based on the participants of the entire 

plan. For example, the plan administrator may choose this option 

when the failure is attributable to the failure of an employer to 

provide the plan administrator with full and complete information. 


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24 ERISA sec. 402. 25Fiduciary is defined in ERISA section 3(21), and named fiduciary is defined in ERISA section 402(a)(2). 26 ERISA sec. 404(c). Under ERISA, a defined contribution plans is referred to also as an individual account plan. 27 ERISA sec. 412. 28 ERISA sec. 210(a). 29 ERISA sec. 3(1) and (2). 30 ERISA sec. 3(5). 

ERISA 

Fiduciary and bonding requirements 

Among other requirements, ERISA requires a plan to be established and maintained pursuant to a written instrument (that is, 

a plan document) that contains certain terms.24 The terms of the 

plan must provide for one or more named fiduciaries that jointly 

or severally have authority to control and manage the operation 

and administration of the plan.25 Among other required plan terms 

are a procedure for the allocation of responsibilities for the operation and administration of the plan and a procedure for amending 

the plan and for identifying the persons who have authority to 

amend the plan. Among other permitted terms, a plan may provide 

also that any person or group of persons may serve in more than 

one fiduciary capacity with respect to the plan (including service 

both as trustee and administrator) and that a person who is a 

named fiduciary with respect to the control or management of plan 

assets may appoint an investment manager or managers to manage plan assets. 

In general, a plan fiduciary is responsible for the investment of 

plan assets. However, ERISA section 404(c) provides a special rule 

in the case of a defined contribution plan that permits participants 

to direct the investment of their individual accounts.26 Under the 

special rule, if various requirements are met, a participant is not 

deemed to be a fiduciary by reason of directing the investment of 

the participant’s account and no person who is otherwise a fiduciary is liable for any loss, or by reason of any breach, that results 

from the participant’s investments. Defined contribution plans that 

provide for participant-directed investments commonly offer a set of 

investment options among which participants may choose. The selection of investment options to be offered under a plan is subject 

to ERISA fiduciary requirements. 

Under ERISA, any plan fiduciary or person that handles plan assets is required to be bonded, generally for an amount not to exceed 

$500,000.27 In some cases, the maximum bond amount is $1 million, rather than $500,000. 

Multiple-employer plan status under ERISA 

Like the Code, ERISA contains rules for multiple-employer retirement plans.28 However, a different concept of multiple-employer 

plan applies under ERISA. 

Under ERISA, an employee benefit plan (whether a pension plan 

or a welfare plan) must be sponsored by an employer, by an employee organization, or by both.29 The definition of employer is any 

person acting directly as an employer, or indirectly in the interest 

of an employer, in relation to an employee benefit plan, and includes a group or association of employers acting for an employer 

in such capacity.30


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31See, for example, Department of Labor Advisory Opinions 2012–04A, 2003–17A, 2001–04A, 

and 1994–07A, and other authorities cited therein. 32Sec. 6058. In addition, under section 6059, the plan administrator of a defined benefit plan 

subject to the minimum funding requirements is required to file an annual actuarial report. 

Under Code section 414(g) and ERISA section 3(16), plan administrator generally means the 

person specifically so designated by the terms of the plan document. In the absence of a designation, the plan administrator generally is (1) in the case of a plan maintained by a single employer, the employer, (2) in the case of a plan maintained by an employee organization, the employee organization, or (3) in the case of a plan maintained by two or more employers or jointly 

by one or more employers and one or more employee organizations, the association, committee, 

joint board of trustees, or other similar group of representatives of the parties that maintain 

the plan. Under ERISA, the party described in (1), (2) or (3) is referred to as the ‘‘plan sponsor.’’ 33 ERISA secs. 103 and 104. Under ERISA section 4065, the plan administrator of certain defined benefit plans must provide information to the PBGC. 34 Information is shared also with the PBGC, as applicable. Form 5500 filings are also publicly 

released in accordance with section 6104(b) and Treas. Reg. sec. 301.6104(b)–1 and ERISA secs. 

104(a)(1) and 106(a). 35 ERISA sec. 104(b). 

These definitional provisions of ERISA are interpreted as permitting a multiple-employer plan to be established or maintained by 

a cognizable, bona fide group or association of employers, acting in 

the interests of its employer members to provide benefits to their 

employees.31 This approach is based on the premise that the person 

or group that maintains the plan is tied to the employers and employees that participate in the plan by some common economic or 

representational interest or genuine organizational relationship unrelated to the provision of benefits. Based on the facts and circumstances, the employers that participate in the benefit program 

must, either directly or indirectly, exercise control over that program, both in form and in substance, in order to act as a bona fide 

employer group or association with respect to the program. However, an employer association does not exist where several unrelated employers merely execute participation agreements or similar 

documents as a means to fund benefits, in the absence of any genuine organizational relationship between the employers. In that 

case, each participating employer establishes and maintains a separate employee benefit plan for the benefit of its own employees, 

rather than a multiple-employer plan. 

Form 5500 reporting 

Under the Code, an employer maintaining a qualified retirement 

plan generally is required to file an annual return containing information required under regulations with respect to the qualification, 

financial condition, and operation of the plan.32 ERISA requires the 

plan administrator of certain pension and welfare benefit plans to 

file annual reports disclosing certain information to the Department of Labor (‘‘DOL’’).33 These filing requirements are met by filing a completed Form 5500, Annual Return/Report of Employee 

Benefit Plan. Forms 5500 are filed with DOL, and information from 

Forms 5500 is shared with the IRS.34 In the case of a multiple-employer plan, the annual report must include a list of participating 

employers and a good faith estimate of the percentage of total contributions made by the participating employers during the plan 

year. Certain small plans, that is, plans covering fewer than 100 

participants, are eligible for simplified reporting requirements, 

which are met by filing Form 5500–SF, Short Form Annual Return/ 

Report of Small Employee Benefit Plan.35


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36 Under the provision, in applying the exclusive benefit requirement under section 408(c) to 

an IRA plan with an IRA trust covering employees of unrelated employers, all employees covered by the plan are treated as employees of all employers participating in the plan. 

REASONS FOR CHANGE

A single, multiple-employer plan can provide economies of scale 

that result in lower administrative costs than apply to a group of 

separate plans covering the employees of different employers. However, concern that a violation by another participating employer 

may jeopardize the tax-favored status of the plan, or create liability 

for other employers, may discourage use of multiple-employer 

plans. In addition, under ERISA, a plan covering employees of unrelated employers might not be eligible for multiple-employer plan 

treatment. The Committee wishes to remove possible barriers to 

broader use of multiple-employer plans, including by providing simplified Form 5500 reporting in appropriate cases. 

In the case of any multiple-employer plan that, in accordance 

with the Department of Labor’s current interpretations of the definition of employer in section 3(5) of ERISA, is treated currently as 

a single plan under ERISA, the Committee does not intend to modify the existing definition and regulatory guidance thereunder, except insofar as specifically provided herein with respect to relief 

from disqualification (or other loss of tax-favored status) and simplified annual reports. 

EXPLANATION OF PROVISION

In general 

The provision amends the Code rules relating to multiple-employer plans to provide that certain plans (referred to herein as 

‘‘covered multiple-employer plans’’) will not fail to meet the Code 

requirements applicable for tax-favored treatment merely because 

one or more employers of employees covered by the plan (referred 

to herein as ‘‘participating employers’’) fail to take the actions that 

are required of employers for the plan to meet such requirements. 

The provision applies to a multiple-employer qualified defined contribution plan or a plan that consists of IRAs (referred to herein 

as an ‘‘IRA plan’’), including under an IRA trust,36 that either (1) 

is sponsored by employers all of which have both a common interest other than having adopted the plan and control of the plan, or 

(2) in the case of a plan not described in (1), has a pooled plan provider (referred to herein as a ‘‘pooled provider plan’’). 

In addition, under the provision, a qualified defined contribution 

plan that is established or maintained for the purpose of providing 

benefits to the employees of two or more employers and that meets 

certain requirements (a ‘‘pooled employer plan’’) is treated for purposes of ERISA as a single plan that is a multiple-employer plan. 

Tax-favored status under the Code 

In general 

The provision provides relief from disqualification (or other loss 

of tax-favored status) of the entire plan merely because one or more 

participating employers fail to take actions required with respect to 

the plan. 


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37For this purpose, a tax-favored retirement plan means an eligible retirement plan as defined in section 402(c)(8)(B), that is, an IRA, a qualified retirement plan, a tax-deferred annuity 

plan under section 403(b), or an eligible deferred compensation plan of a State or local government employer under section 457(b). 

Relief under the provision does not apply to a plan unless the 

terms of the plan provide that, in the case of an employer failing 

to take required actions (referred to herein as a ‘‘noncompliant employer’’)— 

• plan assets attributable to employees of the noncompliant 

employer will be transferred to a plan maintained only by that 

employer (or its successor), to a tax-favored retirement plan for 

each individual whose account is transferred,37 or to any other 

arrangement that the Secretary determines is appropriate, unless the Secretary determines it is in the best interests of the 

employees to retain the assets in the plan, and 

• the noncompliant employer (and not the plan with respect 

to which the failure occurred or any other participating employer) is, except to the extent provided by the Secretary, liable 

for any plan liabilities attributable to employees of the noncompliant employer. 

In addition, in the case of a pooled provider plan, if the pooled 

plan provider does not perform substantially all the administrative 

duties required of the provider (as described below) for any plan 

year, the Secretary, in his or her discretion, may provide that the 

determination as to whether the plan meets the Code requirements 

for tax-favored treatment will be made in the same manner as 

would be made without regard to the relief under the provision. 

Pooled plan provider 

Under the provision, ‘‘pooled plan provider’’ with respect to a 

plan means a person that— 

• is designated by the terms of the plan as a named fiduciary under ERISA, as the plan administrator, and as the person responsible to perform all administrative duties (including 

conducting proper testing with respect to the plan and employees of each participating employer) that are reasonably necessary to ensure that the plan meets the Code requirements 

for tax-favored treatment and the requirements of ERISA and 

to ensure that each participating employer takes actions as the 

Secretary or the pooled plan provider determines necessary for 

the plan to meet Code and ERISA requirements, including providing to the pooled plan provider any disclosures or other information that the Secretary may require or that the pooled 

plan provider otherwise determines is necessary to administer 

the plan or to allow the plan to meet Code and ERISA requirements, 

• registers with the Secretary as a pooled plan provider and 

provides any other information that the Secretary may require, 

before beginning operations as a pooled plan provider, 

• acknowledges in writing its status as a named fiduciary 

under ERISA and as the plan administrator, and 

• is responsible for ensuring that all persons who handle 

plan assets or are plan fiduciaries are bonded in accordance 

with ERISA requirements. 


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38 Any trustee must meet the requirements under the Code to be an IRA trustee. 

The provision specifies that the Secretary may perform audits, 

examinations, and investigations of pooled plan providers as may 

be necessary to enforce and carry out the purposes of the provision. 

Guidance 

The provision directs the Secretary to issue guidance that the 

Secretary determines appropriate to carry out the provision, including guidance (1) to identify the administrative duties and other actions required to be performed by a pooled plan provider, (2) that 

describes the procedures to be taken to terminate a plan that fails 

to meet the requirements to be a covered multiple-employer plan, 

including the proper treatment of, and actions needed to be taken 

by, any participating employer and plan assets and liabilities attributable to employees of that employer, and (3) to identify appropriate cases in which corrective action will apply with respect to 

noncompliant employers. For purposes of (3), the Secretary is to 

take into account whether the failure of an employer or pooled plan 

provider to provide any disclosures or other information, or to take 

any other action, necessary to administer a plan or to allow a plan 

to meet the Code requirements for tax-favored treatment has continued over a period of time that clearly demonstrates a lack of 

commitment to compliance. Any guidance issued by the Secretary 

under the provision will not apply to any action or failure occurring 

before the issuance of the guidance. 

The provision also directs the Secretary, in consultation with the 

Secretary of Labor when appropriate, to publish model plan language that meets the Code and ERISA requirements under the provision and that may be adopted to be treated as a pooled provider 

plan and pooled employer plan under ERISA. 

Pooled employer plans under ERISA 

In general 

As described above, under the provision, a pooled employer plan 

is treated for purposes of ERISA as a single plan that is a multipleemployer plan. ‘‘Pooled employer plan’’ is defined as a plan (1) that 

is a defined contribution plan established or maintained for the 

purpose of providing benefits to the employees of two or more employers, (2) that is a qualified retirement plan or an IRA plan, and 

(3) the terms of which meet the requirements described below. 

Pooled employer plan does not include a plan with respect to which 

all the participating employers have both a common interest other 

than having adopted the plan and control of the plan. 

In order for a plan to be a pooled employer plan, the plan terms 

must— • designate a pooled plan provider and provide that the 

pooled plan provider is a named fiduciary of the plan, • designate one or more trustees (other than a participating 

employer) 38 to be responsible for collecting contributions to, 

and holding the assets of, the plan, and require the trustees to 

implement written contribution collection procedures that are 

reasonable, diligent, and systematic, • provide that each participating employer retains fiduciary 

responsibility for the selection and monitoring, in accordance 


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39 A pooled employer plan also does not include a multiemployer plan. 40 In determining whether a person meets the requirements to be a pooled plan provider with 

respect to a plan, all persons that are members of the same controlled group or group under 

common control and that perform services for the plan are treated as one person. 

with ERISA fiduciary requirements, of the person designated 

as the pooled plan provider and any other person who is also 

designated as a named fiduciary of the plan, and, to the extent 

not otherwise delegated to another fiduciary by the pooled plan 

provider (and subject to the ERISA rules relating to self–directed investments), the investment and management of the 

portion of the plan’s assets attributable to the employees of 

that participating employer, • provide that a participating employer, or a participant or 

beneficiary, is not subject to unreasonable restrictions, fees, or 

penalties with regard to ceasing participation, receipt of distributions, or otherwise transferring assets of the plan in accordance with applicable rules for plan mergers and transfers, • require the pooled plan provider to provide to participating 

employers any disclosures or other information that the Secretary of Labor may require, including any disclosures or other 

information to facilitate the selection or monitoring of the 

pooled plan provider by participating employers, and require 

each participating employer to take any actions that the Secretary of Labor or pooled plan provider determines necessary 

to administer the plan or to allow for the plan to meet the 

ERISA and Code requirements applicable to the plan, including providing any disclosures or other information that the 

Secretary of Labor may require or that the pooled plan provider otherwise determines is necessary to administer the plan 

or to allow the plan to meet ERISA and Code requirements, 

and • provide that any disclosure or other information required 

to be provided as described above may be provided in electronic 

form and will be designed to ensure only reasonable costs are 

imposed on pooled plan providers and participating employers. 

Under the provision, however, a pooled employer plan does not 

include a plan established before January 1, 2016, unless the plan 

administrator elects that the plan will be treated as a pooled employer plan and the plan meets the requirements of ERISA applicable to a pooled employer plan established on or after such date.39

In the case of a fiduciary of a pooled employer plan or a person 

handling assets of a pooled employer plan, the maximum bond 

amount under ERISA is $1 million. 

Pooled plan provider 

The definition of pooled plan provider for ERISA purposes is generally similar to the definition under the Code portion of the provision, described above.40 The ERISA definition requires a person to 

register as a pooled plan provider with the Secretary of Labor and 

provide any other information that the Secretary of Labor may require, before beginning operations as a pooled plan provider. 

The provision specifies that the Secretary of Labor may perform 

audits, examinations, and investigations of pooled plan providers 

as may be necessary to enforce and carry out the purposes of the 

provision. 


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41The Secretary of Labor may waive the requirement to transfer assets to another plan or 

arrangement in appropriate circumstances if the Secretary of Labor determines it is in the best 

interests of the employees of the noncompliant employer to retain the assets in the pooled employer plan. 

Guidance 

The provision directs the Secretary of Labor to issue guidance 

that such Secretary determines appropriate to carry out the provision, including guidance (1) to identify the administrative duties 

and other actions required to be performed by a pooled plan provider, and (2) that requires, in appropriate cases of a noncompliant 

employer, plan assets attributable to employees of the noncompliant employer to be transferred to a plan maintained only by that 

employer (or its successor), to a tax-favored retirement plan for 

each individual whose account is transferred, or to any other arrangement that the Secretary of Labor determines in the guidance 

is appropriate,41 and the noncompliant employer (and not the plan 

with respect to which the failure occurred or any other participating employer) to be liable for any plan liabilities attributable to 

employees of the noncompliant employer, except to the extent provided in the guidance. For purposes of (2), the Secretary of Labor 

is to take into account whether the failure of an employer or pooled 

plan provider to provide any disclosures or other information, or to 

take any other action, necessary to administer a plan or to allow 

a plan to meet the requirements of ERISA and the Code requirements for tax-favored treatment, has continued over a period of 

time that clearly demonstrates a lack of commitment to compliance. Any guidance issued by the Secretary of Labor under the provision will not apply to any action or failure occurring before the 

issuance of the guidance. 

Form 5500 reporting 

Under the provision, the Form 5500 of a pooled employer plan 

must include the identifying information for the person designated 

under the terms of the plan as the pooled plan provider. In addition, with respect to annual reports required under ERISA, the 

Secretary of Labor may by regulation prescribe simplified reporting 

for a multiple-employer plan that covers fewer than 1,000 participants, but only if no single participating employer has 100 or more 

participants covered by the plan. 

EFFECTIVE DATE

The provision applies to years beginning after December 31, 

2019, and to Forms 5500 for plan years beginning after December 

31, 2019. 

Nothing in the Code amendments made by the provision is to be 

construed as limiting the authority of the Secretary of the Treasury 

(or the Secretary’s delegate) to provide for the proper treatment of 

a failure to meet any Code requirement with respect to any employer (and its employees) in a multiple-employer plan. 


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42 Elective deferrals are generally made on a pretax basis and distributions attributable to 

elective deferrals are includible in income. However, a section 401(k) plan is permitted to include a ‘‘qualified Roth contribution program’’ that permits a participant to elect to have all or 

a portion of the participant’s elective deferrals under the plan treated as after-tax Roth contributions. Certain distributions from a designated Roth account are excluded from income, even 

though they include earnings not previously taxed. 43Sec. 402(g). 44Sec. 414(v). 45Treas. Reg. sec. 1.401(k)–1(e)(2)(ii). 46Sec. 401(k)(3). 

B. REMOVAL OF 10 PERCENT CAP FROM AUTOMATIC ENROLLMENT

SAFE HARBOR AFTER FIRST PLAN YEAR (SEC. 103 OF THE BILL

AND SEC. 401(k) OF THE CODE) 

PRESENT LAW

Section 401(k) plans 

A qualified defined contribution plan may include a qualified 

cash or deferred arrangement, under which employees may elect to 

have contributions made to the plan (referred to as ‘‘elective deferrals’’) rather than receive the same amount as current compensation (referred to as a ‘‘section 401(k) plan’’).42 The maximum annual amount of elective deferrals that can be made by an employee 

for a year is $18,000 (for 2016) or, if less, the employee’s compensation.43 For an employee who attains age 50 by the end of the year, 

the dollar limit on elective deferrals is increased by $6,000 (for 

2016) (called catch-up contributions).44 An employee’s elective deferrals must be fully vested. A section 401(k) plan may also provide 

for employer matching and nonelective contributions. 

Automatic enrollment 

A section 401(k) plan must provide each eligible employee with 

an effective opportunity to make or change an election to make 

elective deferrals at least once each plan year.45 Whether an employee has an effective opportunity is determined based on all the 

relevant facts and circumstances, including the adequacy of notice 

of the availability of the election, the period of time during which 

an election may be made, and any other conditions on elections. 

Section 401(k) plans are generally designed so that an employee 

will receive cash compensation unless the employee affirmatively 

elects to make elective deferrals to the section 401(k) plan. Alternatively, a plan may provide that elective deferrals are made at a 

specified rate (referred to as a ‘‘default rate’’) when an employee becomes eligible to participate unless the employee elects otherwise 

(that is, affirmatively elects not to make contributions or to make 

contributions at a different rate). This plan design is referred to as 

automatic enrollment. 

Nondiscrimination test and automatic enrollment safe harbor 

An annual nondiscrimination test, called the actual deferral percentage test (the ‘‘ADP’’ test) applies to elective deferrals under a 

section 401(k) plan.46 The ADP test generally compares the average rate of deferral for highly compensated employees to the average rate of deferral for nonhighly compensated employees and requires that the average deferral rate for highly compensated employees not exceed the average rate for nonhighly compensated employees by more than certain specified amounts. If a plan fails to 


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47Sec. 401(k)(8). 48Sec. 401(k)(12) and (13). If certain additional requirements are met, matching contributions 

under 401(k) safe harbor plan may also satisfy a nondiscrimination test applicable under section 

401(m). 

satisfy the ADP test for a plan year based on the deferral elections 

of highly compensated employees, the plan is permitted to distribute deferrals to highly compensated employees (‘‘excess deferrals’’) in a sufficient amount to correct the failure. The distribution 

of the excess deferrals must be made by the close of the following 

plan year.47

The ADP test is deemed to be satisfied if a section 401(k) plan 

includes certain minimum matching or nonelective contributions 

under either of two plan designs (‘‘401(k) safe harbor plan’’), as well 

as certain required rights and features and satisfies a notice requirement.48 One type of 401(k) safe harbor includes automatic enrollment. 

An automatic enrollment safe harbor plan must provide that, unless an employee elects otherwise, the employee is treated as electing to make elective deferrals at a default rate equal to a percentage of compensation as stated in the plan and at least (1) three 

percent of compensation for the first year the deemed election applies to the participant, (2) four percent during the second year, (3) 

five percent during the third year, and (4) six percent during the 

fourth year and thereafter. Although an automatic enrollment safe 

harbor plan generally may provide for default rates higher than 

these minimum rates, the default rate cannot exceed 10 percent for 

any year. 

REASONS FOR CHANGE

The 10-percent cap on the default rate that may be used under 

an automatic enrollment safe harbor plan reflects a concern that 

too high a default rate may cause employees to elect out and not 

contribute at all, thus undercutting the purpose of the safe harbor. 

An initial default rate that is too high may have that effect. However, such an effect is less likely with respect to automatic increases in default rates for years after default contributions have 

begun. In such a case, the cap may instead have the effect of limiting how much is contributed and, thus, also limiting retirement 

savings. The Committee therefore believes the cap should be removed for years after default contributions have begun. 

EXPLANATION OF PROVISION

Under the provision, the 10-percent limitation on the default 

rates under an automatic enrollment safe harbor plan is removed 

after the first year that an employee’s deemed election applies. 

EFFECTIVE DATE

The provision applies to plan years beginning after December 31, 

2016. 


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49 Elective deferrals are generally made on a pretax basis and distributions attributable to 

elective deferrals are includible in income. However, a section 401(k) plan is permitted to include a ‘‘qualified Roth contribution program’’ that permits a participant to elect to have all or 

a portion of the participant’s elective deferrals under the plan treated as after-tax Roth contributions. Certain distributions from a designated Roth account are excluded from income, even 

though they include earnings not previously taxed. 50Sec. 402(g). 51Sec. 414(v). 52Treas. Reg. sec. 1.401(k)–1(e)(2)(ii). 53Sec. 401(k)(3). 

C. RULES RELATING TO ELECTION OF SAFE HARBOR 401(k) STATUS

(SEC. 104 OF THE BILL AND SEC. 401(k) OF THE CODE) 

PRESENT LAW

Section 401(k) plans 

A qualified defined contribution plan may include a qualified 

cash or deferred arrangement, under which employees may elect to 

have contributions made to the plan (referred to as ‘‘elective deferrals’’) rather than receive the same amount as current compensation (referred to as a ‘‘section 401(k) plan’’).49 The maximum annual amount of elective deferrals that can be made by an employee 

for a year is $18,000 (for 2016) or, if less, the employee’s compensation.50 For an employee who attains age 50 by the end of the year, the dollar limit on elective deferrals is increased by $6,000 (for 

2016) (called catch-up contributions).51 An employee’s elective deferrals must be fully vested. A section 401(k) plan may also provide 

for employer matching and nonelective contributions. 

Automatic enrollment 

A section 401(k) plan must provide each eligible employee with 

an effective opportunity to make or change an election to make 

elective deferrals at least once each plan year.52 Whether an employee has an effective opportunity is determined based on all the 

relevant facts and circumstances, including the adequacy of notice 

of the availability of the election, the period of time during which 

an election may be made, and any other conditions on elections. 

Section 401(k) plans are generally designed so that an employee 

will receive cash compensation unless the employee affirmatively 

elects to make elective deferrals to the section 401(k) plan. Alternatively, a plan may provide that elective deferrals are made at a 

specified rate when an employee becomes eligible to participate unless the employee elects otherwise (that is, affirmatively elects not 

to make contributions or to make contributions at a different rate). 

This plan design is referred to as automatic enrollment. 

Nondiscrimination test 

General rule and design-based safe harbors 

An annual nondiscrimination test, called the actual deferral percentage test (the ‘‘ADP’’ test) applies to elective deferrals under a 

section 401(k) plan.53 The ADP test generally compares the average rate of deferral for highly compensated employees to the average rate of deferral for nonhighly compensated employees and requires that the average deferral rate for highly compensated employees not exceed the average rate for nonhighly compensated employees by more than certain specified amounts. If a plan fails to 

satisfy the ADP test for a plan year based on the deferral elections 


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54Sec. 401(k)(8). 55Sec. 401(k)(12) and (13). If certain additional requirements are met, matching contributions 

under a 401(k) safe harbor plan may also satisfy a nondiscrimination test applicable under section 401(m). 56These automatic increases in default contribution rates are required for plans using the safe 

harbor. Rev. Rul. 2009–30, 2009–39 I.R.B. 391, provides guidance for including automatic increases in other plans using automatic enrollment, including under a plan that includes an eligible automatic contribution arrangement. 

of highly compensated employees, the plan is permitted to distribute deferrals to highly compensated employees (‘‘excess deferrals’’) in a sufficient amount to correct the failure. The distribution 

of the excess deferrals must be made by the close of the following 

plan year.54

The ADP test is deemed to be satisfied if a section 401(k) plan 

includes certain minimum matching or nonelective contributions 

under either of two plan designs (‘‘401(k) safe harbor plan’’), described below, as well as certain required rights and features and 

satisfies a notice requirement.55

Safe harbor contributions 

Under one type of 401(k) safe harbor plan (‘‘basic 401(k) safe harbor plan’’), the plan either (1) satisfies a matching contribution requirement (‘‘matching contribution basic 401(k) safe harbor plan’’) 

or (2) provides for a nonelective contribution to a defined contribution plan of at least three percent of an employee’s compensation 

on behalf of each nonhighly compensated employee who is eligible 

to participate in the plan (‘‘nonelective basic 401(k) safe harbor 

plan’’). The matching contribution requirement under the matching 

contribution basic 401(k) safe harbor requires a matching contribution equal to at least 100 percent of elective contributions of the 

employee for contributions not in excess of three percent of compensation, and 50 percent of elective contributions for contributions 

that exceed three percent of compensation but do not exceed five 

percent, for a total matching contribution of up to four percent of 

compensation. The required matching contributions and the three 

percent nonelective contribution under the basic 401(k) safe harbor 

must be immediately nonforfeitable (that is, 100 percent vested) 

when made. 

Another safe harbor applies for a section 401(k) plan that include 

automatic enrollment (‘‘automatic enrollment 401(k) safe harbor’’). 

Under an automatic enrollment 401(k) safe harbor, unless an employee elects otherwise, the employee is treated as electing to make 

elective deferrals equal to a percentage of compensation as stated 

in the plan, not in excess of 10 percent and at least (1) three percent of compensation for the first year the deemed election applies 

to the participant, (2) four percent during the second year, (3) five 

percent during the third year, and (4) six percent during the fourth 

year and thereafter.56 Under the automatic enrollment 401(k) safe 

harbor, the matching contribution requirement is 100 percent of 

elective contributions of the employee for contributions not in excess of one percent of compensation, and 50 percent of elective contributions for contributions that exceed one percent of compensation but do not exceed six percent, for a total matching contribution 

of up to 3.5 percent of compensation (‘‘matching contribution automatic enrollment 401(k) safe harbor’’). The rate of nonelective contribution under the automatic enrollment 401(k) safe harbor plan 


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is three percent, as under the basic 401(k) safe harbor (‘‘nonelective 

contribution automatic enrollment 401(k) safe harbor’’). However, 

under the automatic enrollment 401(k) safe harbors, the matching 

and nonelective contributions are allowed to become 100 percent 

vested only after two years of service (rather than being required 

to be immediately vested when made). 

Safe harbor notice 

The notice requirement for a 401(k) safe harbor plan is satisfied 

if each employee eligible to participate is given, within a reasonable 

period before any year, written notice of the employee’s rights and 

obligations under the arrangement and the notice meets certain 

content and timing requirements (‘‘safe harbor notice’’). To meet 

the content requirements, a safe harbor notice must be sufficiently 

accurate and comprehensive to inform an employee of the employee’s rights and obligations under the plan, and be written in a 

manner calculated to be understood by the average employee eligible to participate in the plan. A safe harbor notice must provide 

certain information, including the plan’s safe harbor contributions, 

any other plan contributions, the type and amount of compensation 

that may be deferred under the plan, how to make cash or deferred 

elections, the plan’s withdrawal and vesting provisions, and specified contact information. In addition, a safe harbor notice for an 

automatic enrollment 401(k) safe harbor must describe certain additional information items, including the deemed deferral elections 

under the plan if the employee does not make an affirmative election and how contributions will be invested. 

Delay in adopting nonelective 401(k) safe harbor 

Generally the plan provisions for the requirements that must be 

satisfied to be a 401(k) safe harbor plan must be adopted before the 

first day of the plan year and remain in effect for an entire 12- 

month plan year. However, in the case of a nonelective 401(k) safe 

harbor plan (but not the matching contribution 401(k) safe harbor), 

a plan may be amended after the first day of the plan year but no 

later than 30 days before the end of the plan year to adopt the safe 

harbor plan provisions including providing the 3 percent of compensation nonelective contribution. The plan must also provide a 

contingent and follow-up notice. The contingent notice must be provided before the beginning of the plan year and specify that the 

plan may be amended to include the safe harbor nonelective contribution and, if it is so amended, a follow-up notice will be provided. If the plan is amended, the follow-up notice must be provided no later than 30 days before the end of the plan year stating 

that the safe harbor nonelective contribution will be provided. 

REASONS FOR CHANGE

A nonelective contribution 401(k) safe harbor plan is beneficial to 

employees because it provides employer contributions regardless of 

whether employees make contributions. However, some aspects of 

the current procedural rules relating to adoption of the nonelective 

contribution 401(k) safe harbor, intended to protect employees, may 

serve as a barrier. The Committee believes that more flexible rules, 

combined with employee protections, will better facilitate the adoption of nonelective contribution 401(k) safe harbor plans. 


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57 A nonhighly compensated employee is an employee who is not a highly compensated employee as defined under section 414(q). 

EXPLANATION OF PROVISION

In general 

The provision makes a number of changes to the rules for the 

nonelective contribution 401(k) safe harbor. 

Elimination of notice requirement 

The provision eliminates the safe harbor notice requirement with 

respect to nonelective 401(k) safe harbor plans. However, the general rule under present law requiring a section 401(k) plan to provide each eligible employee with an effective opportunity to make 

or change an election to make elective deferrals at least once each 

plan year still applies. As described above, relevant factors used in 

determining if this requirement is satisfied include the adequacy of 

notice of the availability of the election and the period of time during which an election may be made. 

Delay in adopting provisions for nonelective 401(k) safe harbor 

Under the provision, a plan can be amended to become a nonelective 401(k) safe harbor plan for a plan year, that is, amended to 

provide the required nonelective contributions and thereby satisfy 

the safe harbor requirements, at any time before the 30th day before the close of the plan year. 

Further, the provision allows a plan to be amended after the 

30th day before the close of the plan year to become a nonelective 

contribution 401(k) safe harbor plan for the plan year if (1) the 

plan is amended to provide for a nonelective contribution of at least 

four percent of compensation (rather than at least three percent) 

for all eligible employees for that plan year and (2) the plan is 

amended no later than the last day for distributing excess contributions for the plan year, that is, by the close of the following plan 

year. 

EFFECTIVE DATE

The provision applies to plan years beginning after December 31, 

2016. 

D. INCREASE IN CREDIT LIMITATION FOR SMALL EMPLOYER PENSION

PLAN START-UP COSTS (SEC. 105 OF THE BILL AND SEC. 45E OF

THE CODE) 

PRESENT LAW

Present law provides a nonrefundable income tax credit for qualified start-up costs of an eligible small employer that adopts a new 

qualified retirement plan, SIMPLE IRA plan or SEP (referred to as 

an eligible employer plan), provided that the plan covers at least 

one nonhighly compensated employee.57 Qualified start-up costs 

are expenses connected with the establishment or administration of 

the plan or retirement-related education for employees with respect 

to the plan. The credit is the lesser of (1) a flat dollar amount of 

$500 per year or (2) 50 percent of the qualified start-up costs. The 

credit applies for up to three years beginning with the year the 


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58Sec. 52 (a) or (b) and 414(m) or (o). 59Sec. 45E. A nonhighly compensated employee is an employee who is not a highly compensated employee as defined under section 414(q). 

plan is first effective, or, at the election of the employer, with the 

year preceding the first plan year. 

An eligible employer is an employer that, for the preceding year, 

had no more than 100 employees, each with compensation of 

$5,000 or more. In addition, the employer must not have had a 

plan covering substantially the same employees as the new plan 

during the three years preceding the first year for which the credit 

would apply. Members of controlled groups and affiliated service 

groups are treated as a single employer for purposes of these requirements.58 All eligible employer plans of an employer are treated as a single plan. 

No deduction is allowed for the portion of qualified start-up costs 

paid or incurred for the taxable year equal to the amount of the 

credit. 

REASONS FOR CHANGE

Studies show that small employers are less likely to offer retirement plans than large employers. The credit for small employer 

pension plan start-up costs is intended to encourage small employers to adopt plans. The Committee believes that increasing the 

amount of the credit will encourage more small employers to adopt 

plans. 

EXPLANATION OF PROVISION

The provision changes the calculation of the flat dollar amount 

limit on the credit. The flat dollar amount for a taxable year is the 

greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the 

number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. As 

under present law, the credit applies for up to three years. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2016. 

E. SMALL EMPLOYER AUTOMATIC ENROLLMENT CREDIT (SEC. 106 OF

THE BILL AND NEW SEC. 45S OF THE CODE) 

PRESENT LAW

Small employer startup credit 

Present law provides a nonrefundable income tax credit for qualified start-up costs of an eligible small employer that adopts a new 

qualified retirement plan, SIMPLE IRA plan or SEP (referred to as 

an eligible employer plan), provided that the plan covers at least 

one nonhighly compensated employee.59 Qualified start-up costs 

are expenses connected with the establishment or administration of 

the plan or retirement-related education for employees with respect 

to the plan. The credit is the lesser of (1) a flat dollar amount of 

$500 per year or (2) 50 percent of the qualified start-up costs. The 

credit applies for up to three years beginning with the year the 


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60Sec. 52 (a) or (b) and 414(m) or (o). 61Sec. 408(p). 

plan is first effective, or, at the election of the employer, with the 

year preceding the first plan year. 

An eligible employer is an employer that, for the preceding year, 

had no more than 100 employees with compensation of $5,000 or 

more. In addition, the employer must not have had a plan covering 

substantially the same employees as the new plan during the three 

years preceding the first year for which the credit would apply. 

Members of controlled groups and affiliated service groups are 

treated as a single employer for purposes of these requirements.60

All eligible employer plans of an employer are treated as a single 

plan. 

No deduction is allowed for the portion of qualified start-up costs 

paid or incurred for the taxable year equal to the amount of the 

credit. 

Automatic enrollment 

A qualified defined contribution plan may include a qualified 

cash or deferred arrangement under which employees may elect to 

have plan contributions (‘‘elective deferrals’’) made rather than receive cash compensation (commonly called a ‘‘section 401(k) plan’’). 

A SIMPLE IRA plan is an employer-sponsored retirement plan 

funded with individual retirement arrangements (‘‘IRAs’’) that also 

allows employees to make elective deferrals.61 Section 401(k) plans 

and SIMPLE IRA plans may be designed so that the employee will 

receive cash compensation unless the employee affirmatively elects 

to make elective deferrals to the plan. Alternatively, a plan may 

provide that elective deferrals are made at a specified rate (when 

the employee becomes eligible to participate) unless the employee 

elects otherwise (i.e., affirmatively elects not to make contributions 

or to make contributions at a different rate). This alternative plan 

design is referred to as automatic enrollment. 

REASONS FOR CHANGE

Studies show that automatic enrollment increases employee participation in section 401(k) and SIMPLE IRA plans, resulting in 

higher retirement savings. The Committee believes that providing 

a credit to small employers may encourage more employers to use 

an automatic enrollment design. 

EXPLANATION OF PROVISION

Under the provision, an eligible employer is allowed a credit of 

$500 per year for up to three years for startup costs for new section 

401(k) plans and SIMPLE IRA plans that include automatic enrollment, in addition to the plan start-up credit allowed under present 

law. An eligible employer is also allowed a credit of $500 per year 

for up to three years if it converts an existing plan to an automatic 

enrollment design. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2016. 


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62Secs. 408 and 408A. 63Sec. 219(b)(2) and (5), as referenced in secs. 408(a)(1) and (b)(2)(B) and 408A(c)(2). Under 

section 4973, IRA contributions in excess of the applicable limit are generally subject to an excise tax of six percent per year until withdrawn. 64Sec. 219(g). 65Sec. 408A(c)(3). 66 Under a special rule in section 219(f)(1), alimony that is includible in gross income under 

section 71 is treated as compensation for IRA contribution purposes. 

F. CERTAIN TAXABLE NON-TUITION FELLOWSHIP AND STIPEND PAY- MENTS TREATED AS COMPENSATION FOR IRA PURPOSES (SEC. 107 

OF THE BILL AND SEC. 219 OF THE CODE) 

PRESENT LAW

There are two general types of individual retirement arrangements (‘‘IRAs’’): traditional IRAs and Roth IRAs.62 The total 

amount that an individual may contribute to one or more IRAs for 

a year is generally limited to the lesser of: (1) a dollar amount 

($5,500 for 2016); and (2) the amount of the individual’s compensation that is includible in gross income for the year.63 In the case 

of an individual who has attained age 50 by the end of the year, 

the dollar amount is increased by $1,000. In the case of a married 

couple, contributions can be made up to the dollar limit for each 

spouse if the combined compensation of the spouses that is includible in gross income is at least equal to the contributed amount. 

An individual may make contributions to a traditional IRA (up 

to the contribution limit) without regard to his or her adjusted 

gross income. An individual may deduct his or her contributions to 

a traditional IRA if neither the individual nor the individual’s 

spouse is an active participant in an employer-sponsored retirement plan. If an individual or the individual’s spouse is an active 

participant in an employer-sponsored retirement plan, the deduction is phased out for taxpayers with adjusted gross income over 

certain levels.64

Individuals with adjusted gross income below certain levels may 

make contributions to a Roth IRA (up to the contribution limit).65

Contributions to a Roth IRA are not deductible. 

As described above, an individual’s IRA contributions generally 

cannot exceed the amount of his or her compensation that is includible in gross income. Subject to the rule for spouses, described 

above, an individual who has no includible compensation income 

generally is not eligible to make IRA contributions, even if the individual has other income that is includible in gross income.66

REASONS FOR CHANGE

Graduate and postdoctoral students often receive stipends and 

similar amounts that are not treated as compensation and thus 

cannot be the basis for IRA contributions. This delays the ability 

to accumulate tax-favored retirement savings, in some cases for a 

number of years. The Committee believes that treating such 

amounts as compensation for IRA contribution purposes will enable 

some graduate and postdoctoral students to begin saving for retirement. 

EXPLANATION OF PROVISION

Under the provision, an amount that is includible in income and 

is paid to an individual to aid the individual in the pursuit of gradVerDate Sep 11 2014 01:13 Nov 24, 2016 Jkt 069010 PO 00000 Frm 00023 Fmt 6659 Sfmt 6602 E:\HR\OC\SR375.XXX SR375

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67Sec. 219. 68Sec. 219(g). 69Sec. 408(o). The annual contribution limit for IRAs is coordinated so that the maximum 

amount that can be contributed to all of an individual’s IRAs (both traditional and Roth) for 

a taxable year is the lesser of a certain dollar amount ($5,500 for 2016) or the individual’s compensation. 70Sec. 219(d)(1). 71Sec. 408A(c)(4). 

uate or postdoctoral study or research, such as a fellowship, stipend or similar amount, is treated as compensation taken into account for IRA contribution purposes. 

EFFECTIVE DATE

This provision applies for taxable years beginning after December 31, 2016. 

G. REPEAL OF MAXIMUM AGE FOR TRADITIONAL IRA CONTRIBUTIONS

(SEC. 108 OF THE BILL AND SEC. 219 OF THE CODE) 

PRESENT LAW

Under present law, an individual may make deductible contributions to a traditional IRA up to the IRA contribution limit if neither the individual nor the individual’s spouse is an active participant in an employer-sponsored retirement plan.67 If an individual 

(or the individual’s spouse) is an active participant in an employersponsored retirement plan, the deduction is phased out for taxpayers with adjusted gross income (‘‘AGI’’) for the taxable year over 

certain indexed levels.68 To the extent an individual cannot or does 

not make deductible contributions to a traditional IRA, the individual may make nondeductible contributions to a traditional IRA 

(without regard to AGI limits). Alternatively, subject to AGI limits, 

an individual may make nondeductible contributions to a Roth 

IRA.69

An individual who has attained age 701⁄2 by the close of a year 

is not permitted to make contributions to a traditional IRA.70 This 

restriction does not apply to contributions to a Roth IRA.71 In addition, employees over age 701⁄2 are not precluded from contributing 

to employer-sponsored plans. 

REASONS FOR CHANGE

More and more older Americans are continuing to work past traditional retirement ages. This provides current income, as well as 

the potential for additional retirement savings. An individual working past age 701⁄2 may contribute to an employer–sponsored retirement plan, if available, or to a Roth IRA, but not to a traditional 

IRA. The Committee wishes to remove this impediment to retirement savings. 

EXPLANATION OF PROVISION

The provision repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 701⁄2. 

EFFECTIVE DATE

The provision applies to contributions made for taxable years beginning after December 31, 2016. 


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72Secs. 408 and 408A. 73The rules for S corporations are in Subchapter S of the Code, sections 1361–1379. 74This is the date of enactment of the American Jobs Creation Act, Pub. L. No. 108–357, 

which allowed an IRA to be a shareholder of an S corporation that is a bank. A related exemption under section 4975(d)(16) of the prohibited transaction rules allowed stock held by an IRA 

at the time a bank elected to become an S corporation to be sold to the IRA owner. 75Sec. 512(e). This rule does not apply to employee stock ownership plans. 

H. EXPANSION OF IRA OWNERSHIP OF S CORPORATION BANK STOCK

(SEC. 109 OF THE BILL AND SECS. 1361 AND 4975 OF THE CODE) 

PRESENT LAW

IRAs 

An individual retirement account (‘‘IRA’’) is a tax-exempt trust or 

account established for the exclusive benefit of an individual and 

his or her beneficiaries.72 There are two general types of IRAs: traditional IRAs, to which both deductible and nondeductible contributions may be made, and Roth IRAs, contributions to which are not 

deductible. In general, amounts held in a traditional IRA are includible in income when withdrawn (except to the extent the withdrawal is a return of nondeductible contributions). Amounts held in 

a Roth IRA that are withdrawn as a qualified distribution are not 

includible in income; distributions from a Roth IRA that are not 

qualified distributions are includible in income to the extent attributable to earnings. A qualified distribution is a distribution that is 

made (1) after the five-taxable year period beginning with the first 

taxable year for which the individual made a contribution to a Roth 

IRA, and (2) after attainment of age 591⁄2, on account of death or 

disability, or for first-time homebuyer expenses of up to $10,000. 

S corporations and permissible shareholders 

In general, an S corporation is not subject to corporate-level income tax on its items of income and loss.73 Instead, an S corporation passes through its items of income and loss to its shareholders. 

The shareholders take into account separately their shares of these 

items on their individual income tax returns. 

Only certain tax-exempt organizations are permitted to be shareholders of an S corporation, including qualified retirement plans. 

Under present law, an IRA, including a Roth IRA, is permitted to 

be a shareholder of an S corporation only if the S corporation is a 

bank and only to the extent of bank stock held by the IRA on October 22, 2004.74 In the case of a tax-exempt S corporation shareholder, including an IRA, the shareholder’s interest in the S corporation is treated as an unrelated trade or business and its share 

of S corporation items of income and loss (and gain or loss on disposition of the S corporation stock) is taken into account in determining its unrelated business taxable income.75

REASONS FOR CHANGE

The Committee wishes to remove the limit on individuals’ ability 

to invest IRA assets in stock of an S corporation that is a bank. 

EXPLANATION OF PROVISION

Under the provision, an IRA, including a Roth IRA, is permitted 

to be a shareholder of an S corporation that is a bank without regard to whether the IRA held the bank stock on October 22, 2004. 


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76The provision also amends the exemption under section 4975(d)(16) of the prohibited transaction rules to allow stock held by an IRA at the time a bank elects to become an S corporation 

to be sold to the IRA owner. 77Sec. 72(t). 78Sec. 402(c)(4). Treas. Reg. sec. 1.402(c)–1 identifies certain other payments that are not eligible for rollover, including, for example, certain corrective distributions, loans that are treated 

as deemed distributions under section 72(p), and dividends on employer securities as described 

in section 404(k). In addition, pursuant to section 402(c)(11), any distribution to a beneficiary 

other than the participant’s surviving spouse is only permitted to be rolled over to an IRA using 

a direct rollover; 60-day rollovers are not available to nonspouse beneficiaries. 79Sec. 401(a)(31). Unless a participant elects otherwise, a mandatory cash-out of more than 

$1,000 must be directly rolled over to an IRA chosen by the plan administrator or the payor. 

Thus, any IRA is permitted to be a shareholder of any S corporation that is a bank.76 As under present law, an IRA’s interest in 

an S corporation is treated as an unrelated trade or business and 

its share of S corporation items of income and loss (and gain or loss 

on disposition of the S corporation stock) is taken into account in 

determining its unrelated business taxable income. 

EFFECTIVE DATE

The provision is effective January 1, 2016. 

I. EXTENDED ROLLOVER PERIOD FOR PLAN LOAN OFFSET AMOUNTS

(SEC. 110 OF THE BILL AND SEC. 402(c) OF THE CODE) 

PRESENT LAW

Taxation of retirement plan distributions 

General rule 

A distribution from a tax-favored employer-sponsored retirement 

plan (that is, a qualified retirement plan, section 403(b) plan, or a 

governmental section 457(b) plan) is generally includible in gross 

income, except to the extent that the distribution is a recovery of 

basis under the plan, or the amount of the distribution is contributed to an eligible retirement plan (that is, another tax-favored employer-sponsored retirement plan or an individual retirement arrangement (‘‘IRA’’)) in a tax-free rollover. In the case of a distribution from a retirement plan to a participant under age 591⁄2, the 

distribution (other than a distribution from a governmental section 

457(b) plan) is also subject to a 10-percent early distribution tax, 

unless an exception applies.77

Rollovers 

A distribution from a tax-favored employer-sponsored retirement 

plan that is an eligible rollover distribution may be rolled over to 

an eligible retirement plan. The rollover generally can be achieved 

by direct rollover (direct payment from the distributing plan to the 

recipient plan) or by contributing the distribution to the eligible retirement plan within 60 days of receiving the distribution (‘‘60-day 

rollover’’). Amounts that are rolled over are usually not included in 

gross income. Generally, any distribution of the balance to the 

credit of a participant is an eligible rollover distribution with exceptions, for example, certain periodic payments, required minimum distributions, and hardship distributions.78

Tax-favored employer-sponsored retirement plans are required to 

offer a direct rollover with respect to any eligible rollover distribution before paying the amount to the participant or beneficiary.79


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80Treas. Reg. sec. 1.402(c)–2, Q&A–1(b)(3). 81Sec. 72(p). 82Loans specifically for home purchases may be repaid over a longer period. 83Treas. Reg. sec.1.402(c)–2, A–9. 84Treas. Reg. sec. 1.401(a)(31)–1, A–16, and Treas. Reg. sec. 31.3405(c)–1, A–11. 

If an eligible rollover distribution is not directly rolled over into an 

eligible retirement plan, the taxable portion of the distribution generally is subject to mandatory 20-percent income tax withholding.80

Plan loan as a deemed distribution 

Tax-favored employer-sponsored retirement plans may provide 

loans to participants. Unless the loan satisfies certain requirements in both form and operation, the amount of a retirement plan 

loan is a deemed distribution from the retirement plan.81 These requirements include the following: the amount of the loan must not 

exceed the lesser of 50 percent of the participant’s account balance 

or $50,000; the terms of the loan must provide for a repayment period of not more than five years 82 and provide for level amortization of loan payments (with payments not less frequently than 

quarterly); and the terms of the loan must be legally enforceable. 

The rules do not limit the number of loans an employee may obtain 

from a plan. 

If a plan participant ceases to make payments on a loan before 

it is repaid according to the required schedule, a deemed distribution of the outstanding loan balance generally occurs. This deemed 

distribution of an unpaid loan balance is generally taxed as though 

an actual distribution occurred, including being subject to a 10-percent early distribution tax, if applicable. However, a deemed distribution is not eligible for rollover to another eligible retirement 

plan. 

Loan offset amount 

A plan may also provide that, in certain circumstances, for example, when a participant terminates employment with the employer, 

a participant’s obligation to repay a loan is accelerated and, if the 

loan is not repaid, the loan is cancelled and the amount in participant’s account balance is offset by the amount attributable to the 

loan (that is, the amount of the unpaid loan balance), referred to 

as a plan loan offset. In the case of a plan loan offset, an actual 

distribution equal to the unpaid loan balance is considered to occur, 

rather than a deemed distribution as described above, and, unlike 

a deemed distribution, the amount of the distribution is eligible for 

tax-free rollover to another eligible retirement plan.83 However, the 

plan is not required to offer a direct rollover with respect to a plan 

loan offset amount that is an eligible rollover distribution, and the 

plan loan offset amount is generally not subject to 20-percent income tax withholding.84

REASONS FOR CHANGE

A plan loan offset does not involve the current payment of funds 

to a participant. Thus, in order to roll over a plan offset amount, 

a participant must have other funds in that amount available. If 

a loan offset occurs at the time of a participant’s termination of employment, the participant might not have funds immediately available for the rollover, particularly in the case of an involuntary terVerDate Sep 11 2014 01:13 Nov 24, 2016 Jkt 069010 PO 00000 Frm 00027 Fmt 6659 Sfmt 6602 E:\HR\OC\SR375.XXX SR375

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85Sec. 401(k)(2)(B)(i)(IV). Under section 72(t), distributions on account of hardship may be 

subject to an additional 10-percent early distribution tax. 

mination. In addition, the participant may not know the precise 

date when the 60-day rollover period begins. The Committee believes that providing a longer rollover period with respect to plan 

loan offsets may result in more rollovers, thus preserving retirement savings. 

EXPLANATION OF PROVISION

Under the provision, the period during which a qualified plan 

loan offset amount may be contributed to an eligible retirement 

plan as a rollover contribution is extended from 60 days after the 

date of the offset to the due date (including extensions) for filing 

the Federal income tax return for the taxable year in which the 

plan loan offset occurs (meaning the taxable year in which the 

amount is treated as distributed by the plan). The extended rollover period applies with respect to a rollover of all, or a portion, 

of a qualified plan loan offset amount. Under the provision, a qualified plan loan offset amount is a plan loan offset amount which is 

treated as distributed from a tax-favored employer-sponsored retirement plan to a participant or beneficiary solely by reason of either the termination of the plan, or the failure to meet the repayment terms of the loan from such plan because of the separation 

from service of the participant (whether due to layoff, cessation of 

business, termination of employment, or otherwise). As under 

present law, a loan offset amount under the provision is the 

amount by which a participant’s accrued benefit under the plan is 

reduced to repay a loan from the plan. 

EFFECTIVE DATE

The provision applies to loan offsets made in taxable years beginning after December 31, 2016. 

J. MODIFICATION OF RULES RELATING TO HARDSHIP WITHDRAWALS

FROM CASH OR DEFERRED ARRANGEMENTS (SEC. 111 OF THE BILL

AND SEC. 401(k) OF THE CODE) 

PRESENT LAW

A qualified defined contribution plan may include a qualified 

cash or deferred arrangement, under which employees may elect to 

have contributions made to the plan (referred to as ‘‘elective deferrals’’) rather than receive the same amount as current compensation (referred to as a ‘‘section 401(k) plan’’). Amounts attributable 

to elective deferrals generally are subject to distribution restrictions. Such amounts cannot be distributed before the earliest of the 

employee’s severance from employment, death, disability or attainment of age 591⁄2, or termination of the plan. However, in certain 

circumstances, elective deferrals, but not associated earnings, can 

also be distributed on account of hardship.85

An employer may also make nonelective and matching contributions for employees under a section 401(k) plan. Elective deferrals, 

and matching contributions and after-tax employee contributions, 

are subject to special tests (‘‘nondiscrimination tests’’) to prevent 

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86Treas. Reg. sec. 1.401(k)–1(d)(3). 

tive contributions and matching contributions that satisfy certain 

requirements (‘‘qualified nonelective contributions and qualified 

matching contributions’’) may be used to enable the plan to satisfy 

these nondiscrimination tests. One of the requirements is that 

these contributions be subject to the same distribution restrictions 

as elective deferrals, except that these contributions (and attributable earnings) are not permitted to be distributed on account of 

hardship. 

Applicable Treasury regulations provide that a distribution is 

made on account of hardship only if the distribution is made on account of an immediate and heavy financial need of the employee 

and is necessary to satisfy the heavy need.86 Generally, the determination of whether these two requirements are met is based on 

the relevant facts and circumstances. However, a safe harbor applies under which a distribution may be deemed to be on account 

of hardship. One requirement of the safe harbor is that the employee represent that the need cannot be satisfied through currently available plan loans. This in effect requires an employee to 

take any available plan loan before receiving a hardship distribution. Another requirement is that the employee be prohibited from 

making elective deferrals and employee contributions to the plan 

and all other plans maintained by the employer for at least six 

months after receipt of the hardship distribution. 

REASONS FOR CHANGE

The rules relating to hardship distributions contain fine distinctions that create complexity for employers and plan administrators. 

These distinctions may lead to inadvertent errors, correction of 

which increases plan costs, and may also cause confusion for employees. In addition, the rule prohibiting employees from making 

contributions for six months after receiving a hardship distribution 

impedes employees’ ability to replace distributed funds. The Committee believes that the rules relating to hardship withdrawals 

should be more consistent and should not impede retirement savings. 

EXPLANATION OF PROVISION

The provision allows earnings on elective deferrals under a section 401(k) plan, as well as qualified nonelective contributions and 

qualified matching contributions (and attributable earnings), to be 

distributed on account of hardship. Further, a distribution is not 

treated as failing to be on account of hardship solely because the 

employee does not take any available plan loan. 

In addition, the Secretary of the Treasury is directed, within one 

year of the date of enactment, to revise the regulations relating to 

the hardship safe harbor to eliminate the requirement that an employee be prohibited from making elective deferrals and employee 

contributions for six months after the receipt of a hardship distribution. It is intended that an employee not be prevented for any 

period after the receipt of a hardship distribution from making 

elective deferrals and employee contributions. 


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87 A qualified employer plan is a qualified retirement plan under section 401(a) or 403(a), a 

tax-deferred annuity plan under section 403(b), or a plan established and maintained for its employees by the United States, a State or political subdivision, or an agency or instrumentality 

of any of the foregoing. 88Loans specifically for home purchases may be repaid over a longer period. 89For loans made in plan years beginning after December 31, 2017, this amount is increased 

to reflect cost-of-living increases, with any increase rounded down to the next lowest multiple 

of $50. 

EFFECTIVE DATE

The provision applies to plan years beginning after December 31, 

2016. 

K. QUALIFIED EMPLOYER PLANS PROHIBITED FROM MAKING LOANS

THROUGH CREDIT CARDS AND OTHER SIMILAR ARRANGEMENTS

(SEC. 112 OF THE BILL AND SEC. 72(p) OF THE CODE) 

PRESENT LAW

Qualified employer plans may provide loans to participants.87

Unless the loan satisfies certain requirements in both form and operation as discussed above, the amount of a plan loan is a deemed 

distribution from the plan. These requirements include the following: the amount of the loan must not exceed the lesser of 50 

percent of the participant’s account balance or $50,000 (generally 

taking into account outstanding balances of previous loans); the 

terms of the loan must provide for a repayment period of not more 

than five years 88 and provide for level amortization of loan payments (with payments not less frequently than quarterly); and the 

terms of the loan must be legally enforceable. Subject to the limit 

on the amount of loans, which precludes any additional loan that 

would cause the limit to be exceeded, the rules relating to loans do 

not limit the number of loans an employee may obtain from a plan. 

Some arrangements have developed under which an employee can 

access plan loans through the use of a credit card or similar mechanism. 

REASONS FOR CHANGE

The availability of plan loans may encourage employees to contribute to a retirement plan with the knowledge that funds may be 

accessed if needed. However, loans that are not repaid have the effect of depleting retirement savings. Easy access to plan loans 

through credit or debit cards and similar arrangements may lead 

to the use of retirement plan assets for routine or small purchases 

and, over time, result in an accumulated loan balance that an employee cannot repay. The Committee believes that appropriate limits should be placed on such arrangements. 

EXPLANATION OF PROVISION

Under the provision, a plan loan that is made through the use 

of a credit card or similar arrangement generally does not meet the 

requirements for loan treatment and is therefore a deemed distribution. However, an exception applies to the extent a loan is provided through an electronic card system which, as of September 21, 

2016, was available for use to provide loans under qualified employer plans. The exception does not apply to a loan resulting from 

a transaction of $1,000 89 or less or to a transaction with or on the 


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90These establishments are described by reference to section 408(a)(12)(A)(i), (ii) and (iii) of 

the Social Security Act. 

premises of a liquor store, casino, gaming establishment, or any retail establishment that provides adult-oriented entertainment.90

The provision directs the Government Accountability Office 

(‘‘GAO’’) to conduct a study of the impact of loans provided through 

credit cards and similar arrangements on the use of retirement 

savings for purposes other than funding retirement (referred to as 

‘‘leakage’’). GAO is to report the results of its study within one year 

after enactment of the provision to the Chairman and Ranking 

Member of the Senate Committee on Finance of the Senate and the 

Committee on Ways and Means of the House of Representatives. 

If the study shows that such loans, after implementation of the restrictions under the provision, result in greater leakage than other 

loans from retirement plans, the report must include recommendations to reduce leakage. 

EFFECTIVE DATE

The provision applies to plan years beginning after December 31, 

2016. 

L. PORTABILITY OF LIFETIME INCOME OPTIONS (SEC. 113 OF THE

BILL AND SECS. 401(a), 403(b) AND 457(d) OF THE CODE) 

PRESENT LAW

Distribution restrictions for accounts under employer-sponsored 

plans 

Types of plans and contributions 

Tax-favored employer-sponsored retirement plans under which 

individual accounts are maintained for employees include qualified 

defined contribution plans, tax-deferred annuity plans (referred to 

as ‘‘section 403(b)’’ plans), and eligible deferred compensation plans 

of State and local government employers (referred to as ‘‘governmental section 457(b)’’ plans). 

Contributions to a qualified defined contribution plan or section 

403(b) plan may include some or all of the following types of contributions: 

• pretax elective deferrals (that is, pretax contributions 

made at the election of an employee in lieu of receiving cash 

compensation), 

• after-tax designated Roth contributions (that is, elective 

deferrals made on an after-tax basis to a Roth account under 

the plan), 

• after-tax employee contributions (other than designated 

Roth contributions), 

• pretax employer matching contributions (that is, employer 

contributions made as a result of an employee’s elective deferrals, designated Roth contributions, or after-tax contributions), 

and • pretax employer nonelective contributions (that is, employer contributions made without regard to whether an employee makes elective deferrals, designated Roth contributions, 

or after-tax contributions). 


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91Sec. 401(k)(2)(B). Similar restrictions apply to certain other contributions, such as employer 

matching or nonelective contributions required under the nondiscrimination safe harbors under 

section 401(k). 92 Rev. Rul. 71–295, 1971–2 C.B. 184, and Treas. Reg. sec. 1.401–1(b)(1)(ii). Similar rules 

apply to a stock bonus plan. Treas. Reg. sec. 1.401–1(b)(1)(iii). 93Sec. 401(a)(36) and Treas. Reg. secs. 1.401–1(b)(1)(i) and 1.401(a)–1(b). 94Secs. 403(b)(7)(A)(ii) and 403(b)(11). 95Sec. 457(d)(1)(A). 96Secs. 402(a), 403(b)(1) and 457(a)(1). Under section 402A(d), a qualified distribution from 

a designated Roth account under an employer-sponsored plan is not includible in income. 97Sec. 72(t). 

Contributions to a governmental section 457(b) plan generally 

consist of pretax elective deferrals and, if provided for under the 

plan, designated Roth contributions. 

Restrictions on in-service distributions 

The terms of an employer-sponsored retirement plan generally 

determine when distributions are permitted. However, in some 

cases, statutory restrictions on distributions may apply. 

Elective deferrals under a qualified defined contribution plan are 

subject to statutory restrictions on distribution before severance 

from employment, referred to as ‘‘in-service’’ distributions.91 Inservice distributions of elective deferrals (and related earnings) 

generally are permitted only after attainment of age 591⁄2 or termination of the plan. In-service distributions of elective deferrals (but 

not related earnings) are also permitted in the case of hardship. 

Other distribution restrictions may apply to contributions under 

certain types of qualified defined contribution plans. A profit-sharing plan generally may allow an in-service distribution of an 

amount contributed to the plan only after a fixed number of years 

(not less than two).92 A money purchase pension plan generally 

may not allow an in-service distribution before attainment of age 

62 (or attainment of normal retirement age under the plan if earlier) or termination of the plan.93

Elective deferrals under a section 403(b) plan are subject to inservice distribution restrictions similar to those applicable to elective deferrals under a qualified defined contribution plan, and, in 

some cases, other contributions to a section 403(b) plan are subject 

to similar restrictions.94 Deferrals under a governmental section 

457(b) plan are subject to in-service distribution restrictions similar 

to those applicable to elective deferrals under a qualified defined 

contribution plan, except that in-service distributions under a governmental section 457(b) plan apply until age 701⁄2 (rather than 

age 591⁄2).95

Distributions and rollovers 

A distribution from an employer-sponsored retirement plan is 

generally includible in income except for any portion attributable 

to after-tax contributions, which result in basis.96 Unless an exception applies, in the case of a distribution before age 591⁄2 from a 

qualified retirement plan or a section 403(b) plan, any amount included in income is subject to an additional 10-percent tax, referred 

to as the ‘‘early withdrawal’’ tax.97

A distribution from an employer-sponsored retirement plan generally may be rolled over on a nontaxable basis to another such 

plan or to an individual retirement arrangement (‘‘IRA’’), either by 

a direct transfer to the recipient plan or IRA or by contributing the 


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98Secs. 402(c), 402A(c)(3), 403(b)(8) and 457(e)(16). 99 In the case of a plan subject to the Employee Retirement Income Security Act of 1974 

(‘‘ERISA’’), a participant’s exercise of control over the investment of the assets in his or her account by choosing among the investment options offered under the plan does not relieve a plan 

fiduciary from the duty to prudently select and monitor the investment options offered to participants. 29 C.F.R. sec. 2550.404c–1(d)(2)(iv) (2010); Tibble v. Edison International, No. 13–550, 

135 S. Ct. 1823 (2015). The duty to monitor investment options may result in a change in the 

options offered. 

distribution to the recipient plan or IRA within 60 days of receiving 

the distribution.98 If the distribution from an employer-sponsored 

retirement plan consists of property, the rollover is accomplished 

by a transfer or contribution of the property to the recipient plan 

or IRA. 

Investment of accounts under employer-sponsored plans 

Qualified defined contribution plans, section 403(b) plans, and 

governmental section 457(b) plans commonly allow employees to direct the manner in which their accounts are invested. Employees 

may be given a choice among specified investment options, such as 

a choice of specified mutual funds, and, in some cases, may be able 

to direct the investment of their accounts in any product, instrument or investment offered in the market. 

The investment options under a particular employer-sponsored 

retirement plan may change at times.99 Similarly, a plan that allows employees to direct the investment of their accounts in any 

product, instrument or investment offered in the market may be 

amended to limit the investments that can be held in the plan. In 

these cases, employees may be required to change the investments 

held within their accounts without the option of receiving a distribution of the existing investment. 

REASONS FOR CHANGE

The terms of some investments impose a charge or fee when the 

investment is liquidated, particularly if the investment is liquidated within a particular period after acquisition. For example, 

a lifetime income product, such as an annuity contract, may impose 

a surrender charge if the investment is discontinued. If an employee has to liquidate an investment held in an employer-sponsored retirement plan, for example, because of a change in investment options or a limit on investments held in the plan, the employee may be subject to such a charge or fee. Restrictions on inservice distributions may prevent the employee from avoiding such 

a charge or fee, and also from preserving the investment, through 

a distribution and rollover of the existing investment. The Committee wishes to allow distributions in such cases. 

EXPLANATION OF PROVISION

Under the provision, if a lifetime income investment is no longer 

authorized to be held as an investment option under a qualified defined contribution plan, section 403(b) plan, or governmental section 457(b) plan, except as otherwise provided in guidance, the plan 

does not fail to satisfy the Code requirements applicable to the plan 

solely by reason of allowing (1) qualified distributions of a lifetime 

income investment, or (2) distributions of a lifetime income investment in the form of a qualified plan distribution annuity contract. 

Such a distribution must be made within the 90-day period ending 


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100Sec. 402A. 101Sec. 403(b)(7). 

on the date when the lifetime income investment is no longer authorized to be held as an investment option under the plan. 

For purposes of the provision, a qualified distribution is a direct 

trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA. A lifetime income investment is an investment 

option designed to provide an employee with election rights (1) that 

are not uniformly available with respect to other investment options under the plan and (2) that are to a lifetime income feature 

available through a contract or other arrangement offered under 

the plan (or under another employer-sponsored retirement plan or 

IRA through a direct trustee-to-trustee transfer to the other plan 

or IRA of the contract or other arrangement). A lifetime income 

feature is (1) a feature that guarantees a minimum level of income 

annually (or more frequently) for at least the remainder of the life 

of the employee or the joint lives of the employee and the employee’s designated beneficiary, or (2) an annuity payable on behalf of 

the employee under which payments are made in substantially 

equal periodic payments (not less frequently than annually) over 

the life of the employee or the joint lives of the employee and the 

employee’s designated beneficiary. Finally, a qualified plan distribution annuity contract is an annuity contract purchased for a 

participant and distributed to the participant by an employer-sponsored retirement plan. 

EFFECTIVE DATE

The provision applies to plan years beginning after December 31, 

2016. 

M. TREATMENT OF CUSTODIAL ACCOUNTS ON TERMINATION OF SEC- TION 403(b) PLANS (SEC. 114 OF THE BILL AND SEC. 403(b) OF THE

CODE) 

PRESENT LAW

Tax-sheltered annuities (section 403(b) plans) 

Section 403(b) plans are a form of tax-favored employer-sponsored plan that provide tax benefits similar to qualified retirement 

plans. Section 403(b) plans may be maintained only by (1) charitable tax-exempt organizations, and (2) educational institutions of 

State or local governments (that is, public schools, including colleges and universities). Many of the rules that apply to section 

403(b) plans are similar to the rules applicable to qualified retirement plans, including section 401(k) plans. Employers may make 

nonelective or matching contributions to such plans on behalf of 

their employees, and the plan may provide for employees to make 

pre-tax elective deferrals, designated Roth contributions (held in 

designated Roth accounts) 100 or other after-tax contributions. Generally section 403(b) plans provide for contributions toward the 

purchase of annuity contracts or provide for contributions to be 

held in custodial accounts for each employee. In the case of contributions to custodial accounts under a section 403(b) plan, the 

amounts must be invested only in regulated investment company 

stock.101 Contributions to a custodial account are not permitted to 


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102Treas. Reg. sec. 1.403(b)–10(a). 103Sec. 403(b)(8). Similar rules apply to distributions from qualified retirement plans and governmental section 457(b) plans. 104 Under section 402(c)(11), any distribution to a beneficiary other than the participant’s surviving spouse is only permitted to be rolled over to an IRA using a direct rollover; 60-day rollovers are not available to nonspouse beneficiaries. 105Sec. 402(c)(4). Treas. Reg. sec. 1.402(c)–1 identifies certain other payments that are not eligible for rollover, including, for example, certain corrective distributions, loans that are treated 

as deemed distributions under section 72(p), and dividends on employer securities as described 

in section 404(k). 106Sec. 408A(d)(3). Similar rules apply to qualified retirement plans and governmental section 

457(b) plans. 107Sec. 402A(d)(4). Similar rules apply to qualified retirement plans and governmental section 

457(b) plans. 

be distributed before the employee dies, attains age 591⁄2, has a 

severance from employment, or, in the case of elective deferrals, encounters financial hardship. 

A section 403(b) plan is permitted to contain provisions for plan 

termination and that allow accumulated benefits to be distributed 

on termination.102 In order for a plan termination to be effectuated, 

however, all plan assets must be distributed to participants. 

Rollovers 

A distribution from a section 403(b) plan that is an eligible rollover distribution may be rolled over to an eligible retirement plan 

(which include another 403(b) plan, a qualified retirement plan, 

and an IRA).103 The rollover generally can be achieved by direct 

rollover (direct payment from the distributing plan to the recipient 

plan) or by contributing the distribution to the eligible retirement 

plan within 60 days of receiving the distribution (‘‘60-day rollover’’).104 Amounts that are rolled over are usually not included in 

gross income. Generally, a distribution of any portion of the balance to the credit of a participant is an eligible rollover distribution 

with exceptions, for example, certain periodic payments, required 

minimum distributions, and hardship distributions.105

Roth conversions 

Distributions from section 403(b) plans may be rolled into a Roth 

IRA.106 Distributions from these plans that are rolled over into a 

Roth IRA and that are not distributions from a designated Roth account must be included in gross income. Further, a section 403(b) 

plan that allows employees to make designated Roth contributions 

may also allow employees to elect to transfer amounts held in accounts that are not designated Roth accounts into designated Roth 

accounts, but the amount transferred must be included in income 

as though it were distributed.107

Approved nonbank trustees required for IRAs 

An IRA can be a trust, a custodial account, or an annuity contract. The Code requires that the trustee or custodian of an IRA 

be a bank (which is generally subject to Federal or State supervision) or an IRS approved nonbank trustee, that an annuity contract be issued by an insurance company (which is subject to State 

supervision), and that an IRA trust or custodial account be created 

and organized in the United States. 

In order for a trustee or custodian that is not a bank to be an 

IRA trustee or custodian, the entity must apply to the IRS for approval. Treasury Regulations list a number of factors that are 


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108Treas. Reg. sec. 1.408–2(e). 

taken into account in approving an applicant to be a nonbank 

trustee.108 The applicant must demonstrate fiduciary ability (ability to act within accepted rules of fiduciary conduct including continuity and diversity of ownership), capacity to account (experience 

and competence with other activities normally associated with handling of retirement funds), and ability to satisfy other rules of fiduciary conduct which includes a net worth requirement. Because it 

is an objective requirement that may be difficult for some applicants to satisfy, the net worth requirement is the most significant 

of the requirements for nonbank trustees. 

To be approved, the entity must have a net worth of at least 

$250,000 at the time of the application. There is a maintenance 

rule that varies depending on whether the trustee is an active 

trustee or a passive trustee and that includes minimum dollar 

amounts and minimum amounts as a percentage of assets held in 

fiduciary accounts. A special rule is provided for nonbank trustees 

that are members of the Security Investor Protection Corporation 

(‘‘SIPC’’). 

REASONS FOR CHANGE

In general, assets of section 403(b) plans can be invested only in 

annuity contracts or mutual funds. Unlike most qualified defined 

contribution plans, under which assets are held in a trust, historically, assets associated with section 403(b) plans have often consisted of annuity contracts issued in the name of the particular 

participant or mutual funds held in a custodial account in the participant’s name. In many cases, this prevents an employer from distributing these assets in order to effectuate a plan termination. The 

Committee wishes to provide a mechanism under which the plan 

termination may proceed while keeping assets that cannot otherwise be distributed in a tax-favored retirement savings vehicle. 

EXPLANATION OF PROVISION

Under the provision, if an employer terminates a section 403(b) 

plan under which amounts are contributed to custodial accounts, 

and the person holding the assets of the accounts is an IRS approved nonbank trustee, then, as of the date of the termination, the 

custodial accounts are deemed to be IRAs. Only a custodial account 

under a section 403(b) plan that is a designated Roth account is 

treated as a Roth IRA upon termination of the section 403(b) plan. 

EFFECTIVE DATE

The provision applies to plan terminations occurring after December 31, 2016. 

N. CLARIFICATION OF RETIREMENT INCOME ACCOUNT RULES RELAT- ING TO CHURCH-CONTROLLED ORGANIZATIONS (SEC. 115 OF THE

BILL AND SEC. 403(b)(9) OF THE CODE) 

PRESENT LAW

Assets of a tax-sheltered annuity plan (‘‘section 403(b)’’ plan), 

generally must be invested in annuity contracts or mutual 


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109Sec. 403(b)(1)(A) and (7). 110 Sec. 403(b)(9)(B), referring to organizations exempt from tax under section 501(c)(3). For 

this purpose, a church or a convention or association of churches includes an organization described in section 414(e)(3)(A), that is, an organization, the principal purpose or function of 

which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association 

of churches, provided that the organization is controlled by or associated with a church or a convention or association of churches. 111 Sec. 403(b)(1)(D) and (12). 112 These individuals are described in section 414(e)(3)(B). 

funds.109 However, the restrictions on investments do not apply to 

a retirement income account, which is a defined contribution program established or maintained by a church, or a convention or association of churches, to provide benefits under the plan to employees of a religious, charitable or similar tax-exempt organization.110

Certain rules prohibiting discrimination in favor of highly compensated employees, which apply to section 403(b) plans generally, 

do not apply to a plan maintained by a church or qualified churchcontrolled organization.111 For this purpose, church means a 

church, a convention or association of churches, or an elementary 

or secondary school that is controlled, operated, or principally supported by a church or by a convention or association of churches, 

and includes a qualified church-controlled organization. A qualified 

church-controlled organization is any church-controlled tax-exempt 

organization other than an organization that (1) offers goods, services, or facilities for sale, other than on an incidental basis, to the 

general public, other than goods, services, or facilities that are sold 

at a nominal charge substantially less than the cost of providing 

the goods, services, or facilities, and (2) normally receives more 

than 25 percent of its support from either governmental sources, or 

receipts from admissions, sales of merchandise, performance of 

services, or furnishing of facilities, in activities that are not unrelated trades or businesses, or from both. Church-controlled organizations that are not qualified church-controlled organizations are 

generally referred to as ‘‘nonqualified church-controlled organizations.’’ 

In recent years, a question has arisen as to whether employees 

of nonqualified church-controlled organizations may be covered 

under a section 403(b) plan that consists of a retirement income account. 

REASONS FOR CHANGE

The Committee wishes to clarify the individuals who may be covered by a retirement income account. 

EXPLANATION OF PROVISION

The provision clarifies that a retirement income account may 

cover a duly ordained, commissioned, or licensed minister of a 

church in the exercise of his ministry, regardless of the source of 

his compensation; an employee of a tax-exempt organization, 

whether a civil law corporation or otherwise, that is controlled by 

or associated with a church or a convention or association of 

churches; and certain employees after separation from service with 

a church, a convention or association of churches, or an organization described above.112


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113 Rev. Rul. 76–28; 1976–1 C.B. 106. 114 Rev. Rul. 81–114; 1981–1 C.B. 207. 115Sec. 404(a)(6). 116 Sec. 401(b). 117Treas. Reg. sec. 1.401(b)–1(a). 

EFFECTIVE DATE

The provision applies to years beginning before, on, or after the 

date of enactment of the provision. 

TITLE II—ADMINISTRATIVE IMPROVEMENTS 

A. PLAN ADOPTED BY FILING DUE DATE FOR YEAR MAY BE TREATED

AS IN EFFECT AS OF CLOSE OF YEAR (SEC. 201 OF THE BILL AND

SEC. 401(b) OF THE CODE) 

PRESENT LAW

In order for a qualified retirement plan to be treated as maintained for a taxable year, the plan must be adopted by the last day 

of the taxable year.113 However, the trust under the plan will not 

fail to be treated as in existence due to lack of corpus merely because it holds no assets on the last day of the taxable year.114 Contributions made by the due date (plus extensions) of the tax return 

for the employer maintaining the plan for a taxable year are treated as contributed on account of that taxable year.115 Thus a plan 

can be established on the last day of a taxable year even though 

the first contribution is not made until the due date of the employer’s taxable year. Further, if the terms of a plan adopted during an 

employer’s taxable year fail to satisfy the qualification requirements that apply to the plan for the year, the plan may also be 

amended retroactively by the due date (including extensions) of the 

employer’s return, provided that the amendment is made retroactively effective.116 However, this provision does not allow a plan 

to be adopted after the end of a taxable year and made retroactively effective, for qualification purposes, for the taxable year 

prior to the taxable year in which the plan was adopted by the employer.117

REASONS FOR CHANGE

An employer, particularly a small employer, might not know 

until after the end of a taxable year (the ‘‘preceding year’’) that its 

profits for the preceding year are sufficient to support the expenses 

and contributions associated with the establishment of a retirement plan. However, under present law, a plan established at that 

time can be effective only for the current year, not for the preceding year. The Committee believes that allowing a plan to be effective for the preceding year provides the opportunity for employees to receive contributions for that earlier year and begin to accumulate retirement savings. 

EXPLANATION OF PROVISION

Under the provision, if an employer adopts a qualified retirement 

plan after the close of a taxable year but before the time prescribed 

by law for filing the return of the employer for the taxable year (including extensions thereof), the employer may elect to treat the 

plan as having been adopted as of the last day of the taxable year. 


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118 Treas. Reg. sec. 1.401(k)–1(e)(2)(ii). 119Sec. 6058. In addition, under section 6059, the plan administrator of a defined benefit plan 

subject to the minimum funding requirements is required to file an annual actuarial report. 

Under Code section 414(g) and ERISA section 3(16), plan administrator generally means the 

person specifically so designated by the terms of the plan document. In the absence of a designation, the plan administrator generally is (1) in the case of a plan maintained by a single employer, the employer, (2) in the case of a plan maintained by an employee organization, the employee organization, or (3) in the case of a plan maintained by two or more employers or jointly 

by one or more employers and one or more employee organizations, the association, committee, 

joint board of trustees, or other similar group of representatives of the parties that maintain 

the plan. Under ERISA, the party described in (1), (2) or (3) is referred to as the ‘‘plan sponsor.’’ 120 ERISA secs. 103 and 104. Under ERISA section 4065, the plan administrator of certain 

defined benefit plans must provide information to the PBGC. 121 Information is shared also with the PBGC, as applicable. Form 5500 filings are also publicly released in accordance with section 6104(b) and Treas. Reg. sec. 301.6104(b)–1 and ERISA 

secs. 104(a)(1) and 106(a). 122 Under section 6011(a) and (e), the IRS is required to provide standards for electronically 

filed returns, but may not require a person to file a return electronically unless the person is 

required to file at least 250 returns during the calendar year (‘‘250 return threshold for electronic filing’’). Under Treas. Reg. sec. 301.6058–2, Form 5500 for a plan year must be filed electronically if the filer is required to file at least 250 tax returns (including information returns) 

during the calendar year that includes the first day of the plan year. 

The provision does not override rules requiring certain plan provisions to be in effect during a plan year, such as the provision for 

elective deferrals under a qualified cash or deferral arrangement 

(‘‘generally referred to as a 401(k) plan’’).118

EFFECTIVE DATE

The provision applies to plans adopted for taxable years beginning after December 31, 2016. 

B. COMBINED ANNUAL REPORT FOR GROUP OF PLANS (SEC. 202 OF

THE BILL, SEC. 6058 OF THE CODE, AND SEC. 104 OF ERISA) 

PRESENT LAW

Under the Code, an employer maintaining a qualified retirement 

plan generally is required to file an annual return containing information required under regulations with respect to the qualification, 

financial condition, and operation of the plan.119 ERISA requires 

the plan administrator of certain pension and welfare benefit plans 

to file annual reports disclosing certain information to the Department of Labor (‘‘DOL’’).120 These filing requirements are met by filing a completed Form 5500, Annual Return/Report of Employee 

Benefit Plan. Forms 5500 are filed with DOL, and information from 

Forms 5500 is shared with the IRS.121 A separate Form 5500 is required for each plan.122

REASONS FOR CHANGE

Forms 5500 provide valuable information about plans to plan 

participants, administrative agencies, and the public, including researchers. However, the preparation of Form 5500 also involves administrative costs that increase plan expenses. The Committee believes that, in the case of identical plans (that is, plans with the 

same plan year, trustee, administrator and investments) maintained by unrelated employers, permitting a single Form 5500, containing information specific to each plan, rather than requiring a 

separate Form 5500 for each plan as under present law, can reduce 

aggregate administrative costs, making it easier for small employers to sponsor a retirement plan and thus improving retirement 

savings. 


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123 Under the provision, for purposes of applying the 250 return threshold for electronic filing 

to Forms 5500 for plan years beginning after December 31, 2016, information regarding each 

plan for which information is provided on the Form 5500 is treated as a separate return. 124 ERISA sec. 105. Benefits statements are required also with respect to defined benefit 

plans. A civil penalty may apply for a failure to provide a required benefit statement. 125 78 Fed. Reg. 26727 (May 8, 2013). 

EXPLANATION OF PROVISION

The provision directs the IRS and DOL to work together to modify Form 5500 so that all members of a group of plans described 

below may file a single consolidated Form 5500. In developing the 

consolidated Form 5500, IRS and DOL may require it to include all 

information for each plan in the group as IRS and DOL determine 

is necessary or appropriate for the enforcement and administration 

of the Code and ERISA.123

For purposes of the provision, a group of plans is eligible for a 

consolidated Form 5500 if all the plans in the group (1) are defined 

contribution plans, (2) have the same trustee, the same named fiduciary (or named fiduciaries) under ERISA, and the same administrator, (3) use the same plan year, and (4) provide the same investments or investment options to participants and beneficiaries. 

A plan not subject to ERISA may be included in the group if the 

same person that performs each of the previous functions, as applicable, for all the other plans in the group performs each of the 

functions for the plan not subject to ERISA. 

EFFECTIVE DATE

The consolidated Form 5500 is to be implemented not later than 

January 1, 2020, and shall be effective for returns and reports for 

plan years beginning after December 31, 2019. 

C. DISCLOSURE REGARDING LIFETIME INCOME (SEC. 203 OF THE BILL

AND SEC. 105 OF ERISA) 

PRESENT LAW

ERISA requires the administrator of a defined contribution plan 

to provide benefit statements to participants.124 In the case of a 

participant who has the right to direct the investment of the assets 

in his or her account, a benefit statement must be provided at least 

quarterly. Benefit statements must be provided at least annually 

to other participants. 

Among other items, a benefit statement provided with respect to 

a defined contribution plan generally must include (1) the participant’s total benefits accrued, that is, the participant’s account balance, (2) the vested portion of the account balance or the earliest 

date on which the account balance will become vested, and (3) the 

value of each investment to which assets in the participant’s account are allocated. A quarterly benefit statement provided to a 

participant who has the right to direct investments must provide 

additional information, including information relating to investment principles. 

In May 2013, the Department of Labor issued an advance notice 

of proposed rulemaking providing rules under which a benefit provided to a defined contribution plan participant would include an 

estimated lifetime income stream of payments based on the participant’s account balance.125 However, information about lifetime inVerDate Sep 11 2014 02:31 Nov 24, 2016 Jkt 069010 PO 00000 Frm 00040 Fmt 6659 Sfmt 6602 E:\HR\OC\SR375.XXX SR375

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come that might be provided by funds in a defined contribution 

plan is not currently required to be included in a benefit statement. 

REASONS FOR CHANGE

Retirees are generally eligible for annuity benefits under the Social Security system, but, for many retirees, additional income that 

will last for life is needed. Defined contribution plans provide a valuable source of retirement savings, but generally, unlike defined 

benefit plans, do not offer benefits in the form of annuities or other 

distribution forms that provide lifetime income. In addition, most 

plan participants do not understand how to correlate the funds in 

a defined contribute plan account with an annuity or other lifetime 

income form. The Committee wishes to require information on 

equivalent lifetime income to be included in benefit statements 

with respect to defined contribution plan accounts, in a manner 

that is both useful to participants and practicable for plan administrators. 

EXPLANATION OF PROVISION

The provision requires a benefit statement provided to a defined 

contribution plan participant to include a lifetime income disclosure as described in the provision. However, the lifetime income 

disclosure is required to be included in only one benefit statement 

during any 12-month period. 

A lifetime income disclosure is required to set forth the lifetime 

income stream equivalent of the participant’s total account balance 

under the plan. The lifetime income stream equivalent to the account balance is the amount of monthly payments the participant 

would receive if the total account balance were used to provide lifetime income streams, based on assumptions specified in guidance 

prescribed by the Secretary of Labor (referred to as the ‘‘Secretary’’ 

in this explanation). The required lifetime income streams are (1) 

a qualified joint and survivor annuity for the participant and the 

participant’s surviving spouse, based on assumptions specified in 

guidance, including the assumption that the participant has a 

spouse of equal age, and (2) a single life annuity. The lifetime income streams may have a term certain or other features to the extent permitted under guidance. 

The Secretary is directed to issue, not later than a year after the 

provision is enacted, a model lifetime income disclosure, written in 

a manner to be understood by the average plan participant. The 

model must include provisions to (1) explain that the lifetime income stream equivalent is only provided as an illustration, (2) explains that the actual payments under the lifetime income stream 

that may be purchased with the account balance will depend on numerous factors and may vary substantially from the lifetime income stream equivalent in the disclosure, (3) explain the assumptions on which the lifetime income stream equivalent is determined, and (4) provides other similar explanations as the Secretary 

considers appropriate. 

In addition, the Secretary is directed, not later than a year after 

the provision is enacted, (1) to prescribe assumptions that defined 

contribution plan administrators may use in converting account 

balances into lifetime income stream equivalents, and (2) issue interim final rules under the provision. In prescribing assumptions, 


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126 29 C.F.R. sec. 2550.404a–4. 

the Secretary may prescribe a single set of specific assumptions (in 

which case the Secretary may issue tables or factors that facilitate 

conversions of account balances) or ranges of permissible assumptions. To the extent that an account balance is or may be invested 

in a lifetime income stream, the prescribed assumptions are to 

allow, to the extent appropriate, plan administrators to use the 

amounts payable under the lifetime income stream as a lifetime income stream equivalent. 

Under the provision, no plan fiduciary, plan sponsor, or other 

person has any liability under ERISA solely by reason of the provision of lifetime income stream equivalents that are derived in accordance with the assumptions and guidance under the provision 

and that include the explanations contained in model disclosure. 

This protection applies without regard to whether the lifetime income stream equivalent is required to be provided. 

EFFECTIVE DATE

The requirement to provide a lifetime income disclosure applies 

with respect to benefit statements provided more than 12 months 

after the latest of the issuance by the Secretary of (1) interim final 

rules, (2) the model disclosure, or (3) prescribed assumptions. 

D. FIDUCIARY SAFE HARBOR FOR SELECTION OF LIFETIME INCOME

PROVIDER (SEC. 204 OF THE BILL AND SEC. 404 OF ERISA) 

PRESENT LAW

ERISA imposes certain standards of care with respect to the actions of a plan fiduciary. Specifically, a fiduciary is required to discharge its duties with respect to the plan solely in the interest of 

the participants and beneficiaries, for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable administration expenses of the plan, with the care, skill, 

prudence, and diligence under the circumstances then prevailing 

that a prudent man acting in a like capacity and familiar with relevant matters would use in the conduct of an enterprise of a like 

character and with like aims (the ‘‘prudent man’’ requirement), by 

diversifying plan investments so as to minimize the risk of large 

losses unless, under the circumstances, it is clearly prudent not to 

do so, and in accordance with plan documents and governing instruments insofar as the documents and instruments are consistent 

with ERISA. 

Department of Labor regulations provide a safe harbor for a fiduciary to satisfy the prudent man requirement in selecting an annuity provider and a contract for benefit distributions from a defined 

contribution plan.126

REASONS FOR CHANGE

Unlike defined benefit plans, defined contribution plans generally 

do not offer benefits in the form of annuities or other distribution 

forms that provide lifetime income, which, under a defined contribution plan, generally must be provided through a contract 

issued by an insurance company. In the case of a defined contribution plan subject to ERISA, the selection of a lifetime income proVerDate Sep 11 2014 02:31 Nov 24, 2016 Jkt 069010 PO 00000 Frm 00042 Fmt 6659 Sfmt 6602 E:\HR\OC\SR375.XXX SR375

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vider (such as an insurance company) is a fiduciary act. Uncertainty about the applicable fiduciary standard may discourage plan 

sponsors and administrators from offering lifetime income benefit 

options under a defined contribution plan. 

EXPLANATION OF PROVISION

The provision specifies measures that a plan fiduciary may take 

with respect to the selection of an insurer and a guaranteed retirement income contract in order to assure that the fiduciary meets 

the prudent man requirement. The measures under the provision 

are an optional means by which a fiduciary will be considered to 

satisfy the prudent man requirement with respect to the selection 

of insurers and guaranteed retirement income contracts and do not 

establish minimum requirements or the exclusive means for satisfying the prudent man requirement. 

For purposes of the provision, an insurer is an insurance company, insurance service or insurance organization qualified to do 

business in a State and includes affiliates of those entities to the 

extent the affiliate is licensed to offer guaranteed retirement income contracts. A guaranteed retirement income contract is an annuity contract for a fixed term or a contract (or provision or feature 

thereof) designed to provide a participant guaranteed benefits annually (or more frequently) for at least the remainder of the life of 

the participant or joint lives of the participant and the participant’s 

designated beneficiary as part of a defined contribution plan. 

With respect to the selection of an insurer and a guaranteed retirement income contract (as defined below), the prudent man requirement will be deemed met if a fiduciary— 

• engages in an objective, thorough and analytical search for 

the purpose of identifying insurers from which to purchase 

guaranteed retirement income contracts, 

• with respect to each insurer identified through the search, 

considers the financial capability of the insurer to satisfy its 

obligations under the guaranteed retirement income contract 

and considers the cost (including fees and commissions) of the 

guaranteed retirement income contract offered by the insurer 

in relation to the benefits and product features of the contract 

and administrative services to be provided under the contract, 

and • on the basis of the foregoing, concludes that, at the time 

of the selection (as described below), the insurer is financially 

capable of satisfying its obligations under the guaranteed retirement income contract and that the cost (including fees and 

commissions) of the selected guaranteed retirement income 

contract is reasonable in relation to the benefits and product 

features of the contract and the administrative services to be 

provided under the contract. 

A fiduciary will be deemed to satisfy the requirements above 

with respect to the financial capability of the insurer if— • the fiduciary obtains written representations from the insurer that it is licensed to offer guaranteed retirement income 

contracts; that the insurer, at the time of selection and for each 

of the immediately preceding seven years operates under a certificate of authority from the Insurance Commissioner of its 

domiciliary State that has not been revoked or suspended, has 


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127 However, a fiduciary is not required to review the appropriateness of its conclusions following the purchase of any contract or contracts for specific participants or beneficiaries. 

filed audited financial statements in accordance with the laws 

of its domiciliary State under applicable statutory accounting 

principles, maintains (and has maintained) reserves that satisfy all the statutory requirements of all States where the insurer does business, and is not operating under an order of supervision, rehabilitation, or liquidation; and that the insurer 

undergoes, at least every five years, a financial examination 

(within the meaning of the law of its domiciliary State) by the 

Insurance Commissioner of the domiciliary State (or representative, designee, or other party approved thereby); 

• in the case that, following the issuance of the insurer representations described above, there is any change that would 

preclude the insurer from making the same representations at 

the time of issuance of the guaranteed retirement income contract, the insurer is required to notify the fiduciary, in advance 

of the issuance of any guaranteed retirement income contract, 

that the fiduciary can no longer rely on one or more of the representations; and 

• the fiduciary has not received such a notification and has 

no other facts that would cause it to question the insurer representations. 

The provision specifies that nothing in these requirements is to 

be construed to require a fiduciary to select the lowest cost contract. Accordingly, a fiduciary may consider the value, including 

features and benefits of the contract and attributes of the insurer 

in conjunction with the contract’s cost. For this purpose, attributes 

of the insurer that may be considered include, without limitation, 

the issuer’s financial strength. 

For purposes of the provision, the time of selection may be either 

the time that the insurer and contract are selected for distribution 

of benefits to a specific participant or beneficiary or the time that 

the insurer and contract are selected to provide benefits at future 

dates to participants or beneficiaries, provided that the selecting fiduciary periodically reviews the continuing appropriateness of its 

conclusions with respect to the insurer’s financial capability and 

cost, taking into account the considerations described above.127 A 

fiduciary will be deemed to have conducted a periodic review of the 

financial capability of the insurer if the fiduciary obtains the written representations described above on an annual basis unless, in 

the interim, the fiduciary has received notification from the insurer 

that representations cannot be relied on or the fiduciary otherwise 

becomes aware of facts that would cause it to question the representations. 

A fiduciary that satisfies the requirements of the provision is not 

liable following the distribution of any benefit, or the investment 

by or on behalf of a participant or beneficiary pursuant to the selected guaranteed retirement income contract, for any losses that 

may result to the participant or beneficiary due to an insurer’s inability to satisfy its financial obligations under the terms of the 

contract. 


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128Secs. 401(a)(3)–(5) and 410(b). Detailed rules are provided in Treas. Reg. secs. 1.401(a)(4)– 

1 through –13 and secs. 1.410(b)–2 through –10. In applying the nondiscrimination requirements, certain employees, such as those under age 21 or with less than a year of service, generally may be disregarded. In addition, employees of controlled groups and affiliated service 

groups under the aggregation rules of section 414(b), (c), (m) and (o) are treated as employed 

by a single employer. 129Sec. 401(a)(26). 130Section 414(q). At the election of the employer, employees who are highly compensated 

based on the amount of their compensation may be limited to employees who were among the 

top 20 percent of employees based on compensation. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

E. MODIFICATION OF NONDISCRIMINATION RULES TO PROTECT

OLDER, LONGER SERVICE PARTICIPATION (SEC. 205 OF THE BILL

AND SEC. 401(a)(4) OF THE CODE) 

PRESENT LAW

In general 

Qualified retirement plans are subject to nondiscrimination requirements, under which the group of employees covered by a plan 

(‘‘plan coverage’’) and the contributions or benefits provided to employees, including benefits, rights, and features under the plan, 

must not discriminate in favor of highly compensated employees.128

The timing of plan amendments must also not have the effect of 

discriminating significantly in favor of highly compensated employees. In addition, in the case of a defined benefit plan, the plan must 

benefit at least the lesser of (1) 50 employees and (2) the greater 

of 40 percent of all employees and two employees (or one employee 

if the employer has only one employee), referred to as the ‘‘minimum participation’’ requirements.129 These nondiscrimination requirements are designed to help ensure that qualified retirement 

plans achieve the goal of retirement security for both lower and 

higher paid employees. 

For nondiscrimination purposes, an employee generally is treated 

as highly compensated if the employee (1) was a five-percent owner 

of the employer at any time during the year or the preceding year, 

or (2) had compensation for the preceding year in excess of 

$120,000 (for 2016).130 Employees who are not highly compensated 

are referred to as nonhighly compensated employees. 

Nondiscriminatory plan coverage 

Whether plan coverage of employees is nondiscriminatory is determined by calculating a plan’s ratio percentage, that is, the ratio 

of the percentage of nonhighly compensated employees covered 

under the plan to the percentage of highly compensated employees 

covered. For this purpose, certain portions of a defined contribution 

plan are treated as separate plans to which the plan coverage requirements are applied separately, referred to as mandatory 

disaggregation. Specifically, the following, if provided under a plan, 

are treated as separate plans: the portion of a plan consisting of 

employee elective deferrals, the portion consisting of employer 

matching contributions, the portion consisting of employer nonelective contributions, and the portion consisting of an employee stock 


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131 Elective deferrals are contributions that an employee elects to have made to a defined contribution plan that includes a qualified cash or deferred arrangement (referred to as ‘‘section 

401(k) plan’’) rather than receive the same amount as current compensation. Employer matching 

contributions are contributions made by an employer only if an employee makes elective deferrals or after-tax employee contributions. Employer nonelective contributions are contributions 

made by an employer regardless of whether an employee makes elective deferrals or after-tax 

employee contributions. Under section 4975(e)(7), an ESOP is a defined contribution plan, or 

portion of a defined contribution plan, that is designated as an ESOP and is designed to invest 

primarily in employer stock. 132 Contribution and benefit rates are generally determined under the rules for nondiscriminatory contributions or benefit accruals, described below. These rules are generally based on 

benefit accruals under a defined benefit plan, other than accruals attributable to after-tax employee contributions, and contributions allocated to participants’ accounts under a defined contribution plan, other than allocations attributable to after-tax employee contributions. (Under 

these rules, contributions allocated to a participants accounts are referred to as ‘‘allocations,’’ 

with the related rates referred to as ‘‘allocation rates,’’ but ‘‘contribution rates’’ is used herein 

for convenience.) However, as discussed below, benefit accruals can be converted to actuarially 

equivalent contributions, and contributions can be converted to actuarially equivalent benefit accruals. 133Sec. 410(b)(6)(C). 

ownership plan (‘‘ESOP’’).131 Subject to mandatory disaggregation, 

different qualified retirement plans may otherwise be aggregated 

and tested together as a single plan, provided that they use the 

same plan year. The plan determined under these rules for plan 

coverage purposes generally is also treated as the plan for purposes 

of applying the other nondiscrimination requirements. 

A plan’s coverage is nondiscriminatory if the ratio percentage, as 

determined above, is 70 percent or greater. If a plan’s ratio percentage is less than 70 percent, a multi-part test applies, referred 

to as the average benefit test. First, the plan must meet a ‘‘nondiscriminatory classification requirement,’’ that is, it must cover a 

group of employees that is reasonable and established under objective business criteria and the plan’s ratio percentage must be at or 

above a level specified in the regulations, which varies depending 

on the percentage of nonhighly compensated employees in the employer’s workforce. In addition, the average benefit percentage test 

must be satisfied. 

Under the average benefit percentage test, in general, the average rate of employer–provided contributions or benefit accruals for 

all nonhighly compensated employees under all plans of the employer must be at least 70 percent of the average contribution or 

accrual rate of all highly compensated employees.132 In applying 

the average benefit percentage test, elective deferrals made by employees, as well as employer matching and nonelective contributions, are taken into account. Generally, all plans maintained by 

the employer are taken into account, including ESOPs, regardless 

of whether plans use the same plan year. 

Under a transition rule applicable in the case of the acquisition 

or disposition of a business, or portion of a business, or a similar 

transaction, a plan that satisfied the plan coverage requirements 

before the transaction is deemed to continue to satisfy them for a 

period after the transaction, provided coverage under the plan is 

not significantly changed during that period.133

Nondiscriminatory contributions or benefit accruals 

In general 

There are three general approaches to testing the amount of benefits under qualified retirement plans: (1) design-based safe harbors under which the plan’s contribution or benefit accrual formula 


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134Secs. 401(k) and (m), the latter of which applies also to after-tax employee contributions 

under a defined contribution plan. 135For this purpose, under section 401(a)(17), compensation generally is limited to $265,000 

per year (for 2016). 136See sections 401(a)(5)(C) and (D) and 401 (l) and Treas. Reg. section 1. 401(a)(4)–7 and 

1.401(l)–1 through –6 for rules for determining the amount of contributions or benefits that can 

be attributed to the employer-paid portion of Social Security taxes or benefits. 

satisfies certain uniformity standards, (2) a general test, described 

below, and (3) cross-testing of equivalent contributions or benefit 

accruals. Employee elective deferrals and employer matching contributions under defined contribution plans are subject to special 

testing rules and generally are not permitted to be taken into account in determining whether other contributions or benefits are 

nondiscriminatory.134

The nondiscrimination rules allow contributions and benefit accruals to be provided to highly compensated and nonhighly compensated employees at the same percentage of compensation.135

Thus, the various testing approaches described below are generally 

applied to the amount of contributions or accruals provided as a 

percentage of compensation, referred to as a contribution rate or 

accrual rate. In addition, under the ‘‘permitted disparity’’ rules, in 

calculating an employee’s contribution or accrual rate, credit may 

be given for the employer paid portion of Social Security taxes or 

benefits.136 The permitted disparity rules do not apply in testing 

whether elective deferrals, matching contributions, or ESOP contributions are nondiscriminatory. 

The general test is generally satisfied by measuring the rate of 

contribution or benefit accrual for each highly compensated employee to determine if the group of employees with the same or 

higher rate (a ‘‘rate’’ group) is a nondiscriminatory group, using the 

nondiscriminatory plan coverage standards described above. For 

this purpose, if the ratio percentage of a rate group is less than 70 

percent, a simplified standard applies, which includes disregarding 

the reasonable classification requirement, but requires satisfaction 

of the average benefit percentage test. 

Cross-testing 

Cross-testing involves the conversion of contributions under a defined contribution plan or benefit accruals under a defined benefit 

plan to actuarially equivalent accruals or contributions, with the 

resulting equivalencies tested under the general test. However, employee elective deferrals and employer matching contributions 

under defined contribution plans are not permitted to be taken into 

account for this purpose, and cross-testing of contributions under 

a defined contribution plan, or cross-testing of a defined contribution plan aggregated with a defined benefit plan, is permitted only 

if certain threshold requirements are satisfied. 

In order for a defined contribution plan to be tested on an equivalent benefit accrual basis, one of the following three threshold conditions must be met: 

• The plan has broadly available allocation rates, that is, 

each allocation rate under the plan is available to a nondiscriminatory group of employees (disregarding certain permitted additional contributions provided to employees as a replacement for benefits under a frozen defined benefit plan, as 

discussed below); 


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137Sec. 413(c). Multiple-employer status does not apply if the plan is a multi-employer plan, 

defined under sec. 414(f) as a plan maintained pursuant to one or more collective bargaining 

agreements with two or more unrelated employers and to which the employers are required to 

contribute under the collective bargaining agreement(s). Multi-employer plans are also known 

as Taft-Hartley plans. 138Treas. Reg. sec. 1.413–2(a)(3)(ii)–(iii). 

• The plan provides allocations that meet prescribed designs 

under which allocations gradually increase with age or service 

or are expected to provide a target level of annuity benefit; or 

• The plan satisfies a minimum allocation gateway, under 

which each nonhighly compensated employee has an allocation 

rate of (a) at least one-third of the highest rate for any highly 

compensated employee, or (b) if less, at least five percent. 

In order for an aggregated defined contribution and defined benefit plan to be tested on an aggregate equivalent benefit accrual 

basis, one of the following three threshold conditions must be met: 

• The plan must be primarily defined benefit in character, 

that is, for more than fifty percent of the nonhighly compensated employees under the plan, their accrual rate under 

the defined benefit plan exceeds their equivalent accrual rate 

under the defined contribution plan; 

• The plan consists of broadly available separate defined 

benefit and defined contribution plans, that is, the defined benefit plan and the defined contribution plan would separately 

satisfy simplified versions of the minimum coverage and nondiscriminatory amount requirements; or 

• The plan satisfies a minimum aggregate allocation gateway, under which each nonhighly compensated employee has 

an aggregate allocation rate (consisting of allocations under the 

defined contribution plan and equivalent allocations under the 

defined benefit plan) of (a) at least one-third of the highest aggregate allocation rate for any nonhighly compensated employee, or (b) if less, at least five percent in the case of a highest nonhighly compensated employee’s rate up to 25 percent, 

increased by one percentage point for each five-percentagepoint increment (or portion thereof) above 25 percent, subject 

to a maximum of 7.5 percent. 

Benefits, rights, and features 

Each benefit, right, or feature offered under the plan generally 

must be available to a group of employees that has a ratio percentage that satisfies the minimum coverage requirements, including 

the reasonable classification requirement if applicable, except that 

the average benefit percentage test does not have to be met, even 

if the ratio percentage is less than 70 percent. 

Multiple-employer and section 403(b) plans 

A multiple-employer plan generally is a single plan maintained 

by two or more unrelated employers, that is, employers that are 

not treated as a single employer under the aggregation rules for related entities.137 The plan coverage and other nondiscrimination 

requirements are applied separately to the portions of a multipleemployer plan covering employees of different employers.138


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139Sec. 403(b). These plans are available to employers that are tax-exempt under section 

501(c)(3), as well as to educational institutions of State or local governments. 140Treas. Reg. sec. 1.410(b)–7(f). 141 Notice 2014–5, 2014–2 I.R.B. 276, extended by Notice 2016–57 (released September 19, 

2016). Proposed regulations revising the nondiscrimination requirements for closed plans were 

also issued earlier this year, subject to various conditions. 81 Fed. Reg. 4976 (January 29, 2016). 

Certain tax-exempt charitable organizations may offer their employees a tax-deferred annuity plan (‘‘section 403(b) plan).139 The 

nondiscrimination requirements, other than the requirements applicable to elective deferrals, generally apply to section 403(b) plans 

of private tax-exempt organizations. For purposes of applying the 

nondiscrimination requirements to a section 403(b) plan, subject to 

mandatory disaggregation, a qualified retirement plan may be combined with the section 403(b) plan and treated as a single plan.140

However, a section 403(b) plan and qualified retirement plan may 

not be treated as a single plan for purposes of applying the nondiscrimination requirements to the qualified retirement plan. 

Closed and frozen defined benefit plans 

A defined benefit plan may be amended to limit participation in 

the plan to individuals who are employees as of a certain date. 

That is, employees hired after that date are not eligible to participate in the plan. Such a plan is sometimes referred to as a ‘‘closed’’ 

defined benefit plan (that is, closed to new entrants). In such a 

case, it is common for the employer also to maintain a defined contribution plan and to provide employer matching or nonelective 

contributions only to employees not covered by the defined benefit 

plan or at a higher rate to such employees. 

Over time, the group of employees continuing to accrue benefits 

under the defined benefit plan may come to consist more heavily 

of highly compensated employees, for example, because of greater 

turnover among nonhighly compensated employees or because increasing compensation causes nonhighly compensated employees to 

become highly compensated. In that case, the defined benefit plan 

may have to be combined with the defined contribution plan and 

tested on a benefit accrual basis. However, under the regulations, 

if none of the threshold conditions is met, testing on a benefits 

basis may not be available. Notwithstanding the regulations, recent 

IRS guidance provides relief for a limited period, allowing certain 

closed defined benefit plans to be aggregated with a defined contribution plan and tested on an aggregate equivalent benefits basis 

without meeting any of the threshold conditions.141 When the 

group of employees continuing to accrue benefits under a closed defined benefit plan consists more heavily of highly compensated employees, the benefits, rights, and features provided under the plan 

may also fail the tests under the existing nondiscrimination rules. 

In some cases, if a defined benefit plan is amended to cease future accruals for all participants, referred to as a ‘‘frozen’’ defined 

benefit plan, additional contributions to a defined contribution plan 

may be provided for participants, in particular for older participants, in order to make up in part for the loss of the benefits they 

expected to earn under the defined benefit plan (‘‘make-whole’’ contributions). As a practical matter, testing on a benefit accrual basis 

may be required in that case, but may not be available because the 

defined contribution plan does not meet any of the threshold conditions. 


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142 References under the provision to a closed class of participants and similar references to 

a closed class include arrangements under which one or more classes of participants are closed, 

except that one or more classes of participants closed on different dates are not aggregated for 

purposes of determining the date any such class was closed. 143Other testing options available under present law are also available for this purpose. 

REASONS FOR CHANGE

Some employers sponsoring defined benefit plans have determined that it is no longer feasible financially to continue the plans 

in their current form and have therefore closed their plans to new 

entrants. Existing employees continue to earn benefits under the 

plan, consistent with their expectations as to retirement income, 

which is particularly important for employees close to retirement. 

However, without greater flexibility in the nondiscrimination rules, 

employers may be forced to freeze their defined benefit plans, thus 

preventing employees from earning their expected benefits. When 

a defined benefit plan is frozen, make-whole contributions can offset some of the resulting benefit loss for employees. However, in 

that case, too, greater flexibility in the nondiscrimination rules is 

needed. The Committee wishes to provide such flexibility in order 

to protect benefits for older, longer-service employees. 

EXPLANATION OF PROVISION

Closed or frozen defined benefit plans 

In general 

The provision provides nondiscrimination relief with respect to 

benefits, rights, and features for a closed class of participants 

(‘‘closed class’’),142 and with respect to benefit accruals for a closed 

class, under a defined benefit plan that meets the requirements described below (referred to herein as an ‘‘applicable’’ defined benefit 

plan). In addition, the provision treats a closed or frozen applicable 

defined benefit plan as meeting the minimum participation requirements if the plan met the requirements as of the effective date of 

the plan amendment by which the plan was closed or frozen. 

If a portion of an applicable defined benefit plan eligible for relief 

under the provision is spun off to another employer, and if the 

spun-off plan continues to satisfy any ongoing requirements applicable for the relevant relief as described below, the relevant relief 

for the spun-off plan will continue with respect to the other employer. 

Benefits, rights, or features for a closed class 

Under the provision, an applicable defined benefit plan that provides benefits, rights, or features to a closed class does not fail the 

nondiscrimination requirements by reason of the composition of the 

closed class, or the benefits, rights, or features provided to the 

closed class, if (1) for the plan year as of which the class closes and 

the two succeeding plan years, the benefits, rights, and features 

satisfy the nondiscrimination requirements without regard to the 

relief under the provision, but taking into account the special testing rules described below,143 and (2) after the date as of which the 

class was closed, any plan amendment modifying the closed class 

or the benefits, rights, and features provided to the closed class 


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144This rule applies also for purposes applying the plan coverage and other nondiscrimination 

requirements to an applicable defined benefit plan and one or more defined contributions that, 

under the provision, may be treated as a single plan as described below. 145Other testing options available under present law are also available for this purpose. 

does not discriminate significantly in favor of highly compensated 

employees. 

For purposes of requirement (1) above, the following special testing rules apply: • In applying the plan coverage transition rule for business 

acquisitions, dispositions, and similar transactions, the closing 

of the class of participants is not treated as a significant 

change in coverage; • Two or more plans do not fail to be eligible to be a treated 

as a single plan solely by reason of having different plan 

years;144 and • Changes in employee population are disregarded to the extent attributable to individuals who become employees or cease 

to be employees, after the date the class is closed, by reason 

of a merger, acquisition, divestiture, or similar event. 

Benefit accruals for a closed class 

Under the provision, an applicable defined benefit plan that provides benefits to a closed class may be aggregated, that is, treated 

as a single plan, and tested on a benefit accrual basis with one or 

more defined contribution plans (without having to satisfy the 

threshold conditions under present law) if (1) for the plan year as 

of which the class closes and the two succeeding plan years, the 

plan satisfies the plan coverage and nondiscrimination requirements without regard to the relief under the provision, but taking 

into account the special testing rules described above,145 and (2) 

after the date as of which the class was closed, any plan amendment modifying the closed class or the benefits provided to the 

closed class does not discriminate significantly in favor of highly 

compensated employees. 

Under the provision, defined contribution plans that may be aggregated with an applicable defined benefit plan and treated as a 

single plan include the portion of one or more defined contribution 

plans consisting of matching contributions, an ESOP, or matching 

or nonelective contributions under a section 403(b) plan. If an applicable defined benefit plan is aggregated with the portion of a defined contribution plan consisting of matching contributions, any 

portion of the defined contribution plan consisting of elective deferrals must also be aggregated. In addition, the matching contributions are treated in the same manner as nonelective contributions, 

including for purposes of permitted disparity. 

Applicable defined benefit plan 

An applicable defined benefit plan to which relief under the provision applies is a defined benefit plan under which the class was 

closed (or the plan frozen) before September 21, 2016, or that meets 

the following alternative conditions: (1) taking into account any 

predecessor plan, the plan has been in effect for at least five years 

as of the date the class is closed (or the plan is frozen) and (2) 

under the plan, during the five-year period preceding that date, (a) 

for purposes of the relief provided with respect to benefits, rights, 


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146 Under the funding requirements applicable to defined benefit plans, target normal cost for 

a plan year (defined in section 430(b)(1)(A)(i)) is generally the sum of the present value of the 

benefits expected to be earned under the plan during the plan year plus the amount of planrelated expenses to be paid from plan assets during the plan year. Under the provision, in applying this average benefit rule to certain defined benefit plans maintained by cooperative organizations and charities, referred to as CSEC plans (defined in section 414(y)), which are subject 

to different funding requirements, the CSEC plan’s normal cost under section 433(j)(1)(B) is 

used instead of target normal cost. 

and features for a closed class, there has not been a substantial increase in the coverage or value of the benefits, rights, or features, 

or (b) for purposes of the relief provided with respect to benefit accruals for a closed class or the minimum participation requirements, there has not been a substantial increase in the coverage 

or benefits under the plan. 

For purposes of (2)(a) above, a plan is treated as having a substantial increase in coverage or value of benefits, rights, or features 

only if, during the applicable five-year period, either the number of 

participants covered by the benefits, rights, or features on the date 

the period ends is more than 50 percent greater than the number 

on the first day of the plan year in which the period began, or the 

benefits, rights, and features have been modified by one or more 

plan amendments in such a way that, as of the date the class is 

closed, the value of the benefits, rights, and features to the closed 

class as a whole is substantially greater than the value as of the 

first day of the five-year period, solely as a result of the amendments. 

For purposes of (2)(b) above, a plan is treated as having had a 

substantial increase in coverage or benefits only if, during the applicable five-year period, either the number of participants benefiting under the plan on the date the period ends is more than 50 

percent greater than the number of participants on the first day of 

the plan year in which the period began, or the average benefit 

provided to participants on the date the period ends is more than 

50 percent greater than the average benefit provided on the first 

day of the plan year in which the period began. In applying this 

requirement, the average benefit provided to participants under the 

plan is treated as having remained the same between the two relevant dates if the benefit formula applicable to the participants has 

not changed between the dates and, if the benefit formula has 

changed, the average benefit under the plan is considered to have 

increased by more than 50 percent only if the target normal cost 

for all participants benefiting under the plan for the plan year in 

which the five-year period ends exceeds the target normal cost for 

all such participants for that plan year if determined using the 

benefit formula in effect for the participants for the first plan year 

in the five-year period by more than 50 percent.146 In applying 

these rules, a multiple-employer plan is treated as a single plan, 

rather than as separate plans separately covering the employees of 

each participating employer. 

In applying these standards, any increase in coverage or value, 

or in coverage or benefits, whichever is applicable, is generally disregarded if it is attributable to coverage and value, or coverage and 

benefits, provided to employees who (1) became participants as a 

result of a merger, acquisition, or similar event that occurred during the 7-year period preceding the date the class was closed, or (2) 

became participants by reason of a merger of the plan with another 


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147For this purpose, consistency is not required with respect to employees who were subject 

to different benefit formulas under the defined benefit plan. 

plan that had been in effect for at least five years as of the date 

of the merger and, in the case of benefits, rights, or features for 

a closed class, under the merger, the benefits, rights, or features 

under one plan were conformed to the benefits, rights, or features 

under the other plan prospectively. 

Make-whole contributions under a defined contribution plan 

Under the provision, a defined contribution plan is permitted to 

be tested on an equivalent benefit accrual basis (without having to 

satisfy the threshold conditions under present law) if the following 

requirements are met: 

• The plan provides make-whole contributions to a closed 

class of participants whose accruals under a defined benefit 

plan have been reduced or ended (‘‘make-whole class’’); 

• For the plan year of the defined contribution plan as of 

which the make-whole class closes and the two succeeding plan 

years, the make-whole class satisfies the nondiscriminatory 

classification requirement under the plan coverage rules, taking into account the special testing rules described above; 

• After the date as of which the class was closed, any 

amendment to the defined contribution plan modifying the 

make-whole class or the allocations, benefits, rights, and features provided to the make-whole class does not discriminate 

significantly in favor of highly compensated employees; and 

• Either the class was closed before September 21, 2016, or 

the defined benefit plan is an applicable defined benefit plan 

under the alternative conditions applicable for purposes of the 

relief provided with respect to benefit accruals for a closed 

class. 

With respect to one or more defined contribution plans meeting 

the requirements above, in applying the plan coverage and nondiscrimination requirements, the portion of the plan providing 

make-whole or other nonelective contributions may also be aggregated and tested on an equivalent benefit accrual basis with the 

portion of one or more other defined contribution plans consisting 

of matching contributions, an ESOP, or matching or nonelective 

contributions under a section 403(b) plan. If the plan is aggregated 

with the portion of a defined contribution plan consisting of matching contributions, any portion of the defined contribution plan consisting of elective deferrals must also be aggregated. In addition, 

the matching contributions are treated in the same manner as nonelective contributions, including for purposes of permitted disparity. 

Under the provision, ‘‘make-whole contributions’’ generally 

means nonelective contributions for each employee in the makewhole class that are reasonably calculated, in a consistent manner, 

to replace some or all of the retirement benefits that the employee 

would have received under the defined benefit plan and any other 

plan or qualified cash or deferred arrangement under a section 

401(k) plan if no change had been made to the defined benefit plan 

and other plan or arrangement.147 However, under a special rule, 

in the case of a defined contribution plan that provides benefits, 


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148 A third type of plan is a multiemployer plan, defined under sec. 414(f) as a plan maintained pursuant to one or more collective bargaining agreements with two or more unrelated 

employers and to which the employers are required to contribute under the collective bargaining 

agreement(s). Multiemployer plans are also known as Taft-Hartley plans. Multiemployer plans 

are subject to different minimum funding requirements from those applicable to single-employer 

and multiple-employer plans, as well as to different PBGC premium and benefit guarantee 

structures. 

rights, or features to a closed class of participants whose accruals 

under a defined benefit plan have been reduced or eliminated, the 

plan will not fail to satisfy the nondiscrimination requirements 

solely by reason of the composition of the closed class, or the benefits, rights, or features provided to the closed class, if the defined 

contribution plan and defined benefit plan otherwise meet the requirements described above but for the fact that the make-whole 

contributions under the defined contribution plan are made in 

whole or in part through matching contributions. 

If a portion of a defined contribution plan eligible for relief under 

the provision is spun off to another employer, and if the spun-off 

plan continues to satisfy any ongoing requirements applicable for 

the relevant relief as described above, the relevant relief for the 

spun-off plan will continue with respect to the other employer. 

EFFECTIVE DATE

The provision is generally effective on the date of enactment of 

the provision, without regard to whether any plan modifications referred to in the provision are adopted or effective before, on, or 

after the date of enactment. However, at the election of a plan 

sponsor, the provision will apply to plan years beginning after December 31, 2013. For purposes of the provision, a closed class of 

participants under a defined benefit plan is treated as being closed 

before September 21, 2016, if the plan sponsor’s intention to create 

the closed class is reflected in formal written documents and communicated to participants before that date. In addition, a plan does 

not fail to be eligible for the relief under the provision solely because (1) in the case of benefits, rights, or features for a closed 

class under a defined benefit plan, the plan was amended before 

the date of enactment to eliminate one or more benefits, rights, or 

features and is further amended after the date of enactment to provide the previously eliminated benefits, rights, or features to a 

closed class of participants, or (2) in the case of benefit accruals for 

a closed class under a defined benefit plan or application of the 

minimum benefit requirements to a closed or frozen defined benefit 

plan, the plan was amended before the date of the enactment to 

cease all benefit accruals and is further amended after the date of 

enactment to provide benefit accruals to a closed class of participants. In either case, the relevant relief applies only if the plan 

otherwise meets the requirements for the relief, and, in applying 

the relevant relief, the date the class of participants is closed is the 

effective date of the later amendment. 

F. MODIFICATION OF PBGC PREMIUMS FOR CSEC PLANS (SEC. 206 

OF THE BILL AND SEC. 4006 OF ERISA) 

PRESENT LAW

Qualified retirement plans, including defined benefit plans, are 

categorized as single-employer plans or multiple-employer plans.148


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149For this purpose, businesses and organizations that are members of a controlled group of 

corporations, a group under common control, or an affiliated service group are treated as one 

employer (referred to as ‘‘aggregation’’). Secs. 414(b), (c), (m) and (o). 150Sec. 413(c). multiple-employer status does not apply if the plan is a multiemployer plan. 151Secs. 412 and 430–433 and ERISA secs. 301–306. Unless a funding waiver is obtained, an 

employer may be subject to a two-tier excise tax under section 4971 if the funding requirements 

are not met. 152Pub. L. No. 109–280. 153Pub. L. No. 113–197. 154 As defined in section 414(y) and ERISA section 210(f), CSEC plans include defined benefit 

plans maintained by certain cooperative organizations, such as rural electric or telephone cooperatives, or by certain tax-exempt organizations. 155Title IV of ERISA. 156The same PBGC benefit guarantee structure also applies to single-employer and multipleemployer plans. 157These premium rates have been increased several times by legislation since 2005 and are 

subject to automatic increases to reflect inflation (referred to as ‘‘indexing’’). 

A single-employer plan is a plan maintained by one employer.149 A 

multiple-employer plan generally is a single plan maintained by 

two or more unrelated employers (that is, employers that are not 

treated as a single employer under the aggregation rules).150

Defined benefit plans maintained by private employers are generally subject to minimum funding requirements.151 Historically, 

single-employer and multiple-employer defined benefit plans have 

been subject to the same minimum funding requirements. However, when the funding requirements for single-employer plans 

were substantially revised by the Pension Protection Act of 2006,152

effective 2008, a delayed effective date was provided for certain 

multiple-employer plans in order to allow time for further congressional consideration of appropriate rules for these plans. Such consideration resulted in the enactment in 2014 of the Cooperative 

and Small Employer Charity Pension Flexibility Act (‘‘CSEC 

Act’’),153 which provides specific funding rules for certain multipleemployer plans, referred to as CSEC plans.154

Private defined benefit plans are also covered by the Pension 

Benefit Guaranty Corporation (‘‘PBGC’’) insurance program, under 

which the PBGC guarantees the payment of certain plan benefits, 

and plans are required to pay annual premiums to the PBGC.155

Single-employer and multiple-employer plans, including CSEC 

plans, are subject to the same PBGC premium requirements, consisting of flat-rate, per participant premiums and variable rate premiums, based on the unfunded vested benefits under the plan.156

For 2016, flat-rate premiums are $64 per participant, and variable 

rate premiums are $30 for each $1,000 of unfunded vested benefits, 

subject to a limit of $500 multiplied by the number of plan participants.157 For this purpose, unfunded vested benefits under a plan 

for a plan year is the excess (if any) of (1) the plan’s funding target 

for the plan year, determined by taking into account only vested 

benefits and using specified interest rates, over (2) the fair market 

value of plan assets. 

Under the funding rules applicable to single-employer plans, a 

plan’s funding target is the present value of all benefits accrued or 

earned under the plan as of the beginning of the plan year, determined using certain specified actuarial assumptions, including 

specified interest rates and mortality. A single-employer plan’s 

funding target is a factor taken into account in determining required contributions for the plan. Although a CSEC plan’s funding 

target is used under present law to determine variable rate premiums, it does not apply in determining required contributions for 


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158These are the premium rates that applied to single-employer and multiple-employer plans 

in 2005 and are not subject to indexing. 159Sec. 7441. 160Sec. 7443(c). 161Secs. 7447 and 7448. 

a CSEC plan. Instead, a CSEC plan’s funding liability applies, 

which is the present value of all benefits accrued or earned under 

the plan as of the beginning of the plan year, determined using 

reasonable actuarial assumptions chosen by the plan’s actuary. 

REASONS FOR CHANGE

In 2014, Congress passed legislation resulting in different sets of 

funding rules for three types of pension plans: single-employer, 

multiemployer and CSEC plans. In line with this change, the Committee believes that the three types of pension plans also should 

have individualized rules for calculating PBGC premiums. 

EXPLANATION OF PROVISION

Under the provision, for CSEC plans, flat-rate premiums are $19 

per participant, and variable rate premiums are $9 for each $1,000 

of unfunded vested benefits.158 In addition, for purposes of determining a CSEC plan’s variable rate premiums, unfunded vested 

benefits for a plan year is the excess (if any) of (1) the plan’s funding liability, determined by taking into account only vested benefits, over (2) the fair market value of plan assets. 

EFFECTIVE DATE

The provision applies to plan years beginning after December 31, 

2015. 

TITLE III—BENEFITS RELATING TO THE UNITED STATES 

TAX COURT 

A. PROVISIONS RELATING TO JUDGES OF THE TAX COURT

(SECS. 301–302 OF THE BILL AND SEC. 7447 OF THE CODE) 

PRESENT LAW

In general 

The United States Tax Court (‘‘Tax Court’’) is established by the 

Congress pursuant to Article I of the U.S. Constitution (an ‘‘Article 

I’’ court).159 The salary of a Tax Court judge is the same salary as 

received by a U.S. District Court judge.160 As discussed below, 

judges of the Tax Court are provided also with some benefits that 

correspond to benefits provided to U.S. District Court judges, including specific retirement and survivor benefit programs for Tax 

Court judges.161

Retirement and survivors benefits 

A Tax Court judge may be covered under the Federal Employees 

Retirement System (‘‘FERS’’) or, depending on when the judge 

began Federal employment, the Civil Service Retirement System 

(‘‘CSRS’’). FERS and CSRS provide annuity benefits to a retired 

employee and, in some cases, to survivors of a deceased employee. 

Employees covered by FERS are also covered by the Social Security 


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162Wages of employees covered by Social Security are subject to old-age, survivors and disability insurance (‘‘OASDI’’) taxes under the Federal Insurance Contributions Act (‘‘FICA’’), consisting of employer and portions, each at a rate of 6.2 percent of covered wages up to the OASDI 

wage base ($118,500 for 2016). Wages up to the OASDI wage base are taken into account in 

determining Social Security benefits. 163Secs. 7447. Retired pay is generally equal to the salary of an active Tax Court judge. 164Sec. 7448. Special trial judges may also elect into the Tax Court survivors’ annuity plan. 165For this purpose, a judge may make contributions with respect to service performed before 

electing to participate in the plan. 166See, for example, S. Rep. No. 91–552, at 303 (1969). 

program.162 Employees covered by FERS and CSRS may contribute 

to the Thrift Savings Plan (‘‘TSP’’). Employees covered by FERS 

(but not CSRS) generally are also eligible for agency contributions 

(that is, nonelective contributions and matching contributions). A 

Tax Court judge is eligible to contribute to the Thrift Savings Plan, 

but is not eligible for agency contributions, regardless of which 

Federal retirement plan the judge is covered by. 

A Tax Court judge may elect at any time while serving as a Tax 

Court judge to be covered by a ‘‘retired pay’’ program of the Tax 

Court rather than under another Federal retirement program, such 

as FERS or CSRS.163 A Tax Court judge may also elect to participate in a plan providing annuity benefits for the judge’s surviving 

spouse and dependent children (the ‘‘Tax Court survivors’ annuity 

plan’’).164 Generally, benefits under the Tax Court survivors’ annuity plan are payable only if the judge has performed at least five 

years of service and made contributions to the plan for at least five 

years of service.165

The rules governing the retired pay plan for Tax Court judges 

and the Tax Court survivors’ annuity plan provide for coordination 

between CSRS and the retired pay or survivors’ annuity plan when 

a judge covered by CSRS elects into those plans. For example, if 

a judge covered by CSRS elects retired pay, the accumulated CSRS 

contributions previously made by the judge are refunded to the 

judge with interest. However, the rules do not address coordination 

with FERS. 

Limit on outside earned income of a judge receiving retired pay 

Under the retired pay plan for Tax Court judges, retired judges 

generally receive retired pay equal to the salary of an active judge 

and must be available for recall to perform judicial duties as needed by the court for up to 90 days a year (unless the judge consents 

to a longer period). However, retired judges may elect to freeze the 

amount of their retired pay, and those who do so are not available 

for recall. 

Retired Tax Court judges on recall are subject to the limitations 

on outside earned income that apply to active Federal employees 

under the Ethics in Government Act of 1978. Retired Tax Court 

judges who elect to freeze the amount of their retired pay (thus 

making themselves unavailable for recall) are not subject to the 

limitations on outside earned income. 

REASONS FOR CHANGE

The benefit programs for Tax Court judges are intended to accord 

with similar programs applicable to District Court judges.166 However, over time, differences have developed between the benefits 

provided to Tax Court judges and to District Court judges and 

similar judges in certain other Article I courts. The Committee beVerDate Sep 11 2014 01:13 Nov 24, 2016 Jkt 069010 PO 00000 Frm 00057 Fmt 6659 Sfmt 6602 E:\HR\OC\SR375.XXX SR375

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167These changes apply also to special trial judges who elect into the Tax Court survivors’ 

annuity plan. 

lieves that, as a general matter, parity should exist between the 

benefits provided to Tax Court judges and those provided to District Court judges and judges in other Article I courts. Thus, the 

benefits provided to Tax Court judges should be updated to reflect 

benefits currently provided to these other Federal judges. Moreover, the Committee believes that exempting from the limitation on 

outside earned income compensation received by retired Tax Court 

judges for teaching will encourage such judges to remain available 

for recall by the court. 

EXPLANATION OF PROVISIONS

Retirement and survivors benefits 

The provision allows a Tax Court judge who is covered by FERS 

to receive agency contributions to the TSP, similar to other employees covered by FERS. If a judge covered by FERS elects retired 

pay, rather than FERS benefits, the judge’s retired pay is offset by 

the amount of previous TSP distributions attributable to agency 

contributions (without regard to earnings on the agency contributions) made during years of service as a Tax Court judge while covered by FERS. 

Under the provision, benefits under the survivors’ annuity plan 

are payable if a Tax Court judge has performed at least 18 months 

of service and made contributions for at least 18 months (rather 

than five years). In addition, benefits under the survivors’ annuity 

plan are payable if a Tax Court judge is assassinated before the 

judge has performed 18 months of service and made contributions 

for 18 months.167

The provision amends the rules governing the retired pay plan 

for Tax Court judges and the Tax Court survivors’ annuity plan to 

provide for coordination between FERS and those plans when a 

judge covered by FERS elects into those plans, similar to coordination with CSRS under present law. 

Limit on outside earned income of a judge receiving retired pay 

Under the provision, compensation earned by a retired Tax Court 

judge for teaching is not treated as outside earned income for purposes of limitations under the Ethics in Government Act of 1978. 

EFFECTIVE DATE

The provisions are effective on the date of enactment, except that 

the provision relating to TSP contributions applies to basic pay 

earned while serving as a Tax Court judge and the provision relating to outside earned income of a judge receiving retired pay applies to any individual serving as a retired Tax Court judge on or 

after the date of enactment. 


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168Sec. 7443A. 169Sec. 7456(c) deals with contempt authority. 

B. PROVISIONS RELATING TO SPECIAL TRIAL JUDGES OF THE TAX

COURT (SECS. 303–305 OF THE BILL AND SECS. 7443A AND NEW

7443B AND 7443C OF THE CODE) 

PRESENT LAW

The chief judge of the Tax Court may appoint special trial judges 

to handle certain cases.168 Special trial judges serve for an indefinite term. Special trial judges receive a salary of 90 percent of the 

salary of a Tax Court judge. Special trial judges do not have authority to impose punishment in the case of contempt of the authority of the Tax Court.169

Special trial judges generally are covered by the benefit programs that apply to Federal executive branch employees, including 

CSRS or FERS (depending on when the judge began Federal employment). Special trial judges may contribute to TSP, and those 

covered by FERS are also eligible for agency contributions. Special 

trial judges covered by FERS are also covered by the Social Security program. Special trial judges may also elect to participate in 

the Tax Court survivors’ annuity plan. An election into the Tax 

Court survivors’ annuity plan must be made not later than six 

months after the later of the date the special trial judge takes office or the date the judge marries. 

Special trial judges are required to be covered by a leave program under which they earn annual and sick leave during their period of employment. At termination of employment, a lump–sum 

payment is made to the special trial judge for unused annual leave, 

and unused sick leave is credited as additional service for certain 

purposes under CSRS or FERS. Group-term life insurance is available to Federal employees, including special trial judges, under the 

Federal Employees Group Life Insurance (‘‘FEGLI’’) program. 

Under changes made to the FEGLI program in 1999, higher premiums apply to older employees than to younger employees (‘‘agebased premiums’’). 

REASONS FOR CHANGE

Special trial judges of the Tax Court perform a role similar to 

that of magistrate judges in courts established under Article III of 

the U.S. Constitution (‘‘Article III’’ courts). However, disparities 

exist between the positions of magistrate judges of Article III 

courts and special trial judges of the Tax Court. For example, magistrate judges of Article III courts are appointed for a specific term, 

are subject to removal only in limited circumstances, and are eligible for coverage under special retirement and survivor benefit programs. The Committee believes that special trial judges of the Tax 

Court and magistrate judges of Article III courts should receive 

comparable treatment as to the status of the position, salary, and 

benefits. This will better enable the Tax Court to attract and retain 

qualified persons to serve in this capacity. 


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EXPLANATION OF PROVISIONS

Magistrate judges of the Tax Court 

Under the provision, the position of special trial judge of the Tax 

Court is renamed as magistrate judge of the Tax Court (‘‘magistrate judge’’). Magistrate judges are appointed (or reappointed) to 

serve for eight–year terms and are subject to removal in limited 

circumstances. A magistrate judge receives a salary of 92 percent 

of the salary of a Tax Court judge. 

Contempt authority 

Under the provision, magistrate judges have the authority to impose punishment in the case of contempt of the authority of the 

Tax Court, subject to a limit on the sentence that may be imposed. 

Leave, FEGLI and survivors’ annuity plan 

Under the provision, magistrate judges are not required to be 

covered by a leave program. Existing leave balances will be maintained and made available if a magistrate judge changes to a Federal position covered by a leave program. Otherwise, at separation 

from Federal employment, a lump–sum payment will be made to 

the magistrate judge for unused annual leave, and unused sick 

leave will be credited as additional service for certain purposes 

under CSRS or FERS. 

In the case of magistrate judges age 65 or older, the provision allows the Tax Court to pay the portion of FEGLI premiums attributable to increases resulting from the 1999 FEGLI changes. 

Under the provision, a magistrate judge may elect to participate 

in the Tax Court survivors’ annuity plan at any time while serving 

as a magistrate judge. 

Retirement plan for magistrate judges 

In general 

The provision establishes a new retirement plan for magistrate 

judges, under which a magistrate judge may elect to receive a retirement annuity from the Tax Court in lieu of benefits under 

CSRS or FERS. A magistrate judge who elects to be covered by the 

retirement program generally receives a refund of contributions 

(with interest) made to CSRS or FERS. A magistrate judge who 

elects to be covered by the retirement program may contribute to 

the TSP, but not receive agency contributions. The judge’s retired 

pay is offset by the amount of previous TSP distributions attributable to agency contributions (without regard to earnings on the 

agency contributions) made during years of service as a Tax Court 

judge while covered by FERS. A special trial judge covered by the 

retirement program is not covered by the Social Security program. 

Under the new plan, a magistrate judge may retire at age 65 

with 14 years of service and receive an annuity equal to his or her 

salary at the time of retirement. For this purpose, service may include service performed as a special trial judge or a magistrate 

judge, with coordination of total benefits. The provision also provides for payment of a reduced annuity in the case a magistrate 

judge with at least eight years of service or in the case of disability 

or failure to be reappointed after serving at least one full term. 


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A magistrate judge receiving a retirement annuity is entitled to 

cost-of-living increases based on cost-of-living increases in benefits 

paid under CSRS. However, such an increase cannot cause the retirement annuity to exceed the current salary of a magistrate 

judge. A magistrate judge’s retirement annuity is subject to freezing or suspension if the retired magistrate judge practices law or 

accepts other Federal employment. 

Contributions of one percent of salary are withheld from the salary of a magistrate judge who elects to participate in the retirement annuity program. Such contributions must be made also with 

respect to prior service for which the magistrate judge elects credit 

under the retirement annuity program. No contributions are required after 14 years of service or retirement before 14 years of 

service. A lump sum refund of the magistrate judge’s contributions 

(with interest) is made if no annuity is payable, for example, if the 

magistrate judge dies before retirement. 

Establishment of Tax Court Judicial Officers’ Retirement 

Fund 

The provision establishes the Tax Court Judicial Officers’ Retirement Fund (the ‘‘Fund’’), which is appropriated for the payment of 

annuities, refunds, and other payments under the retirement annuity program. Contributions withheld from a magistrate judge’s salary are deposited in the Fund. In addition, the provision requires 

there to be deposited into the Fund, by the end of each fiscal year, 

amounts required to reduce the Fund’s unfunded liability to zero. 

For this purpose, the Fund’s unfunded liability means the estimated excess, actuarially determined on an annual basis, of the 

present value of benefits payable from the Fund over the sum of 

(1) the present value of contributions to be withheld from the future salary of the magistrate judges and (2) the balance in the 

Fund as of the date the unfunded liability is determined. 

Recall of retired magistrate judges 

Under the provision, a retired magistrate judge may be recalled 

to perform services for up to 90 days a year. A retired magistrate 

judge who is receiving an annuity under the retirement plan for 

magistrate judges and is recalled is to be paid the difference between the annuity and the current rate of salary for magistrate 

judges. For years after any year in which the retired judge was recalled, the retirement annuity is increased to the rate of salary for 

magistrate judges during the last year in which the judge was recalled. 

EFFECTIVE DATE

The provisions are generally effective on the date of enactment 

of the provisions. In addition, the provision relating to the position 

of magistrate judge, terms of appointment, salary, contempt authority, and leave apply to individuals serving as special trial 

judges as of the day before the date of enactment. Any individual 

serving as special trial judges as of the day before the date of enactment is deemed to be appointed as a magistrate judge on the 

date of enactment. 


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170 IRS Chief Counsel Advice 200302045 (December 3, 2002). 171Sec. 139B. Under section 3121(a)(23), the exclusion applied also for purposes of taxes under 

the Federal Insurance Contributions Act (‘‘FICA’’). 172Secs. 164(a) and 170. 

TITLE IV—OTHER BENEFITS 

A. BENEFITS FOR VOLUNTEER FIREFIGHTERS AND EMERGENCY MEDICAL RESPONDERS (SEC. 401 OF THE BILL AND SEC. 139B OF THE

CODE) 

PRESENT LAW

Benefits for volunteer firefighters and emergency medical responders 

In general, a reduction in property tax by persons who volunteer 

their services as emergency responders under a State law program 

is includible in gross income.170 However, for taxable years beginning after December 31, 2007, and before January 1, 2011, an exclusion applied for any qualified State or local tax benefit and any 

qualified reimbursement payment provided to members of qualified 

volunteer emergency response organizations.171

A qualified volunteer emergency response organization is a volunteer organization that is organized and operated to provide firefighting or emergency medical services for persons in a State or a 

political subdivision and is required (by written agreement) by the 

State or political subdivision to furnish firefighting or emergency 

medical services in the State or political subdivision. 

A qualified State or local tax benefit is any reduction or rebate 

of certain taxes provided by a State or local government on account 

of services performed by individuals as members of a qualified volunteer emergency response organization. These taxes are limited to 

State or local income taxes, State or local real property taxes, and 

State or local personal property taxes. A qualified reimbursement 

payment is a payment provided by a State or political subdivision 

thereof on account of reimbursement for expenses incurred in connection with the performance of services as a member of a qualified 

volunteer emergency response organization. The amount of excludible qualified reimbursement payments is limited to $30 for each 

month during which a volunteer performs services. 

Itemized deductions 

Individuals are allowed itemized deductions for (1) State and 

local income taxes, real property taxes, and personal property 

taxes, and (2) subject to certain limitations, contributions to charitable organizations, including unreimbursed expenses incurred in 

performing volunteer services for such an organization.172

The amount of State or local taxes taken into account in determining the deduction for taxes is reduced by the amount of any excludible qualified State or local tax benefit. Similarly, expenses 

paid or incurred by an individual in connection with the performance of services as a member of a qualified volunteer emergency response organization are taken into account for purposes of the 

charitable deduction only to the extent the expenses exceed the 

amount of any excludible qualified reimbursement payment. 


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173Sec. 83. Section 83 applies generally to transfers of any property, not just employer stock, 

in connection with the performance of services by any service provider, not just an employee. 

However, the provision described herein applies only with respect to certain employer stock 

transferred to employees. 174 Under section 83(b), if an employee’s right to the stock is not substantially vested at the 

time of receipt (nonvested stock), the employee may nevertheless elect within 30 days of receipt 

to recognize income for the taxable year of receipt, referred to as a ‘‘section 83(b)’’ election. 

Under Treas. Reg. sec. 1.83–2, the employee makes an election by filing with the Internal Revenue Service a written statement that includes the fair market value of the property at the time 

Continued 

REASONS FOR CHANGE

Emergency response volunteers provide valuable services to their 

communities. In return, communities sometimes provide tax discounts or rebates and modest stipends to cover volunteer expenses. 

The Committee wishes to relieve the administrative and financial 

burden associated with applying Federal tax to these benefits by 

reinstating the exclusion for a limited period and increasing the exclusion for expense reimbursements. 

Explanation of Provision 

The provision reinstates for one year the exclusions for qualified 

State or local tax benefits and qualified reimbursement payments 

provided to members of qualified volunteer emergency response organizations. The provision also increases the exclusion for qualified 

reimbursement payments to $50 for each month during which a 

volunteer performs services. Under the provision, the exclusions for 

qualified State or local tax benefits and qualified reimbursement 

payments do not apply for taxable years beginning after December 

31, 2017. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2016. As described above, the exclusions do not apply 

for taxable years beginning after December 31, 2017. Thus, the exclusions apply only for taxable years beginning during 2017. 

B. TREATMENT OF QUALIFIED EQUITY GRANTS (SEC. 402 OF THE BILL

AND SECS. 83, 3401 AND 6051 OF THE CODE) 

PRESENT LAW

Income tax treatment of employer stock transferred to an employee 

Specific rules apply to property, including employer stock, transferred to an employee in connection with the performance of services.173 These rules govern the amount and timing of income inclusion by the employee and the amount and timing of the employer’s 

compensation deduction. 

Under these rules, an employee generally must recognize income 

for the taxable year in which the employee’s right to the stock is 

transferable or is not subject to a substantial risk of forfeiture (referred to herein as ‘‘substantially vested’’). Thus, if the employee’s 

right to the stock is substantially vested when the employee receives the stock, income is recognized for the taxable year in which 

received. If the employee’s right to the stock is not substantially 

vested at the time of receipt, in general, income is recognized for 

the taxable year in which the employee’s right becomes substantially vested.174 The amount includible in the employee’s income is 


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of receipt and the amount (if any) paid for the property. The employee must also provide a copy 

of the statement to the employer. 175See section 83(c)(1) and Treas. Reg. sec. 1.83–3(c) for the definition of substantial risk of 

forfeiture. 176Treas. Reg. sec. 1.83–3(d). In addition, under section 83(c)(2), the right to stock is transferable only if any transferee’s right to the stock would not be subject to a substantial risk of forfeiture. 177Sec. 83(h). 178See section 83(e)(3) and Treas. Reg. sec. 1.83–7. A nonqualified option is an option on employer stock that is not a statutory option, discussed below. 

the excess of the fair market value of the stock (at the time of receipt if substantially vested at that time or, if not, at the time of 

substantial vesting) over the amount, if any, paid by the employee 

for the stock. 

In general, an employee’s right to stock or other property is subject to a substantial risk of forfeiture if the employee’s right to full 

enjoyment of the property is subject to a condition, such as the future performance of substantial services.175 An employee’s right to 

stock or other property is transferable if the employee can transfer 

an interest in the property to any person other than the transferor 

of the property.176 Thus, generally, employer stock transferred to 

an employee by an employer is not transferable merely because the 

employee can sell it back to the employer. 

In the case of stock transferred to an employee, the employer is 

allowed a deduction (to the extent a deduction for a business expense is otherwise allowable) equal to the amount included in the 

employee’s income as a result of receipt of the stock.177 The deduction is allowed for the employer’s taxable year in which or with 

which ends the taxable year for which the amount is included in 

the employee’s income. 

These rules do not apply to the grant to an employee of a nonqualified option on employer stock unless the option has a readily 

ascertainable fair market value.178 Instead, these rules apply to the 

receipt of employer stock by the employee on exercise of the option. 

That is, if the right to the stock is substantially vested on receipt, 

income recognition applies for the taxable year of receipt. If the 

right to the stock is not substantially vested on receipt, the timing 

of income inclusion is determined under the rules applicable to the 

receipt of nonvested stock. In either case, the amount includible in 

income by the employee is the excess of the fair market value of 

the stock as of the time of income inclusion, less the exercise price 

paid by the employee and the amount, if any, paid by the employee 

for the option. The employer’s deduction is also determined under 

these rules. 

In some cases, the transfer of employer stock to an employee may 

be in settlement of restricted stock units. Restricted stock unit 

(‘‘RSU’’) is a term used for an arrangement under which an employee has the right to receive at a specified time in the future an 

amount determined by reference to the value of one or more shares 

of employer stock. An employee’s right to receive the future amount 

may be subject to a condition, such as continued employment for 

a certain period or the attainment of certain performance goals. 

The payment to the employee of the amount due under the arrangement is referred to as settlement of the RSU. The arrangement may provide for the settlement amount to be paid in cash or 

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179Secs. 3101–3128 (FICA), 3301–3311 (FUTA), and 3401–3404 (income tax withholding). Instead of FICA taxes, railroad employers and employees are subject, under the Railroad Retirement Tax Act (‘‘RRTA’’), sections 3201–3241, to taxes equivalent to FICA taxes with respect to 

compensation as defined for RRTA purposes. Sections 3501–3510 provide additional rules relating to all these taxes. 180The employee portion of the HI tax under FICA (not the employer portion) is increased 

by an additional tax of 0.9 percent on wages received in excess of a threshold amount. The 

threshold amount is $250,000 in the case of a joint return, $125,000 in the case of a married 

individual filing a separate return, and $200,000 in any other case. 181 Under section 3501(b), employment taxes with respect to noncash fringe benefits are to be 

collected (or paid) by the employer at the time and in the manner prescribed by the Secretary 

of the Treasury (‘‘Treasury’’). Announcement 85–113, 1985–31 I.R.B. 31, provides guidance on 

the application of employment taxes with respect to noncash fringe benefits. 182Sec. 3402. Specific withholding rates apply in the case of supplemental wages. 183Secs. 6041 and 6051. 

of employer stock with respect to the timing and amount of income 

inclusion by the employee and the employer’s deduction. 

Employment taxes and reporting 

Employment taxes generally consist of taxes under the Federal 

Insurance Contributions Act (‘‘FICA’’), tax under the Federal Unemployment Tax Act (‘‘FUTA’’), and income taxes required to be 

withheld by employers from wages paid to employees (‘‘income tax 

withholding’’).179 Unless an exception applies under the applicable 

rules, compensation provided to an employee constitutes wages 

subject to these taxes. 

FICA imposes tax on employers and employees, generally based 

on the amount of wages paid to an employee during the year. The 

tax imposed on the employer and on the employee is each composed 

of two parts: (1) the Social Security or old age, survivors, and disability insurance (‘‘OASDI’’) tax equal to 6.2 percent of covered 

wages up to the OASDI wage base ($118,500 for 2016); and (2) the 

Medicare or hospital insurance (‘‘HI’’) tax equal to 1.45 percent of 

all covered wages.180 The employee portion of FICA tax generally 

must be withheld and remitted to the Federal government by the 

employer. FICA tax withholding applies regardless of whether compensation is provided in the form of cash or a noncash form, such 

as a transfer of property (including employer stock) or in–kind benefits.181

FUTA imposes a tax on employers of six percent of wages up to 

the FUTA wage base of $7,000. 

Income tax withholding generally applies when wages are paid 

by an employer to an employee, based on graduated withholding 

rates set out in tables published by the Internal Revenue Service 

(‘‘IRS’’).182 Like FICA tax withholding, income tax withholding applies regardless of whether compensation is provided in the form 

of cash or a noncash form, such as a transfer of property (including 

employer stock) or in–kind benefits. 

An employer is required to furnish each employee with a statement of compensation information for a calendar year, including 

taxable compensation, FICA wages, and withheld income and FICA 

taxes.183 In addition, information relating to certain nontaxable 

items must be reported, such as certain retirement and health plan 

contributions. The statement, made on Form W–2, Wage and Tax 


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184 Employers send Form W–2 information to the Social Security Administration, which 

records information relating to Social Security and Medicare and forwards the Form W–2 information to the IRS. Employees include a copy of Form W–2 with their income tax returns. 185Sections 421–424 govern statutory options. Section 423(b)(5) requires that, under the terms 

of an ESPP, all employees granted options generally must have the same rights and privileges. 186 Under section 56(b)(3), this income tax treatment with respect to stock received on exercise 

of an ISO does not apply for purposes of the alternative minimum tax under section 55. 187Secs. 3121(a)(22), 3306(b)(19), and the last sentence of section 421(b). 188 Compensation earned by an employee is generally paid to the employee shortly after being 

earned. However, in some cases, payment is deferred to a later period, referred to as ‘‘deferred 

compensation.’’ Deferred compensation may be provided through a plan that receives tax–favored treatment, such as a qualified retirement plan under section 401(a). Deferred compensation provided through a plan that is not eligible for tax–favored treatment is referred to as ‘‘nonqualified’’ deferred compensation. 189Section 409A and the regulations thereunder provide rules for nonqualified deferred compensation. 

Statement, must be provided to each employee by January 31 of 

the succeeding year.184

Statutory options 

Two types of statutory options apply with respect to employer 

stock: incentive stock options (‘‘ISOs’’) and options provided under 

an employee stock purchase plan (‘‘ESPP’’).185 Stock received pursuant to a statutory option is subject to special rules, rather than 

the rules for nonqualified options, discussed above. No amount is 

includible in an employee’s income on the grant or exercise of a 

statutory option.186 In addition, no deduction is allowed to the employer with respect to the option or the stock transferred to an employee on exercise. 

If a holding requirement is met with respect to the stock received 

on exercise of a statutory option and the employee later disposes 

of the stock, the employee’s gain generally is treated as capital gain 

rather than ordinary income. Under the holding requirement, the 

employee must not dispose of the stock within two years after the 

date the option is granted or one year after the date the option is 

exercised. If a disposition occurs before the end of the required 

holding periods (a ‘‘disqualifying disposition’’), statutory option 

treatment no longer applies. Instead, the income realized on the 

disqualifying disposition, up to the amount of income that would 

have applied if the option had been a nonqualified option, is includible in income by the employee as compensation received in the 

taxable year in which the disposition occurs and a corresponding 

deduction is allowable to the employer for the taxable year in 

which the disposition occurs. 

Employment taxes do not apply with respect to the grant of a 

statutory option, the receipt of stock pursuant to the option, or a 

disqualifying disposition of the stock.187

Nonqualified deferred compensation 

Compensation is generally includible in an employee’s income 

when paid to the employee. However, in the case of a nonqualified 

deferred compensation plan,188 unless the arrangement meets certain requirements, the amount of deferred compensation is includible in income for the taxable year when earned (or, if later, when 

not subject to a substantial risk of forfeiture) even if payment will 

not occur until a later year.189 In general, under these requirements, the time when nonqualified deferred compensation will be 


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190Treas. Reg. sec. 1.409A–1(b)(5). In addition, statutory option arrangements are not nonqualified deferred compensation arrangements. 191The provision does not apply to income with respect to nonvested stock that is includible 

as a result of a section 83(b) election. 192 An inclusion deferral election is made in a manner similar to the manner in which a section 83(b) election is made. Thus, as in the case of a section 83(b) election under present law, 

the employee must provide a copy of the inclusion deferral election to the employer. 193Thus, for this purpose, the qualified stock is considered transferable if the employee has 

the ability to sell the stock to the employer (or any other person). 

paid must be specified at the time of deferral with limits on further 

deferral after the time for payment. 

Nonqualified options on employer stock may be structured so as 

not to be considered nonqualified deferred compensation and thus 

not subject to these rules.190 An arrangement providing RSUs is 

considered a nonqualified deferred compensation plan and is subject to these rules, including the limits. 

REASONS FOR CHANGE

Employer stock may provide a valuable form of employee compensation. In some cases, the receipt of employer stock with a high 

fair market value may result in compensation income, and a related tax liability, disproportionately large in comparison to an employee’s regular salary or wages. In the case of publicly traded employer stock, an employee may sell some of the stock to provide 

funds to cover that tax liability. However, that approach often is 

not available in the case of a closely held company that restricts 

the transferability of its stock. This may make employer stock a 

less attractive form of compensation. In the case of stock options, 

the inability to pay the tax liability that would result from the 

stock received on exercise of the option may mean employees let options lapse, thus losing compensation they have already earned. 

The Committee wishes to address these situations by allowing employees to elect to defer recognition of income attributable to stock 

received on exercise of an option or settlement of an RSU until an 

opportunity to sell some of the stock arises, but in no event longer 

than five years from the date that the employee’s right to the stock 

becomes substantially vested. 

EXPLANATION OF PROVISION

In general 

The provision allows a qualified employee to elect to defer, for income tax purposes, the inclusion in income of the amount of income 

attributable to qualified stock transferred to the employee by the 

employer.191 An election to defer income inclusion (‘‘inclusion deferral election’’) with respect to qualified stock must be made no later 

than 30 days after the first time the employee’s right to the stock 

is substantially vested.192 Absent an inclusion deferral election 

under the provision, the income is includable for the taxable year 

in which the qualified employee’s right to the qualified stock is substantially vested under present law. 

If an employee elects to defer income inclusion, the income must 

be included in the employee’s income for the taxable year that includes the earliest of (1) the first date the qualified stock becomes 

transferable, including, solely for this purpose, transferable to the 

employer;193 (2) the date the employee first becomes an excluded 


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194 An established securities market is determined for this purpose by the Secretary, but does 

not include any market unless the market is recognized as an established securities market for 

purposes of another Code provision. 195 An inclusion deferral election is revoked at the time and in the manner as the Secretary 

provides. 196This requirement is met if the stock purchased by the corporation includes all the corporation’s outstanding deferral stock. 197For purposes of the requirement that an ESPP provide employees with the same rights 

and privileges, the rules of the provision apply in determining which employees have the right 

to make an inclusion deferral election with respect to stock received under the ESPP. 

employee (as described below); (3) the first date on which any stock 

of the employer becomes readily tradable on an established securities market;194 (4) the date five years after the date the employee’s 

right to the stock becomes substantially vested; and (5) the date on 

which the employee revokes his or her inclusion deferral election.195

An employee may not make an inclusion deferral election for a 

year with respect to qualified stock if, in the preceding calendar 

year, the corporation purchased any of its outstanding stock unless 

at least 25 percent of the total dollar amount of the stock so purchased is stock with respect to which an inclusion deferral election 

is in effect (‘‘deferral stock’’) and the determination of which individuals from whom deferral stock is purchased is made on a reasonable basis.196 For purposes of this requirement, stock purchased 

from an individual is not treated as deferral stock (and the purchase is not treated as a purchase of deferral stock) if, immediately 

after the purchase, the individual holds any deferral stock with respect to which an inclusion deferral election has been in effect for 

a longer period than the election with respect to the purchased 

stock. Thus, in general, in applying the purchase requirement, an 

individual’s deferral stock with respect to which an inclusion deferral election has been in effect for the longest periods must be purchased first. A corporation that has deferral stock outstanding as 

of the beginning of any calendar year and that purchases any of 

its outstanding stock during the calendar year must report on its 

income tax return for the taxable year in which, or with which, the 

calendar year ends the total dollar amount of the outstanding stock 

purchased during the calendar year and such other information as 

the Secretary may require for purposes of administering this requirement. 

A qualified employee may make an inclusion deferral election 

with respect to qualified stock attributable to a statutory option.197

In that case, the option is not treated as a statutory option and the 

rules relating to statutory options and related stock do not apply. 

In addition, an arrangement under which an employee may receive 

qualified stock is not treated as a nonqualified deferred compensation plan solely because of an employee’s inclusion deferral election 

or ability to make an election. 

Deferred income inclusion applies also for purposes of the employer’s deduction of the amount of income attributable to the 

qualified stock. That is, if an employee makes an inclusion deferral 

election, the employer’s deduction is deferred until the employer’s 

taxable year in which or with which ends the taxable year of the 

employee for which the amount is included in the employee’s income as described in (1)–(5) above. 


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198One-percent owner status is determined under the top-heavy rules for qualified retirement 

plans, that is, section 416(i)(1)(B)(ii). 199 In the case of one-percent owners, this results from application of the attribution rules of 

section 318 under section 416(i)(1)(B)(i)(II). Family members are determined under section 

318(a)(1) and generally include an individual’s spouse, children, grandchildren and parents. 200 Highest paid employee status is determined at the close of the corporation’s taxable year. 201This requirement continues to apply up to the time an inclusion deferral election is made. 

That is, under the provision, no inclusion deferral election may be made with respect to qualified 

stock if any stock of the corporation is readily tradable on an established securities market at 

any time before the election is made. 202 In applying the requirement that 80 percent of employees receive stock options or RSUs, 

excluded employees and part-time employees are not taken into account. For this purpose, parttime employee is defined as under section 4980E(d)(4), that is, an employee customarily employed for fewer than 30 hours per week. 203Sec. 423(b)(5). 

Qualified employee and qualified stock 

Under the provision, a qualified employee means an individual 

who is not an excluded employee and who agrees, in the inclusion 

deferral election, to meet the requirements necessary (as determined by the Secretary) to ensure the income tax withholding requirements of the employer corporation with respect to the qualified stock (as described below) are met. For this purpose, an excluded employee with respect to a corporation is any individual (1) 

who was a one-percent owner of the corporation at any time during 

the 10 preceding calendar years,198 (2) who is, or has been at any 

prior time, the chief executive officer or chief financial officer of the 

corporation or an individual acting in either capacity, (3) who is a 

family member of an individual described in (1) or (2),199 or (4) who 

has been one of the four highest compensated officers of the corporation for any of the 10 preceding taxable years.200

Qualified stock is any stock of a corporation if— • an employee receives the stock in connection with the exercise of an option or in settlement of an RSU, and • the option or RSU was granted by the corporation to the 

employee in connection with the performance of services and in 

a year in which the corporation was an eligible corporation (as 

described below). 

However, qualified stock does not include any stock if, at the 

time the employee’s right to the stock becomes substantially vested, 

the employee may sell the stock to, or otherwise receive cash in 

lieu of stock from, the corporation. 

A corporation is an eligible corporation with respect to a calendar 

year if (1) no stock of the employer corporation (or any predecessor) 

is readily tradable on an established securities market during any 

preceding calendar year,201 and (2) the corporation has a written 

plan under which, in the calendar year, not less than 80 percent 

of all employees who provide services to the corporation in the 

United States (or any U.S. possession) are granted stock options, 

or restricted stock units (‘‘RSUs’’), with the same rights and privileges to receive qualified stock (‘‘80-percent requirement’’).202 For 

this purpose, in general, the determination of rights and privileges 

with respect to stock is determined in a similar manner as provided under the present–law ESPP rules.203 However, employees 

will not fail to be treated as having the same rights and privileges 

to receive qualified stock solely because the number of shares available to all employees is not equal in amount, provided that the 

number of shares available to each employee is more than a de 

minimis amount. In addition, rights and privileges with respect to 


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204 Under a transition rule, in the case of a calendar year beginning before January 1, 2017, 

the 80-percent requirement is applied without regard to whether the rights and privileges with 

respect to the qualified stock are the same. 205That is, the maximum rate of tax in effect for the year under section 1. The provision specifies that qualified stock is treated as a noncash fringe benefit for income tax withholding purposes. 

the exercise of a stock option are not treated for this purpose as 

the same as rights and privileges with respect to the settlement of 

an RSU.204

For purposes of the provision, corporations that are members of 

the same controlled group are treated as one corporation. 

Notice, withholding and reporting requirements 

Under the provision, a corporation that transfers qualified stock 

to a qualified employee must provide a notice to the qualified employee at the time (or a reasonable period before) the employee’s 

right to the qualified stock is substantially vested (and income attributable to the stock would be includible absent an inclusion deferral election). The notice must (1) certify to the employee that the 

stock is qualified stock, and (2) notify the employee (a) that the employee may elect to defer income inclusion with respect to the stock 

and (b) that, if the employee makes an inclusion deferral election, 

the amount of income required to be included at the end of the deferral period will be based on the value of the stock at the time the 

employee’s right to the stock is substantially vested, notwithstanding whether the value of the stock has declined during the deferral period, and the amount of income to be included at the end 

of the deferral period will be subject to withholding as provided 

under the provision, as well as of the employee’s responsibilities 

with respect to required withholding. Failure to provide the notice 

may result in the imposition of a penalty of $100 for each failure, 

subject to a maximum penalty of $50,000 for all failures during any 

calendar year. 

An inclusion deferral election applies only for income tax purposes. The application of FICA and FUTA are not affected. The 

provision includes specific income tax withholding and reporting requirements with respect to income subject to an inclusion deferral 

election. 

For the taxable year for which income subject to an inclusion deferral election is required to be included in income by the employee 

(as described above), the amount required to be included in income 

is treated as wages with respect to which the employer is required 

to withhold income tax at a rate not less than the highest income 

tax rate applicable to individual taxpayers.205 The employer must 

report on Form W–2 the amount of income covered by an inclusion 

deferral election (1) for the year of deferral and (2) for the year the 

income is required to be included in income by the employee. In addition, for any calendar year, the employer must report on Form 

W–2 the aggregate amount of income covered by inclusion deferral 

elections, determined as of the close of the calendar year. 

EFFECTIVE DATE

The provision generally applies with respect to stock attributable 

to options exercised or RSUs settled after December 31, 2016. 

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206Secs. 401(a)(9), 403(b)(1), 408(a)(6), 408(b)(3), and 457(d)(2). Tax-favored employer-sponsored retirement plans include qualified retirement plans and annuities under sections 401(a) 

and 403(a), tax-deferred annuity plans under section 403(b), and governmental eligible deferred 

compensation plans under section 457(b). Minimum distribution requirements also apply to eligible deferred compensation plans under section 457(b) of tax-exempt employers. 207Sec. 408A(c)(5). 208 Reflecting the directive in section 823 of the Pension Protection Act of 2006 (Pub. L. No. 

109–280), pursuant to Treas. Reg. sec. 1.401(a)(9)–1, A–2(d), a governmental plan within the 

meaning of section 414(d) or a governmental eligible deferred compensation plan is treated as 

having complied with the statutory minimum distribution rules if the plan complies with a reasonable and good faith interpretation of those rules. 209Sec. 4974. 

egate) issues regulations or other guidance implementing the 80- 

percent and employer notice requirements under the provision, a 

corporation will be treated as complying with those requirements 

(respectively) if it complies with a reasonable good faith interpretation of the requirements. The penalty for a failure to provide the 

notice required under the provision applies to failures after December 31, 2016. 

TITLE V—REVENUE PROVISIONS 

A. MODIFICATIONS TO REQUIRED MINIMUM DISTRIBUTION RULES

(SEC. 501 OF THE BILL AND SEC. 401(a)(9) OF THE CODE) 

PRESENT LAW

In general 

Minimum distribution rules apply to tax-favored employer-sponsored retirement plans and IRAs.206 Employer-sponsored retirement plans are of two general types: defined benefit plans, under 

which benefits are determined under a plan formula and paid from 

general plan assets, rather than individual accounts; and defined 

contribution plans, under which benefits are based on a separate 

account for each participant, to which are allocated contributions, 

earnings and losses. 

In general, under the minimum distribution rules, distribution of 

minimum benefits must begin to an employee (or IRA owner) no 

later than a required beginning date and a minimum amount must 

be distributed each year (sometimes referred to as ‘‘lifetime’’ minimum distribution requirements). These lifetime requirements do 

not apply to a Roth IRA.207 Minimum distribution rules also apply 

to benefits payable with respect to an employee (or IRA owner) who 

has died (sometimes referred to as ‘‘after-death’’ minimum distribution requirements). The regulations provide a methodology for calculating the required minimum distribution from an individual account under a defined contribution plan or from an IRA.208 In the 

case of annuity payments under a defined benefit plan or an annuity contract, the regulations provide requirements that the stream 

of annuity payments must satisfy. 

Failure to comply with the minimum distribution requirement 

results in an excise tax imposed on the individual who was required to take the distributions equal to 50 percent of the required 

minimum amount not distributed for the year.209 The excise tax 

may be waived in certain cases. For employer-sponsored retirement 

plans, satisfying the minimum distribution requirement under the 

plan terms and in operation is also a requirement for tax-favored 

treatment. 


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210Sec. 401(a)(9)(A). 211Treas. Reg. sec. 1.401(a)(9)–5. This table is based on the joint life and last survivor expectancy of the individual and a hypothetical beneficiary 10 years younger. For an individual with 

a spouse as designated beneficiary who is more than 10 years younger (and thus the number 

of years in the couple’s joint life and last survivor expectancy is greater than the uniform lifetime table), the joint life expectancy and last survivor expectancy of the couple (calculated using 

the table in the regulations) is used. For this purpose and other special rules that apply to the 

surviving spouse as beneficiary, a former spouse to whom all or a portion of an employee’s benefit is payable pursuant to a qualified domestic relations order (within the meaning of section 

414(p)) is treated as the spouse (including a surviving spouse) of the employee for purposes of 

section 401(a)(9). 212 In the case of amounts for which the employee or IRA owner’s surviving spouse is the beneficiary, the surviving spouse generally is permitted to do a tax-free rollover of such amounts 

into an IRA (or account of a tax-favored employer-sponsored plan of the spouse’s employer) established in the surviving spouse’s name as IRA owner or employee. The rules applicable to the 

rollover account, including the minimum distribution rules, are the same rules that apply to an 

IRA owner or employee. In the case of an IRA for which the spouse is sole beneficiary, this can 

be accomplished by simply renaming the IRA as an IRA held by the spouse as IRA owner rather 

than as a beneficiary. 

Required beginning date 

For traditional IRAs, the required beginning date is April 1 following the calendar year in which the employee (or IRA owner) attains age 701⁄2. For employer-sponsored retirement plans, for an 

employee other than an employee who is a five-percent owner in 

the year the employee attains age 701⁄2, the required beginning 

date is April 1 after the later of the calendar year in which the employee attains age 701⁄2 or retires. For an employee who is a fivepercent owner under an employer-sponsored tax-favored retirement 

plan in the year the employee attains age 701⁄2, the required beginning date is the same as for IRAs even if the employee continues 

to work past age 701⁄2. 

Lifetime rules 

While an employee (or IRA owner) is alive, distributions of the 

individual’s interest are required to be made (in accordance with 

regulations) over the life or life expectancy of the employee (or IRA 

owner), or over the joint lives or joint life expectancy of the employee (or IRA owner) and a designated beneficiary.210 For defined 

contribution plans and IRAs, the required minimum distribution 

for each year is determined by dividing the account balance as of 

the end of the prior year by a distribution period which, while the 

employee (or IRA owner) is alive, is the factor for the employee (or 

IRA owner’s) age from the uniform lifetime table included in the 

Treasury regulations.211 The distribution period for annuity payments under a defined benefit plan or annuity contract (to the extent not limited to the life of the employee (or IRA owner) or the 

joint lives of the employee (or IRA owner) and a designated beneficiary) is generally subject to the same limitations as apply to individual accounts. 

After-death rules 

Payments over a distribution period 

The after-death minimum distributions rules vary depending on 

(i) whether an employee (or IRA owner) dies on or after the required beginning date or before the required beginning date, and 

(ii) whether there is a designated beneficiary for the benefit.212

Under the regulations, a designated beneficiary is an individual 


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213Treas. Reg. sec. 1.401(a)(9)–4, A–1. The individual need not be named as long as the individual is identifiable under the terms of the plan (or IRA). There are special rules for multiple 

beneficiaries and for trusts named as beneficiary (where the beneficiaries of the trust are individuals). However, the fact that an interest under a plan or IRA passes to a certain individual 

under a will or otherwise under State law does not make that individual a designated beneficiary unless the individual is designated as a beneficiary under the plan or IRA. 214Sec. 401(a)(9)(B)(i). 215Treas. Reg. sec. 1.401(a)(9)–5, A–5(a)(2). 216Treas. Reg. sec. 1.401(a)(9)–5, A–5(a)(1). 217Treas. Reg. sec. 1.401(a)(9)–5, A–5(b). 218 If the distribution period is based on the surviving spouse’s life expectancy (whether the 

employee or IRA owner’s death is before or after the required beginning date), the spouse’s life 

Continued 

designated as a beneficiary under the plan or IRA.213 Similar to 

the lifetime rules, for defined contribution plans and IRAs (‘‘individual accounts’’), the required minimum distribution for each year 

after the death of the employee (or IRA owner) is generally determined by dividing the account balance as of the end of the prior 

year by a distribution period. 

If an employee (or IRA owner) dies on or after the required beginning date, the basic statutory rule is that the remaining interest 

must be distributed at least as rapidly as under the method of distribution being used before death.214 Under the regulations, for individual accounts, this rule is also interpreted as requiring the 

minimum required distribution to be calculated using a distribution period. If there is no designated beneficiary, the distribution 

period is equal to the remaining years of the employee’s (or IRA 

owner’s) life, as of the year of death.215 If there is a designated 

beneficiary, the distribution period (if longer) is the beneficiary’s 

life expectancy calculated using the life expectancy table in the regulations, determined in the year after the year of death.216

If an employee (or IRA owner) dies before the required beginning 

date and any portion of the benefit is payable to a designated beneficiary, the statutory rule is that distributions are generally required to begin within one year of the employee’s (or IRA owner’s) 

death (or such later date as prescribed in regulations) and are permitted to be paid (in accordance with regulations) over the life or 

life expectancy of the designated beneficiary. If the beneficiary of 

the employee (or IRA owner) is the individual’s surviving spouse, 

distributions are not required to commence until the year in which 

the employee (or IRA owner) would have attained age 701⁄2. If the 

surviving spouse dies before the employee (or IRA owner) would 

have attained age 701⁄2, the after-death rules apply after the death 

of the spouse as though the spouse were the employee (or IRA 

owner). Under the regulations, for individual accounts, the required 

minimum distribution for each year is determined using a distribution period and the period is measured by the designated beneficiary’s life expectancy, calculated in the same manner as if the individual died on or after the required beginning date.217

In cases where distribution after death is based on life expectancy (either the remaining life expectancy of the employee (or IRA 

owner) or a designated beneficiary), the distribution period generally is fixed at the employee’s (or IRA owner’s) death and then 

reduced by one for each year that elapses after the year in which 

it is calculated. If the designated beneficiary dies during the distribution period, distributions continue to the subsequent beneficiaries over the remaining years in the distribution period.218


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expectancy generally is recalculated each year while the spouse is alive and then fixed the year 

after the spouse’s death. 219Section 401(a)(9)(B)(ii) provides that the entire interest must be distributed within five 

years of the employee’s death. Treas. Reg. sec. 1.401(a)(9)–3, A–2, provides that this requirement is satisfied if the entire interest is distributed by the end of the fifth calendar year following the employee’s death. There are provisions in the regulations allowing a designated beneficiary to take advantage of the five-year rule. See Treas. Reg. secs. 1.401(a)(9)–4, A–4, and 

1.4974–2, A–7(b). 220Treas. Reg. sec. 1.401(a)(9)–6, A–14. 221Sec. 401(b). 

The distribution period for annuity payments under a defined 

benefit plan or annuity contract (to the extent not limited to the 

life of a designated beneficiary) is generally subject to the same 

limitations as apply to individual accounts. 

Five-year rule 

If an employee (or IRA owner) dies before the required beginning 

date and there is no designated beneficiary, then the entire remaining interest of the employee (or IRA owner) must generally be 

distributed by the end of the fifth calendar year following the individual’s death.219

Defined benefit plans and annuity distributions 

The regulations provide rules for the amount of annuity distributions from a defined benefit plan, or from an annuity purchased by 

the plan from an insurance company, that are paid over life or life 

expectancy. Annuity distributions are generally required to be nonincreasing with certain exceptions, which include, for example, (i) 

increases to the extent of certain specified cost-of-living indices, (ii) 

a constant percentage increase (for a qualified defined benefit plan, 

the constant percentage cannot exceed five percent per year), (iii) 

certain accelerations of payments, and (iv) increases to reflect when 

an annuity is converted to a single life annuity after the death of 

the beneficiary under a joint and survivor annuity or after termination of the survivor annuity under a qualified domestic relations 

order.220 If distributions are in the form of a joint and survivor annuity and the survivor annuitant both is not the surviving spouse 

and is younger than the employee (or IRA owner), the survivor annuity benefit is limited to a percentage of the life annuity benefit 

for the employee (or IRA owner). The survivor benefit as a percentage of the benefit of the primary annuitant is required to be smaller (but not required to be less than 52 percent) as the difference 

in the ages of the primary annuitant and the survivor annuitant 

become greater. 

Plan amendment and anti-cut-back requirements 

Present law provides a remedial amendment period during 

which, under certain circumstances, a qualified retirement plan 

may be amended retroactively in order to comply with the qualification requirements.221 In general, plan amendments to reflect 

changes in the law generally must be made by the time prescribed 

by law for filing the income tax return of the employer for the employer’s taxable year in which the change in law occurs. The Secretary may extend the time by which plan amendments need to be 

made. 

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222Sec. 411(d)(6) and ERISA sec. 204(g). 

duce optional forms of benefit with respect to benefits already accrued except to the extent prescribed in regulations.222 This prohibition on the reduction of accrued benefits is commonly referred to 

as the ‘‘anti-cut-back rule.’’ 

REASONS FOR CHANGE

The tax subsidy for retirement savings is intended to encourage 

the accumulation of funds that will provide adequate income during retirement. Because of the uncertainty as to how much income 

will be needed during retirement, individuals may accumulate 

more than is actually needed during the individual’s lifetime (and 

surviving spouse’s lifetime, if applicable), leaving some amount to 

other surviving beneficiaries. Present law generally allows other 

beneficiaries to withdraw inherited amounts from a tax-favored account or plan over the beneficiary’s lifetime, thus allowing funds to 

remain in tax-favored form long after the original purpose of adequate retirement income has been served. In some cases, the inherited amount may be so large that tax-favored retirement savings 

includes an estate-planning element, rather than just providing retirement income security. The Committee believes that the tax subsidy for retirement savings should be limited once the needs of the 

individual and surviving spouse, and certain other beneficiaries, 

have been met. 

EXPLANATION OF PROVISION

Change in after-death rules for defined contribution plans and IRAs 

The provision changes the after-death required minimum distribution rules applicable to defined contribution plans and IRAs, 

as described below. However, the provision applies only to the extent that the amount of an individual’s aggregate account balances 

under all IRAs and defined contributions plans, determined as of 

the date of death, exceeds $450,000 (indexed for inflation). Thus for 

example if an individual dies with aggregate account balances of 

$600,000, as of the date of death, present law continues to apply 

to $450,000, and the provision applies to the remaining $150,000. 

If an employee has multiple defined contribution plan accounts 

and IRAs, the $450,000 threshold is allocated among the accounts 

as provided in regulations. If the individual has more than one 

beneficiary, the portion of the amount above $450,000 that is subject to the provision with respect to each beneficiary is the amount 

that is the same proportion of the excess as the portion of the total 

to which the individual is entitled. The result is the same whether 

or not the beneficiary is an eligible beneficiary (as described below). 

Thus, under the example above, if the individual has two beneficiaries, one who is an eligible designated beneficiary, as discussed 

below, and one who is not an eligible designated beneficiary, each 

with a right to 50 percent of the aggregate amount, then present 

law applies for determining required minimum distributions for 

each beneficiary with respect to $225,000 and the provision applies 

to $75,000. 

The provision does not apply for determining after-death required minimum distributions from defined benefit plans. 


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223 As in the case of the present law special rule in section 401(a)(9)(B)(iv) for surviving 

spouses, spouse is not defined in the provision. Under Treas. Reg. sec. 1.401(a)(9)–8, A–5, a 

spouse is the employee’s spouse under applicable State law. In the case of a special rule for a 

surviving spouse, that determination is generally made based on the employee’s marital status 

on the date of death. An exception is provided in Treas. Reg. sec. 1.401(a)(9)–6, A–6, under 

which a former spouse to whom all or a portion of the employee’s benefits is payable pursuant 

to a qualified domestics relations order as defined in section 414(p) is treated as the employee’s 

spouse (including a surviving spouse). In the case of a qualified joint and survivor annuity under 

section 401(a)(11) and 417, the spouse is generally determined as of the annuity starting date. 224The measurement period is the life expectancy of the child calculated for the child’s age 

in the year after the employee’s (or IRA owner’s) death (age 21 (20 plus 1)). 

Expansion of five-year after-death rule for defined contributions 

plans 

In general 

Under the provision, the five-year rule is the general rule for all 

distributions after death (regardless of whether the employee (or 

IRA owner) dies before, on, or after the required beginning date) 

unless the designated beneficiary is an eligible beneficiary as defined in the provision. Thus, in the case of an ineligible beneficiary, 

distribution of the employee (or IRA owner’s) entire benefit is required to be distributed by the end of the fifth calendar year following the year of the employee or IRA owner’s death. 

Eligible beneficiaries 

For eligible beneficiaries, an exception to the five-year rule (for 

death before the required beginning date under present law) applies whether or not the employee (or IRA owner) dies before, on, 

or after the required beginning date. The exception (similar to 

present law) generally allows distributions over life or life expectancy of an eligible beneficiary beginning in the year following the 

year of death. Eligible beneficiaries includes any beneficiary who, 

as of the date of death, is the surviving spouse of the employee (or 

IRA owner),223 is disabled, is a chronically ill individual, is an individual who is not more than 10 years younger than the employee 

(or IRA owner), or is a child of the employee (or IRA owner) who 

has not reached the age of majority. In the case of a child who has 

not reached the age of majority, calculation of the minimum required distribution under this exception is only allowed through 

the year that the child reaches the age of majority. 

Further, under the provision, the five-year rule also applies after 

the death of an eligible beneficiary or after a child reaches the age 

of majority. Thus, for example, if a disabled child of an employee 

(or IRA owner) is an eligible beneficiary of a parent who dies when 

the child is age 20 and the child dies at age 30, even though 52.1 

years remain in measurement period,224 the disabled child’s remaining beneficiary interest must be distributed by the end of the 

fifth year following the death of the disabled child. If a child is an 

eligible beneficiary based on having not reached the age of majority 

before the employee’s (or IRA owner’s) death, the five-year rule applies beginning with the earlier of the date of the child’s death or 

the date that the child reaches the age of majority. The child’s entire interest must be distributed by the end of the fifth year following that date. 

As under present law, if the surviving spouse is the beneficiary, 

a special rule allows the commencement of distribution to be delayed until end of the year that the employee (or IRA owner) would 


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225The definition of disabled in section 72(m)(7) is incorporated by reference. 226Treas. Reg. sec. 1.72–17(f). Under the regulations, in determining whether an individual 

is disabled, primary consideration is given to the nature and severity of the individual’s impairment. However, consideration is also given to other factors such as the individual’s education, 

training, and work experience. Whether an impairment in a particular case constitutes a disability is determined with reference to all the facts in the case. 227Sec. 7702B(c)(2). 228Section 7702B(c) only requires this period to be at least 90 days. 

have attained age 701⁄2. If the spouse dies before distributions were 

required to begin to the spouse, the surviving spouse is treated as 

the employee (or IRA owner) in determining the required distributions to beneficiaries of the surviving spouse. 

Definitions of disabled and chronically ill individual 

Under the provision, disabled means unable to engage in any 

substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to 

end in death or to be for long-continued and indefinite duration.225

Further, under the definition, an individual is not considered to be 

disabled unless proof of the disability is furnished in such form and 

manner as the Secretary may require. Substantial gainful activity 

for this purpose is the activity, or a comparable activity, in which 

the individual customarily engaged prior to the arising of the disability (or prior to retirement if the individual was retired at the 

time the disability arose).226

Under the provision, the definition of a chronically ill individual 

for purposes of qualified long-term care insurance227 is incorporated by reference with a modification. Under this definition, a 

chronically ill individual is any individual who (1) is unable to perform (without substantial assistance from another individual) at 

least two activities of daily living for an indefinite period (expected 

to be lengthy in nature)228 due to a loss of functional capacity, (2) 

has a level of disability similar (as determined under regulations 

prescribed by the Secretary in consultation with the Secretary of 

Health and Human Services) to the level of disability described 

above requiring assistance with daily living based on loss of functional capacity, or (3) requires substantial supervision to protect 

the individual from threats to health and safety due to severe cognitive impairment. The activities of daily living for which assistance is needed for purposes of determining loss of functional capacity are eating, toileting, transferring, bathing, dressing, and continence. 

Annuity payments under commercial annuities 

The provision applies to after-death required minimum distributions under defined contribution plans and IRAs, including annuity 

contracts purchased from insurance companies under defined contribution plans or IRAs. 

EFFECTIVE DATE

General effective date 

In determining required minimum distributions after the death 

of an employee (or IRA owner), the provision is generally effective 

for required minimum distributions with respect to employees (or 

IRA owners) with a date of death after December 31, 2016. 


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229 A collectively bargained plan is a plan maintained pursuant to one or more collective bargaining agreements between employee representatives and one or more employers. 230The date that the last agreement terminates is determined without regard to any extension 

thereof agreed to on or after the date of enactment of the provision. Further, any plan amendment made pursuant to a collective bargaining agreement relating to the plan that amends the 

plan solely to conform to any requirement added by the provision shall not be treated as a termination of the collective bargaining agreement. 231For this purpose, commercial annuity is defined in section 3405(e)(6). 

Delayed effective date for governmental and collectively bargained 

plans 

In the case of a governmental plan (as defined in section 414(d)), 

in determining required minimum distributions after the death of 

an employee, the provision applies to distributions with respect to 

employees who die after December 31, 2018. 

In the case of a collectively bargained plan,229 in determining required minimum distributions after the death of an employee, the 

provision applies to distributions with respect to employees who die 

in calendar years beginning after the earlier of two dates. The first 

date is the later of (1) the date on which the last collective bargaining agreement ratified before date of enactment of the provision terminates,230 or (2) December 31, 2016. The second date is 

December 31, 2018. 

Five-year rule after the death of a beneficiary 

In the case of an employee (or IRA owner) who dies before the 

effective date (as described below) for the plan (or IRA), if the designated beneficiary of the employee (or IRA owner) dies on or after 

the effective date, the provision applies to any beneficiary of the 

designated beneficiary as though the designated beneficiary were 

an eligible beneficiary. Thus, the entire interest must be distributed by the end of the fifth calendar year after the death of the 

designated beneficiary. For this purpose, the effective date is the 

date of death of the employee (or IRA owner) used to determine 

when the provision applies to the plan (or IRA), for example, before 

January 1, 2017, under the general effective date. 

Certain annuities grandfathered 

The modification to the after-death minimum distribution rules 

does not apply to a qualified annuity that is a binding annuity contract in effect on the date of enactment of the provision and at all 

times thereafter. A qualified annuity with respect to an individual 

is a commercial annuity,231 under which the annuity payments are 

made over the lives of the individual and a designated beneficiary 

(or over a period not extending beyond the life expectancy of the 

individual or the life expectancy of the individual and a designated 

beneficiary) in accordance with the required minimum distribution 

regulations for annuity payments as in effect before enactment of 

this proposal. In addition to these requirements, annuity payments 

to the individual must begin before the date of enactment, and the 

individual must have made an irrevocable election before that date 

as to the method and amount of the annuity payments to the individual or any designated beneficiaries. Alternatively, if an annuity 

is not a qualified annuity solely based on annuity payments not 

having begun irrevocably before the date of enactment, an annuity 

can be a qualified annuity if the individual has made an irrevocable election before the date of enactment as to the method and 


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232See United States v. Boyle, 469 U.S. 241, 245 (1985). 233Sec. 6651(a)(1). 234Sec. 6651(f). 

amount of the annuity payments to the individual or any designated beneficiaries. 

Plan amendments made pursuant to the provision 

A plan amendment made pursuant to the provision (or regulations issued thereunder) may be retroactively effective and (except 

as provided by the Secretary) will not violate the anti-cut-back 

rule, if, in addition to meeting the other applicable requirements 

described below, the amendment is made on or before the last day 

of the first plan year beginning after December 31, 2018 (or in the 

case of a governmental or collectively bargained plan, December 31, 

2020), or a later date prescribed by the Secretary. In addition, the 

plan will be treated as operated in accordance with plan terms during the period beginning with the date of the provision or regulations take effect (or the date specified by the plan if the amendment is not required by the provision or regulations) and ending 

on the last permissible date for the amendment (or, if earlier, the 

date the amendment is adopted). 

A plan amendment will not be considered to be pursuant to the 

provision (or applicable regulations) if it has an effective date before the effective date of the provision under the provision (or regulations) to which it relates. Similarly, the provision does not provide relief from the anti-cut-back rule for periods prior to the effective date of the relevant portion of the provision (or regulations) or 

the plan amendment. In order for an amendment to be retroactively effective and not violate the anti-cut-back rule, the plan 

amendment must apply retroactively for the period described in the 

preceding paragraph, and the plan must be operated in accordance 

with the amendment during that period. 

B. INCREASE IN PENALTY FOR FAILURE TO FILE (SEC. 502 OF THE

BILL AND SEC. 6651(a) OF THE CODE) 

PRESENT LAW

The Federal tax system is one of ‘‘self-assessment,’’ i.e., taxpayers 

are required to declare their income, expenses, and ultimate tax 

due, while the IRS has the ability to propose subsequent changes. 

This voluntary system requires that taxpayers comply with deadlines and adhere to the filing requirements. While taxpayers may 

obtain extensions of time in which to file their returns, the Federal 

tax system consists of specific due dates of returns. In order to foster compliance in meeting these deadlines, Congress has enacted a 

penalty for the failure to timely file tax returns.232

A taxpayer who fails to file a tax return on or before its due date 

is subject to a penalty equal to five percent of the net amount of 

tax due for each month that the return is not filed, up to a maximum of 25 percent of the net amount.233 If the failure to file a return is fraudulent, the taxpayer is subject to a penalty equal to 15 

percent of the net amount of tax due for each month the return is 

not filed, up to a maximum of 75 percent of the net amount.234 The 

net amount of tax due is the amount of tax required to be shown 

on the return reduced by the amount of any part of the tax which 


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235Sec. 6651(b)(1). 236Sec. 6651(a)(1). 237Sec. 6651(c)(1). 238 Ibid. 239Sec. 6651(a)(1). 240Sec. 6651(e). 

is paid on or before the date prescribed for payment of the tax and 

by the amount of any credits against tax which may be claimed on 

the return.235 The penalty will not apply if it is shown that the failure to file was due to reasonable cause and not willful neglect.236

If a return is filed more than 60 days after its due date, and unless it is shown that such failure is due to reasonable cause, then 

the failure to file penalty may not be less than the lesser of $205 

or 100 percent of the amount required to be shown as tax on the 

return. If a penalty for failure to file and a penalty for failure to 

pay tax shown on a return both apply for the same month, the 

amount of the penalty for failure to file for such month is reduced 

by the amount of the penalty for failure to pay tax shown on a return.237 If a return is filed more than 60 days after its due date, 

then the penalty for failure to pay tax shown on a return may not 

reduce the penalty for failure to file below the lesser of $205 or 100 

percent of the amount required to be shown on the return.238

The failure to file penalty applies to all returns required to be 

filed under subchapter A of Chapter 61 (relating to income tax returns of an individual, fiduciary of an estate or trust, or corporation; self-employment tax returns, and estate and gift tax returns), 

subchapter A of chapter 51 (relating to distilled spirits, wines, and 

beer), subchapter A of chapter 52 (relating to tobacco, cigars, cigarettes, and cigarette papers and tubes), and subchapter A of chapter 53 (relating to machine guns and certain other firearms).239

The failure to file penalty is adjusted annually to account for inflation. The failure to file penalty does not apply to any failure to pay 

estimated tax required to be paid by sections 6654 or 6655.240

REASONS FOR CHANGE

The Committee believes the present law penalties are too low to 

discourage noncompliance. The Committee believes that increasing 

the penalties will encourage the filing of timely and accurate returns which, in turn, will improve overall tax administration. 

EXPLANATION OF PROVISION

Under the provision, if a return is filed more than 60 days after 

its due date, then the failure to file penalty may not be less than 

the lesser of $400 or 100 percent of the amount required to be 

shown as tax on the return. 

EFFECTIVE DATE

The provision applies to returns with filing due dates (including 

extensions) after December 31, 2016. 


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241Sec. 6058. 242Sec. 412. Most governmental plans (defined in section 414(d)) and church plans (defined 

in section 414(e)) are exempt from the minimum funding requirements. 243Sec. 6059. 244Treas. Reg. secs. 301.6058–1(a) and 301.6059–1. 245Sec. 6652(e). The failure to file penalties in section 6652 generally apply to certain information returns, including retirement plan returns. The failure to file penalties in section 

6651(a)(1), discussed above in section 502 of the bill, generally apply to income, estate, gift, employment and self-employment, and certain excise tax returns. 246 Code sec. 6057(a). Under Code section 6057(e) and ERISA section 105(c), similar information must be provided to the separated participant. 247Sec. 6652(d)(1). 

C. INCREASED PENALTIES FOR FAILURE TO FILE RETIREMENT PLAN

RETURNS (SEC. 503 OF THE BILL AND SEC. 6652(d), (e), AND (h) OF

THE CODE) 

PRESENT LAW

Form 5500 

An employer that maintains a pension, annuity, stock bonus, 

profit-sharing or other funded deferred compensation plan (or the 

plan administrator of the plan) is required to file an annual return 

containing information required under regulations with respect to 

the qualification, financial condition, and operation of the plan.241

The plan administrator of a defined benefit plan subject to the minimum funding requirements242 is required to file an annual actuarial report.243 These filing requirements are met by filing an Annual Return/Report of Employee Benefit Plan, Form 5500 series, 

and providing the information as required on the form and related 

instructions.244 A failure to file Form 5500 generally results in a civil penalty of $25 for each day during which the failure continues, 

subject to a maximum penalty of $15,000.245 This penalty may be 

waived if it is shown that the failure is due to reasonable cause. 

Annual registration statement and notification of changes 

In the case of a plan subject to the vesting requirements under 

the Employee Retirement Income Security Act of 1974 (‘‘ERISA’’), 

the plan administrator is required to file a registration statement 

with the IRS with respect to any plan participant who (1) separated from service during the year and (2) has a vested benefit 

under the plan, but who was not paid the benefit during the year 

(a ‘‘deferred vested’’ benefit).246 The registration statement must 

include the name of the plan, the name and address of the plan administrator, the name and taxpayer identification number of the 

separated participant, and the nature, amount, and form of the 

participant’s deferred vested benefit. A failure to file a registration 

statement as required generally results in a civil penalty of $1 for 

each participant with respect to whom the failure applies, multiplied by the number of days during which the failure continues, 

subject to a maximum penalty of $5,000 for a failure with respect 

to any plan year.247 This penalty may be waived if it is shown that 

the failure is due to reasonable cause. 

A plan administrator is also required to notify the IRS if certain 

information in a registration changes, specifically, any change in 

the name of the plan or in the name or address of the plan administrator, the termination of the plan, or the merger or consolidation 

of the plan with any other plan or its division into two or more 

plans. A failure to file a required notification of change generally 


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248Sec. 6652(d)(2). 249Sec. 3405. 250Sec. 6652(h). 

results in a penalty of $1 for each day during which the failure continues, subject to a maximum penalty of $1,000 for any failure.248

This penalty may be waived if it is shown that the failure is due 

to reasonable cause. 

Withholding notices 

Withholding requirements apply to distributions from tax-favored 

employer-sponsored retirement plans and IRAs, but, except in the 

case of certain distributions, payees may generally elect not to have 

withholding apply.249 A plan administrator or IRA custodian is required to provide payees with notices of the right to elect no withholding. A failure to provide a required notice generally results in 

a civil penalty of $10 for each failure, subject to a maximum penalty of $5,000 for all failures during any calendar year.250 This penalty may be waived if it is shown that the failure is due to reasonable cause and not to willful neglect. 

REASONS FOR CHANGE

The Committee notes that the penalties for failing to file certain 

retirement plan returns and statements or provide certain notices 

have not been increased in many years. The Committee believes 

the present law penalties are too low to discourage noncompliance. 

The Committee believes that increasing these penalties will encourage the filing of timely and accurate information returns and statements and the provision of required notices, which, in turn, will 

improve overall tax administration. 

EXPLANATION OF PROVISION

Form 5500 

Under the provision, a failure to file Form 5500 generally results 

in a penalty of $100 for each day during which the failure continues, subject to a maximum but the total amount imposed under 

this subsection on any person for failure to file any return shall not 

exceed $50,000. 

Annual registration statement and notification of changes 

Under the provision, a failure to file a registration statement as 

required generally results in a penalty of $2 for each participant 

with respect to whom the failure applies, multiplied by the number 

of days during which the failure continues, subject to a maximum 

penalty of $10,000 for a failure with respect to any plan year. A 

failure to file a required notification of change generally results in 

a penalty of $2 for each day during which the failure continues, 

subject to a maximum penalty of $5,000 for any failure. 

Withholding notices 

Under the provision, a failure to provide a required withholding 

notice generally results in a penalty of $100 for each failure, subject to a maximum penalty of $50,000 for all failures during any 

calendar year. 


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251Sec. 6159. 252Sec. 6331(k). 253The IRS accepts applications for installment agreements online, from individuals and businesses, if the total tax, penalties and interest is below $50,000 for the former, and $25,000 for 

the latter. 254 31 U.S.C. sec. 9701; Treas. Reg. sec. 300.1. The Independent Offices Appropriations Act of 

1952 (IOAA), 65 Stat. B70, (June 27, 1951). A discussion of the IRS practice regarding user fees 

and a list of actions for which fees are charged is included in the Internal Revenue Manual. 

See ‘‘User Fees,’’ paragraph 1.32.19 IRM, available at https://www.irs.gov/irm/part1/irm_01- 

032-019.html. 255On August 22, 2016, Treasury issued proposed changes to the schedule of user fees for installment agreements, effective January 2017, based on a biennial review of the costs of administering the program. https://www.irs.gov/uac/irs-proposes-revised-fees-for-installment-agreements. If finalized, the revised schedule imposes user fees in the following amounts: $225 for 

a regular installment agreement; $107 for a regular direct debit installment agreement; $149 

for online payment agreement; $31 for a direct debit online payment agreement; $89 for a restructured or reinstated agreement; and $43 for an agreement with a low-income taxpayer. 

EFFECTIVE DATE

The provision is effective for returns, statements and notifications required to be filed, and withholding notices required to be 

provided, in calendar years beginning after December 31, 2016. 

D. MODIFICATION OF USER FEE REQUIREMENTS FOR INSTALLMENT

AGREEMENTS (SEC. 504 OF THE BILL AND SEC. 6159 OF THE CODE) 

PRESENT LAW

The Code authorizes the IRS to enter into written agreements 

with any taxpayer under which the taxpayer agrees to pay taxes 

owed, as well as interest and penalties, in installments over an 

agreed schedule, if the IRS determines that doing so will facilitate 

collection of the amounts owed.251 This agreement provides for a 

period during which IRS enforcement actions are held in abeyance 

while payments are made.252 An installment agreement generally 

does not reduce the amount of taxes, interest, or penalties owed. 

However, the IRS is authorized to enter into installment agreements with taxpayers which do not provide for full payment of the 

taxpayer’s liability over the life of the agreement. The IRS is required to review such partial payment installment agreements at 

least every two years to determine whether the financial condition 

of the taxpayer has significantly changed so as to warrant an increase in the value of the payments being made. 

Taxpayers can request an installment agreement by filing Form 

9465, Installment Agreement Request.253 If the request for an installment agreement is approved by the IRS, the IRS charges a 

user fee.254 Under sections 300.1 and 300.2 of the Treasury Regulations, the IRS currently charges $120 for entering into an installment agreement.255 If the application is for a direct debit installment agreement, whereby the taxpayer authorizes the IRS to request the monthly electronic transfer of funds from the taxpayer’s 

bank account to the IRS, the fee is reduced to $52. In addition, regardless of the method of payment, the fee is $43 for low-income 

taxpayers. For this purpose, low-income is defined as a person who 

falls below 250 percent of the Federal poverty guidelines published 

annually. Finally, there is no user fee if the agreement is for a 

term of 120 days or less (i.e., a short-term agreement). 


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256See American Bar Association letter to Mr. Daniel Werfel, Acting Commissioner, IRS, 

‘‘Comments Concerning User Fees for Processing Installment Agreements and Offers in Compromise,’’ October 1, 2013, page 2, available at http://www.americanbar.org/content/dam/aba/ 

administrative/taxation/policy/100113comments.authcheckdam.pdf. 257Sec. 6103(a). 258Sec. 7431. 

REASONS FOR CHANGE

The Committee believes user fees are a barrier to compliance in 

collection and discourage low-income taxpayers from voluntary tax 

compliance, as many of them do not have the means to pay the 

user fee, even at the reduced rate. Further, when negotiating installment agreements, many low-income taxpayers are charged the 

full user fee, despite qualifying for the reduced amount.256

EXPLANATION OF PROVISION

The provision generally prohibits increases in the amount of user 

fees charged by the IRS for installment agreements. For low-income taxpayers (those whose adjusted gross income, as determined 

for the most recent year for which such information is available, 

does not exceed 250 percent of the applicable poverty level as determined by the Secretary), it alleviates the user fee requirement in 

two ways. First, it waives the user fee if the low-income taxpayer 

enters into an installment agreement under which the taxpayer 

agrees to make automated installment payments through a debit 

account. Second, it provides that low-income taxpayers who are unable to make payments electronically remain subject to the required user fee, but the fee is reimbursed upon completion of the 

installment agreement. 

EFFECTIVE DATE

The provision applies to agreements entered into on or after the 

date that is 60 days after the date of enactment. 

E. INCREASE INFORMATION SHARING TO ADMINISTER EXCISE TAXES

(SEC. 505 OF THE BILL AND SEC. 6103(o) OF THE CODE) 

PRESENT LAW

Generally, tax returns and return information (‘‘tax information’’) 

are confidential and may not be disclosed unless authorized in the 

Code.257 Return information includes data received, collected or 

prepared by the Secretary with respect to the determination of the 

existence or possible existence of liability of any person under the 

Code for any tax, penalty, interest, fine, forfeiture, or other imposition or offense. Criminal penalties apply for the unauthorized inspection or disclosure of tax information. Willful unauthorized disclosure is a felony under section 7213 and the willful unauthorized 

inspection of tax information is a misdemeanor under section 

7213A. Taxpayers may also pursue a civil cause of action for disclosures and inspections not authorized by section 6103.258

Section 6103 provides exceptions to the general rule of confidentiality, detailing permissible disclosures. Under section 6103(h)(1), 

tax information is open to inspection by or disclosure to Treasury 

officers and employees whose official duties require the inspection 

or disclosure for tax administration purposes. 


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259Sec. 4481(a). 260Treas. Reg. 41.6001–3(a). 261Treas. Reg. 41.6001–3(b). 262The Homeland Security Act of 2002, Pub. L. No. 107–296 (‘‘Homeland Security Act’’), enacted November 25, 2002 established the U.S. Department of Homeland Security. Several agencies were combined under this new department. 263Sec. 708(b)(1). 264Sec. 708(b)(2). Mergers, consolidations, and divisions of partnerships take either an assetsover form or an assets-up form pursuant to Treas. Reg. sec. 1.708–1(c). 265Sec. 708(b)(1)(A). 

The heavy vehicle use tax, an annual highway use tax, is imposed on the use of any highway motor vehicle that has a gross 

weight of 55,000 pounds or more.259 Proof of payment of the heavy 

vehicle use tax must be presented to customs officials upon entry 

into the United States of any highway motor vehicle subject to the 

tax and that has a base in a contiguous foreign country.260 If the 

operator of the vehicle is unable to present proof of payment of the 

tax with respect to the vehicle, entry into the United States may 

be denied.261

Prior to 2003, customs officials who had responsibility for enforcing and/or collecting excise taxes were employees of the U.S. Department of the Treasury (‘‘Treasury’’). Thus, prior to 2003, section 

6103(h)(1) allowed disclosure of tax information by the IRS to these 

customs officials in the performance of their duties. In 2003, U.S. 

Customs and Border Protection became an official agency of the 

U.S. Department of Homeland Security.262 At that time, customs 

officials were transferred from Treasury to the Department of 

Homeland Security. 

REASONS FOR CHANGE

Allowing limited disclosures of tax information will facilitate tax 

administration and improve compliance with the heavy vehicle use 

tax by allowing customs officials to confirm payment or nonpayment of the tax. 

EXPLANATION OF PROVISION

The provision allows the IRS to share returns and return information with employees of U.S. Customs and Border Protection 

whose official duties require such inspection or disclosure for purposes of administering and collecting the heavy vehicle use tax. 

EFFECTIVE DATE

The provision is effective for disclosures made on or after the 

date of enactment. 

F. REPEAL OF PARTNERSHIP TECHNICAL TERMINATIONS (SEC. 506 OF

THE BILL AND SEC. 708(b)(1)(B) OF THE CODE) 

PRESENT LAW

Present law provides that a partnership is considered as terminated under specified circumstances.263 Present law also provides 

rules for the merger, consolidation, or division of a partnership.264

A partnership is considered as terminated if no part of any business, financial operation, or venture of the partnership continues to 

be carried on by any of its partners in a partnership.265


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266Sec. 708(b)(1)(B). 267Treas. Reg. sec. 1.708–1(b)(4). 268Sec. 706(c)(1); Treas. Reg. sec. 1.708–1(b)(3). 269Partnership level elections include, for example, the section 754 election to adjust basis on 

a transfer or distribution, as well as other elections that determine the partnership’s tax treatment of partnership items. A list of elections can be found at William S. McKee, William F. Nelson, and Robert L. Whitmire, Federal Taxation of Partnerships and Partners, 4th edition, para. 

9.01[7], pp. 9–42—9–44. 270 Although section 168(i)(7) provides that for purposes of computing the depreciation deduction, generally the transferee partnership is treated as the transferor when property is contributed in a tax-free transaction governed by section 721, it further provides that this rule does 

not apply in the case of a technical termination. Thus, the deemed contribution under Treas. 

Reg. sec. 1.708–1(b)(4) may have the result of restarting depreciation periods applying the current adjusted basis of the property deemed contributed. 

A partnership is also considered as terminated if within any 12- 

month period, there is a sale or exchange of 50 percent or more of 

the total interest in partnership capital and profits.266 This is 

sometimes referred to as a technical termination. Under regulations, the technical termination gives rise to a deemed contribution 

of all the partnership’s assets and liabilities to a new partnership 

in exchange for an interest in the new partnership, followed by a 

deemed distribution of interests in the new partnership to the purchasing partners and the other remaining partners.267

The effect of a technical termination is the termination of the old 

partnership and the formation of a new partnership. As a result of 

a technical termination, some of the tax attributes of the old partnership terminate. Upon a technical termination, the partnership’s 

taxable year closes, potentially resulting in short taxable years.268

Partnership-level elections generally cease to apply following a 

technical termination.269 A technical termination generally results 

in the restart of partnership depreciation recovery periods.270

REASONS FOR CHANGE

The Committee is concerned that the present-law rule providing 

for technical terminations of partnerships has become both a trap 

for the unwary and a tool subject to manipulation for the well-advised. This is because its effects on partnership-level tax attributes 

such as elections, depreciation periods, and closing of the partnership taxable year can be either unanticipated by the unwary, or 

planned by the well-advised, in the event of a sale or exchange of 

partnership interests. Further, well-advised taxpayers may avoid 

the effects of a technical termination by structuring transactions as 

something other than a sale or exchange of the requisite percentage of partnership interests in profits and capital in a 12-month period. The Committee believes that tax policy or tax administrability 

purposes served by the partnership technical termination rule are 

outweighed by these disadvantages, and therefore, the bill repeals 

the technical termination rule. 

EXPLANATION OF PROVISION

The provision repeals the section 708(b)(1)(B) rule providing for 

technical terminations of partnerships. 

The provision does not change the present-law rule of section 

708(b)(1)(A) that a partnership is considered as terminated if no 

part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership. 


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271Title IV of ERISA. 272 29 C.F.R. sec. 4007.11(a). Under section 502 of the Bipartisan Budget Act of 2015, Pub. 

L. No. 114–74, premiums for plan years beginning in 2025 (that is, plan years beginning after 

December 31, 2024, and before January 1, 2026) are due by the fifteenth day of the ninth calendar month that begins on or after the first day of the premium payment year. 

EFFECTIVE DATE

The provision applies to periods beginning after December 31, 

2016. A transition rule provides that in the case of a period beginning before January 1, 2017, the present-law partnership technical 

termination rule applies without regard to any sale or exchange 

after December 31, 2016. 

G. PENSION PLAN ACCELERATION OF PBGC PREMIUM PAYMENT

(SEC. 507 OF THE BILL AND SEC. 4007 OF ERISA) 

PRESENT LAW

Private defined benefit plans are covered by the Pension Benefit 

Guaranty Corporation (‘‘PBGC’’) insurance program, under which 

the PBGC guarantees the payment of certain plan benefits, and 

plans are required to pay annual premiums to the PBGC.271 PBGC 

premiums consist of a per-participant premium (referred to as ‘‘flatrate’’ premiums) and, in the case of single-employer and multipleemployer plans, additional premiums (referred to as ‘‘variable-rate’’ 

premiums) based on the amount by which the present value of 

vested benefits under the plan exceeds the value of plan assets. 

PBGC premiums for a plan year are generally due by a date 

within that plan year (referred to as the ‘‘premium payment year’’). 

In general, premiums are due by the fifteenth day of the tenth calendar month that begins on or after the first day of the premium 

payment year.272

REASONS FOR CHANGE

The Committee believes that accelerating the due date of certain 

variable-rate premiums will strengthen the financial status of the 

PBGC insurance program. 

EXPLANATION OF PROVISION

Under the provision, variable-rate premiums for which the due 

date under present law occurs during the period October 1, 2026, 

through November 30, 2026, must be paid by September 30, 2026. 

Effective Date The provision is effective on the date of enactment. 

III. BUDGET EFFECTS OF THE BILL 

A. COMMITTEE ESTIMATES

In compliance with paragraph 11(a) of rule XXVI of the Standing 

Rules of the Senate and section 308(a)(1) of the Congressional 

Budget and Impoundment Control Act of 1974, as amended (the 

‘‘Budget Act’’), the following statement is made concerning the estimated budget effects of the revenue provisions of the Retirement 

Enhancement and Savings Act of 2016, as reported. 

The bill is estimated to have the following effects on Federal 

budget receipts for fiscal years 2017–2026: 


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B. BUDGET AUTHORITY AND TAX EXPENDITURES

Budget authority 

In compliance with section 308(a)(1) of the Budget Act, the Committee states that the provisions of the bill relating to the Tax 

Court and PBGC premiums for CSEC plans involve new or increased budget authority. 

Tax expenditures 

In compliance with section 308(a)(1) of the Budget Act, the Committee states that certain provisions affect the levels of tax expenditures, as shown in the revenue table in Part A. 

C. CONSULTATION WITH CONGRESSIONAL BUDGET OFFICE

In accordance with section 403 of the Budget Act, the Committee 

advises that the Congressional Budget Office has not submitted a 

statement on the bill. The statement from the Congressional Budget Office will be provided separately. 

IV. VOTES OF THE COMMITTEE 

In compliance with paragraph 7(b) of rule XXVI of the Standing 

Rules of the Senate, the Committee states that, with a majority 

present, the Retirement Enhancement and Savings Act of 2016, 

was ordered favorably reported on September 21, 2016, by a roll 

call vote of 26 ayes and 0 nays. The vote was as follows: 

Ayes: Hatch, Grassley, Crapo, Roberts, Enzi, Cornyn, Thune 

(proxy), Burr (proxy), Isakson, Portman, Toomey (proxy), Coats, 

Heller, Scott, Wyden, Schumer, Stabenow, Cantwell, Nelson, 

Menendez, Carper, Cardin, Brown, Bennet, Casey, Warner. 

V. REGULATORY IMPACT AND OTHER MATTERS 

A. REGULATORY IMPACT

Pursuant to paragraph 11(b) of rule XXVI of the Standing Rules 

of the Senate, the Committee makes the following statement concerning the regulatory impact that might be incurred in carrying 

out the provisions of the bill. 

Impact on individuals and businesses and personal privacy 

The bill includes various provisions relating to tax-favored retirement savings, including provisions designed to expand access to 

employer-sponsored plans and IRAs, to encourage greater participation in tax-favored arrangement, to preserve funds held in taxfavored form, and to help ensure that savings are sufficient to last 

through retirement. The bill also contains provisions relating to the 

U.S. Tax Court, benefits provided to emergency services volunteers, 

stock-based compensation provided to employees of closely held 

businesses, and tax compliance. Some provisions may involve additional record-keeping or reporting by individuals or businesses 

wishing to avail themselves of favorable tax treatment. A number 

of the provisions in the bill are designed to reduce the administrative burdens associated with tax-favored savings and other employee benefits. 

The provisions of the bill do not impact personal privacy. 


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B. UNFUNDED MANDATES STATEMENT

This information is provided in accordance with section 423 of 

the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104–4). 

The Committee has determined that the revenue provisions of 

the bill do not impose any Federal private sector or intergovernmental mandates on State, local, or tribal governments within the 

meaning of the Unfunded Mandates Reform Act of 1995. 

C. TAX COMPLEXITY ANALYSIS

Section 4022(b) of the Internal Revenue Service Reform and Restructuring Act of 1998 (‘‘IRS Reform Act’’) requires the staff of the 

Joint Committee on Taxation (in consultation with the Internal 

Revenue Service and the Treasury Department) to provide a tax 

complexity analysis. The complexity analysis is required for all legislation reported by the Senate Committee on Finance, the House 

Committee on Ways and Means, or any committee of conference if 

the legislation includes a provision that directly or indirectly 

amends the Internal Revenue Code and has widespread applicability to individuals or small businesses. The staff of the Joint 

Committee on Taxation has determined that there are no provisions that are of widespread applicability to individuals or small 

businesses. 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS 

REPORTED 

In the opinion of the Committee, it is necessary in order to expedite the business of the Senate, to dispense with the requirements 

of paragraph 12 of Rule XXVI of the Standing Rules of the Senate 

(relating to the showing of changes in existing law made by the bill 

as reported by the Committee). 

Æ 


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