DESCRIPTION OF THE CHAIRMAN’S AMENDMENT

IN THE NATURE OF A SUBSTITUTE TO H.R. 1994,

THE “SETTING EVERY COMMUNITY UP FOR RETIREMENT 

ENHANCEMENT (SECURE) ACT OF 2019”

Scheduled for Markup

by the

HOUSE COMMITTEE ON WAYS AND MEANS

on April 2, 2019

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

April 1, 2019

JCX-13-19
i

CONTENTS

Page

INTRODUCTION .......................................................................................................................... 1

TITLE I ─ EXPANSION AND PRESERVING RETIREMENT SAVINGS................................ 2

A. Multiple Employer Plans and Pooled Employer Plans; Reporting..................................... 2

B. Increase in 10 Percent Cap for Automatic Enrollment Safe Harbor After First Plan

Year................................................................................................................................... 15

C. Rules Relating to Election of Safe Harbor 401(k) Status................................................. 17

D. Increase in Credit Limitation for Small Employer Pension Plan Startup Costs............... 21

E. Small Employer Automatic Enrollment Credit................................................................. 22

F. Certain Taxable Non-Tuition Fellowship and Stipend Payments Treated as

Compensation for IRA Purposes ...................................................................................... 24

G. Repeal of Maximum Age for Traditional IRA Contributions .......................................... 26

H. Qualified Employer Plans Prohibited From Making Loans Through Credit Cards

and Other Similar Arrangements...................................................................................... 27

I. Portability of Lifetime Income Options............................................................................ 28

J. Treatment of Custodial Accounts on Termination of Section 403(b) Plans..................... 32

K. Clarification of Retirement Income Account Rules Relating to Church-Controlled 

Organizations.................................................................................................................... 35

L. Qualified Cash or Deferred Arrangements Must Allow Long-Term Employees

Working More than 500 But Less than 1,000 Hours Per Year to Participate................... 37

M. Penalty-Free Withdrawals from Retirement Plans for Individuals in Case of Birth of 

Child or Adoption ............................................................................................................. 45

N. Increase in Age for Required Beginning Date for Mandatory Distributions.................... 48

O. Election to Apply Alternative Minimum Funding Standards to Certain

Single-Employer Community Newspaper Plans .............................................................. 51

P. Treating Excluded Difficulty of Care Payments as Compensation for Determining 

Retirement Contribution Limitations................................................................................ 55
ii

TITLE II ─ ADMINISTRATIVE IMPROVEMENTS ................................................................ 57

A. Plan Adopted by Filing Due Date for Year May be Treated as in Effect as of Close

of Year .............................................................................................................................. 57

B. Combined Annual Report for Group of Plans .................................................................. 59

C. Disclosure Regarding Lifetime Income ............................................................................ 61

D. Fiduciary Safe Harbor for Selection of Lifetime Income Provider .................................. 63

E. Modification of Nondiscrimination Rules to Protect Older, Longer Service

Participants........................................................................................................................ 66

F. Modification of PBGC Premiums for CSEC Plans.......................................................... 77

TITLE III ─ OTHER BENEFITS................................................................................................. 80

A. Benefits Provided to Volunteer Firefighters and Emergency Medical Responders......... 80

B. Expansion of Section 529 Plans........................................................................................ 82

TITLE IV ─ REVENUE PROVISIONS ...................................................................................... 86

A. Modifications of Required Minimum Distribution Rules for Designated Beneficiaries.. 86

B. Increase in Penalty for Failure to File............................................................................... 95

C. Increased Penalties for Failure to File Retirement Plan Returns...................................... 97

D. Increase Information Sharing to Administer Excise Taxes ............................................ 100
1

INTRODUCTION

The House Committee on Ways and Means has scheduled a markup on April 2, 2019 of

H.R. 1994, the “SECURE Act of 2019.” This document,1 prepared by the staff of the Joint 

Committee on Taxation, provides a description of the Chairman’s Amendment in the Nature of a 

Substitute of H.R. 1994, the Setting Every Community Up for Retirement Enhancement 

(SECURE) Act of 2019.

 1

 This document may be cited as follows: Joint Committee on Taxation, Description of the Chairman’s 

Amendment in the Nature of a Substitute to H.R. 1994, the “Setting Every Community Up for Retirement 

Enhancement (SECURE) Act of 2019” (JCX-13-19), April 1, 2019. This document can also be found on the Joint 

Committee on Taxation website at www.jct.gov. All section references herein are to the Internal Revenue Code of 

1986, as amended (herein “Code”), unless otherwise stated.
2

TITLE I ─ EXPANSION AND PRESERVING RETIREMENT SAVINGS

A. Multiple Employer Plans and Pooled Employer Plans; Reporting

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 contribution 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 

 2

 Sec. 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. Unless otherwise stated, all section references are to the 

Internal Revenue Code of 1986, as amended (the “Code”).

3

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

include a qualified cash or deferred arrangement under a section 401(k) plan, under which employees may elect to 

contribute to the plan.

4

 Sec. 414(j).

5

 Sec. 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).

6

 Sections 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 
3

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.

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 that, 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, 

 

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.

7

 Simplified 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.

8

 Sec. 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. 2510.3-3(b)-(c).

11 29 C.F.R. 2510.3-2(f).

12 The 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. 
4

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 multiple employer 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 account.19 

Other requirements are applied separately, including the minimum coverage requirements, 

 13 ERISA sec. 3004. 

14 43 Fed. Reg. 47713 (October 17, 1978).

15 Secs. 414(b), (c), (m) and (o).

16 Sec. 413(c). Multiple employer status does not apply if the plan is a multiemployer plan. 

Multiemployer plans are different from single employer plans and multiple employer plans. A multiemployer plan 

is 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.

18 Sec. 413(c).

19 Treas. Reg. sec. 1.415(a)-1(e).
5

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 (sometimes referred to as the “one bad 

apple” rule).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 multiple employer 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 

 20 Treas. Reg. secs. 1.413-2(a)(3)(ii)-(iii) and 1.416-1, G-2.

21 Treas. 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.

23 Section 10.11 of Rev. Proc. 2016-51.
6

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.

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.

 24 ERISA sec. 402.

25 Fiduciary 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 also referred to as an individual 

account plan.

27 ERISA sec. 412.
7

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

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, or the plan is sponsored by one or more employers as defined in section 3(5) of 

ERISA.32 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.33 ERISA requires the plan 

 28 ERISA sec. 210(a).

29 ERISA secs. 3(1) and (2).

30 ERISA sec. 3(5).

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

1994-07A, and other authorities cited therein.

32 See, for example, Department of Labor Advisory Opinion 2017-02AC.

33 Sec. 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 
8

administrator of certain pension and welfare benefit plans to file annual reports disclosing certain 

information to the Department of Labor (“DOL”).34 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.35 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.36 

Description of Proposal

In general

The proposal amends the Code rules relating to multiple employer plans to provide relief 

from the “one bad apple” rule for certain plans (referred to herein as “covered multiple employer 

plans”). A covered multiple employer plan is a multiple employer qualified defined contribution 

plan37 or a plan that consists of IRAs (referred to herein as an “IRA plan”), including under an 

IRA trust,38 that either (1) is maintained by employers which have a common interest other than 

having adopted 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”), and which meets certain other 

requirements as described below. 

The proposal outlines various requirements that apply to a pooled provider plan under the 

Code. It also outlines various requirements that apply under ERISA to 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 to be a “pooled 

 

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.”

34 ERISA secs. 103 and 104. Under ERISA section 4065, the plan administrator of certain defined benefit 

plans must provide information to the PBGC.

35 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).

36 ERISA sec. 104(b).

37 To which section 413(c) applies.

38 Under the proposal, 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.
9

employer plan,” and provides that a pooled employer plan is treated for purposes of ERISA as a 

single plan that is a multiple employer plan.39 

Tax-favored status under the Code 

In general

The proposal 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 (that is, relief from the “one bad apple” rule).

Such relief under the proposal does not apply to a plan unless the terms of the plan 

provide that, in the case of any employer in the plan failing to take required actions (referred to 

herein as a “noncompliant employer)”─

• plan assets attributable to employees of the noncompliant employer (or beneficiaries 

of such employees) 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,40 or to any other arrangement that the Secretary determines is 

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

of the noncompliant employer (and beneficiaries of such 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 employer in the plan) is, except to the extent provided by the 

Secretary, liable for any plan liabilities attributable to employees of the noncompliant 

employer (or beneficiaries of such employees).

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 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 proposal.

Pooled plan provider

Under the proposal, “pooled plan provider” with respect to a plan means a person that─

 39 With respect to plans described under proposed section 413(e)(1)(A), other than providing relief from 

the “one bad apple” rule if certain requirements are met and adding certain reporting requirements, the proposal 

generally does not change present law and related guidance applicable to such multiple employer plans under the 

Code or ERISA.

40 For 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 governmental employer under section 457(b).
10

• is designated by the terms of the plan as a named fiduciary under ERISA,41 as the 

plan administrator, and as the person responsible to perform all administrative duties 

(including conducting proper testing with respect to the plan and the employees of 

each employer in the plan) 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 employer in the plan 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 are 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.

The proposal 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 proposal.

In addition, the proposal provides that in determining whether a person meets the 

requirements to be a pooled plan provider with respect to any plan, all persons who perform 

services for the plan and who are treated as a single employer42 are treated as one person.

Plan sponsor

The proposal also provides that, except with respect to the administrative duties (as a 

named fiduciary, as the plan administrator, and as the person responsible for the performance of 

all administrative duties) for which the pooled plan provider is responsible as described above, 

each employer in a plan which has a pooled plan provider will be treated as the plan sponsor with 

respect to the portion of the plan attributable to that employer’s employees (or beneficiaries of 

such employees).

Guidance

The proposal directs the Secretary to issue guidance that the Secretary determines 

appropriate to carry out the proposal, including guidance (1) to identify the administrative duties 

and other actions required to be performed by a pooled plan provider, (2) that describes the 

 41 Within the meaning of ERISA section 402(a)(2).

42 Under subsection (b), (c), (m), or (o) of section 414.
11

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 

employer in the plan and plan assets and liabilities attributable to employees of that employer (or 

beneficiaries of such employees), 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 demonstrates a lack of commitment to compliance. An employer or pooled 

plan provider is not treated as failing to meet a requirement of guidance issued by the Secretary 

if, before the issuance of such guidance, the employer or pooled plan provider complies in good 

faith with a reasonable interpretation of the provisions to which the guidance relates.

The proposal also directs the Secretary to publish model plan language that meets the 

Code and ERISA requirements under the proposal and that may be adopted in order to be treated 

as a pooled employer plan under ERISA.

Pooled employer plans under ERISA

In general

As described above, under the proposal, a pooled employer plan is treated for purposes of 

ERISA as a single plan that is a multiple employer plan. A “pooled employer plan” is defined as 

a plan (1) that is an individual account 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. A 

pooled employer plan does not include a plan maintained by employers that have a common 

interest other than having adopted 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 an employer in the plan)43 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 employer in the plan retains fiduciary responsibility for the 

selection and monitoring, in accordance 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 

 43 Any trustee must meet the requirements under the Code to be an IRA trustee.
12

of the plan’s assets attributable to the employees of that employer (or beneficiaries of 

such employees) in the plan,

• provide that employers in the plan, and participants and beneficiaries, are 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 employers in the plan any disclosures 

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

disclosures or other information to facilitate the selection or any monitoring of the 

pooled plan provider by employers in the plan, and require each employer in the plan 

to take any actions that the Secretary of Labor or pooled plan provider determines are 

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 are necessary to administer the plan or to allow the plan to meet 

such 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 employers in the plan.

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.

The term “pooled employer plan” does not include a multiemployer plan. Such term also 

does not include a plan established before the date of enactment of the Setting Every Community 

Up for Retirement Enhancement Act of 2019 unless the plan administrator elects to have the plan 

treated as a pooled employer plan and the plan meets the ERISA requirements applicable to a 

pooled employer plan established on or after such date.

Pooled plan provider

The definition of pooled plan provider for ERISA purposes is generally similar to the 

definition under the Code portion of the proposal, described above.44 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 proposal 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 proposal.

 44 In determining whether a person meets the requirements to be a pooled plan provider with respect to a 

plan, all persons who perform services for the plan and who are treated as a single employer under subsection (b), 

(c), (m), or (o) of section 414 are treated as one person.
13

Plan sponsor

The proposal also provides that except with respect to the administrative duties (as a 

named fiduciary, as the plan administrator, and as the person responsible for the performance of 

all administrative duties) for which the pooled plan provider is responsible as described above, 

each employer in a pooled employer plan will be treated as the plan sponsor with respect to the 

portion of the plan attributable to that employer’s employees (or beneficiaries of such 

employees).

Guidance

The proposal directs the Secretary of Labor to issue guidance that such Secretary 

determines appropriate to carry out the proposal, 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 (or beneficiaries of such employees) 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,45 and the noncompliant employer (and not the 

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

any plan liabilities attributable to employees of the noncompliant employer (or beneficiaries of 

such employees), 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 demonstrates a 

lack of commitment to compliance. An employer or pooled plan provider is not treated as failing 

to meet a requirement of guidance issued by the Secretary if, before the issuance of such 

guidance, the employer or pooled plan provider complies in good faith with a reasonable 

interpretation of the provisions to which the guidance relates. 

Form 5500 reporting

Under the proposal, the Form 5500 filing for a multiple employer plan (including a 

pooled employer plan) must include a list of the employers in the plan, a good faith estimate of 

the percentage of total contributions made by such employers during the plan year, and the 

aggregate account balances attributable to each employer in the plan (determined as the sum of 

the account balances of the employees of each employer (and the beneficiaries of such 

employees)); and with respect to a pooled employer plan, the identifying information for the 

person designated under the terms of the plan as the pooled plan provider. In addition, the 

proposal adds, to the list of pension plans to which simplified reporting may be prescribed by the 

 45 The 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 (and the beneficiaries of such employees) to retain the assets in the pooled employer plan.
14

Secretary of Labor, a multiple employer plan that covers fewer than 1,000 participants, but only 

if no single employer in the plan has 100 or more participants covered by the plan.

Effective Date

The proposal applies to plan years beginning after December 31, 2020, including 

reporting for purposes of Forms 5500 for plan years beginning after December 31, 2020.

Nothing in the Code amendments made by the proposal is to be construed as limiting the 

authority of the Secretary (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.
15

B. Increase in 10 Percent Cap for Automatic Enrollment Safe Harbor

After First Plan Year

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”).46 The maximum annual amount of elective deferrals that can be 

made by an employee for a year is $19,000 (for 2019) or, if less, the employee’s compensation.47 

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 2019) (called catch-up contributions).48 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.49 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. 

 46 Elective deferrals generally are 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. 

47 Sec. 402(g).

48 Sec. 414(v).

49 Treas. Reg. sec. 1.401(k)-1(e)(2)(ii).
16

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.50 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 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.51

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.52 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.

Description of Proposal

Under the proposal, the 10-percent limitation on the default rates under an automatic 

enrollment safe harbor plan is increased to 15 percent after the first year that an employee’s

deemed election applies.

Effective Date

The proposal applies to plan years beginning after December 31, 2019.

 50 Sec. 401(k)(3). 

51 Sec. 401(k)(8).

52 Sec. 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).
17

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

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”).53 The maximum annual amount of elective deferrals that can be 

made by an employee for a year is $19,000 (for 2019) or, if less, the employee’s compensation.54 

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 2019) (called catch-up contributions).55 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.56 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. 

 53 Elective deferrals generally are 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. 

54 Sec. 402(g).

55 Sec. 414(v).

56 Treas. Reg. sec. 1.401(k)-1(e)(2)(ii).
18

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.57 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 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.58

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.59

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 

 57 Sec. 401(k)(3). 

58 Sec. 401(k)(8).

59 Sec. 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).
19

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.60 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 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. 

 60 These 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.
20

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.

Description of Proposal

In general

The proposal makes a number of changes to the rules for the nonelective contribution 

401(k) safe harbor. 

Elimination of notice requirement

The proposal 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 proposal, 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 proposal 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 (generally, by the close of following plan year). 

Effective Date

The proposal applies to plan years beginning after December 31, 2019.
21

D. Increase in Credit Limitation for Small Employer

Pension Plan Startup Costs

Present Law

A nonrefundable income tax credit is available for qualified startup 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.61 Qualified startup 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 startup costs. The credit applies for up to three years beginning with the year the 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.62

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

No deduction is allowed for the portion of qualified startup costs paid or incurred for the 

taxable year equal to the amount of the credit.

Description of Proposal

The proposal 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 proposal applies to taxable years beginning after December 31, 2019.

 61 A nonhighly compensated employee is an employee who is not a highly compensated employee as 

defined under section 414(q).

62 Sec. 52 (a) or (b) and 414(m) or (o).
22

E. Small Employer Automatic Enrollment Credit

Present Law

Small employer startup credit

A nonrefundable income tax credit is available for qualified startup 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.63 Qualified startup 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 startup costs. The credit applies for up to three years beginning with the year the 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.64 All eligible 

employer plans of an employer are treated as a single plan. 

No deduction is allowed for the portion of qualified startup 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.65 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. 

 63 Sec. 45E. A nonhighly compensated employee is an employee who is not a highly compensated 

employee as defined under section 414(q).

64 Sec. 52 (a) or (b) and 414(m) or (o).

65 Sec. 408(p). 
23

Description of Proposal

Under the proposal, 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 startup 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 proposal applies to taxable years beginning after December 31, 2019.
24

F. Certain Taxable Non-Tuition Fellowship and Stipend

Payments Treated as Compensation for IRA Purposes

Present Law

There are two general types of individual retirement arrangements (“IRAs”): traditional 

IRAs and Roth IRAs.66 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 ($6,000 for 2019); and (2) the 

amount of the individual's compensation that is includible in gross income for the year.67 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.68

Individuals with adjusted gross income below certain levels may make contributions to a 

Roth IRA (up to the contribution limit).69 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.70

Description of Proposal

Under the proposal, an amount includible in an individual’s income and paid to the 

individual to aid the individual in the pursuit of graduate or postdoctoral study or research (such 

 66 Secs. 408 and 408A.

67 Sec. 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.

68 Sec. 219(g).

69 Sec. 408A(c)(3).

70 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.
25

as a fellowship, stipend, or similar amount) is treated as compensation for purposes of IRA 

contributions.

Effective Date

The proposal applies to taxable years beginning after December 31, 2019.
26

G. Repeal of Maximum Age for Traditional IRA Contributions

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.71 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 (“AGI”) for the taxable year over certain indexed levels.72

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.

73

An individual who has attained age 701⁄2 by the close of a year is not permitted to make 

contributions to a traditional IRA.74 This restriction does not apply to contributions to a Roth 

IRA.75 In addition, employees over age 701⁄2 are not precluded from contributing to 

employer-sponsored plans.

Description of Proposal

The provision repeals the prohibition on contributions to a traditional IRA by an 

individual who has attained age 701⁄2. 

Effective Date

The proposal applies to contributions made for taxable years beginning after 

December 31, 2019.

 71 Sec. 219.

72 Sec. 219(g).

73 Sec. 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 ($6,000 for 2019) or the individual’s compensation. 

74 Sec. 219(d)(1).

75 Sec. 408A(c)(4).
27

H. Qualified Employer Plans Prohibited From Making Loans

Through Credit Cards and Other Similar Arrangements

Present Law

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. Among the requirements that the loan must 

satisfy are that the loan amount 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), and the loan’s terms must provide for a repayment period of not more than five years 

(except for a loan specifically to purchase a home) and for level amortization of loan payments to 

be made not less frequently than quarterly.76 Thus, if an employee stops making payments on a 

loan before the loan is repaid, a deemed distribution of the outstanding loan balance generally 

occurs. A deemed distribution of an unpaid loan balance generally is taxed as though an actual 

distribution occurred, including being subject to a 10-percent early distribution tax, if applicable. 

A deemed distribution is not eligible for rollover to another eligible retirement plan. 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.

Description of Proposal

Under the proposal, a plan loan that is made through the use of a credit card or similar 

arrangement does not meet the requirements for loan treatment applicable to qualified retirement 

plans, and is therefore a deemed distribution. 

Effective Date

The proposal applies to loans made after the date of enactment.

 76 Sec. 72(p).
28

I. Portability of Lifetime Income Options

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).77

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).

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” 

 77 Secs. 401(a), 403(a), 403(b), 457(b) and (e)(1)(A). 
29

distributions.78 In-service 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.79

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).80 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.81

Elective deferrals under a section 403(b) plan are subject to in-service 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.82 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).83

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.84 

Unless an exception applies, in the case of a distribution before age 591⁄2 from a qualified 

 78 Sec. 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).

79 The Bipartisan Budget Act of 2018, Pub. L. No. 115-123 (“BBA”), amends certain hardship distribution 

rules applicable to 401(k) plans, effective for plan years beginning after December 31, 2018. One such amendment 

under BBA section 41114 permits 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. 

80 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).

81 Sec. 401(a)(36) and Treas. Reg. secs. 1.401-1(b)(1)(i) and 1.401(a)-1(b).

82 Secs. 403(b)(7)(A)(ii) and 403(b)(11).

83 Sec. 457(d)(1)(A).

84 Secs. 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.
30

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.85

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 distribution to the 

recipient plan or IRA within 60 days of receiving the distribution.86 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 lifetime investments, 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.87 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. 

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 because of a change in investment options or a limit on investments held in the plan, the 

employee may be subject to a charge or fee as described above. In addition, restrictions on 

in-service distributions may prevent the employee from preserving the investment through a 

rollover.

 85 Sec. 72(t).

86 Secs. 402(c), 402A(c)(3), 403(b)(8) and 457(e)(16). 

87 In the case of a plan subject to 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.
31

Description of Proposal

Under the proposal, 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 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 proposal, a qualified distribution is a direct trustee-to-trustee transfer 

to another employer-sponsored retirement plan or IRA.88 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 rights 

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-totrustee transfer). 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 or an employer-sponsored retirement plan 

contract.89

Effective Date

The proposal applies to plan years beginning after December 31, 2019.

 88 For this purpose, an employer-sponsored retirement plan or IRA means such a plan or IRA that is an 

eligible retirement plan under section 402(c)(8)(B).

89 For this purpose, an employer-sponsored retirement plan contract is an annuity contract distributed from 

an eligible retirement plan described in section 402(c)(8)(B) other than an IRA or individual retirement annuity.
32

J. Treatment of Custodial Accounts on Termination of Section 403(b) Plans

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 pretax 

elective deferrals, designated Roth contributions (held in designated Roth accounts)90 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.91 Contributions to a 

custodial account are not permitted to 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 provision for plan termination and that 

allow accumulated benefits to be distributed on termination.92 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).93 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”).94 

 90 Sec. 402A.

91 Sec. 403(b)(7).

92 Treas. Reg. sec. 1.403(b)-10(a).

93 Sec. 403(b)(8). Similar rules apply to distributions from qualified retirement plans and governmental 

section 457(b) plans. 

94 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.
33

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.95 

Roth conversions

Distributions from section 403(b) plans may be rolled into a Roth IRA.96 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.97

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 

taken into account in approving an applicant to be a nonbank trustee.98 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 

 95 Sec. 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). 

96 Sec. 408A(d)(3). Similar rules apply to qualified retirement plans and governmental section 457(b) 

plans.

97 Sec. 402A(d)(4). Similar rules apply to qualified retirement plans and governmental section 457(b) 

plans. 

98 Treas. Reg. sec. 1.408-2(e).
34

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”).

Description of Proposal

Under the proposal, the Secretary of the Treasury is directed to issue guidance within six 

months after the date of enactment to provide that, if an employer terminates a section 403(b) 

plan under which amounts are contributed to custodial accounts, the plan administrator or 

custodian may distribute an individual custodial account in kind to a participant or beneficiary of 

the plan and the distributed custodial account must be maintained by the custodian on a taxdeferred basis as a section 403(b)(7) custodial account, similar to the treatment of fully-paid 

individual annuity contracts under Revenue Ruling 2011-7,99 until amounts are actually paid to 

the participant or beneficiary. In addition, such guidance must provide that (1) the section 

403(b)(7) status of the distributed custodial account is generally maintained if such account 

thereafter adheres to the requirements of section 403(b) in effect at the time of the account’s 

distribution, and (2) a custodial account is not considered distributed to the participant or 

beneficiary if the employer has any material retained rights under the account (the employer, 

however, is not treated as retaining material rights simply because the custodial account was 

originally opened under a group contract).

The proposal directs such guidance to apply retroactively for taxable years beginning 

after December 31, 2008.

Effective Date

The proposal is effective upon date of enactment.

 99 2011-10 I.R.B. 534 (March 7, 2011).
35

K. Clarification of Retirement Income Account Rules Relating to

Church-Controlled Organizations

Present Law

Assets of a tax-sheltered annuity plan (“section 403(b)” plan), generally must be invested 

in annuity contracts or mutual funds.100 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.101

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 church-controlled organization.102 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 churchcontrolled organizations.” 

In recent years, a question has arisen as to whether employees of nonqualified churchcontrolled organizations may be covered under a section 403(b) plan that consists of a retirement 

income account.

Description of Proposal

The proposal 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 an organization, whether a civil law corporation or 

 100 Sec. 403(b)(1)(A) and (7).

101 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.

102 Sec. 403(b)(1)(D) and (12).
36

otherwise, that is exempt from tax under section 501 and is controlled by or associated with a 

church or a convention or association of churches; and an employee who is included in a church 

plan under certain circumstances after separation from the service of a church, a convention or 

association of churches, or an organization described above.103

Effective Date

The proposal applies to years beginning before, on, or after the date of enactment.

 103 These individuals are described in sections 414(e)(3)(B) and (E).
37

L. Qualified Cash or Deferred Arrangements Must Allow Long-Term Employees

Working More than 500 But Less than 1,000 Hours Per Year to Participate

Present Law

Qualified retirement plans

Qualified 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 which include section 401(k) plans, under 

which benefits are based on a separate account for each participant, to which are allocated 

contributions, earnings and losses. 

A section 401(k) plan legally is not a separate type of plan, but is a profit-sharing or stock 

bonus plan104 that contains a qualified cash or deferred arrangement under which employees may 

make elective deferrals.

105 Section 401(k) plans may be designed so that elective deferrals are 

made only if the employee affirmatively elects them. Alternatively, a section 401(k) plan may 

provide for “automatic enrollment,” under which elective deferrals are made at a specified rate 

(referred to as a “default rate”) when an employee becomes eligible to participate unless the 

employee affirmatively elects not to make contributions or to make contributions at a different 

rate. Other special rules apply to such arrangements. The maximum annual amount of elective 

deferrals that can be made by an employee to a section 401(k) plan for a year for 2019 is $19,000 

plus $6,000 for employees age 50 or older (catch-up contribution amount) or, if less, the 

employee’s compensation.106 Section 401(k) plans may provide for matching contributions, 

which are made on account of elective deferrals,107 and may provide for employer nonelective 

contributions.

 104 Defined contribution plans include money purchase pension plans, profit-sharing plans, and stock bonus 

plans. Certain pre-ERISA money purchase plans and rural cooperative plans may also include a qualified cash or 

deferred arrangement. Except for certain grandfathered plans, a State or local governmental employer may not 

maintain a section 401(k) plan.

105 Elective deferrals are generally made on a pretax basis, excludable from the participant’s gross income 

when contributed but includable with attributable earnings when distributed. However, under section 402A, 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 designated Roth contributions. 

Designated Roth contributions are not excludable from the participant’s gross income when contributed, but 

qualified distributions of designated Roth contributions and attributable earnings are excluded from gross income 

(even though the earnings are not previously taxed). A qualified distribution is a distribution made after the end of a 

specified period (generally five years after the participant’s first designated Roth contribution) and that is (1) made 

on or after the date on which the participant attains age 591⁄2, (2) made to a beneficiary (or to the estate of the 

participant) on or after the death of the participant, or (3) attributable to the participant’s being disabled.

106 Secs. 402(g) and 414(v).

107 Sec. 401(m). Matching contributions can also be made on account of after-tax employee contributions. 
38

Participation requirement

A qualified retirement plan generally can delay participation in the plan based on 

attainment of age or completion of years of service but not beyond the later of completion of one 

year of service (that is, a 12-month period with at least 1,000 hours of service) or attainment of 

age 21.108 A plan also cannot exclude an employee from participation (on the basis of age) when 

that employee has attained a specified age.109 Employees can be excluded from plan 

participation on other bases, such as job classification, as long as the other basis is not an indirect 

age or service requirement. A plan can provide that an employee is not entitled to an allocation 

of employer nonelective or matching contributions for a plan year unless the employee 

completes either 1,000 hours of service during the plan year or is employed on the last day of the 

year even if the employee previously completed 1,000 hours of service in a prior year. However, 

once an employee has completed 1,000 hours of service during a plan year, an employee cannot 

be precluded from making elective deferrals based on a service requirement.

110

Vesting

Qualified retirement plans are subject to requirements as to the period of service after 

which a participant’s right to his or her accrued benefit must be nonforfeitable (that is, 

“vested”).111 Generally, a year of vesting service is only required to be credited if an employee 

completes 1,000 hours of service during the year. 

In the case of a defined contribution plan, a participant’s accrued benefit is the balance of 

his or her account under the plan. The portion of an employee’s account balance attributable to 

employee after-tax contributions and elective deferrals must be nonforfeitable at all times.112

Generally, the portion of an employee’s account balance attributable to nonelective or matching 

contributions must become nonforfeitable after the completion of a specified number of years of 

service in accordance with one of two minimum vesting schedules.113 Under the first vesting 

 108 Secs. 401(a)(3) and 410(a)(1). Parallel requirements generally apply to plans of private employers 

under section 202 of the Employee Retirement Income Security Act of 1974 (“ERISA). Governmental plans under 

section 414(d) and church plans under section 414(e) are generally exempt from these Code requirements and from 

ERISA.

109 Sec. 410(a)(2).

110 Sec. 401(k)(2)(D).

111 Secs. 401(a)(7) and 411. Governmental plans and church plans are generally exempt from these Code 

requirements. Parallel requirements generally apply to plans of private employers under sections 203-204 of 

ERISA.

112 Secs. 411(a)(1) and 401(k)(2)(C). Certain nonelective contributions under a section 401(k) plan and 

employer matching contributions with respect to elective deferrals must also be nonforfeitable at all times. 

113 Sec. 411(a)(2)(B). Section 411(a)(3) provides certain permitted forfeitures for accrued benefits that are 

otherwise 100 percent vested, including, for example, forfeiture upon the participant’s death or withdrawal of

mandatory employee contributions and suspension of benefits upon reemployment.
39

schedule, the participant’s accrued benefit derived from employer contributions must become 

100 percent vested upon completion of no more than three years of service (often referred to as 

“three year cliff vesting”). Under the second vesting schedule (referred to as “graduated 

vesting”), the participant’s accrued benefit derived from employer contributions must become 

vested ratably at least over the period from two to six years of service. 

Minimum coverage and nondiscrimination requirements

In general

A qualified retirement plan is prohibited from discriminating in favor of highly 

compensated employees, referred to as the nondiscrimination requirements. These requirements 

are intended to ensure that a qualified retirement plan provides meaningful benefits to an 

employer’s rank-and-file employees as well as highly compensated employees, so that qualified 

retirement plans achieve the goal of retirement security for both lower-paid and higher-paid 

employees. The nondiscrimination requirements consist of a minimum coverage requirement

and general nondiscrimination requirements.114 For purposes of these requirements, 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 $125,000 (for 2019).

115

The minimum coverage and general nondiscrimination requirements apply annually on 

the basis of the plan year. In applying these requirements, employees of all members of a 

controlled group or affiliated service group are treated as employed by a single employer. 

Employees who have not satisfied minimum age and service conditions under the plan, certain 

nonresident aliens, and employees covered by a collective bargaining agreement are generally 

disregarded.116 However, a plan that covers employees with less than a year of service or who 

are under age 21 must generally include those employees in any nondiscrimination test for the 

year but can test the plan for nondiscrimination in two parts: (1) by separately testing the portion 

of the plan covering employees who have not completed a year of service or are under age 21 

and treating all of the employer’s employees with less than a year of service or under age 21 as 

the only employees of the employer; and (2) then testing the rest of the plan taking into account 

the rest of the employees of the employer and excluding those employees. If a plan does not 

satisfy the nondiscrimination requirements on its own, it may in some circumstances be 

aggregated with another plan, and the two plans tested together as a single plan.

 114 Sections 401(a)(3) and 410(b) deal with the minimum coverage requirement; section 401(a)(4) deals 

with the general nondiscrimination requirements, with related rules in section 401(a)(5). Detailed regulations 

implement the statutory requirements. Governmental plans are generally exempt from these requirements.

115 Sec. 414(q). At the election of the employer, employees who are highly compensated based on 

compensation may be limited to the top 20 percent highest paid employees. A nonhighly compensated employee is 

an employee other than a highly compensated employee. 

116 A plan or portion of a plan covering collectively bargained employees is generally deemed to satisfy the 

nondiscrimination requirements.
40

Minimum coverage requirement

Under the minimum coverage requirement, the plan’s coverage of employees must be 

nondiscriminatory. This is determined by calculating the plan’s ratio percentage, that is, the ratio 

of the percentage of nonhighly compensated employees (of all nonhighly compensated 

employees in the workforce) covered under the plan over the percentage of highly compensated 

employees covered. In the case of a section 401(k) plan, the right to make elective deferrals, the 

right to receive matching contributions, and the allocation of nonelective contributions are each 

tested separately for nondiscriminatory coverage as though provided under separate plans. 

If the plan’s ratio percentage is 70 percent or greater, the plan satisfies the minimum 

coverage requirement. If the plan’s ratio percentage is less than 70 percent, a multi-part test 

applies. First, the plan must cover a group (or “classification”) of employees that is reasonable 

and established under objective business criteria, such as hourly or salaried employees (referred 

to as a reasonable classification), and the plan’s ratio percentage must be at or above a specific 

level specified in the regulations. In addition, the average benefit percentage test must be 

satisfied. Under the average benefit percentage test, the average rate of contributions or benefit 

accruals for all nonhighly compensated employees in the workforce (taking into account all plans 

of the employer) must be at least 70 percent of the average contribution or accrual rate of all 

highly compensated employees. 

General nondiscrimination requirements

Nondiscrimination in the amount of contributions or benefits

There are two general approaches to testing the amount of contributions benefits under a 

qualified retirement plan:117 (1) design-based safe harbors under which the benefit formula 

under a defined benefit plan, or the formula for allocating employer nonelective contributions 

under a defined contribution plan to participants’ accounts, satisfies certain uniformity standards; 

and (2) a mechanical general test under which the distribution of the rates of benefit among 

highly compensated and nonhighly compensated employees within a plan is tested for 

nondiscrimination by applying a modified version of the minimum coverage requirement.118 The 

safe harbors and general test may include cross-testing of equivalent accruals or allocations.119 

A plan is not discriminatory merely because benefit accruals or allocations for highly 

 117 Treas. Reg. sec. 1.401(a)(4)-1. With respect to the amount of contributions, employee elective deferrals 

under a section 401(k) plan and employer matching contributions and after-tax employee contributions to a defined 

contribution plan are subject to special testing rules, rather than being included in applying the general 

nondiscrimination requirements. In addition, the amount of employer contributions to an ESOP is tested separately 

from other employer contributions. Rules applicable to benefits, rights and features and the timing of plan 

amendments are provided in Treas. Reg. secs. 1. 401(a)(4)-4 and -5 respectively.

118 These approaches are explained in Treas. Reg. secs. 1.401(a)(4)-2 and -3 and -8. Sections 

401(a)(5)(C)-(D) and 401(l) and Treas. Reg. secs. 1.401(a)(4)-7 and 1.401(l)-1 through -6 provide rules under which 

nondiscrimination testing may take into account the employer-paid portion of social security taxes or benefits, 

referred to as permitted disparity.

119 Treas. Reg. sec. 1.401(a)(4)-8
41

compensated and nonhighly compensated employees are provided as a percentage of 

compensation (up to $280,000 for 2019).

120 Thus, the various testing approaches are generally 

applied to the amount of contributions or benefits provided as a percentage of compensation

(expressed as allocation or accrual rates).

Special nondiscrimination tests for section 401(k) plans

A special annual nondiscrimination test, called the actual deferral percentage test (the 

“ADP” test) applies to test the amount of elective deferrals under a section 401(k) plan.121 The 

ADP test generally compares the average rate of deferral for highly compensated employees to

the average rate of deferral for nonhighly compensated employees. The ADP test allows the 

average deferral rate for highly compensated employees to exceed that for nonhighly 

compensated employees within limits: (1) the average deferral rate for highly compensated 

employees can be up to 125 percent of the average deferral rate for nonhighly compensated 

employees; or (2) the average deferral rate for highly compensated employees can be two 

percentage points greater than the average deferral rate for nonhighly compensated employees

or, if less, twice the average deferral rate for nonhighly compensated employees. Employer 

matching contributions and after-tax employee contributions are subject to a similar special 

nondiscrimination test (the actual contribution percentage test or “ACP test”) which compares 

the average rate of matching and after-tax contributions to the plan of the two groups.122

If the ADP test is not satisfied, a mechanism is provided for the employer to make 

immediately vested additional contributions for nonhighly compensated employees (and certain 

other corrections) or to distribute deferrals of highly compensated employees to such employees, 

so that the ADP test is satisfied. Similar correction mechanisms apply for purposes of satisfying 

the ACP test. 

There are also designed-based safe harbor methods of satisfying the ADP and ACP tests. 

These safe harbors are based on the premise that, for a 401(k) plan with certain design features 

with respect to contributions (elective, matching, and nonelective) and enrollment (one of the 

safe harbors is combined with automatic enrollment), satisfaction of the minimum coverage 

requirement is a sufficient test of the amount of whether the amount elective deferrals and 

matching contributions are nondiscriminatory.123

 120 Sec. 401(a)(5)(B).

121 Sec. 401(k)(3). 

122 Sec. 401(m)(2).

123 The safe harbors that only require certain matching contributions potentially allow satisfaction of the 

nondiscrimination requirement with respect to elective and matching contributions under a 401(k) plan for a year 

even though no contributions are ultimately provided to nonhighly compensated employees under the plan for the 

year due to a lack of voluntary participation.
42

Top heavy rules 

Top-heavy rules apply to limit the extent to which accumulated benefits or account 

balances under a qualified retirement plan can be concentrated with key employees.124 Whereas 

the general nondiscrimination requirements are designed to test annual contributions or benefits 

for highly compensated employees, compared to those of nonhighly compensated employees, the 

top-heavy rules test the portion of the total plan contributions or benefits that have accumulated 

for the benefit of key employees as a group. If a plan is top-heavy, minimum contributions or 

benefits are required for participants who are non-key employees, and, in some cases, faster 

vesting is required. Non-key employees who have become participants in a defined contribution 

plan, but who subsequently fail to complete 1,000 hours of service (or the equivalent) for an 

accrual computation period must receive the top-heavy defined contribution minimum. 

For this purpose, a key employee is an officer with annual compensation greater than 

$180,000 (for 2019), a five-percent owner, or a one-percent owner with compensation in excess 

of $150,000. A defined benefit plan generally is top-heavy if the present value of cumulative 

accrued benefits for key employees exceeds 60 percent of the cumulative accrued benefits for all 

employees. A defined contribution plan is top-heavy if the aggregate of accounts for key 

employees exceeds 60 percent of the aggregate accounts for all employees. 

Section 403(b) and governmental 457(b) plans

Tax-deferred annuity plans (referred to as section 403(b) plans) plans are generally 

similar to qualified defined contribution plans, but may be maintained only by (1) tax-exempt 

charitable organizations,125 and (2) educational institutions of State or local governments (that is, 

public schools, including colleges and universities).126 Section 403(b) plans may provide for

employees to make elective deferrals (in pretax or designated Roth form), including catch-up 

contributions, or other after-tax employee contributions, and employers may make nonelective or 

matching contributions on behalf of employees. Contributions to a section 403(b) plan are 

generally subject to the same contribution limits applicable to qualified defined contribution 

plans, including the limits on elective deferrals.

Contributions to a section 403(b) plan must be fully vested. The minimum coverage and 

general nondiscrimination requirements applicable to a qualified retirement plan generally apply 

to a section 403(b) plan and to employer matching and nonelective contributions and after-tax 

 124 Secs. 401(a)(10)(B) and 416. The nature of the top-heavy test is such that a plan of a large business 

with many employees is unlikely to be top-heavy. The top-heavy requirements are therefore viewed as primarily 

affecting plans of smaller employers in which the owners participate.

125 These are organizations exempt from tax under section 501(c)(3). Section 403(b) plans of private, taxexempt employers may be subject to ERISA as well as the requirements of section 403(b).

126 Sec. 403(b).
43

employee contributions to the plan.127 If a section 403(b) plan provides for elective deferrals, the 

plan is subject to a “universal availability” requirement under which all employees must be given 

the opportunity to make deferrals of more than $200. In applying this requirement, nonresident 

aliens, students, and employees who normally work less than 20 hours per week may be 

excluded.

128

An eligible deferred compensation plan of a governmental employer (referred to as a 

governmental section 457(b) plan) is generally similar to a qualified cash-or deferred 

arrangement under a section 401(k) plan in that it consists of elective deferrals, that is, 

contributions (in pretax or designated Roth form) made at the election of an employee, including 

catch-up contributions. Deferrals under a governmental section 457(b) plan are generally subject 

to the same limits as elective deferrals under a section 401(k) plan or a section 403(b) plan.

Description of Proposal

The proposal requires a section 401(k) plan to permit an employee to make elective 

deferrals if the employee has worked at least 500 hours per year with the employer for at least 

three consecutive years and has met the age requirement (age 21) by the end of the three 

consecutive year period (for this proposal, an employee is referred to as a “long-term part-time 

employee" after having completed this period of service). Thus, a long-term part-time employee 

could not be excluded from the plan because the employee has not completed a year of service as 

defined under the participation requirements described above (a 12-month period with at least 

1,000 hours of service). Once a long-term part-time employee meets the age and service 

requirements, such employee must be able to commence participation no later than the earlier of 

(1) the first day of the first plan year beginning after the date on which the employee satisfied the 

age and service requirements or (2) the date 6 months after the date on which the individual 

satisfied those requirements. Employers may, but are not required to, allow long-term part-time 

employees to participate in the design based safe harbors (including the automatic enrollment 

safe harbor). If an employer does permit a long-term part-time employee to participate in such 

an automatic enrollment 401(k) plan, that employee would have elective deferrals automatically 

made at the default rate unless the employee affirmatively elects not to make contributions or to 

make contributions at a different rate. 

The proposal does not require a long-term part-time employee to be otherwise eligible to 

participate in the plan. Thus, the plan can continue to treat a long-term part-time employee as 

ineligible under the plan for employer nonelective and matching contributions based on not 

having completed a year of service. However, for a plan that does provide employer 

contributions for long-term part-time employees, the proposal requires a plan to credit, for each 

 127 These requirements do not apply to a governmental section 403(b) plan or a section 403(b) plan 

maintained by a church or a qualified church-controlled organization as defined in section 3121(w).

128 For this purpose, nonresident has the meaning in section 410(b)(3)(C), and student has the meaning in 

section 3121(b)(10). The universal availability requirement does not apply to a section 403(b) plan maintained by a 

church or a qualified church-controlled organization.
44

year in which such an employee worked at least 500 hours, a year of service for purposes of 

vesting in any employer contributions.

With respect to long-term part-time employees, employers would receive 

nondiscrimination testing relief (similar to the present-law rules for plans covering otherwise 

excludable employees), including permission to exclude these employees from top-heavy vesting 

and top-heavy benefit requirements. However, the relief from the nondiscrimination rules ceases 

to apply to any employee who becomes a full-time employee (as of the first plan year beginning 

after the plan year in which the employee completes a 12-month period with at least 1,000 hours 

of service).

This provision does not apply to collectively bargained employees.

Effective Date

The proposal applies to plan years beginning after December 31, 2020, except that for 

determining whether the three consecutive year period has been met, 12-month periods 

beginning before January 1, 2021 will not be taken into account.
45

M. Penalty-Free Withdrawals from Retirement Plans for Individuals

in Case of Birth of Child or Adoption 

Present Law

Distributions from tax-favored retirement plans

A distribution from a qualified retirement plan, a tax-sheltered annuity plan (a 

“section 403(b) plan”), an eligible deferred compensation plan of a State or local government 

employer (a “governmental section 457(b) plan”), or an IRA generally is included in income for 

the year distributed.129 These plans are referred to collectively as “eligible retirement plans.” In 

addition, unless an exception applies, a distribution from a qualified retirement plan, a 

section 403(b) plan, or an IRA received before age 591⁄2 is subject to a 10-percent additional tax 

(referred to as the “early withdrawal tax”) on the amount includible in income.130

In general, a distribution from an eligible retirement plan may be rolled over to another 

eligible retirement plan within 60 days, in which case the amount rolled over generally is not 

includible in income. The IRS has the authority to waive the 60-day requirement if failure to 

waive the requirement would be against equity or good conscience, including cases of casualty, 

disaster or other events beyond the reasonable control of the individual.

The terms of a qualified retirement plan, section 403(b) plan, or governmental 

section 457(b) plan generally determine when distributions are permitted. However, in some 

cases, restrictions may apply to distributions before an employee’s termination of employment, 

referred to as “in-service” distributions. Despite such restrictions, an in-service distribution may 

be permitted in the case of financial hardship or an unforeseeable emergency.

Description of Proposal

In general

Under the proposal, an exception to the 10-percent early withdrawal tax applies in the 

case of a qualified birth or adoption distribution from an applicable eligible retirement plan (as 

defined). In addition, qualified birth or adoption distributions may be recontributed to an 

individual’s applicable eligible retirement plans, subject to certain requirements.

 129 Secs. 401(a), 403(a), 403(b), 457(b) and 408. Under section 3405, distributions from these plans are 

generally subject to income tax withholding unless the recipient elects otherwise. In addition, certain distributions 

from a qualified retirement plan, a section 403(b) plan, or a governmental section 457(b) plan are subject to 

mandatory income tax withholding at a 20-percent rate unless the distribution is rolled over.

130 Sec. 72(t). Under present law, the 10-percent early withdrawal tax does not apply to distributions from 

a governmental section 457(b) plan.
46

Distributions from applicable eligible retirement plans 

A qualified birth or adoption distribution is a permissible distribution from an applicable 

eligible retirement plan which, for this purpose, encompasses eligible retirement plans other than 

defined benefit plans, including qualified retirement plans, section 403(b) plans, governmental 

section 457(b) plans, and IRAs.131 

A qualified birth or adoption distribution is a distribution from an applicable eligible 

retirement plan to an individual if made during the one-year period beginning on the date on 

which a child of the individual is born or on which the legal adoption by the individual of an 

eligible adoptee is finalized. An eligible adoptee means any individual (other than a child of the 

taxpayer’s spouse) who has not attained age 18 or is physically or mentally incapable of selfsupport. The proposal requires the name, age, and taxpayer identification number of the child or 

eligible adoptee to which any qualified birth or adoption distribution relates to be provided on 

the tax return of the individual taxpayer for the taxable year. 

The maximum aggregate amount which may be treated as qualified birth or adoption 

distributions by any individual with respect to a birth or adoption is $5,000. The maximum 

aggregate amount applies on an individual basis. Therefore, each spouse separately may receive 

a maximum aggregate amount of $5,000 of qualified birth or adoption distributions (with respect 

to a birth or adoption) from applicable eligible retirement plans in which each spouse participates 

or holds accounts. 

An employer plan is not treated as violating any Code requirement merely because it 

treats a distribution (that would otherwise be a qualified birth or adoption distribution) to an 

individual as a qualified birth or adoption distribution, provided that the aggregate amount of 

such distributions to that individual from plans maintained by the employer and members of the 

employer’s controlled group132 does not exceed $5,000. Thus, under such circumstances an 

employer plan is not treated as violating any Code requirement merely because an individual 

might receive total distributions in excess of $5,000 as a result of distributions from plans of 

other employers or IRAs.

Recontributions to applicable eligible retirement plans

Generally, any portion of a qualified birth or adoption distribution may, at any time after 

the date on which the distribution was received, be recontributed to an applicable eligible 

retirement plan to which a rollover can be made. Such a recontribution is treated as a rollover 

and thus is not includible in income. If an employer adds the ability for plan participants to 

receive qualified birth or adoption distributions from a plan, the plan must permit an employee 

who has received qualified birth or adoption distributions from that plan to recontribute only up 

to the amount that was distributed from that plan to that employee, provided the employee 

 131 A qualified birth or adoption distribution is subject to income tax withholding unless the recipient elects 

otherwise. Mandatory 20-percent withholding does not apply.

132 The term “controlled group” means any group treated as a single employer under subsection (b), (c), 

(m), or (o) of section 414.
47

otherwise is eligible to make contributions (other than recontributions of qualified birth or 

adoption distributions) to that plan. Any portion of a qualified birth or adoption distribution 

from an individual’s applicable eligible retirement plans (whether employer plans or IRAs) may 

be recontributed to an IRA held by such an individual which is an applicable eligible retirement 

plan to which a rollover can be made. 

Effective Date

The proposal applies to distributions made after December 31, 2019.
48

N. Increase in Age for Required Beginning Date

for Mandatory Distributions

Present Law

Required minimum distributions

Employer-provided qualified retirement plans, traditional IRAs, and individual retirement 

annuities are subject to required minimum distribution rules. A qualified retirement plan for this 

purpose means a tax-qualified plan described in section 401(a) (such as a defined benefit pension 

plan or a section 401(k) plan), employee retirement annuities described in section 403(a), taxsheltered annuities described in section 403(b), and a plan described in section 457(b) that is 

maintained by a governmental employer.133 An employer-provided qualified retirement plan that 

is a defined contribution plan is a plan which provides (1) an individual account for each 

participant and (2) for benefits based on the amount contributed to the participant’s account, and 

any income, expenses, gains, losses, and forfeitures of accounts of other participants which may 

be allocated to such participant’s account.134

Required minimum distributions generally must begin by April 1 of the calendar year 

following the calendar year in which the individual (employee or IRA owner) reaches age 701⁄2. 

However, in the case of an employer-provided qualified retirement plan, the required minimum 

distribution date for an individual who is not a 5-percent owner of the employer maintaining the 

plan may be delayed to April 1 of the year following the year in which the individual retires if 

the plan provides for this later distribution date. For all subsequent years, including the year in 

which the individual was paid the first required minimum distribution by April 1, the individual 

must take the required minimum distribution by December 31 of the year.

For IRAs and defined contributions plans, the required minimum distribution for each 

year generally is determined by dividing the account balance as of the end of the prior year by a 

distribution period,135 generally a number in the uniform lifetime table.136 This table is based on 

joint life expectancies of the individual and a hypothetical beneficiary 10 years younger than the 

individual. 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 expectancy is greater than the 

uniform life time table), the joint life expectancy of the couple is used. There are special rules in 

the case of annuity payments from an insurance contract.

If an individual dies on or after the individual’s required beginning date, the required 

minimum distribution is also determined by dividing the account balance as of the end of the 

 133 The required minimum distribution rules also apply to section 457(b) plans maintained by tax-exempt 

employers other than governmental employers.

134 Sec. 414(i).

135 Treas. Reg. sec. 1.401(a)(9)-5.

136 Treas. Reg. sec. 1.401(a)(9)-9.
49

prior year by a distribution period. The distribution period is equal to the remaining years of the 

beneficiary’s life expectancy or, if there is no designated beneficiary, a distribution period equal 

to the remaining years of the deceased individual’s single life expectancy, using the age of the 

deceased individual in the year of death.137

In the case of an individual who dies before the individual’s required beginning date, 

there are two methods for satisfying the after death required minimum distribution rules, the life 

expectancy rule or the five year rule. Under the life expectancy rule, annual required minimum 

distributions must begin no later than December 31 of the calendar year immediately following 

the calendar year in which the individual died. This rule is only available if the designated 

beneficiary is an individual (e.g., not the individual’s estate or a charity). If the designated 

beneficiary is the individual’s spouse, commencement of distributions can be delayed until 

December 31 of the calendar year in which the deceased individual would have attained age 

701⁄2. The required minimum distribution for each year is also determined by dividing the 

account balance as of the end of the prior year by a distribution period, which is determined by 

reference to the beneficiary’s life expectancy.138 Under the five-year rule, the individual’s entire 

account must be distributed no later than December 31 of the calendar year containing the fifth 

anniversary of the individual’s death.139

A special after-death rule applies for an IRA if the beneficiary of the IRA is the surviving 

spouse. The surviving spouse is permitted to choose to calculate required minimum distributions 

while the spouse is alive, and after the spouse’s death, as though the spouse is the IRA owner, 

rather than a beneficiary. 

Roth IRAs are not subject to the minimum distribution rules during the IRA owner’s 

lifetime. However, Roth IRAs are subject to the post-death minimum distribution rules that 

apply to traditional IRAs. For Roth IRAs, the IRA owner is treated as having died before the 

individual’s required beginning date. Thus only the life expectancy rule and the five year rule 

apply.

Failure to make a required minimum distribution triggers a 50-percent excise tax, payable 

by the individual or the individual’s beneficiary. The tax is imposed during the taxable year that 

begins with or within the calendar year during which the distribution was required.140 The tax 

may be waived if the distribution did not occur because of reasonable error and reasonable steps 

are taken to remedy the violation.141 

 137 Treas. Reg. sec. 1.401(a)(9)-5, A-5(a).

138 Treas. Reg. sec. 1.401(a)(9)-5, A-5(b).

139 Treas. Reg. sec. 1.401(a)(9)-3, Q&As 1, 2.

140 Sec. 4974(a).

141 Sec. 4974(d).
50

Eligible rollover distributions

With certain exceptions, distributions from an employer-provided qualified retirement 

plan are eligible to be rolled over tax free into another employer-provided qualified retirement 

plan or an IRA. This can be achieved by contributing the amount of the distribution to the other 

plan or IRA within 60 days of the distribution, or by a direct payment by the plan to the other 

plan or IRA (referred to as a “direct rollover”). Distributions that are not eligible for rollover 

include (i) any distribution that is one of a series of periodic payments generally for a period of 

10 years or more (or, if a shorter period, certain life expectancies) and (ii) any distribution to the 

extent that the distribution is a required minimum distribution.142

For any distribution that is eligible for rollover, an employer-provided tax-qualified 

retirement plan must offer the distributee the right to have the distribution made in a direct 

rollover143 and, before making the distribution, the plan administrator must provide the 

distributee with a written explanation of the direct rollover right and related tax consequences.144 

If a distributee does not choose to have the distribution made in a direct rollover, the distribution 

is generally subject to mandatory 20-percent income tax withholding.145

Description of Proposal

The proposal changes the age on which the required beginning date for required 

minimum distributions is based, from the calendar year in which the employee or IRA owner 

attains 701⁄2 years to the calendar year in which the employee or IRA owner attains 72 years. 

Under the proposal, present law continues to apply to employees and IRA owners who attain age 

701⁄2 prior to January 1, 2020. 

In addition, the present law requirement to actuarially adjust an employee’s accrued 

benefit for an employee who retires in a calendar year after the year the employee attains age 

701⁄2, to take into account the period after age 701⁄2 in which the employee was not receiving any 

benefits under the plan, is not changed. 

Effective Date

The proposal is effective for distributions required to be made after December 31, 2019, 

for employees and IRA owners who attain age 701⁄2 after December 31, 2019.

 142 Sec. 402(c)(4). Distributions that are not eligible rollover distributions also include distributions made 

upon hardship of the employee and any qualified disaster relief distribution (within the meaning of section 

72(t)(2)(G)). 

143 Sec. 401(a)(31)

144 Sec. 402(f).

145 Sec. 3405(c). This mandatory withholding does not apply to a distributee that is a beneficiary other 

than a surviving spouse of an employee.
51

O. Election to Apply Alternative Minimum Funding Standards

to Certain Single-Employer Community Newspaper Plans 

Present Law

The Internal Revenue Code of 1986 (“Code”) and the Employee Retirement Income 

Security Act of 1974 (“ERISA”) apply minimum funding requirements146 to defined benefit 

retirement plans maintained by private-sector employers for their employees (referred to as 

“single-employer” plans), for purposes of which employers that are members of a controlled 

group are considered a single employer.

Under these rules, a minimum contribution is required for a plan year if the value of the 

plan’s assets is less than the plan’s “funding target,” that is, the present value, determined 

actuarially, of all benefits earned as of the beginning of the year. If the value of plan assets is 

less than the plan’s funding target, such that the plan has a funding shortfall, the shortfall is 

generally required to be funded by contributions, with interest, over seven years, taking into 

account the remaining installments attributable to shortfalls from preceding years. In addition, if 

participants earn additional benefits for the year,147 the required contribution must include the 

amount of the plan’s “target normal cost,” that is, the present value, determined actuarially, of 

benefits expected to be earned for the year. In the case of a plan funded below a certain level, 

referred to as an “at-risk” plan, specified assumptions must be used in determining the plan’s 

funding target and target normal cost.

148

 146 Special funding rules may apply to certain categories of single-employer plans. For example, special 

rules apply to certain plans maintained by commercial passenger airlines, under section 402of the Pension Protection 

Act of 2006 (“PPA”), Pub. L. No.109-280. If an election is made by a commercial passenger airline described in 

section 402(a)(1) of PPA, then in determining the plan’s minimum required contribution under section 430, the 

airline may use an interest rate of 8.85% to amortize the unfunded liability of the plan in equal installments over the 

remaining part of the 17-year amortization period. See Treas. Reg. sec. 1.430(a)-1(b)(4)(ii). 

147 In some cases, a plan may be “frozen” as to service and/or compensation. When a plan is frozen with 

respect to both service and compensation, participants are entitled to previously earned benefits but do not accrue or 

earn additional benefits.

148 For an at-risk plan, the specified assumptions generally are as follows: All employees who are not 

otherwise assumed to retire as of the valuation date but who will be eligible to elect benefits during the plan year and 

the next 10 plan years must be assumed to retire at the earliest retirement date under the plan but not before the end 

of the plan year for which the “at-risk funding target” and “at-risk normal cost” are being determined. Also, all 

employees must be assumed to elect the retirement benefit available under the plan at the assumed retirement age 

(determined as above) that would result in the highest present value of benefits. The at-risk funding target is the 

present value of all benefits accrued or earned under the plan as of the beginning of the plan year using the actuarial 

assumptions set forth in the Code and regulations for single-employer plans, with the addition of a loading factor 

which arises when the plan has been in at-risk status for at least two of the four preceding plan years. This loading 

factor is equal to the sum of (1) $700 multiplied by the number of participants in the plan and (2) four percent of the 

funding target (determined without regard to the definition of at-risk funding target). The at-risk normal cost for a 

plan year generally represents the excess of the sum of (1) the present value of all benefits which are expected to 

accrue or to be earned under the plan during the plan year using the at-risk assumptions described above plus (2) the 

amount of plan related expenses expected to be paid from plan assets during the plan year, over (3) the amount of 

mandatory employee contributions expected to be made during the plan year. In addition, where the plan has been 

in at-risk status for at least two of the four preceding plan years, a loading factor is added, which is equal to four 
52

The minimum funding rules enacted in the Pension Protection Act of 2006 (“PPA”)149

specify the interest rates used to determine a plan’s funding target and target normal cost for a 

year, consisting of three “segment” rates, each of which applies to benefit payments expected to 

be made from the plan during a certain period.

150 The first segment rate applies to benefits 

reasonably determined to be payable during the five-year period beginning on the first day of the 

year; the second segment rate applies to benefits reasonably determined to be payable during the 

15-year period following the initial five-year period; and the third segment rate applies to 

benefits reasonably determined to be payable at the end of the 15-year period. The first, second,

and third segment rates are based on the corresponding portion of a corporate bond yield curve 

with certain adjustments. 

Under the Moving Ahead for Progress in the 21st Century Act,151 for plan years 

beginning after December 31, 2011, a segment rate determined under the PPA rules is adjusted if 

it falls outside a specified percentage range of the average segment rates for a preceding period. 

In particular, if a segment rate determined under the PPA rules is less than the applicable 

minimum percentage in the specified range, the segment rate is adjusted upward to match the 

minimum percentage. If a segment rate determined under the PPA rules is more than the 

applicable maximum percentage in the specified range, the segment rate is adjusted downward to 

match the maximum percentage. 

The specified percentage range (that is, the range from the applicable minimum 

percentage to the applicable maximum percentage of average segment rates), as most recently 

modified in the Bipartisan Budget Act of 2015,152 for determining whether a segment rate must 

 

percent of the target normal cost (the excess of the sum of (1) the present value of all benefits which are expected to 

accrue or to be earned under the plan during the plan year plus (2) the amount of plan-related expenses expected to 

be aid from plan assets during the plan year, over (3) the amount of mandatory employee contributions expected to 

be made during the plan year) with respect to the plan for the plan year.

149 Pub. L. No. 109-280.

150 Each segment rate is a single interest rate determined monthly by the Secretary of the Treasury, on the 

basis of a corporate bond yield curve, taking into account only the portion of the yield curve based on corporate 

bonds maturing during the particular segment rate period. The corporate bond yield curve used for this purpose 

reflects the average, for the 24-month period ending with the preceding month, of yields on investment grade 

corporate bonds with varying maturities and that are in the top three quality levels available. Solely for purposes of 

determining minimum required contributions, in lieu of the segment rates, an employer may elect to use interest 

rates on a yield curve based on the yields on investment grade corporate bonds for the month preceding the month in 

which the plan year begins (that is, without regard to the 24-month averaging described above) (“monthly yield 

curve”). If an election to use a monthly yield curve is made, it cannot be revoked without Internal Revenue Service 

approval. 

151 Pub. L. No. 112-141. The Highway Transportation and Funding Act of 2014 (Pub. L. No. 113-159) 

made changes to the applicable minimum and maximum percentage ranges for determining whether a segment rate 

must be adjusted upward or downward, as well as the periods for determining such segment rates.

152 Pub. L. No. 114-74. 
53

be adjusted upward or downward for a plan year is determined by reference to the calendar year 

in which the plan year begins as follows:

• 90 percent to 110 percent for 2012 through 2020,

• 85 percent to 115 percent for 2021,

• 80 percent to 120 percent for 2022,

• 75 percent to 125 percent for 2023, and

• 70 percent to 130 percent for 2024 or later.

For February 2019, the first, second, and third segment rates after adjustment are 

3.01 percent, 4.11 percent, and 4.41 percent, respectively.153

Description of Proposal

Under the proposal, an employer maintaining a “community newspaper plan” (as defined 

below) under which no participant has had the participant’s accrued benefit increased (whether 

because of service or compensation) after December 31, 2017, may elect to apply certain 

alternative funding rules to the plan and any other plan sponsored by any member of the 

controlled group (determined as of the date of enactment).

154 An election under the proposal to 

apply the alternative funding rules is to be made at such time and in such manner as prescribed 

by the Secretary of the Treasury, and once made with respect to a plan year, applies to all 

subsequent years unless revoked with the consent of the Secretary of the Treasury.

Under the alternative funding rules, an interest rate of eight percent is used to determine a 

plan’s funding target and target normal cost, rather than the first, second, and third segment rates. 

However, if new benefits are accrued or earned under a plan for a plan year in which the election 

is in effect, the present value of such benefits must be determined on the basis of the U.S. 

Treasury obligation yield curve for the day that is the valuation date of such plan for such plan 

year. In addition, if the value of plan assets is less than the plan’s funding target, such that the 

plan has a funding shortfall, the shortfall is required to be funded by contributions, with interest, 

over 30 years, rather than over seven years. The shortfall amortization bases determined155 for 

all plan years preceding the first plan year to which the election applies (and all related shortfall 

amortization installments) are reduced to zero. Further, the assumptions applicable to an “atrisk” plan do not apply.

Under the proposal, a “community newspaper plan” is a plan to which the new proposal 

applies, which is maintained by an employer that, as of December 31, 2017,

 153 Notice 2019-21, 2019-14 I.R.B. These rates are determined and published monthly by the Internal 

Revenue Service by notice and on its website. See https://www.irs.gov/retirement-plans/minimum-present-valuesegment-rates.

154 For this purpose, the controlled group means all persons treated as a single employer under subsection 

(b), (c), (m), or (o) of section 414 as of the date of enactment. 

155 Under section 430(c)(3).
54

• publishes and distributes daily, either electronically or in printed form, one or more 

community newspapers (as defined below) in a single State,

• is not a company the stock of which is publicly traded on a stock exchange or in an 

over-the-counter market, and is not controlled, directly or indirectly, by such a 

company, 

• is controlled, directly or indirectly (a) by one or more persons residing primarily in 

the State in which the community newspaper is published; (b) for at least 30 years by 

individuals who are members of the same family; (c) by a trust created or organized 

in the State in which the community newspaper is published, the sole trustees of 

which are persons described in (a) or (b); (d) by an entity described in section 

501(c)(3) and exempt from tax under code section 501(a) that is organized and 

operated in the State in which the community newspaper is published, and the 

primary purpose of which is to benefit communities in the State; or (e) by a 

combination of persons described in (a), (c), or (d), and

• does not control, directly or indirectly, any newspaper in any other State.

A “community newspaper” means a newspaper that primarily serves a metropolitan 

statistical area, as determined by the Office of Management and Budget, with a population of not 

less than 100,000. For purposes of the proposal, a person (the “first” person) is treated as 

controlled by another person if the other person possesses, directly or indirectly, the power to 

direct or cause the direction and management of the first person (including the power to elect a 

majority of the members of the board of directors of the first person) through the ownership of 

voting securities.

The proposal makes the above-described amendments to both the Code and ERISA.156 

Effective Date

The proposal applies the amendments to plan years ending after December 31, 2017.

 156 The proposal adds a new subsection (m) to section 430, and a new subsection (m) to section 303 of 

ERISA. However, the term community newspaper plan for ERISA purposes includes one that publishes and 

distributes daily, either electronically or in printed form, either a community newspaper or one or more community 

newspapers in the same State. Additionally, in the case of a community newspaper plan to which the election has 

been made, the proposal does not change the basis for calculating underfunding for purposes of Pension Benefit 

Guaranty Corporation variable rate premiums.
55

P. Treating Excluded Difficulty of Care Payments as Compensation

for Determining Retirement Contribution Limitations

Present Law

Difficulty of care payments

Gross income does not include amounts received by a foster care provider during the 

taxable year as qualified foster care payments.157 Qualified foster care payments include any 

payment made pursuant to a foster care program of a State or political subdivision which is paid 

by (1) a State or political subdivision thereof or (2) a qualified foster care placement agency, and 

which is either (1) paid to the foster care provider for caring for a qualified foster individual in 

the foster care provider’s home, or (2) a “difficulty of care” payment.158 A “qualified foster 

individual” is any individual who is living in a foster family home in which the individual was 

placed by either an agency of a State (or a political subdivision thereof) or a qualified foster care 

placement agency.159 A qualified foster care placement agency is any placement agency which 

is licensed or certified by a State (or political subdivision thereof) or an entity designated by a 

State (or political subdivision thereof).160

A “difficulty of care” payment is compensation for providing the additional care needed 

for certain qualified foster individuals. Such payments are provided when a qualified foster 

individual has a physical, mental or emotional disability for which the State has determined that 

(1) there is a need for additional compensation to care for the individual, (2) the care is provided 

in the home of the foster care provider, and (3) the payments are designated by the payor as 

compensation for such purpose.161 An applicant must request an assessment of need from the 

State agency administering the program and submit a medical evaluation which is reassessed 

every year. 

In the case of a tax-qualified defined contribution plan, such a plan will not satisfy the tax 

qualification requirements unless contributions made by a participant to the plan (as well as other 

additions such as employer contributions and forfeitures) do not exceed the lesser of (1) $40,000 

or (2) 100 percent of the participant’s compensation.162 A participant’s compensation is defined 

 157 Sec. 131(a)

158 Sec. 131(b)(1).

159 Sec. 131(b)(2).

160 Sec. 131(b)(3).

161 Pursuant to section 131(c)(2), in the case of any foster home, difficulty of care payments for any period 

to which such payments relate are not excludable from gross income to the extent such payments are made for more 

than 10 qualified foster individuals who have not attained age 19 and five qualified foster individuals who have 

attained age 19.

162 Sec. 415(c)(1). 
56

generally as the compensation of the participant from the employer for the year.163 A special 

rule applies for self-employed individuals providing that a participant’s compensation is the 

participant’s earned income.164 Similar rules apply for contributions made to an individual 

retirement account.165

Since “difficulty of care” payments are excluded from gross income, home healthcare 

workers receiving only such payments are unable to participate in tax-qualified retirement plans 

or individual retirement accounts because “difficulty of care” payments are not considered 

compensation or earnings upon which contributions to such plans or accounts may be made. 

Description of Proposal

The proposal amends sections 415(c)(3) and 408(o) to increase the contribution limit to 

qualified retirement plans and individual retirement accounts to include “difficulty of care” 

payments.

Effective Date

The proposal applies to contributions to individual retirement accounts made after the 

date of enactment of the Act and to defined contribution plans for plan years beginning after 

December 31, 2015. 

 163 Sec. 415(c)(3)(A).

164 Sec. 415(c)(3)(B).

165 See secs. 219, 408 and 408A.
57

TITLE II ─ ADMINISTRATIVE IMPROVEMENTS

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

as in Effect as of Close of Year

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.166 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.167 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.168 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 return of 

tax for the 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.169 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.170

Description of Proposal

Under the proposal, 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 tax 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.

The proposal 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”).171

 166 Rev. Rul. 76-28, 1976-1 C.B. 106.

167 Rev. Rul. 81-114, 1981-1 C.B. 207.

168 Sec. 404(a)(6). 

169 Sec. 401(b).

170 Treas. Reg. sec. 1.401(b)-1(a). 

171 Treas. Reg. sec. 1.401(k)-1(e)(2)(ii).
58

Effective Date

The proposal applies to plans adopted for taxable years beginning after December 31, 

2019.
59

B. Combined Annual Report for Group of Plans 

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.172 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”).173 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.174 A separate Form 5500 is 

required for each plan.175

Description of Proposal 

The proposal 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.176

For purposes of the proposal, 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 

 172 Sec. 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.”

173 ERISA secs. 103 and 104. Under ERISA section 4065, the plan administrator of certain defined benefit 

plans must provide information to the PBGC.

174 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).

175 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. 

176 Under the proposal, for purposes of applying the 250 return threshold for electronic filing to 

Forms 5500 for plan years beginning after December 31, 2019, information regarding each plan for which 

information is provided on the Form 5500 is treated as a separate return.
60

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, 2022, and 

shall be effective for returns and reports for plan years beginning after December 31, 2021.
61

C. Disclosure Regarding Lifetime Income

Present Law

ERISA requires the administrator of a defined contribution plan to provide benefit 

statements to participants.177 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.178 However, information about lifetime income that might be provided by funds in a 

defined contribution plan is not currently required to be included in a benefit statement.

Description of Proposal

The proposal requires a benefit statement provided to a defined contribution plan 

participant to include a lifetime income disclosure as described in the proposal. 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.

 177 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.

178 78 Fed. Reg. 26727 (May 8, 2013).
62

The Secretary is directed to issue, not later than a year after the proposal 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 proposal 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, 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 proposal, 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 proposal 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.
63

D. Fiduciary Safe Harbor for Selection of Lifetime Income Provider

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.179

Description of Proposal

The proposal 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 proposal 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 proposal, 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 

 179 29 C.F.R. sec. 2550.404a-4.
64

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 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 proposal 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 proposal, 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 
65

appropriateness of its conclusions with respect to the insurer’s financial capability and cost, 

taking into account the considerations described above.180 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 proposal 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.

Effective Date

The proposal is effective on the date of enactment.

 180 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.
66

E. Modification of Nondiscrimination Rules to Protect Older,

Longer Service Participants

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.181 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 of the employer, or (2) the greater of (a) 40 percent of all employees 

of the employer or (b) two employees (or one employee if there is only one employee), referred 

to as the “minimum participation” requirements.182 These 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 $125,000 (for 

2019).183 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 

 181 Secs. 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.

182 Sec. 401(a)(26).

183 Section 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.
67

consisting of an employee stock ownership plan (“ESOP”).184 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.185 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 

 184 Elective deferrals are contributions that an employee elects to have made to a defined contribution plan 

that includes a qualified cash or deferred arrangement (a 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.

185 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 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.
68

transaction,186 provided coverage under the plan is not significantly changed during that 

period.187

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 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.188

The nondiscrimination rules allow contributions and benefit accruals to be provided to 

highly compensated and nonhighly compensated employees at the same percentage of 

compensation.189 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.

190 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.

 186 It is for the period beginning on date of the transaction and ending on the last day of the first plan year 

beginning after the date of the transaction.

187 Sec. 410(b)(6)(C).

188 Secs. 401(k) and (m), the latter of which applies also to after-tax employee contributions under a 

defined contribution plan.

189 For this purpose, under section 401(a)(17), annual compensation generally is limited to $280,000 per 

year (for 2019).

190 See 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. 
69

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);

• 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-percentage-point increment (or portion thereof) 

above 25 percent, subject to a maximum of 7.5 percent.
70

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.191 The plan coverage and other nondiscrimination requirements are 

applied separately to the portions of a multiple employer plan covering employees of different 

employers.192

Certain tax-exempt charitable organizations may offer their employees a tax-deferred 

annuity plan (“section 403(b) plan”).193 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.194 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.

 191 Sec. 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.

192 Treas. Reg. sec. 1.413-2(a)(3)(ii)-(iii).

193 Sec. 403(b). These plans are available to employers that are tax-exempt under section 501(c)(3), as 

well as to employers that are educational institutions of State or local governments.

194 Treas. Reg. sec. 1.410(b)-7(f).
71

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.195 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.

Description of Proposal

Closed or frozen defined benefit plans

In general

The proposal provides nondiscrimination relief with respect to benefits, rights, and 

features for a closed class of participants (“closed class”),196 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 proposal 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 proposal is 

spun off to another employer, and if the spun-off plan continues to satisfy any ongoing 

 195 Notice 2014-5, 2014-2 I.R.B. 276, December 13, 2013 extended by Notice 2015-28, 2015-14 I.R.B. 

848, March 19, 2015, Notice 2016-57, 2016-40 I.R.B. 432, September 19, 2016, and most recently by Notice 2017-

45, 2017-38 I.R.B. 232, August 31, 2017. Proposed regulations revising the nondiscrimination requirements for 

closed plans were also issued in 2016, subject to various conditions. 81 Fed. Reg. 4976 (January 29, 2016).

196 References under the proposal 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.
72

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 proposal, 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 proposal, but taking into account the special testing rules described below,197 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 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;198 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 proposal, 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 proposal, but taking into account the special testing rules described 

above,199 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.

 197 Other testing options available under present law are also available for this purpose.

198 This rule applies also for purposes of applying the plan coverage and other nondiscrimination 

requirements to an applicable defined benefit plan and one or more defined contributions that, under the proposal, 

may be treated as a single plan as described below.

199 Other testing options available under present law are also available for this purpose.
73

Under the proposal, 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 proposal applies is a defined 

benefit plan under which the class was closed (or the plan frozen) before April 5, 2017, 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, 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 
74

plan year in the five-year period by more than 50 percent.200 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 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 proposal, 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 April 5, 2017, 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 

 200 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 plan-related expenses to be paid from plan assets during the 

plan year. Under the proposal, 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. 
75

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 proposal, “make-whole contributions” generally means nonelective 

contributions for each employee in the make-whole 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.201 However, under a special rule, in the case of a defined 

contribution plan that provides benefits, 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 proposal 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 proposal is generally effective on the date of enactment, without regard to whether 

any plan modifications referred to in the proposal are adopted or effective before, on, or after the 

date of enactment. 

However, at the election of a plan sponsor, the proposal will apply to plan years 

beginning after December 31, 2013. For purposes of the proposal, a closed class of participants 

under a defined benefit plan is treated as being closed before April 5, 2017, 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 proposal 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 

 201 For this purpose, consistency is not required with respect to employees who were subject to different 

benefit formulas under the defined benefit plan.
76

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.
77

F. Modification of PBGC Premiums for CSEC Plans

Present Law

Qualified retirement plans, including defined benefit plans, are categorized as singleemployer plans or multiple-employer plans.202 A single-employer plan is a plan maintained by 

one employer.203 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).204

Defined benefit plans maintained by private employers are generally subject to minimum 

funding requirements.205 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 2006,206 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”),207 which 

provides specific funding rules for certain multiple-employer plans, referred to as CSEC plans.208

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.209 Plan 

 202 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.

203 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”). Secs. 414(b), (c), (m) and (o).

204 Sec. 413(c). Multiple-employer status does not apply if the plan is a multiemployer plan.

205 Secs. 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.

206 Pub. L. No. 109-280.

207 Pub. L. No. 113-197.

208 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.

209 Title IV of ERISA.
78

sponsors of single-employer and multiemployer plans must participate in the PBGC insurance 

program. 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.210 For 2019, 

flat-rate premiums are $80 per participant, and variable rate premiums are $43 for each $1,000 of 

unfunded vested benefits, subject to a limit of $541 multiplied by the number of plan 

participants.211 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 rates212, 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 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.

Description of Proposal

Under the proposal, for CSEC plans, flat-rate premiums are $19 per participant, and 

variable rate premiums are $9 for each $1,000 of unfunded vested benefits.213 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 (CSEC plans may use the third 

segment rate as the interest rate), determined by taking into account only vested benefits, over 

(2) the fair market value of plan assets.

 210 The same PBGC benefit guarantee structure also applies to single-employer and multiple-employer 

plans.

211 These premium rates have been increased several times by legislation since 2005 and are subject to 

automatic increases to reflect inflation (referred to as “indexing”).

212 Corporate bond rates are used for PBGC liability measurement purposes. For funding purposes, singleemployer plans are required to use the 24-month average segment rates (before adjustment) determined under 

Section 430(h)(2), as amended by the “Moving Ahead for Progress in the 21st Century Act” (MAP-21), Pub. L. No. 

112-141, the “Highway and Transportation Funding Act of 2014” (HATFA), Pub. L. No.113-159 and the Bipartisan 

Budget Act of 2015 (BBA), Pub. L. No. 114-74. However, a plan sponsor is permitted to elect to use the monthly 

yield curve under section 430(h)(2)(D)(ii) in place of the segment rates. CSEC plans may use the third segment rate 

to determine current liability. Sec. 433(h)(3). CSEC plans were also able to elect (not later than the close of the first 

plan year of the plan beginning after December 31, 2013), not to be treated as a CSEC plan so that the same interest 

rates that apply to single-employer plans would apply to CSEC plans.

213 These are the premium rates that applied to single-employer and multiple-employer plans in 2005 and 

are not subject to indexing.
79

The proposal applies to such plans with plan years beginning after December 31, 2018.

Effective Date

The proposal is effective on date of enactment.
80

TITLE III ─ OTHER BENEFITS

A. Benefits Provided to Volunteer Firefighters

and Emergency Medical Responders

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.214 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.215

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

Subject to certain limitations, individuals are allowed itemized deductions for (1) State 

and local income taxes, real property taxes, and personal property taxes, and (2) contributions to 

charitable organizations, including unreimbursed expenses incurred in performing volunteer 

services for such an organization.216

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 

 214 IRS Chief Counsel Advice 200302045 (December 3, 2002).

215 Sec. 139B. Under section 3121(a)(23), the exclusion applied also for purposes of taxes under the 

Federal Insurance Contributions Act (“FICA”).

216 Secs. 164(a) and 170.
81

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.

Description of Proposal

The proposal 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 proposal also increases the exclusion for qualified reimbursement 

payments to $50 for each month during which a volunteer performs services. Under the 

proposal, the exclusions for qualified State or local tax benefits and qualified reimbursement 

payments do not apply for taxable years beginning after December 31, 2020.

Effective Date

The proposal is effective for taxable years beginning after December 31, 2019. As 

described above, the exclusions do not apply for taxable years beginning after December 31, 

2020. Thus, the exclusions apply only for taxable years beginning during 2020.
82

B. Expansion of Section 529 Plans

Present Law

In general

A qualified tuition program (often referred to as a “529 plan”) is a program established 

and maintained by a State or agency or instrumentality thereof, or by one or more eligible 

educational institutions, which satisfies certain requirements and under which a person may 

purchase tuition credits or certificates on behalf of a designated beneficiary that entitle the 

beneficiary to the waiver or payment of qualified higher education expenses of the beneficiary (a 

“prepaid tuition program”). Section 529 provides specified income tax and transfer tax rules for 

the treatment of accounts and contracts established under qualified tuition programs.217 In the 

case of a program established and maintained by a State or agency or instrumentality thereof, a 

qualified tuition program also includes a program under which a person may make contributions 

to an account that is established for the purpose of satisfying the qualified higher education 

expenses of the designated beneficiary of the account, provided it satisfies certain specified 

requirements (a “savings account program”). Under both types of qualified tuition programs, a 

contributor establishes an account for the benefit of a particular designated beneficiary to provide 

for that beneficiary’s higher education expenses.

In general, prepaid tuition contracts and tuition savings accounts established under a 

qualified tuition program involve prepayments or contributions made by one or more individuals 

for the benefit of a designated beneficiary. Decisions with respect to the contract or account are 

typically made by an individual who is not the designated beneficiary. Qualified tuition accounts 

or contracts generally require the designation of a person (generally referred to as an “account 

owner”)218 whom the program administrator (oftentimes a third-party administrator retained by 

the State or by the educational institution that established the program) may look to for decisions, 

recordkeeping, and reporting with respect to the account established for a designated beneficiary. 

The person or persons who make the contributions to the account need not be the same person 

who is regarded as the account owner for purposes of administering the account. Under many 

qualified tuition programs, the account owner generally has control over the account or contract, 

including the ability to change designated beneficiaries and to withdraw funds at any time and 

for any purpose. Thus, in practice, qualified tuition accounts or contracts generally involve a 

contributor, a designated beneficiary, an account owner (who oftentimes is not the contributor or 

the designated beneficiary), and an administrator of the account or contract.

Qualified higher education expenses

Distributions for the purpose of meeting the designated beneficiary’s higher education 

expenses are generally not subject to tax. For purposes of receiving a distribution from a 

 217 For purposes of this description, the term “account” is used interchangeably to refer to a prepaid tuition 

benefit contract or a tuition savings account established pursuant to a qualified tuition program.

218 Section 529 refers to contributors and designated beneficiaries, but does not define or otherwise refer to 

the term “account owner,” which is a commonly used term among qualified tuition programs.
83

qualified tuition program that qualifies for this favorable tax treatment, the term qualified higher 

education expenses means tuition, fees, books, supplies, and equipment required for the 

enrollment or attendance of a designated beneficiary at an eligible educational institution, and 

expenses for special needs services in the case of a special needs beneficiary that are incurred in 

connection with such enrollment or attendance. Qualified higher education expenses generally 

also include room and board for students who are enrolled at least half-time. Qualified higher 

education expenses include the purchase of any computer technology or equipment, or Internet 

access or related services, if such technology or services are to be used primarily by the 

beneficiary during any of the years a beneficiary is enrolled at an eligible institution.

For distributions made after December 31, 2017, a designated beneficiary may, on an 

annual basis, receive up to $10,000 in aggregate 529 distributions to be used in connection with 

expenses for tuition in connection with enrollment or attendance at an elementary or secondary 

public, private, or religious school. To the extent such distributions do not exceed $10,000, they 

are treated in the same manner as distributions for qualified higher education expenses.

Contributions to qualified tuition programs

Contributions to a qualified tuition program must be made in cash. Section 529 does not 

impose a specific dollar limit on the amount of contributions, account balances, or prepaid tuition 

benefits relating to a qualified tuition account; however, the program is required to have 

adequate safeguards to prevent contributions in excess of amounts necessary to provide for the 

beneficiary’s qualified higher education expenses. Contributions generally are treated as a 

completed gift eligible for the gift tax annual exclusion. Contributions are not tax deductible for 

Federal income tax purposes, although they may be deductible for State income tax purposes. 

Amounts in the account accumulate on a tax-free basis (i.e., income on accounts in the plan is 

not subject to current income tax).

A qualified tuition program may not permit any contributor to, or designated beneficiary 

under, the program to direct (directly or indirectly) the investment of any contributions (or 

earnings thereon) more than two times in any calendar year, and must provide separate 

accounting for each designated beneficiary. A qualified tuition program may not allow any 

interest in an account or contract (or any portion thereof) to be used as security for a loan.

Deduction for interest on education loans

Certain individuals who have paid interest on qualified education loans may claim an 

above-the-line deduction for such interest expenses, subject to a maximum annual deduction 

limit of $2,500.219 For 2019, the deduction is phased out ratably for taxpayers with modified 

AGI between $70,000 and $85,000 ($140,000 and $170,000 for married taxpayers filing a joint 

return). The income phaseout ranges are indexed for inflation.

A qualified education loan generally is defined as any indebtedness incurred solely to pay 

for the costs of attendance (including room and board) of the taxpayer, the taxpayer's spouse, or 

any dependent of the taxpayer as of the time the indebtedness was incurred in attending on at 

 219 Sec. 221.
84

least a half-time basis (1) eligible educational institutions, or (2) institutions conducting 

internship or residency programs leading to a degree or certificate from an institution of higher 

education, a hospital, or a health care facility conducting postgraduate training. The cost of 

attendance is reduced by any amount excluded from gross income under the exclusions for 

qualified scholarships and tuition reductions, employer-provided educational assistance, interest 

earned on education savings bonds, qualified tuition programs, and Coverdell education savings 

accounts, as well as the amount of certain other scholarships and similar payments.

Description of Proposal

The proposal makes four modifications to section 529 plans.

First, the proposal allows tax-free treatment applicable to distributions for higher 

education expenses to apply to expenses for fees, books, supplies, and equipment required for the 

participation of a designated beneficiary in an apprenticeship program. The apprenticeship 

program must be registered and certified with the Secretary of Labor under section 1 of the 

National Apprenticeship Act.220

Second, the proposal allows tax-free treatment to apply to distributions made for certain 

expenses in connection with a homeschool. Under the proposal, distributions for certain 

homeschool expenses are treated in the same manner as distributions for qualified higher 

education expenses, and like distributions for elementary and secondary school tuition, are also 

subject to an annual limit of $10,000 in aggregate 529 distributions, per beneficiary.221 For these 

purposes, qualifying homeschool expenses are those expenses, with respect to a beneficiary, 

which are incurred in connection with a homeschool and are for: (i) curriculum and curricular 

materials; (ii) books or other instructional materials; (iii) online educational materials; (iv) tuition 

for tutoring or educational classes outside of the home if the tutor or instructor is unrelated to the 

student; (v) dual enrollment in an institution of higher education; and (vi) educational therapies 

for students with disabilities.

Third, the proposal allows tax-free treatment to apply to distributions of certain amounts 

used to make payments on principal or interest of a qualified education loan. No individual may 

receive more than $10,000 of such distributions, in aggregate, over the course of the individual’s 

lifetime.222 To the extent that an individual receives in excess of $10,000 of such distributions, 

they are subject to the usual tax treatment of 529 distributions (i.e., the earnings are included in 

income and subject to a 10-percent penalty). The proposal contains a special rule allowing such 

amounts to be distributed to a sibling of a designated beneficiary (i.e., a brother, sister, 

stepbrother, or stepsister). This rule allows a 529 account holder to make a student loan 

distribution to a sibling of the designated beneficiary without changing the designated 

 220 29 U.S.C. 50.

221 The $10,000 per beneficiary limit applies to the combined distributions used for either (i) elementary 

and secondary school tuition or (ii) homeschool expenses.

222 This limitation applies to such distributions from all 529 accounts. Thus, an individual may not avoid 

the limitation by receiving separate $10,000 distributions from multiple 529 accounts.
85

beneficiary of the account. For purposes of the $10,000 lifetime limit on student loan 

distributions, a distribution to a sibling of a designated beneficiary is applied towards the 

sibling’s lifetime limit, and not the designated beneficiary’s lifetime limit. The deduction 

available for interest paid by the taxpayer during the taxable year on any qualified education loan 

is disallowed to the extent such interest was paid from a tax-free distribution from a 529 plan.

Fourth, the proposal adds additional qualifying expenses for distributions made on behalf 

of designated beneficiaries attending elementary or secondary school. Under the proposal, in 

addition to tuition, tax-free treatment would apply to a distribution made for expenses for fees, 

academic tutoring, special needs services, books, supplies, and other equipment, incurred in 

connection with enrollment or attendance at such elementary or secondary school. Expenses for 

the purchase of computer technology or equipment or Internet access and related services are not 

considered eligible expenses under the proposal.

Effective Date

The proposal applies to distributions made after December 31, 2018.
86

TITLE IV ─ REVENUE PROVISIONS

A. Modifications of Required Minimum Distribution

Rules for Designated Beneficiaries

Present Law

In general

Minimum distribution rules apply to tax-favored employer-sponsored retirement plans 

and IRAs.223 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.224 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.225 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.226 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. 

 223 Secs. 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 taxexempt employers.

224 Sec. 408A(c)(5). 

225 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. 

226 Sec. 4974.
87

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 five-percent 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.227 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.228 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.229 Under the regulations, a 

 227 Sec. 401(a)(9)(A). 

228 Treas. 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). 

229 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 taxfavored 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, 
88

designated beneficiary is an individual designated as a beneficiary under the plan or IRA.230

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.231 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.232 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.233 

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.234

 

this can be accomplished by simply renaming the IRA as an IRA held by the spouse as IRA owner rather than as a 

beneficiary. 

230 Treas. 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. 

231 Sec. 401(a)(9)(B)(i).

232 Treas. Reg. sec. 1.401(a)(9)-5, A-5(a)(2).

233 Treas. Reg. sec. 1.401(a)(9)-5, A-5(a)(1).

234 Treas. Reg. sec. 1.401(a)(9)-5, A-5(b). 
89

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.235

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.236

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.237 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. 

 235 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 expectancy generally is 

recalculated each year while the spouse is alive and then fixed the year after the spouse’s death. 

236 Section 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). 

237 Treas. Reg. sec. 1.401(a)(9)-6, A-14.
90

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.238 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. 

The Code and ERISA generally prohibit plan amendment that reduce accrued benefits, 

including amendments that eliminate or reduce optional forms of benefit with respect to benefits 

already accrued except to the extent prescribed in regulations.239 This prohibition on the 

reduction of accrued benefits is commonly referred to as the “anti-cut-back rule.”

Description of Proposal

Change in after-death rules for defined contribution plans 

The proposal changes the after-death required minimum distribution rules applicable to 

defined contribution plans, as defined, with respect to required minimum distributions to 

designated beneficiaries. A defined contribution plan for this purpose means an eligible 

retirement plan240 (qualified retirement plans, section 403(b) plans, governmental section 457(b) 

plans, and IRAs) other than a defined benefit plan. 

Ten-year after-death rule for defined contributions plans

In general

Under the proposal, the five-year rule is expanded to become a 10-year period instead of 

five years (“10-year rule”), such that the 10-year rule is the general rule for distributions to 

designated beneficiaries 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 proposal. 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 

tenth calendar year following the year of the employee or IRA owner’s death. 

Eligible beneficiaries

For eligible beneficiaries, an exception to the 10-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 

 238 Sec. 401(b).

239 Sec. 411(d)(6) and ERISA sec. 204(g). 

240 Sec. 402(c)(8)(B).
91

allows distributions over life or life expectancy of an eligible beneficiary beginning in the year 

following the year of death. Eligible beneficiaries include any beneficiary who, as of the date of 

death, is the surviving spouse of the employee (or IRA owner),241 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 proposal, the 10-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,242 the 

disabled child’s remaining beneficiary interest must be distributed by the end of the tenth 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 10-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 tenth 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 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 proposal, 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.

243 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 

 241 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 proposal. 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, A6, 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.

242 The 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)).

243 The definition of disabled in section 72(m)(7) is incorporated by reference. 
92

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).244

Under the proposal, the definition of a chronically ill individual for purposes of qualified 

long-term care insurance245 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)246 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 proposal 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 proposal is generally effective for required minimum distributions with respect to 

employees (or IRA owners) with a date of death after December 31, 2019. 

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 proposal applies to distributions with 

respect to employees who die after December 31, 2021. 

 244 Treas. 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. 

245 Sec. 7702B(c)(2). 

246 Section 7702B(c) only requires this period to be at least 90 days.
93

In the case of a collectively bargained plan,247 in determining required minimum 

distributions after the death of an employee, the proposal 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 proposal terminates,248 or (2) December 31, 2019. The second date is 

December 31, 2021. 

10-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 proposal 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 tenth 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 proposal applies to the plan (or IRA), for example, 

before January 1, 2020, 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 

proposal and at all times thereafter. A qualified annuity with respect to an individual is a 

commercial annuity,249 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 amount of the annuity 

payments to the individual or any designated beneficiaries.

 247 A collectively bargained plan is a plan maintained pursuant to one or more collective bargaining 

agreements between employee representatives and one or more employers. 

248 The 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 proposal. 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 proposal shall not be treated as a termination of the collective bargaining agreement.

249 For this purpose, commercial annuity is defined in section 3405(e)(6).
94

Plan amendments made pursuant to the proposal 

A plan amendment made pursuant to the enacted 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, 2021 (or in the case of a governmental or collectively bargained 

plan, December 31, 2023), 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 

that 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 (or regulations) to 

which it relates. Similarly, the proposal 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.
95

B. Increase in Penalty for Failure to File

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.250

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.251 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.252 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 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.253 The penalty will not 

apply if it is shown that the failure to file was due to reasonable cause and not willful neglect.254

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.255 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.256

 250 See United States v. Boyle, 469 U.S. 241, 245 (1985).

251 Sec. 6651(a)(1).

252 Sec. 6651(f).

253 Sec. 6651(b)(1).

254 Sec. 6651(a)(1).

255 Sec. 6651(c)(1).

256 Ibid.
96

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).257 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 6655.258

Description of Proposal

Under the proposal, 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 proposal applies to returns with filing due dates (including extensions) after 

December 31, 2019.

 257 Sec. 6651(a)(1).

258 Sec. 6651(e).
97

C. Increased Penalties for Failure to File Retirement Plan Returns

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.259 The plan administrator of a defined benefit plan 

subject to the minimum funding requirements260 is required to file an annual actuarial report.261

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.262 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 $15,000.263 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).264 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 

 259 Sec. 6058.

260 Sec. 412. Most governmental plans (defined in section 414(d)) and church plans (defined in section 

414(e)) are exempt from the minimum funding requirements.

261 Sec. 6059.

262 Treas. Reg. secs. 301.6058-1(a) and 301.6059-1. 

263 Sec. 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. 

264 Code sec. 6057(a). Under Code section 6057(e) and ERISA section 105(c), similar information must be 

provided to the separated participant.
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failure with respect to any plan year.265 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 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.266 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.267 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.

268 This penalty may be waived if it is shown 

that the failure is due to reasonable cause and not to willful neglect. 

Description of Proposal 

Form 5500

Under the proposal, a failure to file Form 5500 generally results in a penalty of $105 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 proposal, 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 

 265 Sec. 6652(d)(1).

266 Sec. 6652(d)(2).

267 Sec. 3405.

268 Sec. 6652(h).
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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 proposal, 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.

Effective Date

The proposal is effective for returns, statements and notifications required to be filed, and 

withholding notices required to be provided, after December 31, 2019.
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D. Increase Information Sharing to Administer Excise Taxes

Present Law

Generally, tax returns and return information (“tax information”) are confidential and 

may not be disclosed unless authorized in the Code.269 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 6103.270 

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. 

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.271 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.272 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.273 

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.274 At that time, 

customs officials were transferred from Treasury to the Department of Homeland Security. 

 269 Sec. 6103(a).

270 Sec. 7431.

271 Sec. 4481(a).

272 Treas. Reg. 41.6001-3(a).

273 Treas. Reg. 41.6001-3(b).

274 The 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.
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Description of Proposal

The proposal 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 proposal is effective on date of enactment.