Joint Committee on Taxation

July 11, 2000

JCX-68-00

SUMMARY OF THE “COMPREHENSIVE RETIREMENT SECURITY

AND PENSION REFORM ACT”

A. Individual Retirement Arrangements (“IRAs”)

• Increase in IRA contribution limit.--The proposal would increase the annual dollar IRA

contribution limit from $2,000 to $3,000 in 2001, $4,000 in 2002, and $5,000 in 2003,

with indexing thereafter.

• Catch-up contributions.--The proposal would accelerate the increase of the IRA

maximum contribution limit for individuals age 50 and older. The limit for such

individuals would be $5,000 beginning in 2001, with indexing after 2003.

B. Expanding Coverage

• Increase contribution and benefit limits.--Beginning in 2001, the proposal would increase

the dollar limit on annual elective deferrals under section 401(k) plans, section 403(b)

annuities, and salary reduction SEPs in $1,000 annual increments until the limits reach

$15,000 in 2005. Beginning in 2001, the proposal would increase the maximum annual

elective deferrals that may be made to a SIMPLE plan in $1,000 annual increments until

the limit reaches $10,000 in 2004. The $15,000 and $10,000 dollar limits would be

indexed in $500 increments, as under present law. The proposal would increase the

dollar limit on deferrals under a section 457 plan to $11,000 in 2001, $12,000 in 2002,

$13,000 in 2003, $14,000 in 2004 and $15,000 in 2005. After 2005, the limit would be

indexed in $500 increments. The limit would be twice the otherwise applicable dollar

limit in the three years prior to retirement. Effective in 2001, the proposal would:

increase the $135,000 annual benefit limit for defined benefit plans to $160,000 (indexed

in $5,000 increments) and lower the early retirement age to 62 and the normal retirement

age to 65 for purposes of applying the limit; increase the $30,000 annual contribution

limit for defined contribution plans to $40,000 (indexed in $1,000 increments); and

increase the limit on compensation that may be taken into account under a plan to

$200,000 (indexed in $5,000 increments).

• Plan loans for subchapter S shareholders, partners, and sole proprietors.--The proposal

generally would eliminate the special present-law rules relating to plan loans made to an

owner-employee. Thus, the general statutory exemption would apply to such

transactions. Present law would apply with respect to IRAs. The proposal would be

effective with respect to loans made in years beginning after December 31, 2000.
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• Modification of top-heavy rules.--The proposal would provide that a safe-harbor section

401(k) plan is not a top-heavy plan and that matching contributions may be taken into

account in satisfying the minimum contribution requirements. In addition, the proposal

would simplify the definition of key employee and the determination of top-heavy and

status and would repeal the family attribution rule used to determine whether an

individual is a key employee by reason of being a 5-percent owner of the employer. The

proposal would be effective for years beginning after December 31, 2000.

• Elective deferrals not taken into account for purposes of deduction limits.--The proposal

would provide that elective deferral contributions are not subject to the qualified plan

deduction limits, and the application of a deduction limitation to any other employer

contribution to a qualified retirement plan would not take into account elective deferral

contributions. The proposal would be effective for years beginning after December 31,

2000.

• Repeal of coordination requirements for deferred compensation plans of State and local

governments and tax-exempt organizations.--For years beginning after December 31,

2000, the proposal would repeal the rules coordinating the section 457 dollar limit with

contributions under other types of plans.

• Eliminate IRS user fees for determination letter requests regarding small employer plans.-

-Under the proposal, an employer with no more than 100 employees would not be

required to pay a user fee for any determination letter request made during the first 5 plan

years with respect to the qualified status of a retirement plan that the employer maintains. 

The proposal would be effective for determination letter requests made after December

31, 2000.

• Deduction limits.--The proposal would provide that, for purposes of the qualified plan

deduction limits, the compensation otherwise paid or accrued during the employer’s

taxable year to the beneficiaries under the plan includes elective deferrals under a section

401(k) plan or a section 403(b) annuity, elective contributions under a section 457 plan,

and salary reductions under a section 125 plan. In addition, the proposal would increase

the limit on deductible contributions under a profit-sharing or stock bonus plan from 15

percent to 20 percent of the compensation of the employees covered by the plan. The

proposal would be effective for years beginning after December 31, 2000.

• Option to treat elective deferrals as after-tax contributions.--The proposal would provide

that a section 401(k) plan or a section 403(b) annuity may permit a participant to elect to

have all or a portion of the participant’s elective deferrals under the plan treated as

“designated plus contributions.” Designated plus contributions would be includible in

income; a qualified distribution from a participant’s designated plus contributions

account would not be includible in the participant’s gross income. Designated plus
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contributions would generally otherwise treated the same as elective deferrals for

purposes of the qualified plan rules. The proposal would be effective for taxable years

beginning after December 31, 2000.

C. Enhancing Fairness for Women

• Additional catch-up contributions.--The proposal would permit individuals who are age

50 or older to make additional contributions to a section 401(k) (or similar plan). The

maximum permitted additional contribution would be $5,000 (indexed in 2006 and

thereafter). Catch-up contributions to a section 401(k) (or similar) plan would not be

subject to any other contribution limits, would not be taken into account in applying other

contribution limits, and would not be subject to nondiscrimination rules.

• Equitable treatment for contributions of employees to defined contribution plans.--The

proposal would (1) increase the 25 percent of compensation limitation on annual

additions under a defined contribution plan to 100 percent, (2) conform the limits on

contributions to a tax-sheltered annuity to the limits applicable to tax-qualified plans, and

(3) increase the 33-1/3 percent of compensation limitation on deferrals under a section

457 plan to 100 percent of compensation. The proposal would be effective for years

beginning after December 31, 2000.

• Faster vesting of employer matching contributions.--Under the proposal, employer

matching contributions would have to vest at least as rapidly as under 3-year cliff vesting

or under 6-year graded vesting that provides for a nonforfeitable right to 20 percent of

employer matching contributions for each year of service beginning with the participant’s

second year of service and ending with 100 percent after 6 years of service. The proposal

would be effective for plan years beginning after December 31, 2000, with a delayed

effective date for plans maintained pursuant to a collective bargaining agreement.

• Simplify and update the minimum distribution rules.--The proposal would apply the

present-law rules applicable if the participant dies before distribution of minimum

benefits has begun to all post-death distributions. The proposal would reduce the excise

tax on failures to satisfy the minimum distribution rules to 10 percent of the amount that

was required to be distributed but was not distributed. The Treasury would be directed to

update, simplify, and finalize the regulations relating to the minimum distribution rules. 

The proposal would repeal the special minimum distribution rules applicable to section

457 plans. The proposal would be effective for years beginning after December 31, 2000.

• Clarification of tax treatment of division of section 457 plan benefits upon divorce.--The

proposal would apply the taxation rules for qualified plan distributions pursuant to a

QDRO to distributions made pursuant to a domestic relations order from a section 457

plan. In addition, a section 457 plan would not be treated as violating the restrictions on

distributions from such plans due to payments to an alternate payee under a QDRO. The
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proposal would be effective for transfers, distributions and payments made after

December 31, 2000.

• Modification of safe harbor relief for hardship withdrawals from 401(k) plans.--The

proposal would direct the Secretary of the Treasury to revise the applicable regulations to

reduce from 12 months to 6 months the period during which an employee must be

prohibited from making elective contributions and employee contributions in order for a

distribution to be deemed necessary to satisfy an immediate and heavy financial need. 

The proposal would be effective for years beginning after December 31, 2000.

D. Increasing Portability for Participants

• Rollovers of retirement plan and IRA distributions.--The proposal would provide that

eligible rollover distributions from qualified retirement plans, section 403(b) annuities,

IRAs and governmental section 457 plans generally can be rolled over to any of such

plans or arrangements. The direct rollover and withholding rules would be extended to

distributions from a governmental section 457 plan. The proposal would provide that

employee after-tax contributions can be rolled over into another qualified plan or a

traditional IRA. In the case of a rollover from a qualified plan to another qualified plan,

the rollover would be permitted only through a direct rollover. The proposal would

provide that surviving spouses can roll over distributions to a qualified plan, section

403(b) annuity, or governmental section 457 plan in which the spouse participates. The

proposal would be effective for distributions made after December 31, 2000.

• Waiver of 60-day rule.--The proposal would provide that the Secretary may waive the 60-

day rollover period if the failure to waive such requirement would be against equity or

good conscience, including cases of casualty, disaster, or other events beyond the

reasonable control of the individual subject to such requirement. The proposal would

apply to distributions made after December 31, 2000.

• Treatment of forms of distribution.--Under the proposal, if certain requirements are

satisfied, a defined contribution plan would be permitted to eliminate optional forms of

benefit (1) in connection with certain transfers of benefits, or (2) if a single sum

distribution is offered. In addition, the Secretary would be directed to provide for

circumstances under which early retirement benefits, retirement-type subsidies, or an

optional form of benefit may be reduced or eliminated if the rights of participants are not

materially affected. The proposal would be effective for years beginning after December

31, 2000.

• Rationalization of restrictions on distributions.--The proposal would modify the

distribution restrictions applicable to section 401(k) plans, section 403(b) annuities, and

section 457 plans to provide that distribution may occur upon severance from

employment rather than separation from service. The proposal would be effective for
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distributions after December 31, 2000.

• Purchase of service credit under governmental pension plans.--Under the proposal, a

participant in a State or local governmental plan would not be required to include in gross

income a direct trustee-to-trustee transfer to a governmental defined benefit plan from a

section 403(b) annuity or a section 457 plan if the transferred amount is used (1) to

purchase permissive service credits under the plan, or (2) to repay certain contributions. 

The proposal would be effective for transfers after December 31, 2000.

• Employers may disregard rollovers for purposes of cash-out rules.--Under the proposal, a

plan would be permitted to disregard benefits attributable to rollover contributions for

purposes of the cash-out rules. The proposal would be effective for distributions after

December 31, 2000.

E. Strengthening Pension Security and Enforcement

• Phase in repeal of 150 percent of current liability funding limit; deduction for

contributions to fund termination liability.--Under the proposal, the current liability full

funding limit would be 160 percent of current liability for plan years beginning in 2001,

165 percent for plan years beginning in 2002, and 170 percent for plan years beginning in

2003. The current liability full funding limit would be repealed for plan years beginning

in 2004 and thereafter. The special rule allowing a deduction for unfunded current

liability generally would be extended to all defined benefit pension plans covered by the

PBGC. The proposal would be effective for years beginning after December 31, 2000.

• Excise tax relief for sound pension funding.--Under the proposal, if an employer elects,

contributions in excess of the current liability full funding limit would not be subject to

the excise tax on nondeductible contributions. The proposal would be effective for years

beginning after December 31, 2000.

• Notice of significant reduction in plan benefit accruals.--The proposal would require the

plan administrator of a defined benefit plan (other than governmental plans and certain

church plans) with more than 100 participants to notify plan participants in advance of an

amendment that significantly reduces the rate of future benefit accruals. The notice

would be required to include sufficient information to allow participants to understand

how the amendment will affect different classes of employees. In some cases, additional

information would be required to be provided after the amendment would be effective. 

An excise tax would apply if the required notice is not provided. The proposal generally

would be effective for plan amendments taking effect after the date of enactment.

• Modifications to section 415 limits for multiemployer plans.--The proposal would modify

the section 415 limits for multiemployer plans. The proposal would be effective for years

beginning after December 31, 2000.
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• Prohibited allocations of stock in an S corporation ESOP.--Under the proposal, if there is

a prohibited allocation of stock to a disqualified individual under an ESOP sponsored by

an S corporation at least 50 percent of which is owned by disqualified individuals: (1) an

excise tax would be imposed on the employer equal to 50 percent of the amount involved

in the prohibited allocation; and (2) the stock allocated in the prohibited allocation would

be treated as distributed to the disqualified individual. An excise tax would also be

imposed with respect to synthetic equity held during a nonallocation year. The provision

would generally be effective with respect to years beginning after December 31, 2001. In

the case of an ESOP established after July 11, 2000, or an ESOP established on or before

such date if the employer maintaining the plan was not an S corporation on such date, the

provision would be effective with respect to plan years ending after July 11, 2000.

F. Reducing Regulatory Burdens

• Modification of timing of plan valuations.--The proposal would permit a defined benefit

plan with assets of at least 125 percent of current liability to use a valuation date within

the prior plan year. The proposal would be effective for plan years beginning after

December 31, 2000.

• ESOP dividends may be reinvested without loss of dividend deduction.--Under the

proposal, an employer would be entitled to deduct dividends that, at the election of plan

participants or their beneficiaries, are paid to the plan and reinvested in employer

securities. The proposal would be effective for taxable years beginning after December

31, 2000.

• Repeal transition rule relating to certain highly compensated employees.--The proposal

would repeal the special definition of highly compensated employee under the Tax

Reform Act of 1986. The proposal would be effective for plan years beginning after

December 31, 2000.

• Employees of tax-exempt entities.--The proposal would direct the Treasury Department

to revise its regulations under section 410(b) to provide that, if certain requirements are

satisfied, employees of a tax-exempt charitable organization who are eligible to make

salary reduction contributions under a section 403(b) annuity may be treated as

excludable employees for purposes of testing a section 401(k) plan.

• Treatment of employer-provided retirement advice.--Under the proposal, qualified

retirement planning services provided to an employee and his or her spouse by an

employer maintaining a qualified plan would generally be excludable from income and

wages. The proposal would be effective with respect to taxable years beginning after

December 31, 2000.
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• Reporting simplification.--The proposal would direct the Secretary of the Treasury to

provide for an exemption from the annual return requirement for a plan that covers only

the sole owner of a business that maintains the plan (and such owner’s spouse), or

partners in a partnership that maintains the plan (and such partners’ spouses), if the total

value of the plan assets as of the end of the plan year and all prior plan years does not

exceed $250,000 and the plan meets certain other requirements. In addition, the Secretary

of the Treasury would be directed to provide for the filing of a simplified annual return

substantially similar to the Form 5500-EZ by a plan that meets certain requirements. The

proposal would be effective on the date of enactment.

• Improvement to employer plans compliance resolution system.--The proposal would

direct the Secretary of the Treasury to continue to update and improve EPCRS, giving

special attention to (1) increasing the awareness and knowledge of small employers

concerning the availability and use of EPCRS, (2) taking into account special concerns

and circumstances that small employers face with respect to compliance and correction of

compliance failures, (3) extending the duration of the self-correction period under

APRSC for significant compliance failures, (4) expanding the availability to correct

insignificant compliance failures under APRSC during audit, and (5) assuring that any

tax, penalty, or sanction that is imposed by reason of a compliance failure is not excessive

and bears a reasonable relationship to the nature, extent, and severity of the failure. The

proposal would be effective on the date of enactment.

• Repeal of the multiple use test.--The proposal would repeal the multiple use test, effective

for years beginning after December 31, 2000.

• Flexibility in nondiscrimination, coverage, and line of business rules.--The proposal

would direct the Secretary of the Treasury to provide by regulation circumstances under

which plans can use the prior-law facts and circumstances test to satisfy the

nondiscrimination, coverage, and line of business rules.

• Extension to all governmental plans of moratorium on application of certain

nondiscrimination rules applicable to State and local government plans.--Under the

proposal, a plan maintained by any governmental entity would be exempt from the

nondiscrimination and minimum participation rules. The proposal would be effective for

plan years beginning after December 31, 2000.

G. Provisions Relating to Plan Amendments

• Under the proposal, any amendments to a plan or annuity contract required to be made by

the proposal would not be required to be made before the last day of the first plan year

beginning on or after January 1, 2003. In the case of a governmental plan, the date for

amendments would be extended to the first plan year beginning on or after January 1,

2005. The proposal would be effective on the date of enactment.