DESCRIPTION OF THE 

“COMPREHENSIVE RETIREMENT SECURITY AND 

PENSION REFORM ACT”

Scheduled for Markup

by the

HOUSE COMMITTEE ON WAYS AND MEANS

on July 13, 2000

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

July 11, 2000

JCX-69-00
(i)

CONTENTS

(Contents page numbers don’t necessarily correspond with PDF text. Please excuse the inconvenience)

Page

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

I. INDIVIDUAL RETIREMENT ARRANGEMENTS (“IRAs”) ................ 2

II. PENSION PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

A. Expanding Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

1. Increase in benefit and contribution limits .......................... 5

2. Plan loans for subchapter S shareholders, partners, and sole

proprietors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

3. Modification of top-heavy rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

4. Elective deferrals not taken into account for purposes of deduction

limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

5. Repeal of coordination requirements for deferred compensation plans of

State and local governments and tax-exempt organizations . . . . . . . . . . . . 14

6. Eliminate IRS user fees for certain determination letter requests regarding

employer plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

7. Deduction limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

8. Option to treat elective deferrals as after-tax contributions . . . . . . . . . . . . . 17

B. Enhancing Fairness for Women . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

1. Additional salary reduction catch-up contributions . . . . . . . . . . . . . . . . . . . 19

2. Equitable treatment for contributions of employees to defined contribution

plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

3. Faster vesting of employer matching contributions . . . . . . . . . . . . . . . . . . . 23

4. Simplify and update the minimum distribution rules . . . . . . . . . . . . . . . . . 24

5. Clarification of tax treatment of division of section 457 plan benefits upon

divorce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

6. Modification of safe harbor relief for hardship withdrawals from 401(k)

plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

C. Increasing Portability for Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

1. Rollovers of retirement plan and IRA distributions . . . . . . . . . . . . . . . . . . . 28

2. Waiver of 60-day rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

3. Treatment of forms of distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Page

(ii)

4. Rationalization of restrictions on distributions . . . . . . . . . . . . . . . . . . . . . . 35

5. Purchase of service credit under governmental pension plans . . . . . . . . . . . 36

6. Employers may disregard rollovers for purposes of cash-out rules . . . . . . . 36

D. Strengthening Pension Security and Enforcement . . . . . . . . . . . . . . . . . . . . . . . 37

1. Phase in repeal of 150 percent of current liability funding limit; deduction

for contributions to fund termination liability . . . . . . . . . . . . . . . . . . . . . . . 37

2. Excise tax relief for sound pension funding . . . . . . . . . . . . . . . . . . . . . . . . 39

3. Notice of significant reduction in plan benefit accruals . . . . . . . . . . . . . . . . 40

4. Modifications to section 415 limits for multiemployer plans . . . . . . . . . . . 42

5. Prohibited allocations of stock in an S corporation ESOP . . . . . . . . . . . . . 43

E. Reducing Regulatory Burdens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

1. Modification of timing of plan valuations . . . . . . . . . . . . . . . . . . . . . . . . . . 46

2. ESOP dividends may be reinvested without loss of dividend deduction . . . 47

3. Repeal transition rule relating to certain highly compensated employees . . 48

4. Employees of tax-exempt entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

5. Treatment of employer-provided retirement advice . . . . . . . . . . . . . . . . . . . 49

6. Reporting simplification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

7. Improvement to Employee Plans Compliance Resolution System . . . . . . . 52

8. Repeal of the multiple use test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

9. Flexibility in nondiscrimination and line of business rules . . . . . . . . . . . . . 55

10. Extension to all governmental plans of moratorium on application of

certain nondiscrimination rules applicable to State and local government

plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

11. Notice and consent period regarding distributions . . . . . . . . . . . . . . . . . . . 56

F. Provisions Relating to Plan Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
1

 This document may be cited as follows: Joint Committee on Taxation, Description of

the “Comprehensive Retirement Security and Pension Reform Act” (JCX-69-00), July 11, 2000.

-1-

INTRODUCTION

This document,1

 prepared by the staff of the Joint Committee on Taxation, provides a

description of the “Comprehensive Retirement Security and Pension Reform Act,” scheduled for

markup by the House Committee on Ways and Means on July 13, 2000.
-2-

I. INDIVIDUAL RETIREMENT ARRANGEMENTS (“IRAs”)

Present Law

In general

There are two general types of individual retirement arrangements (“IRAs”) under present

law: traditional IRAs, to which both deductible and nondeductible contributions may be made,

and Roth IRAs. The Federal income tax rules regarding each type of IRA (and IRA contribution)

differ.

Traditional IRAs

Under present law, an individual may make deductible contributions to an IRA up to the

lesser of $2,000 or the individual’s compensation if neither the individual nor the individual’s

spouse is an active participant in an employer-sponsored retirement plan. In the case of a married

couple, deductible IRA contributions of up to $2,000 can be made for each spouse (including, for

example, a homemaker who does not work outside the home), if the combined compensation of

both spouses is at least equal to the contributed amount. If the individual (or the individual’s

spouse) is an active participant in an employer-sponsored retirement plan, the $2,000 deduction

limit is phased out for taxpayers with adjusted gross income (“AGI”) over certain levels for the

taxable year.

The AGI phase-out limits for taxpayers who are active participants in employersponsored plans are as follows.

Single Taxpayers

Taxable years beginning in: Phase-out range

2000 ................................................ 32,000-42,000

2001 ................................................ 33,000-43,000

2002 ................................................ 34,000-44,000

2003 ................................................ 40,000-50,000

2004 ................................................ 45,000-55,000

2005 and thereafter ..................................... 50,000-60,000
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Joint Returns

Taxable years beginning in: Phase-out range

2000 ................................................ 52,000-62,000

2001 ................................................ 53,000-63,000

2002 ................................................ 54,000-64,000

2003 ................................................ 60,000-70,000

2004 ................................................ 65,000-75,000

2005 ................................................ 70,000-80,000

2006 ................................................ 75,000-85,000

2007 and thereafter ..................................... 80,000-100,000

If the individual is not an active participant in an employer-sponsored retirement plan, but

the individual’s spouse is, the $2,000 deduction limit is phased out for taxpayers with AGI

between $150,000 and $160,000.

To the extent an individual cannot or does not make deductible contributions to an IRA or

contributions to a Roth IRA, the individual may make nondeductible contributions to a

traditional IRA.

Amounts held in a traditional IRA are includible in income when withdrawn (except to

the extent the withdrawal is a return of nondeductible contributions). Includible amounts

withdrawn prior to attainment of age 59-1/2 are subject to an additional 10-percent early

withdrawal tax, unless the withdrawal is due to death or disability, is made in the form of certain

periodic payments, is used to pay medical expenses in excess of 7.5 percent of AGI, is used to

purchase health insurance of an unemployed individual, is used for education expenses, or is

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

Roth IRAs

Individuals with AGI below certain levels may make nondeductible contributions to a

Roth IRA. The maximum annual contribution that may be made to a Roth IRA is the lesser of

$2,000 or the individual’s compensation for the year. The contribution limit is reduced to the

extent an individual makes contributions to any other IRA for the same taxable year. As under

the rules relating to IRAs generally, a contribution of up to $2,000 for each spouse may be made

to a Roth IRA provided the combined compensation of the spouses is at least equal to the

contributed amount. The maximum annual contribution that can be made to a Roth IRA is

phased out for single individuals with AGI between $95,000 and $110,000 and for joint filers

with AGI between $150,000 and $160,000.

Taxpayers with modified AGI of $100,000 or less generally may convert a traditional

IRA into an Roth IRA. The amount converted is includible in income as if a withdrawal had
2

 Early distribution of converted amounts may also accelerate income inclusion of

converted amounts that are taxable under the 4-year rule applicable to 1998 conversions.

-4-

been made, except that the 10-percent early withdrawal tax does not apply and, if the conversion

occurred in 1998, the income inclusion may be spread ratably over 4 years. Married taxpayers

who file separate returns cannot convert a traditional IRA into a Roth IRA.

Amounts held in a Roth IRA that are withdrawn as a qualified distribution are not

includible in income, nor subject to the additional 10-percent tax on early withdrawals. A

qualified distribution is a distribution that (1) is made after the 5-taxable year period beginning

with the first taxable year for which the individual made a contribution to a Roth IRA, and (2)

which is made after attainment of age 59-1/2, on account of death or disability, or is made for

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

Distributions from a Roth IRA that are not qualified distributions are includible in income

to the extent attributable to earnings, and subject to the 10-percent early withdrawal tax (unless

an exception applies).2 The same exceptions to the early withdrawal tax that apply to IRAs apply

to Roth IRAs.

Description of Proposal

Increase in annual contribution limits

The proposal would increase the maximum annual dollar contribution limit for IRA

contributions from $2,000 to $3,000 in 2001, $4,000 in 2002, and $5,000 in 2003. The limit

would be indexed in $500 increments in 2004 and thereafter.

Additional catch-up contributions

The proposal would accelerate the increase of the IRA maximum contribution limit for

individuals who have attained age 50 before the end of the taxable year. The maximum dollar

contribution limit (before application of the AGI phase-out limits) for such an individual would

be increased to $5,000 in 2001, 2002, and 2003, and would be indexed in $500 increments in

2004 and thereafter, under the general rule.

Effective date

The proposal would be effective for taxable years beginning after December 31, 2000.
-5-

II. PENSION PROVISIONS

A. Expanding Coverage

1. Increase in benefit and contribution limits

Present Law

In general

Under present law, limits apply to contributions and benefits under qualified plans (sec.

415), the amount of compensation that may be taken into account under a plan for determining

benefits (sec. 401(a)(17)), the maximum amount of elective deferrals that an individual may

make to a salary reduction plan or tax sheltered annuity (sec. 402(g)), and deferrals under an

eligible deferred compensation plan of a tax-exempt organization or a State or local government

(sec. 457).

Limitations on contributions and benefits

Under present law, the limits on contributions and benefits under qualified plans are

based on the type of plan. Under a defined contribution plan, the qualification rules limit the

annual additions to the plan with respect to each plan participant to the lesser of (1) 25 percent of

compensation or (2) $30,000 (for 2000). Annual additions are the sum of employer contributions,

employee contributions, and forfeitures with respect to an individual under all defined

contribution plans of the same employer. The $30,000 limit is indexed for cost-of-living

adjustments in $5,000 increments.

Under a defined benefit plan, the maximum annual benefit payable at retirement is

generally the lesser of (1) 100 percent of average compensation, or (2) $135,000 (for 2000). The

dollar limit is adjusted for cost-of-living increases in $5,000 increments.

Under present law, in general, the dollar limit on annual benefits is reduced if benefits

under the plan begin before the social security retirement age (currently, age 65) and increased if

benefits begin after social security retirement age.

Compensation limitation

Under present law, the annual compensation of each participant that may be taken into

account for purposes of determining contributions and benefits under a plan, applying the

deduction rules, and for nondiscrimination testing purposes is limited to $170,000 (for 2000).

The compensation limit is indexed for cost-of-living adjustments in $10,000 increments.
3

 The 25 percent of compensation limitation would be increased to 100 percent of

compensation under another provision of the proposal.

-6-

Elective deferral limitations

Under present law, under certain salary reduction arrangements, an employee may elect to

have the employer make payments as contributions to a plan on behalf of the employee, or to the

employee directly in cash. Contributions made at the election of the employee are called elective

deferrals.

The maximum annual amount of elective deferrals that an individual may make to a

qualified cash or deferred arrangement (a “section 401(k) plan”), a tax-sheltered annuity

(“section 403(b) annuity”) or a salary reduction simplified employee pension plan (“SEP”) is

$10,500 (for 2000). The maximum annual amount of elective deferrals that an individual may

make to a SIMPLE plan is $6,000. These limits are indexed for inflation in $500 increments.

Section 457 plans

The maximum annual deferral under a deferred compensation plan of a State or local

government or a tax-exempt organization (a “section 457 plan”) is the lesser of (1) $8,000 (for

1999) or (2) 33-1/3 percent of compensation. The $8,000 dollar limit is increased for inflation

in $500 increments. Under a special catch-up rule, the section 457 plan may provide that, for one

or more of the participant’s last 3 years before retirement, the otherwise applicable limit is

increased to the lesser of (1) $15,000 or (2) the sum of the otherwise applicable limit for the year

plus the amount by which the limit applicable in preceding years of participation exceeded the

deferrals for that year.

Description of Proposal

Limits on contributions and benefits

The proposal would increase the $30,000 annual addition limit for defined contribution

plans to $40,000. This amount would be indexed in $1,000 increments.3

The proposal would increase the $135,000 annual benefit limit under a defined benefit

plan to $160,000. The dollar limit would be reduced for benefit commencement before age 62

and increased for benefit commencement after age 65.

Compensation limitation

The proposal would increase the limit on compensation that may be taken into account

under a plan to $200,000. This amount would be indexed in $5,000 increments.
4

 Another proposal would increases the 33-1/3 percentage of compensation limit to 100

percent.

5

 Title I of the Employee Retirement Income Security Act of 1974, as amended

(“ERISA”), also contains prohibited transaction rules. The Code and ERISA proposals are

substantially similar, although not identical. 

-7-

Elective deferral limitations

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, with indexing in $500

increments thereafter. 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. Beginning after 2004, the $10,000 dollar limit would be indexed in

$500 increments.

Section 457 plans

The proposal would increase the dollar limit on deferrals under a section 457 plan to

conform to the elective deferral limitation. Thus, the limit would be $11,000 in 2001, and would

be increased in $1,000 annual increments until the limit reaches $15,000 in 2005. The limit

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

applicable dollar limit in the three years prior to retirement.4

Effective Date

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

2. Plan loans for subchapter S shareholders, partners, and sole proprietors

Present Law

The Internal Revenue Code prohibits certain transactions (“prohibited transactions”)

between a qualified plan and a disqualified person in order to prevent persons with a close

relationship to the qualified plan from using that relationship to the detriment of plan participants

and beneficiaries.5 Certain types of transactions are exempted from the prohibited transaction

rules, including loans from the plan to plan participants, if certain requirements are satisfied. In

addition, the Department of Labor can grant an administrative exemption from the prohibited

transaction rules if she finds the exemption is administratively feasible, in the interest of the plan

and plan participants and beneficiaries, and protective of the rights of participants and

beneficiaries of the plan. Pursuant to this exemption process, the Secretary of Labor grants

exemptions both with respect to specific transactions and classes of transactions.
6

 Certain transactions involving a plan and Subchapter S shareholders are permitted.

-8-

The statutory exemptions to the prohibited transaction rules do not apply to certain

transactions in which the plan makes a loan to an owner-employee.6 Loans to participants other

than owner-employees are permitted if loans are available to all participants on a reasonably

equivalent basis, are not made available to highly compensated employees in an amount greater

than made available to other employees, are made in accordance with specific provisions in the

plan, bear a reasonable rate of interest, and are adequately secured. In addition, the Code places

limits on the amount of loans and repayment terms.

For purposes of the prohibited transaction rules, an owner-employee means (1) a sole

proprietor, (2) a partner who owns more than 10 percent of either the capital interest or the

profits interest in the partnership, (3) an employee or officer of a Subchapter S corporation who

owns more than 5 percent of the outstanding stock of the corporation, and (4) the owner of an

individual retirement arrangement (“IRA”). The term owner-employee also includes certain

family members of an owner-employee and certain corporations owned by an owner-employee.

Under the Internal Revenue Code, a two-tier excise tax is imposed on disqualified

persons who engage in a prohibited transaction. The first level tax is equal to 15 percent of the

amount involved in the transaction. The second level tax is imposed if the prohibited transaction

is not corrected within a certain period, and is equal to 100 percent of the amount involved.

Description of Proposal

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 continue to apply with respect to IRAs.

Effective Date

The proposal would be effective with respect to loans made after December 31, 2000.

3. Modification of top-heavy rules

Present Law

In general

Under present law, additional qualification requirements apply to plans that primarily

benefit an employer’s key employees (“top-heavy plans”). These additional requirements

provide (1) more rapid vesting for plan participants who are non-key employees and (2)

minimum nonintegrated employer contributions or benefits for plan participants who are non-key

employees.
-9-

Definition of top-heavy plan

In general, a top-heavy plan is a plan under which more than 60 percent of the

contributions or benefits are provided to key employees. More precisely, a defined benefit plan

is a top-heavy plan if more than 60 percent of the cumulative accrued benefits under the plan are

for key employees. A defined contribution plan is top heavy if the sum of the account balances

of key employees is more than 60 percent of the total account balances under the plan. For each

plan year, the determination of top-heavy status generally is made as of the last day of the

preceding plan year (“the determination date”).

For purposes of determining whether a plan is a top-heavy plan, benefits derived both

from employer and employee contributions, including employee elective contributions, are taken

into account. In addition, the accrued benefit of a participant in a defined benefit plan and the

account balance of a participant in a defined contribution plan includes any amount distributed

within the 5-year period ending on the determination date.

An individual’s accrued benefit or account balance is not taken into account in

determining whether a plan is top-heavy if the individual has not performed services for the

employer during the 5-year period ending on the determination date.

In some cases, two or more plans of a single employer must be aggregated for purposes of

determining whether the group of plans is top-heavy. The following plans must be aggregated:

(1) plans which cover a key employee (including collectively bargained plans); and (2) any plan

upon which a plan covering a key employee depends for purposes of satisfying the Code’s

nondiscrimination rules. The employer may be required to include terminated plans in the

required aggregation group. In some circumstances, an employer may elect to aggregate plans

for purposes of determining whether they are top heavy.

SIMPLE plans are not subject to the top-heavy rules.

Definition of key employee

A key employee is an employee who, during the plan year that ends on the determination

date or any of the 4 preceding plan years, is (1) an officer earning over one-half of the defined

benefit plan dollar limitation of section 415 ($67,500 for 2000), (2) a 5-percent owner of the

employer, (3) a 1-percent owner of the employer earning over $150,000, or (4) one of the 10

employees earning more than the defined contribution plan dollar limit ($30,000 for 2000) with

the largest ownership interests in the employer. A family ownership attribution rule applies to

the determination of 1-percent owner status, 5-percent owner status, and largest ownership

interest. Under this attribution rule, an individual is treated as owning stock owned by the

individual’s spouse, children, grandchildren, or parents.
7

 Tres. Reg. sec. 1.416-1 Q&A M-19.

8

 Benefits under a plan that is not top heavy must vest at least as rapidly as under one of

the following schedules: (1) 5-year cliff vesting; and (2) 3-7 year graded vesting, which provides

for 20 percent vesting after 3 years and 20 percent more each year thereafter so that a participant

is fully vested after 7 years of service.

-10-

Minimum benefit for non-key employees

A minimum benefit generally must be provided to all non-key employees in a top-heavy

plan. In general, a top-heavy defined benefit plan must provide a minimum benefit equal to the

lesser of (1) 2 percent of compensation multiplied by the employee’s years of service, or (2) 20

percent of compensation. A top-heavy defined contribution plan must provide a minimum

annual contribution equal to the lesser of (1) 3 percent of compensation, or (2) the percentage of

compensation at which contributions were made for key employees (including employee elective

contributions made by key employees and employer matching contributions).

For purposes of the minimum benefit rules, only benefits derived from employer

contributions (other than amounts employees have elected to defer) to the plan are taken into

account, and an employee’s social security benefits are disregarded (i.e., the minimum benefit is

nonintegrated). Employer matching contributions may be used to satisfy the minimum

contribution requirement; however, in such a case the contributions are not treated as matching

contributions for purposes of applying the special nondiscrimination requirements applicable to

employee elective contributions and matching contributions under sections 401(k) and (m). 

Thus, such contributions would have to meet the general nondiscrimination test of section

401(a)(4).7

Top-heavy vesting

Benefits under a top-heavy plan must vest at least as rapidly as under one of the following

schedules: (1) 3-year cliff vesting, which provides for 100 percent vesting after 3 years of

service; and (2) 2-6 year graduated vesting, which provides for 20 percent vesting after 2 years of

service, and 20 percent more each year thereafter so that a participant is fully vested after 6 years

of service.8

Qualified cash or deferred arrangements

Under a qualified cash or deferred arrangement (a “section 401(k) plan”), an employee

may elect to have the employer make payments as contributions to a qualified plan on behalf of

the employee, or to the employee directly in cash. Contributions made at the election of the

employee are called elective deferrals. A special nondiscrimination test applies to elective

deferrals under cash or deferred arrangements, which compares the elective deferrals of highly

compensated employees with elective deferrals of nonhighly compensated employees. (This test
9

 This proposal would not be intended to preclude the use of nonelective contributions

that are used to satisfy the safe harbor rules from being used to satisfy other qualified retirement

plan nondiscrimination rules, including those involving cross-testing.

-11-

is called the actual deferral percentage test or the “ADP” test). Employer matching contributions 

under qualified defined contribution plans are also subject to a similar nondiscrimination test. 

(This test is called the actual contribution percentage test or the “ACP” test.)

Under a design-based safe harbor, a cash or deferred arrangement is deemed to satisfy the

ADP test if the plan satisfies one of two contribution requirements and satisfies a notice

requirement. A plan satisfies the contribution requirement under the safe harbor rule for

qualified cash or deferred arrangements if the employer either (1) satisfies a matching

contribution requirement or (2) makes a nonelective contribution to a defined contribution plan

of at least 3 percent of an employee’s compensation on behalf of each nonhighly compensated

employee who is eligible to participate in the arrangement without regard to the permitted

disparity rules (sec. 401(1)). A plan satisfies the matching contribution requirement if, under the

arrangement: (1) the employer makes a matching contribution on behalf of each nonhighly

compensated employee that is equal to (a) 100 percent of the employee’s elective deferrals up to

3 percent of compensation and (b) 50 percent of the employee’s elective deferrals from 3 to 5

percent of compensation; and (2), the rate of match with respect to any elective contribution for

highly compensated employees is not greater than the rate of match for nonhighly compensated

employees. Matching contributions that satisfy the design-based safe harbor for cash or deferred

arrangements are deemed to satisfy the ACP test. Certain additional matching contributions are

also deemed to satisfy the ACP test.

Description of Proposal

Definition of top-heavy plan

The proposal would provide that a plan consisting of a cash-or-deferred arrangement that

satisfies the design-based safe harbor for such plans and matching contributions that satisfy the

safe harbor rule for such contributions is not a top-heavy plan. Matching or nonelective

contributions provided under such a plan could be taken into account in satisfying the minimum

contribution requirements applicable to top-heavy plans.9

In determining whether a plan is top-heavy, the proposal would provide that distributions

during the year ending on the date the top-heavy determination is being made are taken into

account. The present-law 5-year rule would apply with respect to in-service distributions. 

Similarly, the proposal would provide that an individual’s accrued benefit or account balance is

not taken into account if the individual has not performed services for the employer during the 1-

year period ending on the date the top-heavy determination is being made.
10 Thus, this proposal would override the provision in Treasury regulations that, if

matching contributions are used to satisfy the minimum benefit requirement, then they are not

treated as matching contributions for purposes of the section 401(m) nondiscrimination rules.

-12-

Definition of key employee

The proposal (1) would provide that an employee is not considered a key employee by

reason of officer status unless the employee earns more than $150,000 in compensation for the

year, and (2) would repeal the top-10 owner key employee category.

The proposal would repeal the 4-year lookback rule for determining key employee status

and provide that an employee is a key employee only if he or she is a key employee during the

current plan year.

The family ownership attribution rule no longer would apply in determining whether an

individual is a 5-percent owner of the employer for purposes of the top-heavy rules only.

Minimum benefit for non-key employees

Under the proposal, matching contributions would be taken into account in determining

whether the minimum benefit requirement has been satisfied.10

The proposal would provide that, in determining the minimum benefit required under a

defined benefit plan, a year of service does not include any year in which no employee benefits

under the plan (as determined under sec. 410).

Effective Date

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

4. Elective deferrals not taken into account for purposes of deduction limits

Present Law

Employer contributions to one or more qualified retirement plans are deductible subject

to certain limits. In general, the deduction limit depends on the kind of plan.

In the case of a defined benefit pension plan or a money purchase pension plan, the

employer generally may deduct the amount necessary to satisfy the minimum funding cost of the

plan for the year. If a defined benefit pension plan has more than 100 participants, the maximum

amount deductible is at least equal to the plan’s unfunded current liabilities.
-13-

In the case of a profit-sharing or stock bonus plan, the employer generally may deduct an

amount equal to 15 percent of compensation of the employees covered by the plan for the year.

If an employer sponsors both a defined benefit pension plan and a defined contribution

plan that covers some of the same employees (or a money purchase pension plan and another

kind of defined contribution plan), the total deduction for all plans for a plan year generally is

limited to the greater of (1) 25 percent of compensation or (2) the contribution necessary to meet

the minimum funding requirements of the defined benefit pension plan for the year (or the

amount of the plan’s unfunded current liabilities, in the case of a plan with more than 100

participants).

For purposes of the deduction limits, employee elective deferral contributions to a section

401(k) plan are treated as employer contributions and, thus, are subject to the generally

applicable deduction limits.

Subject to certain exceptions, nondeductible contributions are subject to a 10-percent

excise tax.

Description of Proposal

Under the proposal, elective deferral contributions would not be subject to the 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.

Effective Date

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

5. Repeal of coordination requirements for deferred compensation plans of State and local

governments and tax-exempt organizations

Present Law

Compensation deferred under an eligible deferred compensation plan of a tax-exempt or

State and local government employer (a “section 457 plan”) is not includible in gross income

until paid or made available. In general, the maximum permitted annual deferral under such a

plan is the lesser of (1) $8,000 (in 2000) or (2) 33-1/3 percent of compensation. The $8,000 limit

is increased for inflation in $500 increments. Under a special catch-up rule, a section 457 plan

may provide that, for one or more of the participant’s last 3 years before retirement, the otherwise

applicable limit is increased to the lesser of (1) $15,000 or (2) the sum of the otherwise

applicable limit for the year plus the amount by which the limit applicable in preceding years of

participation exceeded the deferrals for that year.
11 The limits on deferrals under a section 457 plan would be modified under other

provisions of the proposal.

12 User fees are statutorily authorized; however, the IRS sets the dollar amount of the fee

applicable to any particular type of request.

-14-

The $8,000 limit (as modified under the catch-up rule), applies to all deferrals under all

section 457 plans in which the individual participates. In addition, in applying the $8,000 limit,

contributions under a tax-sheltered annuity (“section 403(b) annuity”), elective deferrals under a

qualified cash or deferred arrangement (“section 401(k) plan”), salary reduction contributions

under a simplified employee pension plan (“SEP”), and contributions under a SIMPLE plan are

taken into account. Further, the amount deferred under a section 457 plan is taken into account in

applying a special catch-up rule for section 403(b) annuities.

Description of Proposal

The proposal would repeal the rules coordinating the section 457 dollar limit with

contributions under other types of plans.11

Effective Date

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

6. Eliminate IRS user fees for certain determination letter requests regarding employer

plans

Present Law

An employer that maintains a retirement plan for the benefit of its employees may request

from the Internal Revenue Service (“IRS”) a determination as to whether the form of the plan

satisfies the requirements applicable to tax-qualified plans (sec. 401(a)). In order to obtain from

the IRS a determination letter on the qualified status of the plan, the employer must pay a user

fee. The user fee may range from $125 to $1,250, depending upon the scope of the request and

the type and format of the plan.12

Description of Proposal

A small employer (100 or fewer employees) would not be required to pay a user fee for a

determination letter request with respect to the qualified status of a retirement plan that the

employer maintains if the request is made within the first 5 plan years of the plan. The proposal

would apply only to requests by employers for determination letters concerning the qualified

retirement plans they maintain. Therefore, a sponsor of a prototype plan would be required to

pay a user fee for a request for a notification letter, opinion letter, or similar ruling. A small
13 Another proposal would provide that elective deferrals are not subject to the deduction

limits.

-15-

employer that adopts a prototype plan, however, would not be required to pay a user fee for a

determination letter request with respect to the employer’s plan.

Effective Date

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

31, 2000.

7. Deduction limits

Present Law

Employer contributions to one or more qualified retirement plans are deductible subject

to certain limits. In general, the deduction limit depends on the kind of plan. Subject to certain

exceptions, nondeductible contributions are subject to a 10-percent excise tax.

In the case of a defined benefit pension plan or a money purchase pension plan, the

employer generally may deduct the amount necessary to satisfy the minimum funding cost of the

plan for the year. If a defined benefit pension plan has more than 100 participants, the maximum

amount deductible is at least equal to the plan’s unfunded current liabilities.

In some cases, the amount of deductible contributions is limited by compensation. In the

case of a profit-sharing or stock bonus plan, the employer generally may deduct an amount equal

to 15 percent of compensation of the employees covered by the plan for the year.

If an employer sponsors both a defined benefit pension plan and a defined contribution

plan that covers some of the same employees (or a money purchase pension plan and another

kind of defined contribution plan), the total deduction for all plans for a plan year generally is

limited to the greater of (1) 25 percent of compensation or (2) the contribution necessary to meet

the minimum funding requirements of the defined benefit pension plan for the year (or the

amount of the plan’s unfunded current liabilities, in the case of a plan with more than 100

participants).

In the case of an employee stock ownership plan (“ESOP”), principal payments on a loan

used to acquire qualifying employer securities are deductible up to 25 percent of compensation.

For purposes of the deduction limits, employee elective deferral contributions to a

qualified cash or deferred arrangement (“section 401(k) plan”) are treated as employer

contributions and, thus, are subject to the generally applicable deduction limits.13
14 Rev. Rul. 65-295, 1965-2 C.B. 148.

15 Treas. Reg. sec. 1.410(b)-3.

-16-

For purposes of the deduction limits, compensation means the compensation otherwise

paid or accrued during the taxable year to the beneficiaries under the plan, and the beneficiaries

under a profit-sharing or stock bonus plan are the employees who benefit under the plan with

respect to the employer’s contribution.14 An employee who is eligible to make elective deferrals

under a section 401(k) plan is treated as benefitting under the arrangement even if the employee

elects not to defer.15

For purposes of the deduction rules, compensation generally includes only taxable

compensation, and thus does not include salary reduction amounts, such as elective deferrals

under a section 401(k) plan or a tax-sheltered annuity (“section 403(b) annuity”), elective

contributions under a deferred compensation plan of a tax-exempt organization or a State or local

government (“section 457 plan”), and salary reduction contributions under a section 125 cafeteria

plan. For purposes of the contribution limits under section 415, compensation does include such

salary reduction amounts.

Description of Proposal

Under the proposal, the definition of compensation for purposes of the deduction rules

would include salary reduction amounts treated as compensation under section 415. In addition,

the annual limitation on the amount of deductible contributions to a profit-sharing or stock bonus

plan would be increased from 15 percent to 20 percent of compensation of the employees

covered by the plan for the year.

Effective Date

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

8. Option to treat elective deferrals as after-tax contributions

Present Law

A qualified cash or deferred arrangement (“section 401(k) plan”) or a tax-sheltered

annuity (“section 403(b) annuity”) may permit a participant to elect to have the employer make

payments as contributions to the plan or to the participant directly in cash. Contributions made to

the plan at the election of a participant are elective deferrals. Elective deferrals must be

nonforfeitable and are subject to an annual dollar limitation (sec. 402(g)) and distribution

restrictions. In addition, elective deferrals under a section 401(k) plan are subject to special

nondiscrimination rules. Elective deferrals (and earnings attributable thereto) are not includible

in a participant’s gross income until distributed from the plan.
16 Early distributions of converted amounts may also accelerate income inclusion of

converted amounts that are taxable under the 4-year rule applicable to 1998 conversions.

17 A qualified special purpose distribution, as defined under the rules relating to Roth

IRAs, does not qualify as a tax-free distribution from a designated plus contributions account.

-17-

Individuals with adjusted gross income below certain levels generally may make

nondeductible contributions to a Roth IRA and may convert a deductible or nondeductible IRA

into a Roth IRA. Amounts held in a Roth IRA that are withdrawn as a qualified distribution are

not includible in income, nor subject to the additional 10-percent tax on early withdrawals. A

qualified distribution is a distribution that (1) is made after the 5-taxable year period beginning

with the first taxable year for which the individual made a contribution to a Roth IRA, and (2) is

made after attainment of age 59-1/2, is made on account of death or disability, or is a qualified

special purpose distribution (i.e., for first-time homebuyer expenses of up to $10,000). A

distribution from a Roth IRA that is not a qualified distribution is includible in income to the

extent attributable to earnings, and is subject to the 10-percent tax on early withdrawals (unless

an exception applies).16

Description of Proposal

A section 401(k) plan or a section 403(b) annuity would be permitted to include a

“qualified plus 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 plus contributions. 

Designated plus contributions would be elective deferrals that the participant designates as not

excludable from the participant’s gross income.

The annual dollar limitation on a participant’s designated plus contributions would be the

section 402(g) annual limitation on elective deferrals, reduced by the participant’s elective

deferrals that the participant does not designate as designated plus contributions. Designated

plus contributions would be treated as any other elective deferral for purposes of nonforfeitability

requirements and distribution restrictions. Under a section 401(k) plan, designated plus

contributions also would be treated as any other elective deferral for purposes of the special

nondiscrimination requirements.

The plan would be required to establish a separate account, and maintain separate

recordkeeping, for a participant’s designated plus contributions (and earnings allocable thereto).

A qualified distribution from a participant’s designated plus contributions account would not be

includible in the participant’s gross income. A qualified distribution would be a distribution that

is made after the end of a specified nonexclusion period and that is (1) made on or after the date

on which the participant attains age 59-1/2, (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.17 The nonexclusion period would be the 5-year-taxable period beginning with the

earlier of (1) the first taxable year for which the participant made a designated plus contribution
-18-

to any designated plus contribution account established for the participant under the plan, or (2)

if the participant has made a rollover contribution to the designated plus contribution account that

is the source of the distribution from a designated plus contribution account established for the

participant under another plan, the first taxable year for which the participant made a designated

plus contribution to the previously established account.

A distribution from a designated plus contributions account that is a corrective

distribution of an elective deferral (and income allocable thereto) that exceeds the section 402(g)

annual limit on elective deferrals would not be a qualified distribution.

A participant would be permitted to roll over a distribution from a designated plus

contributions account only to another designated plus contributions account or a Roth IRA of the

participant.

The Secretary of the Treasury would be directed to require the plan administrator of each

section 401(k) plan or section 403(b) annuity that permits participants to make designated plus

contributions to make such returns and reports regarding designated plus contributions to the

Secretary, plan participants and beneficiaries, and other persons that the Secretary may designate.

Effective Date

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

B. Enhancing Fairness for Women

1. Additional salary reduction catch-up contributions

Present Law

Elective deferral limitations

Under present law, under certain salary reduction arrangements, an employee may elect to

have the employer make payments as contributions to a plan on behalf of the employee, or to the

employee directly in cash. Contributions made at the election of the employee are called elective

deferrals.

The maximum annual amount of elective deferrals that an individual may make to a

qualified cash or deferred arrangement (a “401(k) plan”), a tax-sheltered annuity (“section 403(b)

annuity”) or a salary reduction simplified employee pension plan (“SEP”) is $10,500 (for 2000). 

The maximum annual amount of elective deferrals that an individual may make to a SIMPLE

plan is $6,000. These limits are indexed for inflation in $500 increments.
18 Another proposal would increase the dollar limit on elective deferrals under such

arrangements.

19 Another proposal would provide that elective contributions are deductible without

regard to the otherwise applicable deduction limits.

-19-

Section 457 plans

The maximum annual deferral under a deferred compensation plan of a State or local

government or a tax-exempt organization (a “section 457 plan”) is the lesser of (1) $8,000 (for

1999) or (2) 33-1/3 percent of compensation. The $8,000 dollar limit is increased for inflation

in $500 increments. Under a special catch-up rule, the section 457 plan may provide that, for one

or more of the participant’s last 3 years before retirement, the otherwise applicable limit is

increased to the lesser of (1) $15,000 or (2) the sum of the otherwise applicable limit for the year

plus the amount by which the limit applicable in preceding years of participation exceeded the

deferrals for that year. 

Description of Proposal

The proposal would provide that the otherwise applicable dollar limit on elective

deferrals under a section 401(k) plan, section 403(b) annuity, or SIMPLE, or deferrals under a

section 457 plan are increased for individuals who have attained age 50 by the end of the year.18

Additional contributions would be permitted to be made by an individual who has attained age

50 before the end of the plan year and with respect to whom no other elective deferrals may

otherwise be made to the plan for the year because of the application of any limitation of the

Code (e.g., the annual limit on elective deferrals) or of the plan. Under the proposal, the

additional amount of elective contributions that would be permitted to be made by an eligible

individual participating in such a plan would be $5,000. This $5,000 amount would in increased

for inflation in $500 increments in 2006 and thereafter.

Catch-up contributions made under the proposal would not be subject to any other

contribution limits and would not be taken into account in applying other contribution limits. In

addition, such contributions would not be subject to applicable nondiscrimination rules.19

An employer would be permitted to make matching contributions with respect to catch-up

contributions. Any such matching contributions would be subject to the normally applicable

rules.

Effective Date

The proposal would be effective for taxable years beginning after December 31, 2000.
-20-

2. Equitable treatment for contributions of employees to defined contribution plans

Present Law

Present law imposes limits on the contributions that may be made to tax-favored

retirement plans. 

Defined contribution plans

In the case of a tax-qualified defined contribution plan, the limit on annual additions that

can be made to the plan on behalf of an employee is the lesser of $30,000 (for 2000) or 25

percent of the employee’s compensation (sec. 415(c)). Annual additions include employer

contributions, including contributions made at the election of the employee (i.e., employee

elective deferrals), after-tax employee contributions, and any forfeitures allocated to the

employee. For this purpose, compensation means taxable compensation of the employee, plus

elective deferrals, and similar salary reduction contributions. A separate limit applies to benefits

under a defined benefit plan.

For years before January 1, 2000, an overall limit applies if an employee is a participant

in both a defined contribution plan and a defined benefit plan of the same employer.

Tax-sheltered annuities

In the case of a tax-sheltered annuity (a “section 403(b) annuity”), the annual contribution

generally cannot exceed the lesser of the exclusion allowance or the section 415(c) defined

contribution limit. The exclusion allowance for a year is equal to 20 percent of the employee’s

includible compensation, multiplied by the employee’s years of service, minus excludable

contributions for prior years under qualified plans, tax-sheltered annuities or section 457 plans of

the employer. 

In addition to this general rule, employees of nonprofit educational institutions, hospitals,

home health service agencies, health and welfare service agencies, and churches may elect

application of one of several special rules that increase the amount of the otherwise permitted

contributions. The election of a special rule is irrevocable; an employee may not elect to have

more than one special rule apply. 

Under one special rule, in the year the employee separates from service, the employee

may elect to contribute up to the exclusion allowance, without regard to the 25 percent of

compensation limit under section 415. Under this rule, the exclusion allowance is determined by

taking into account no more than 10 years of service.

Under a second special rule, the employee may contribute up to the lesser of: (1) the

exclusion allowance; (2) 25 percent of the participant’s includible compensation; or (3) $15,000.
20 Another proposal would increase the defined contribution plan dollar limit.

-21-

Under a third special rule, the employee may elect to contribute up to the section 415(c)

limit, without regard to the exclusion allowance. If this option is elected, then contributions to

other plans of the employer are also taken into account in applying the limit.

For purposes of determining the contribution limits applicable to section 403(b) annuities,

includible compensation means the amount of compensation received from the employer for the

most recent period which may be counted as a year of service under the exclusion allowance. In

addition, includible compensation includes elective deferrals and similar salary reduction

amounts.

Treasury regulations include provisions regarding application of the exclusion allowance

in cases where the employee participates in a section 403(b) annuity and a defined benefit plan. 

The Taxpayer Relief Act of 1997 directed the Secretary of the Treasury to revise these

regulations, effective for years beginning after December 31, 1999, to reflect the repeal of the

overall limit on contributions and benefits.

Section 457 plans

Compensation deferred under an eligible deferred compensation plan of a tax-exempt or

State and local governmental employer (a “section 457 plan”) is not includible in gross income

until paid or made available. In general, the maximum permitted annual deferral under such a

plan is the lesser of (1) $8,000 (in 2000) or (2) 33-1/3 percent of compensation. The $8,000 limit

is increased for inflation in $500 increments.

Description of Proposal

Increase in defined contribution plan limit

The proposal would increase the 25 percent of compensation limitation on annual

additions under a defined contribution plan to 100 percent.20

Conforming limits on tax-sheltered annuities

The proposal would repeal the exclusion allowance applicable to contributions to taxsheltered annuities. Thus, such annuities would be subject to the limits applicable to taxqualified plans. 

The proposal also would direct the Secretary of the Treasury to revise the regulations

relating to the exclusion allowance under section 403(b)(2) to render void the requirement that

contributions to a defined benefit plan be treated as previously excluded amounts for purposes of

the exclusion allowance. For taxable years beginning after December 31, 1999, the regulatory
21 The minimum vesting requirements are also contained in Title I of the Employee

Retirement Income Security Act of 1974, as amended (“ERISA”).

-22-

provisions regarding the exclusion allowance would be applied as if the requirement that

contributions to a defined benefit plan be treated as previously excluded amounts for purposes of

the exclusion allowance were void.

Section 457 plans

The proposal would increase the 33-1/3 percent of compensation limitation on deferrals

under a section 457 plan to 100 percent of compensation.

Effective Date

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

The proposal regarding the regulations under section 403(b)(2) would be effective on the date of

enactment.

3. Faster vesting of employer matching contributions

Present Law

Under present law, a plan is not a qualified plan unless a participant’s employer-provided

benefit vests at least as rapidly as under one of two alternative minimum vesting schedules. A

plan satisfies the first schedule if a participant acquires a nonforfeitable right to 100 percent of

the participant’s accrued benefit derived from employer contributions upon the completion of 5

years of service. A plan satisfies the second schedule if a participant has a nonforfeitable right to

at least 20 percent of the participant’s accrued benefit derived from employer contributions after

3 years of service, 40 percent after 4 years of service, 60 percent after 5 years of service, 80

percent after 6 years of service, and 100 percent after 7 years of service.21

Description of Proposal

The proposal would apply faster vesting schedules to employer matching contributions.

Under the proposal, employer matching contributions would have to vest at least as rapidly as

under one of the following two alternative minimum vesting schedules. A plan would satisfy the

first schedule if a participant acquires a nonforfeitable right to 100 percent of employer matching

contributions upon the completion of 3 years of service. A plan would satisfy the second

schedule if a participant has 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.
-23-

Effective Date

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. The

proposal would not apply to any employee until the employee has an hour of service after the

effective date. In applying the new vesting schedule, service before the effective date would be

taken into account.

4. Simplify and update the minimum distribution rules

Present Law

In general

Minimum distribution rules apply to all types of tax-favored retirement vehicles,

including qualified plans, individual retirement arrangements (“IRAs”), tax-sheltered annuities

(“section 403(b) annuities”), and eligible deferred compensation plans of tax-exempt and State

and local government employers (“section 457 plans”). In general, under these rules, distribution

of minimum benefits must begin no later than the required beginning date. Minimum

distribution rules also apply to benefits payable with respect to a plan participant who has died. 

Failure to comply with the minimum distribution rules results in an excise tax imposed on the

individual plan participant equal to 50 percent of the required minimum distribution not

distributed for the year. The excise tax can be waived if the individual establishes to the

satisfaction of the Secretary that the shortfall in the amount distributed was due to reasonable

error and reasonable steps are being taken to remedy the shortfall.

Distributions prior to the death of the individual

In the case of distributions prior to the death of the plan participant, the minimum

distribution rules are satisfied if either (1) the participant’s entire interest in the plan is distributed

by the required beginning date, or (2) the participant’s interest in the plan is to be distributed (in

accordance with regulations), beginning not later than the required beginning date, over a

permissible period. The permissible periods are (1) the life of the participant, (2) the lives of the

participant and a designated beneficiary, (3) the life expectancy of the participant, or (4) the joint

life and last survivor expectancy of the participant and a designated beneficiary. In calculating

minimum required distributions, life expectancies of the participant and the participant’s spouse

may be recomputed annually.

In the case of qualified plans, tax-sheltered annuities, and section 457 plans, the required

beginning date is the April 1 of the calendar year following the later of (1) the calendar year in

which the employee attains age 70-1/2 or (2) the calendar year in which the employee retires.

However, in the case of a 5-percent owner of the employer, distributions are required to begin no

later than the April 1 of the calendar year following the year in which the 5-percent owner attains
22 State and local government plans and church plans are not required to actuarially

increase benefits that begin after age 70-1/2.

-24-

age 70-1/2. If commencement of benefits is delayed beyond age 70-1/2 from a defined benefit

plan, then the accrued benefit of the employee must be actuarially increased to take into account

the period after age 70-1/2 in which the employee was not receiving benefits under the plan.22 In

the case of distributions from an IRA other than a Roth IRA, the required beginning date is the

April 1 following the calendar year in which the IRA owner attains age 70-1/2. The pre-death

minimum distribution rules do not apply to Roth IRAs.

In general, under proposed regulations, in order to satisfy the minimum distribution rules,

annuity payments under a defined benefit plan must be paid in period payments made at intervals

not longer than one year over a permissible period, and must be nonincreasing, or increase only

as a result of the following: (1) cost-of-living adjustments; (2) cash refunds of employee

contributions; (3) benefit increases under the plan; or (4) an adjustment due to death of the

employee’s beneficiary. In the case of a defined contribution plan, the minimum required

distribution is determined by dividing the employee’s benefit by the applicable life expectancy. 

Distributions after the death of the plan participant

The minimum distribution rules also apply to distributions to beneficiaries of deceased

participants. In general, if the participant dies after minimum distributions have begun, the

remaining interest must be distributed at least as rapidly as under the minimum distribution

method being used as of the date of death. If the participant dies before minimum distributions

have begun, then the entire remaining interest must generally be distributed within 5 years of the

participant’s death. The 5-year rule does not apply if distributions begin within 1 year of the

participant’s death and are payable over the life of a designated beneficiary or over the life

expectancy of a designated beneficiary. A surviving spouse beneficiary is not required to begin

distribution until the date the deceased participant would have attained age 70-1/2. 

Special rules for section 457 plans

Eligible deferred compensation plans of State and local and tax-exempt employers

(“section 457 plans”) are subject to the minimum distribution rules described above. Such plans

are also subject to additional minimum distribution requirements (sec. 457(d)(2)(b)). 

Description of Proposal

Modification of post-death 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. Thus, in general, if

the employee dies before his or her entire interest has been distributed, distribution of the
-25-

remaining interest would be required to be made within 5 years of the date of death, or begin

within one year of the date of death and paid over the life or life expectancy of a designated

beneficiary. In the case of a surviving spouse, distributions would not be required to begin until

the surviving spouse attains age 70-1/2. Minimum distributions that have already begun would

be permitted to be recalculated under the new rule.

Reduction in excise tax

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.

Treasury regulations

The Treasury would be directed to update, simplify and finalize the regulations relating to

the minimum distribution rules. The Treasury would be directed to reflect in the regulations

current life expectancies and to revise the required distribution methods so that, under reasonable

assumptions, the amount of the required distribution does not decrease over time. The

regulations would permit recalculation of distributions for future years to reflect the change in the

regulations, and to permit the election of a new designated beneficiary and method of calculating

life expectancy. The regulations would be effective for years beginning after December 31,

2000.

Section 457 plans

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

457 plans. Thus, such plans would be subject to the same minimum distribution rules applicable

to other types of tax-favored arrangements.

Effective Date

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

5. Clarification of tax treatment of division of section 457 plan benefits upon divorce

Present Law

Under present law, benefits provided under a qualified retirement plan for a participant

may not be assigned or alienated to creditors of the participant, except in very limited

circumstances. One exception to the prohibition on assignment or alienation rule is a qualified

domestic relations order (“QDRO”). A QDRO is a domestic relations order that creates or

recognizes a right of an alternate payee to any plan benefit payable with respect to a participant,

and that meets certain procedural requirements.
23 Treas. Reg. sec. 1.401(k)-1.

-26-

Under present law, a distribution from a governmental plan or a church plan is treated as

made pursuant to a QDRO if it is made pursuant to a domestic relations order that creates or

recognizes a right of an alternate payee to any plan benefit payable with respect to a participant. 

Such distributions are not required to meet the procedural requirements that apply with respect to

distributions from qualified plans.

Under present law, amounts distributed from a qualified plan generally are taxable to the

participant in the year of distribution. However, if amounts are distributed to the spouse (or

former spouse) of the participant by reason of a QDRO, the benefits are taxable to the spouse (or

former spouse). Amounts distributed pursuant to a QDRO to an alternate payee other than the

spouse (or former spouse) are taxable to the plan participant.

 Section 457 of the Internal Revenue Code provides rules for deferral of compensation by

an individual participating in an eligible deferred compensation plan (“section 457 plan”) of a

tax-exempt or State and local government employer. The QDRO rules do not apply to section

457 plans. 

Description of Proposal

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 special rule

applicable to governmental plans and church plans would apply for purposes of determining

whether a distribution is pursuant to a QDRO.

Effective Date

The proposal would be effective for transfers, distributions and payments made after

December 31, 2000. 

6. Modification of safe harbor relief for hardship withdrawals from 401(k) plans

Present Law

Elective deferrals under a qualified cash or deferred arrangement (a “section 401(k)

plan”) may not be distributable prior to the occurrence of one or more specified events. One

event upon which distribution is permitted is the financial hardship of the employee. Applicable

Treasury regulations23 provide that a distribution is made on account of hardship only if the

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

necessary to satisfy the heavy need.
24 A “traditional” IRA refers to IRAs other than Roth IRAs or SIMPLE IRAs. All

references to IRAs refers only to traditional IRAs.

25 An eligible rollover distribution may either be rolled over by the distributee within 60

days of the date of the distribution or, as described below, directly rolled over by the distributing

plan.

-27-

The Treasury regulations provide a safe harbor under which a distribution may be deemed

necessary to satisfy an immediate and heavy financial need. One requirement of this safe harbor

is that the employee be prohibited from making elective contributions and employee

contributions to the plan and all other plans maintained by the employer for at least 12 months

after receipt of the hardship distribution.

Description of Proposal

The Secretary of the Treasury would be directed 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.

Effective Date

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

C. Increasing Portability for Participants

1. Rollovers of retirement plan and IRA distributions

Present Law

In general

Present law permits the rollover of funds from a tax-favored retirement plan to another

tax-favored retirement plan. The rules that apply depend on the type of plan involved. Similarly,

the rules regarding the tax treatment of amounts that are not rolled over depend on the type of

plan involved.

Distributions from qualified plans

Under present law, an “eligible rollover distribution” from a tax-qualified employersponsored retirement plan may be rolled over tax free to a traditional individual retirement

arrangement (“IRA”)24 or another qualified plan.25 An “eligible rollover distribution” means any

distribution to an employee of all or any portion of the balance to the credit of the employee in a
-28-

qualified plan, except the term does not include (1) any distribution which is one of a series of

substantially equal periodic payments made (a) for the life (or life expectancy) of the employee or

the joint lives (or joint life expectancies) of the employee and the employee’s designated

beneficiary, or (b) for a specified period of 10 years or more, (2) any distribution to the extent

such distribution is required under the minimum distribution rules, and (3) certain hardship

distributions. The maximum amount that can be rolled over is the amount of the distribution

includible in income, i.e., after-tax employee contributions cannot be rolled over. Qualified 

plans are not required to accept rollovers.

Distributions from tax-sheltered annuities

Eligible rollover distributions from a tax-sheltered annuity (“section 403(b) annuity”)

may be rolled over into an IRA or another section 403(b) annuity. Distributions from a section

403(b) annuity cannot be rolled over into a tax-qualified plan. Section 403(b) annuities are not

required to accept rollovers.

IRA distributions

Distributions from a traditional IRA, other than minimum required distributions, can be

rolled over into another IRA. In general, distributions from an IRA cannot be rolled over into a

qualified plan or section 403(b) annuity. An exception to this rule applies in the case of so-called

“conduit IRAs.” Under the conduit IRA rule, amounts can be rolled from a qualified plan into an

IRA and then subsequently rolled back to another qualified plan if the amounts in the IRA are

attributable solely to rollovers from a qualified plan. Similarly, an amount may be rolled over

from a section 403(b) annuity to an IRA and subsequently rolled back into a section 403(b)

annuity if the amounts in the IRA are attributable solely to rollovers from a section 403(b)

annuity.

Distributions from section 457 plans

A “section 457 plan” is an eligible deferred compensation plan of a State or local

government or tax-exempt employer that meets certain requirements. In some cases, different

rules apply under section 457 to governmental plans and plans of tax-exempt employers. For

example, governmental section 457 plans are like qualified plans in that plan assets are required

to be held in a trust for the exclusive benefit of plan participants and beneficiaries. In contrast,

benefits under a section 457 plan of a tax-exempt employer are unfunded, like nonqualified

deferred compensation plans of private employers.

Section 457 benefits can be transferred to another section 457 plan. Distributions from a

section 457 plan cannot be rolled over to another section 457 plan, a qualified plan, a section

403(b) annuity, or an IRA.
-29-

Rollovers by surviving spouses

A surviving spouse that receives an eligible rollover distribution may roll over the

distribution into an IRA, but not a qualified plan or section 403(b) annuity.

Direct rollovers and withholding requirements

Qualified plans and section 403(b) annuities are required to provide that a plan participant

has the right to elect that an eligible rollover distribution be directly rolled over to another

eligible retirement plan. If the plan participant does not elect the direct rollover option, then

withholding is required on the distribution at a 20-percent rate.

Notice of eligible rollover distribution

The plan administrator of a qualified plan or a section 403(b) annuity is required to

provide a written explanation of rollover rules to individuals who receive a distribution eligible

for rollover. In general, the notice is to be provided within a reasonable period of time before

making the distribution and is to include an explanation of (1) the provisions under which the

individual may have the distribution directly rolled over to another eligible retirement plan, (2)

the provision that requires withholding if the distribution is not directly rolled over, (3) the

provision under which the distribution may be rolled over within 60 days of receipt, and (4) if

applicable, certain other rules that may apply to the distribution. The Treasury Department has

provided more specific guidance regarding timing and content of the notice.

Taxation of distributions

As is the case with the rollover rules, different rules regarding taxation of benefits apply

to different types of tax-favored arrangements. In general, distributions from a qualified plan,

section 403(b) annuity, or IRA are includible in income in the year received. In certain cases,

distributions from qualified plans are eligible for capital gains treatment and averaging. These

rules do not apply to distributions from another type of plan. Distributions from a qualified plan,

IRA, and section 403(b) annuity generally are subject to an additional 10-percent early

withdrawal tax if made before age 59-1/2. There are a number of exceptions to the early

withdrawal tax. Some of the exceptions apply to all three types of plans, and others apply only to

certain types of plans. For example, the 10-percent early withdrawal tax does not apply to IRA

distributions for educational expenses, but does apply to similar distributions from qualified

plans and section 403(b) annuities. Benefits under a section 457 plan are generally includible in

income when paid or made available. The 10-percent early withdrawal tax does not apply to

section 457 plans.
26 Hardship distributions from governmental section 457 plans would be considered

eligible rollover distributions.

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Description of Proposal

In general

The proposal would provide that eligible rollover distributions from qualified retirement

plans, section 403(b) annuities, and governmental section 457 plans generally could be rolled

over to any of such plans or arrangements.26 Similarly, distributions from an IRA generally

would be permitted to be rolled over into a qualified plan, section 403(b) annuity, or

governmental section 457 plan. The direct rollover and withholding rules would be extended to

distributions from a governmental section 457 plan, and such plans would be required to provide

the written notification regarding eligible rollover distributions. The rollover notice (with respect

to all plans) would be required to include a description of the provisions under which

distributions from the plan to which the distribution is rolled over may be subject to restrictions

and tax consequences different than those applicable to distributions from the distributing plan. 

Qualified plans, section 403(b) annuities, and section 457 plans would not be required to accept

rollovers.

Some special rules would apply in certain cases. A distribution from a qualified plan

would not be eligible for capital gains or averaging treatment if there was a rollover to the plan

that would not have been permitted under present law. Thus, in order to preserve capital gains

and averaging treatment for a qualified plan distribution that is rolled over, the rollover would

have to be made to a “conduit IRA” as under present law, and then rolled back into a qualified

plan. Amounts distributed from a section 457 plan would be subject to the early withdrawal tax

to the extent the distribution consists of amounts attributable to rollovers from another type of

plan. Section 457 plans would be required to separately account for such amounts.

The proposal also would provide that benefits in governmental section 457 plans are

includible in income when paid.

Rollover of after-tax contributions

The proposal would provide that employee after-tax contributions may 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 to be accomplished only through a direct

rollover. In addition, a qualified plan would not be permitted to accept rollovers of after-tax

contributions unless the plan provides separate accounting for such contributions (and earnings

thereon). After-tax contributions (including nondeductible contributions to an IRA) would not

be permitted to be rolled over from an IRA into a qualified plan, tax-sheltered annuity, or section

457 plan.
-31-

In the case of a distribution from a traditional IRA that is rolled over into an eligible

rollover plan that is not an IRA, the distribution would be attributed first to amounts other than

after-tax contributions.

Expansion of spousal rollovers

The proposal would provide that surviving spouses may roll over distributions to a

qualified plan, section 403(b) annuity, or governmental section 457 plan in which the spouse

participates.

Treasury regulations

The Secretary would be directed to prescribe rules necessary to carry out the proposals. 

Such rules may include, for example, reporting requirements and mechanisms to address

mistakes relating to rollovers. It would be anticipated that the IRS would develop forms to assist

individuals who roll over after-tax contributions to an IRA in keeping track of such

contributions. Such forms could, for example, expand Form 8606 - Nondeductible IRAs, to

include information regarding after-tax contributions.

Effective Date

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

2. Waiver of 60-day rule

Present Law

Under present law, amounts received from an IRA or qualified plan may be rolled over

tax free if the rollover is made within 60 days of the date of the distribution. The Secretary does

not have the authority to waive the 60-day requirement.

Description of Proposal

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. 

Effective Date

The proposal would apply to distributions made after December 31, 2000.
27 A similar provision is contained in Title I of ERISA.

28 Treas. Reg. sec. 1.411(d)-4, Q&A-2(a)(3)(i).

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3. Treatment of forms of distribution

Present Law

An amendment of a qualified retirement plan may not decrease the accrued benefit of a

plan participant. An amendment is treated as reducing an accrued benefit if, with respect to

benefits accrued before the amendment is adopted, the amendment has the effect of either (1)

eliminating or reducing an early retirement benefit or a retirement-type subsidy, or (2) except as

provided by Treasury regulations, eliminating an optional form of benefit (sec. 411(d)(6)).27

The prohibition against the elimination of an optional form of benefit applies to plan

mergers, spinoffs, transfers, and transactions amending or having the effect of amending a plan

or plans to transfer plan benefits. For example, if Plan A, a profit-sharing plan that provides for

distribution of benefits in annual installments over ten or twenty years, is merged with Plan B, a

profit-sharing plan that provides for distribution of benefits in annual installments over life

expectancy at the time of retirement, the merged plan must preserve the ten- or twenty-year

installment option with respect to benefits accrued under Plan A as of the date of the merger and

the installments over life expectancy with respect to benefits accrued under Plan B as of the date

of the merger. Similarly, for example, if a participant’s benefit under a defined contribution plan

is transferred to another defined contribution plan maintained by the same or a different

employer, the optional forms of benefit available with respect to the participant’s accrued benefit

under the transferor plan must be preserved.28

Description of Proposal

A defined contribution plan to which benefits are transferred would not be treated as

reducing a participant’s or beneficiary’s accrued benefit even though it does not provide all of the

forms of distribution previously available under the transferor plan if (1) the plan receives from

another defined contribution plan a direct transfer of the participant’s or beneficiary’s benefit

accrued under the transferor plan, or the plan results from a merger or other transaction that has

the effect of a direct transfer (including consolidations of benefits attributable to different

employers within a multiple employer plan), (2) the terms of both the transferor plan and the

transferee plan authorize the transfer, (3) the transfer occurs pursuant to a voluntary election by

the participant or beneficiary that is made after the participant or beneficiary received a notice

describing the consequences of making the election, (4) if the transferor plan provides for an

annuity as the normal form of distribution in accordance with the joint and survivor annuity rules

(sec. 417), the participant’s spouse (if any) consents to the transfer in a manner similar to the

consent required by section 417, and (5) the transferee plan allows the participant or beneficiary
-33-

to receive distribution of his or her benefit under the transferee plan in the form of a single sum

distribution.

In addition, except to the extent provided by the Secretary of the Treasury in regulations,

a defined contribution plan would not be treated as reducing a participant’s accrued benefit if (1)

a plan amendment eliminates a form of distribution previously available under the plan, (2) a

single sum distribution is available to the participant at the same time or times as the form of

distribution eliminated by the amendment, and (3) the single sum distribution is based on the

same or greater portion of the participant’s accrued benefit as the form of distribution eliminated

by the amendment.

Furthermore, the proposal would direct the Secretary of the Treasury to provide by

regulations that the prohibitions against eliminating or reducing an early retirement benefit, a

retirement-type subsidy, or an optional form of benefit not apply to plan amendments that do not

adversely affect the rights of participants in a material manner but that do eliminate or reduce

early retirement benefits, retirement-type subsidies, and optional forms of benefit that create

significant burdens and complexities for a plan and its participants.

It would be intended that the factors to be considered in determining whether an

amendment has a materially adverse effect on a participant would include (1) all of the

participant’s early retirement benefits, retirement-type subsidies, and optional forms of benefits

that are reduced or eliminated by the amendment, (2) the extent to which early retirement

benefits, retirement-type subsidies, and optional forms of benefit in effect with respect to a

participant after the amendment effective date provide rights that are comparable to the rights

that are reduced or eliminated by the plan amendment, (3) the number of years before the

participant attains normal retirement age under the plan (or early retirement age, as applicable),

(4) the size of the participant’s benefit that is affected by the plan amendment, in relation to the

amount of the participant’s compensation, and (5) the number of years before the plan

amendment is effective.

The Secretary would be directed to issue, not later than December 31, 2001, final

regulations under section 411(d)(6), including regulations required under the proposal.

Effective Date

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

the direction to the Secretary would be effective on the date of enactment.
29 Rev. Rul. 79-336, 1979-2 C.B. 187.

-34-

4. Rationalization of restrictions on distributions

Present Law

Elective deferrals under a qualified cash or deferred arrangement (“section 401(k) plan”),

tax-sheltered annuity (“section 403(b) annuity”), or an eligible deferred compensation plan of a

tax-exempt organization or State or local government (“section 457 plan”), may not be

distributable prior to the occurrence of one or more specified events. These permissible

distributable events include “separation from service.” 

A separation from service occurs only upon a participant’s death, retirement, resignation

or discharge, and not when the employee continues on the same job for a different employer as a

result of the liquidation, merger, consolidation or other similar corporate transaction. A

severance from employment occurs when a participant ceases to be employed by the employer

that maintains the plan. Under a so-called “same desk rule,” a participant’s severance from

employment does not necessarily result in a separation from service.29

In addition to separation from service and other events, a section 401(k) plan that is

maintained by a corporation may permit distributions to certain employees who experience a

severance from employment with the corporation that maintains the plan but does not experience

a separation from service because the employee continues on the same job for a different

employer as a result of a corporate transaction. If the corporation disposes of substantially all of

the assets used by the corporation in a trade or business, a distributable event occurs with respect

to the accounts of the employees who continue employment with the corporation that acquires

the assets. If the corporation disposes of its interest in a subsidiary, a distributable event occurs

with respect to the accounts of the employees who continue employment with the subsidiary.

Description of Proposal

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. In addition, the provisions for

distribution from a section 401(k) plan based upon a corporation’s disposition of its assets or a

subsidiary would be repealed; this special rule would no longer be necessary under the proposal.

Effective Date

The proposal would be effective for distributions after December 31, 2000.
-35-

5. Purchase of service credit under governmental pension plans

Present Law

A qualified retirement plan maintained by a State or local government employer may

provide that a participant may make after-tax employee contributions in order to purchase

permissive service credit, subject to certain limits (sec. 415). Permissive service credit means

credit for a period of service recognized by the governmental plan only if the employee

voluntarily contributes to the plan an amount (as determined by the plan) that does not exceed the

amount necessary to fund the benefit attributable to the period of service and that is in addition to

the regular employee contributions, if any, under the plan.

In the case of any repayment of contributions and earnings to a governmental plan with

respect to an amount previously refunded upon a forfeiture of service credit under the plan (or

another plan maintained by a State or local government employer within the same State), any

such repayment is not taken into account for purposes of the section 415 limits on contributions

and benefits. Also, service credit obtained as a result of such a repayment is not considered

permissive service credit for purposes of the section 415 limits.

A participant may not use a rollover or direct transfer of benefits from a tax-sheltered

annuity (“section 403(b) annuity”) or an eligible deferred compensation plan of a tax-exempt

organization of a State or local government (“section 457 plan”) to purchase permissive service

credits or repay contributions and earnings with respect to a forfeiture of service credit.

Description of 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 contributions and earnings with respect

to an amount previously refunded under a forfeiture of service credit under the plan (or another

plan maintained by a State or local government employer within the same State).

Effective Date

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

6. Employers may disregard rollovers for purposes of cash-out rules

Present Law

If an qualified retirement plan participant ceases to be employed by the employer that

maintains the plan, the plan may distribute the participant’s nonforfeitable accrued benefit
30 A similar provision is contained in Title I of ERISA.

31 Other proposals expand the kinds of plans to which benefits may be rolled over.

32 The minimum funding requirements, including the full funding limit, are also

contained in title I of ERISA.

-36-

without the consent of the participant and, if applicable, the participant’s spouse, if the present

value of the benefit does not exceed $5,000. If such an involuntary distribution occurs and the

participant subsequently returns to employment covered by the plan, then service taken into

account in computing benefits payable under the plan after the return need not include service

with respect to which a benefit was involuntarily distributed unless the employee repays the

benefit.30

Generally, a participant may roll over an involuntary distribution from a qualified plan to

an IRA or to another qualified plan.31

Description of Proposal

A plan would be permitted to provide that the present value of a participant’s

nonforfeitable accrued benefit is determined without regard to the portion of such benefit that is

attributable to rollover contributions (and any earnings allocable thereto).

Effective Date

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

D. Strengthening Pension Security and Enforcement

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

contributions to fund termination liability

Present Law

Under present law, defined benefit pension plans are subject to minimum funding

requirements designed to ensure that pension plans have sufficient assets to pay benefits. A

defined benefit pension plan is funded using one of a number of acceptable actuarial cost

methods.

No contribution is required under the minimum funding rules in excess of the full funding

limit. The full funding limit is generally defined as the excess, if any, of (1) the lesser of (a) the

accrued liability under the plan (including normal cost) or (b) 155 percent of the plan’s current

liability, over (2) the value of the plan’s assets (sec. 412(c)(7)).32 In general, current liability is
33 As originally enacted in the Pension Protection Act of 1997, the current liability full

funding limit was 150 percent of current liability. The Taxpayer Relief Act of 1997 increased the

current liability full funding limit to 155 percent in 1999 and 2000, and adopted the scheduled

increases described in the text.

34 The PBGC termination insurance program does not cover plans of professional service

employers that have fewer than 25 participants.

-37-

all liabilities to plan participants and beneficiaries accrued to date, whereas the accrued liability

full funding limit is based on projected benefits. The current liability full funding limit is

scheduled to increase as follows: 160 percent for plan years beginning in 2001 or 2002, 165

percent for plan years beginning in 2003 and 2004, and 170 percent for plan years beginning in

2005 and thereafter.33 In no event is a plan’s full funding limit less than 90 percent of the plan’s

current liability over the value of the plan’s assets.

An employer sponsoring a defined benefit pension plan generally may deduct amounts

contributed to satisfy the minimum funding standard for the plan year. Contributions in excess

of the full funding limit generally are not deductible. Under a special rule, an employer that

sponsors a defined benefit pension plan (other than a multiemployer plan) which has more than

100 participants for the plan year may deduct amounts contributed of up to 100 percent of the

plan’s unfunded current liability.

Description of Proposal

Current liability full funding limit

The proposal would gradually increase and then repeal the current liability full funding

limit. 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.

Deduction for contributions to fund termination liability

The special rule allowing a deduction for unfunded current liability generally would be

extended to all defined benefit pension plans, i.e., the proposal would apply to multiemployer

plans and plans with 100 or fewer participants. The special rule would not apply to plans not

covered by the PBGC termination insurance program.34 

The proposal also would modify the rule by providing that the deduction is for up to 100

percent of unfunded termination liability, determined as if the plan terminated at the end of the

plan year. In the case of a plan with less than 100 participants for the plan year, termination

liability would not include the liability attributable to benefit increases for highly compensated
35 As originally enacted in the Pension Protection Act of 1997, the current liability full

funding limit was 150 percent of current liability. The Taxpayer Relief Act of 1997 increased the

current liability full funding limit to 155 percent in 1999 and 2000, and adopted the scheduled

increases described in the text. Another proposal would gradually increase and then repeal the

current liability full funding limit.

-38-

employees resulting from a plan amendment which was made or became effective, whichever is

later, within the last two years.

Effective Date

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

2. Excise tax relief for sound pension funding

Present Law

Under present law, defined benefit pension plans are subject to minimum funding

requirements designed to ensure that pension plans have sufficient assets to pay benefits. A

defined benefit pension plan is funded using one of a number of acceptable actuarial cost

methods. 

No contribution is required under the minimum funding rules in excess of the full funding

limit. The full funding limit is generally defined as the excess, if any, of (1) the lesser of (a) the

accrued liability under the plan (including normal cost) or (b) 155 percent of the plan’s current

liability, over (2) the value of the plan’s assets (sec. 412(c)(7)). In general, current liability is all

liabilities to plan participants and beneficiaries accrued to date, whereas the accrued liability full

funding limit is based on projected benefits. The current liability full funding limit is scheduled

to increase as follows: 160 percent for plan years beginning in 2001 or 2002, 165 percent for plan

years beginning in 2003 and 2004, and 170 percent for plan years beginning in 2005 and

thereafter.35 In no event is a plan’s full funding limit less than 90 percent of the plan’s current

liability over the value of the plan’s assets.

An employer sponsoring a defined benefit pension plan generally may deduct amounts

contributed to satisfy the minimum funding standard for the plan year. Contributions in excess

of the full funding limit generally are not deductible. Under a special rule, an employer that

sponsors a defined benefit pension plan (other than a multiemployer plan) which has more than

100 participants for the plan year may deduct amounts contributed of up to 100 percent of the

plan’s unfunded current liability. 

Present law also provides that contributions to defined contribution plans are deductible,

subject to certain limitations.
36 Treas. Reg. sec. 1.411(d)-6.

-39-

Subject to certain exceptions, an employer that makes nondeductible contributions to a

plan is subject to an excise tax equal to 10 percent of the amount of the nondeductible

contributions for the year. The 10-percent excise tax does not apply to contributions to certain

terminating defined benefit plans. The 10-percent excise tax also does not apply to contributions 

of up to 6 percent of compensation to a defined contribution plan for employer matching and

employee elective deferrals. 

Description of Proposal

In determining the amount of nondeductible contributions, the employer would be

permitted to elect not to take into account contributions to a defined benefit pension plan except

to the extent they exceed the accrued liability full funding limit. Thus, 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. An employer making such an election for a year

would not be permitted to take advantage of the present-law exceptions for certain terminating

plans and certain contributions to defined contribution plans.

Effective Date

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

3. Notice of significant reduction in plan benefit accruals

Present Law

Section 204(h) of Title I of ERISA provides that a defined benefit pension plan or a

money purchase pension plan may not be amended so as to provide for a significant reduction in

the rate of future benefit accrual, unless, after adoption of the plan amendment and not less than

15 days before the effective date of the plan amendment, the plan administrator provides a

written notice (“section 204(h) notice”), setting forth the plan amendment (or a summary of the

amendment written in a manner calculated to be understood by the average plan participant) and

its effective date. The plan administrator must provide the section 204(h) notice to each plan

participant, each alternate payee under an applicable qualified domestic relations order

(“QDRO”), and each employee organization representing participants in the plan. The applicable

Treasury regulations36 provide, however, that a plan administrator need not provide the section

204(h) notice to any participant or alternate payee whose rate of future benefit accrual is

reasonably expected not to be reduced by the amendment, nor to an employee organization that

does not represent a participant to whom the section 204(h) notice must be provided. In addition,

the regulations provide that the rate of future benefit accrual is determined without regard to

optional forms of benefit, early retirement benefits, retirement-type subsidiaries, ancillary

benefits, and certain other rights and features.
-40-

A covered amendment generally will not become effective with respect to any

participants and alternate payees whose rate of future benefit accrual is reasonably expected to be

reduced by the amendment but who do not receive a section 204(h) notice. An amendment will

become effective with respect to all participants and alternate payees to whom the section 204(h)

notice was required to be provided if the plan administrator (1) has made a good faith effort to

comply with the section 204(h) notice requirements, (2) has provided a section 204(h) notice to

each employee organization that represents any participant to whom a section 204(h) notice was

required to be provided, (3) has failed to provide a section 204(h) notice to no more than a de

minimis percentage of participants and alternate payees to whom a section 204(h) notice was

required to be provided, and (4) promptly upon discovering the oversight, provides a section

204(h) notice to each omitted participant and alternate payee.

The Internal Revenue Code does not require any notice concerning a plan amendment that

provides for a significant reduction in the rate of future benefit accrual.

Description of Proposal

The proposal would add to the Internal Revenue Code a requirement that the plan

administrator of a defined benefit pension plan or a money purchase pension plan with more than

100 participants furnish a written notice concerning a plan amendment that provides for a

significant reduction in the rate of future benefit accrual. The plan administrator would be

required to provide in this notice, in a manner calculated to be understood by the average plan

participant, sufficient information (as defined in Treasury regulations) to allow participants to

understand the effect of the amendment.

The notice requirement would not apply to governmental plans or church plans with

respect to which an election to have the qualified plan participation, vesting, and funding rules

apply has not been made (sec. 410(d)).

The plan administrator would be required to provide this notice to each affected

participant, each affected alternate payee, and each employee organization representing affected

participants. For purposes of the proposal, an affected participant or alternate payee would be a

participant or alternate payee to whom the significant reduction in the rate of future benefit

accrual is reasonably expected to apply. 

Except to the extent provided by Treasury regulations, the plan administrator would be

required to provide the notice within a reasonable time before the effective date of the plan

amendment.

The proposal would impose on a plan administrator that fails to comply with the notice

requirement an excise tax equal to $100 per day per omitted participant and alternate payee. For

failures due to reasonable cause and not to willful neglect, the total excise tax imposed during a

taxable year of the employer would not exceed $500,000. Furthermore, in the case of a failure
37 Another proposal increases this limit to 100 percent of compensation.

-41-

due to reasonable cause and not to willful neglect, the Secretary of the Treasury would be

authorized to waive the excise tax to the extent that the payment of the tax would be excessive

relative to the failure involved.

Effective Date

The proposal would be effective for plan amendments taking effect on or after the date of

enactment. The period for providing any notice required under the proposal would not end

before the last day of the 3-month period following the date of enactment. Prior to the issuance

of Treasury regulations, a plan would be treated as meeting the requirements of the proposal if

the plan makes a good faith effort to comply with such requirements. 

4. Modifications to section 415 limits for multiemployer plans

Present Law

Under present law, limits apply to contributions and benefits under qualified plans (sec.

415). The limits on contributions and benefits under qualified plans are based on the type of

plan.

Under a defined benefit plan, the maximum annual benefit payable at retirement is

generally the lesser of (1) 100 percent of average compensation for the highest three years, or (2)

$135,000 (for 2000). The dollar limit is adjusted for cost-of-living increases in $5,000

increments. The dollar limit is reduced in the case of retirement before the social security

retirement age and increases in the case of retirement after the social security retirement age. 

A special rule applies to governmental defined benefit plans. In the case of such plans,

the defined benefit dollar limit is reduced in the case of retirement before age 62 and increased in

the case of retirement after age 65. In addition, there is a floor on early retirement benefits. 

Pursuant to this floor, the minimum benefit payable at age 55 is $75,000.

In the case of a defined contribution plan, the limit on annual is additions if the lesser of

(1) 25 percent of compensation37 or (2) $30,000 (for 2000). In applying the limits on

contributions and benefits, plans of the same employer are aggregated.

Description of Proposal

Under the proposal, the 100 percent of compensation defined benefit plan limit would not

apply to multiemployer plans. In addition, except in applying the defined benefit plan dollar

limitation and the limitations on annual additions, multiemployer plans would not be aggregated

with other plans maintained by an employer contributing to the multiemployer plan.
38 A prohibited allocation would not result in disqualification of the plan.

-42-

Effective Date

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

5. Prohibited allocations of stock in an S Corporation ESOP

Present Law

The Small Business Job Protection Act of 1996 allowed qualified retirement plan trusts

described in section 401(a) to own stock in an S corporation. That Act treated the plan’s share of

the S corporation’s income (and gain on the disposition of the stock) as includible in full in the

trust’s unrelated business taxable income (“UBTI”).

The Tax Relief Act of 1997 repealed the provision treating items of income or loss of an

S corporation as UBTI in the case of an employee stock ownership plan (“ESOP”). Thus, the

income of an S corporation allocable to an ESOP is not subject to current taxation.

Present law provides a deferral of income on the sales of certain employer securities to an

ESOP (sec. 1042). A 50-percent excise tax is imposed on certain prohibited allocations of

securities acquired by an ESOP in a transaction to which section 1042 applies. In addition, such

allocations are currently includible in the gross income of the individual receiving the prohibited

allocation.

Description of Proposal

In general

Under the proposal, if there is a nonallocation year with respect to an ESOP maintained

by an S corporation: (1) the amount allocated in a prohibited allocation to an individual who is a

disqualified person would be treated as distributed to such individual (i.e., the value of the

prohibited allocation would be includible in the gross income of the individual receiving the

prohibited allocation); (2) an excise tax would be imposed on the S corporation equal to 50

percent of the amount involved in a prohibited allocation; and (3) an excise tax would be

imposed on the S corporation with respect to any synthetic equity owned by a disqualified

person.38

It is expected that the proposal would limit the establishment of ESOPs by S corporations

to those that provide broad-based employee coverage and benefit rank-and-file employees as well

as highly compensated employees and historical owners.
39 A family member of a member of a “deemed 20-percent shareholder group” with

deemed owned shares would also be treated as a disqualified person.

40 These attribution rules would also apply to stock treated as owned by reason of the

ownership of synthetic equity.

41 As under section 318, an individual’s spouse would not be treated as a member of the

individual’s family if the spouses are legally separated.

-43-

Definition of nonallocation year

A nonallocation year would mean any plan year of an ESOP holding shares in an S

corporation if, at any time during the plan year, disqualified persons own at least 50 percent of

the number of outstanding shares of the S corporation.

A person would be a disqualified person if the person is either (1) a member of a “deemed

20-percent shareholder group” or (2) a “deemed 10-percent shareholder.” A person would be a

member of a “deemed 20-percent shareholder group” if the aggregate number of deemed-owned

shares of the person and his or her family members is at least 20 percent of the number of

deemed-owned shares of stock in the S corporation.39 A person would be a deemed 10-percent

shareholder if the person is not a member of a deemed 20-percent shareholder group and the

number of the person’s deemed-owned shares is at least 10 percent of the number of deemedowned shares of stock of the corporation.

In general, “deemed-owned shares” would mean: (1) stock allocated to the account of an

individual under the ESOP, and (2) an individual’s share of unallocated stock held by the ESOP. 

An individual’s share of unallocated stock held by an ESOP would be determined in the same

manner as the most recent allocation of stock under the terms of the plan.

For purposes of determining whether there is a nonallocation year, ownership of stock

would generally be attributed under the rules of section 318,40 except that: (1) the family

attribution rules would be modified to include certain other family members, as described below,

(2) option attribution would not apply (but instead special rules relating to synthetic equity

described below would apply), and (3) “deemed-owned shares” held by the ESOP would be

treated as held by the individual with respect to whom they are deemed owned.

Under the proposal, family members of an individual would include (1) the spouse41 of

the individual, (2) an ancestor or lineal descendant of the individual or his or her spouse, (3) a

sibling of the individual (or the individual’s spouse) and any lineal descendant of the brother or

sister, and (4) the spouse of any person described in (2) or (3).

The proposal contains special rules applicable to synthetic equity interests. Except to the

extent provided in regulations, the stock on which a synthetic equity interest is based would be
42 The provisions relating to synthetic equity would not modify the rules relating to S

corporations, e.g., the circumstances in which options or similar interests are treated as creating a

second class of stock.

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treated as outstanding stock of the S corporation and as deemed-owned shares of the person

holding the synthetic equity interest if such treatment would result in the treatment of any person

as a disqualified person or the treatment of any year as a nonallocation year. Thus, for example,

disqualified persons for a year would include those individuals who are disqualified persons

under the general rule (i.e., treating only those shares held by the ESOP as deemed-owned shares)

and those individuals who are disqualified individuals if synthetic equity interests are treated as

deemed-owned shares.

“Synthetic equity” would mean any stock option, warrant, restricted stock, deferred

issuance stock right, or similar interest that gives the holder the right to acquire or receive stock

of the S corporation in the future. Except to the extent provided in regulations, synthetic equity

also would include a stock appreciation right, phantom stock unit, or similar right to a future cash

payment based on the value of such stock or appreciation in such value.42

Ownership of synthetic equity would be attributed in the same manner as stock would be

attributed under the proposal (as described above). In addition, ownership of synthetic equity

would be attributed under the rules of section 318(a)(2) and (3) in the same manner as stock.

Definition of prohibited allocation

An ESOP of an S corporation would be required to provide that no portion of the assets

of the plan attributable to (or allocable in lieu of) S corporation stock may, during a nonallocation

year, accrue (or be allocated directly or indirectly under any qualified plan of the S corporation)

for the benefit of a disqualified person. A “prohibited allocation” would refer to violation of this

provision. A prohibited allocation would occur, for example, if income on S corporation stock

held by an ESOP were allocated to the account of an individual who is a disqualified person.

Application of excise tax

In the case of a prohibited allocation, the S corporation would be liable for an excise tax

equal to 50 percent of the amount of the allocation. For example, if S corporation stock were

allocated in a prohibited allocation, the excise tax would be equal to 50 percent of the fair market

value of such stock.

A special rule would apply in the case of the first nonallocation year, regardless of

whether there is a prohibited allocation. In that year, the excise tax also would apply to the fair

market value of the deemed-owned shares of any disqualified person held by the ESOP, even

though those shares are not allocated to the disqualified person in that year.
43 Prop. reg. sec. 1.412(c)(9)-1(b)(1).

-45-

As mentioned above, the S corporation would also be liable for an excise tax with respect

to any synthetic equity interest owned by any disqualified person in a nonallocation year. The

excise tax would be 50 percent of the value of the shares on which synthetic equity is based.

Treasury regulations

The Treasury Department would be given the authority to prescribe such regulations as

may be necessary to carry out the purposes of the proposal.

Effective Date

The proposal generally would 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

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

E. Reducing Regulatory Burdens

1. Modification of timing of plan valuations

Present Law

Under present law, plan valuations are generally required annually for plans subject to the

minimum funding rules. Under proposed Treasury regulations, except as provided by the

Commissioner, the valuation must be as of a date within the plan year to which the valuation

refers or within the month prior to the beginning of that year.43

Description of Proposal

The proposal would incorporate into the statute the proposed regulation regarding the

date of valuations. The proposal would also provide, as an exception to this general rule, that the

valuation date with respect to a plan year may be any date within the immediately preceding plan

year if, as of such date, plan assets are not less than 125 percent of the plan's current liability. 

Information determined as of such date would be required to be adjusted actuarially, in

accordance with Treasury regulations, to reflect significant differences in plan participants. An

election to use a prior plan year valuation date, once made, could only be revoked with the

consent of the Secretary. 

Effective Date

The proposal would be effective for plan years beginning after December 31, 2000.
44 An employee includes a self-employed individual.

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2. ESOP dividends may be reinvested without loss of dividend deduction

Present Law

An employer is entitled to deduct certain dividends paid in cash during the employer’s

taxable year with respect to stock of the employer that is held by an employee stock ownership

plan (“ESOP”). The deduction is allowed with respect to dividends that, in accordance with plan

provisions, are (1) paid in cash directly to the plan participants or their beneficiaries, (2) paid to

the plan and subsequently distributed to the participants or beneficiaries in cash no later than 90

days after the close of the plan year in which the dividends are paid to the plan, or (3) used to

make payments on loans (including payments of interest as well as principal) that were used to

acquire the employer securities (whether or not allocated to participants) with respect to which

the dividend is paid.

Description of Proposal

In addition to the deductions permitted under present law for dividends paid with respect

to employer securities that are held by an ESOP, an employer would be entitled to deduct

dividends that, at the election of plan participants or their beneficiaries, are (1) payable in cash

directly to plan participants or beneficiaries, (2) paid to the plan and subsequently distributed to

the participants or beneficiaries in cash no later than 90 days after the close of the plan year in

which the dividends are paid to the plan, or (3) paid to the plan and reinvested in qualifying

employer securities.

Effective Date

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

3. Repeal transition rule relating to certain highly compensated employees

Present Law

Under present law, for purposes of the rules relating to qualified plans, a highly

compensated employee is generally defined as an employee44 who (1) was a 5-percent owner of

the employer at any time during the year or the preceding year or (2) either (a) had compensation

for the preceding year in excess of $85,000 (for 2000) or (b) at the election of the employer, had

compensation in excess of $85,000 for the preceding year and was in the top 20 percent of

employees by compensation for such year. 

Under a rule enacted in the Tax Reform Act of 1986, a special definition of highly

compensated employee applies for purposes of the nondiscrimination rules relating to qualified
45 Treas. Reg. sec. 1.410(b)-6(g).

-47-

cash or deferred arrangements (“section 401(k) plans”) and matching contributions. This special

definition applies to an employer incorporated on December 15, 1924, that meets certain specific

requirements.

Description of Proposal

The proposal would repeal the special definition of highly compensated employee under

the Tax Reform Act of 1986. Thus, the present-law definition would apply.

Effective Date

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

4. Employees of tax-exempt entities

Present Law

The Tax Reform Act of 1986 provided that nongovernmental tax-exempt employers were

not permitted to maintain a qualified cash or deferred arrangement (“section 401(k) plan”). This

prohibition was repealed, effective for years beginning after December 31, 1996, by the Small

Business Job Protection Act of 1996.

 Treasury regulations provide that, in applying the nondiscrimination rules to a section

401(k) plan (or a section 401(m) plan that is provided under the same general arrangement as the

section 401(k) plan), the employer may treat as excludable those employees of a tax-exempt

entity who could not participate in the arrangement due to the prohibition on maintenance of a

section 401(k) plan by such entities. Such employees may be disregarded only if more than 95

percent of the employees who could participate in the section 401(k) plan benefit under the plan

for the plan year.45

Tax-exempt charitable organizations may maintain a tax-sheltered annuity (a “section

403(b) annuity”) that allows employees to make salary reduction contributions.

Description of Proposal

The Treasury Department would be directed to revise its regulations under section 410(b)

to provide that 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, or a section 401(m) plan that is provided under the

same general arrangement as the section 401(k) plan of the employer if (1) no employee of such

tax-exempt entity is eligible to participate in the section 401(k) or 401(m) plan and (2) at least 95
46 The exclusion does not apply with respect to graduate-level courses.

-48-

percent of the employees who are not employees of the charitable employer are eligible to

participate in such section 401(k) plan or section 401(m) plan.

The revised regulations would be effective for years beginning after December 31, 1996.

Effective Date

The proposal would be effective on the date of enactment.

5. Treatment of employer-provided retirement advice

Present Law

Under present law, certain employer-provided fringe benefits are excludable from gross

income (sec. 132) and wages for employment tax purposes. These excludable fringe benefits

include working condition fringe benefits and de minimis fringes. In general, a working

condition fringe benefit is any property or services provided by an employer to an employee to

the extent that, if the employee paid for such property or services, such payment would be

allowable as a deduction as a business expense. A de minimis fringe benefit is any property or

services provided by the employer the value of which, after taking into account the frequency

with which similar fringes are provided, is so small as to make accounting for it unreasonable or

administratively impracticable.

In addition, if certain requirements are satisfied, up to $5,250 annually of employerprovided educational assistance is excludable from gross income (sec. 127) and wages. This

exclusion expires with respect to courses beginning after May 31, 2000.46 Education not

excludable under section 127 may be excludable as a working condition fringe.

There is no specific exclusion under present law for employer-provided retirement

planning services. However, such services may be excludable as employer-provided educational

assistance or a fringe benefit.

Description of Proposal

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

an employer maintaining a qualified plan would be excludable from income and wages. The

exclusion would not apply with respect to highly compensated employees unless the services are

available on substantially the same terms to each member of the group of employees normally

provided education and information regarding the employer’s qualified plan. The exclusion

would be intended to allow employers to provide advice and information regarding retirement

planning. The exclusion would not be limited to information regarding the qualified plan, and,
47 Treas. Reg. sec. 301.6058-1(a).

-49-

thus, for example, would apply to advice and information regarding retirement income planning

for an individual and his or her spouse and how the employer’s plan fits into the individual’s

overall retirement income plan. On the other hand, the exclusion would not be intended to apply

to services that may be related to retirement planning, such as tax preparation, accounting, legal

or brokerage services.

Effective Date

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

31, 2000.

6. Reporting simplification

Present Law

A plan administrator of a pension, annuity, stock bonus, profit-sharing or other funded

plan of deferred compensation generally must file with the Secretary of the Treasury an annual

return for each plan year containing certain information with respect to the qualification,

financial condition, and operation of the plan. Title I of ERISA also may require the plan

administrator to file annual reports concerning the plan with the Department of Labor and the

Pension Benefit Guaranty Corporation (“PBGC”). The plan administrator must use the Form

5500 series as the format for the required annual return.47 The Form 5500 series annual

return/report, which consists of a primary form and various schedules, includes the information

required to be filed with all three agencies. The plan administrator satisfies the reporting

requirement with respect to each agency by filing the Form 5500 series annual return/report with

the Internal Revenue Service (“IRS”), which forwards the form to the Department of Labor and

the PBGC.

The Form 5500 series consists of 3 different forms: Form 5500, Form 5500-C/R, and

Form 5500-EZ. Form 5500 is the most comprehensive of the forms and requires the most

detailed financial information. Form 5500-C/R requires less information than Form 5500, and

Form 5500-EZ, which consists of only 1 page, is the simplest of the forms.

The size of the plan determines which form a plan administrator must file. If the plan has

more than 100 participants at the beginning of the plan year, the plan administrator generally

must file Form 5500. If the plan has fewer than 100 participants at the beginning of the plan

year, the plan administrator generally may file Form 5500-C/R. A plan administrator generally

may file Form 5500-EZ if (1) the only participants in the plan are 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), (2) the plan is not aggregated with another plan in order to

satisfy the minimum coverage requirements of section 410(b), (3) the employer is not a member
48 Rev. Proc. 98-22, 1998-12 I.R.B. 11, as modified by Rev. Proc. 99-13, 1999-5, I.R.B.

52.

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of a related group of employers, and (4) the employer does not receive the services of leased

employees. If the plan satisfies the eligibility requirements for Form 5500-EZ and the total value

of the plan assets as of the end of the plan year and all prior plan years does not exceed $100,000,

the plan administrator is not required to file a return.

Description of Proposal

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 (1) covers less than 25

employees on the first day of the plan year, (2) is not aggregated with another plan in order to

satisfy the minimum coverage requirements of section 410(b), (3) is maintained by an employer

that is not a member of a related group of employers, and (4) is maintained by an employer that

does not receive the services of leased employees.

In addition, the Secretary would be directed to modify the annual return filing

requirements with respect to plans that satisfy the eligibility requirements for Form 5500-EZ to

provide that if the total value of the plan assets of such a plan as of the end of the plan year and

all prior plan years does not exceed $250,000, the plan administrator is not required to file a

return.

Effective Date

The proposal would be effective on the date of enactment.

7. Improvement to Employee Plans Compliance Resolution System

Present Law

A retirement plan that is intended to be a tax-qualified plan provides retirement benefits

on a tax-favored basis if the plan satisfies all of the requirements of section 401(a). Similarly, an

annuity that is intended to be a tax-sheltered annuity provides retirement benefits on a taxfavored basis if the program satisfies all of the requirements of section 403(b). Failure to satisfy

all of the applicable requirements of section 401(a) or section 403(b) may disqualify a plan or

annuity for the intended tax-favored treatment.

The Internal Revenue Service (“IRS”) has established the Employee Plans Compliance

Resolution System (“EPCRS”), which is a comprehensive system of correction programs for

sponsors of retirement plans and annuities that are intended, but have failed, to satisfy the

requirements of section 401(a) and section 403(b), as applicable.48 EPCRS permits employers to
-51-

correct compliance failures and continue to provide their employees with retirement benefits on a

tax-favored basis.

The IRS has designed EPCRS to (1) encourage operational and formal compliance, (2)

promote voluntary and timely correction of compliance failures, (3) provide sanctions for

compliance failures identified on audit that are reasonable in light of the nature, extent, and

severity of the violation, (4) provide consistent and uniform administration of the correction

programs, and (5) permit employers to rely on the availability of EPCRS in taking corrective

actions to maintain the tax-favored status of their retirement plans and annuities.

The basic elements of the programs that comprise EPCRS are self-correction, voluntary

correction with IRS approval, and correction on audit. The Administrative Policy Regarding

Self-Correction (“APRSC”) permits a plan sponsor that has established compliance practices to

correct certain insignificant failures at any time (including during an audit), and certain

significant failures within a 2-year period, without payment of any fee or sanction. The

Voluntary Compliance Resolution (“VCR”) program, the Walk-In Closing Agreement Program

(“Walk-In CAP”), and the Tax-Sheltered Annuity Voluntary Correction (“TVC”) program permit

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.

The IRS has expressed its intent that EPCRS will be updated and improved periodically

in light of experience and comments from those who use it.

Description of Proposal

The Secretary of the Treasury would be directed 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.

Effective Date

The proposal would be effective on the date of enactment.

8. Repeal of the multiple use test
-52-

Present Law

Elective deferrals under a qualified cash or deferred arrangement (“section 401(k) plan”)

are subject to a special annual nondiscrimination test (“ADP test”). The ADP test compares the

actual deferral percentages (“ADPs”) of the highly compensated employee group and the

nonhighly compensated employee group. The ADP for each group generally is the average of the

deferral percentages separately calculated for the employees in the group who are eligible to

make elective deferrals for all or a portion of the relevant plan year. Each eligible employee’s

deferral percentage generally is the employee’s elective deferrals for the year divided by the

employee’s compensation for the year.

The plan generally satisfies the ADP test if the ADP of the highly compensated employee

group for the current plan year is either (1) not more than 125 percent of the ADP of the

nonhighly compensated employee group for the prior plan year, or (2) not more than 200 percent

of the ADP of the nonhighly compensated employee group for the prior plan year and not more

than 2 percentage points greater than the ADP of the nonhighly compensated employee group for

the prior plan year.

Employer matching contributions and after-tax employee contributions under a defined

contribution plan also are subject to a special annual nondiscrimination test (“ACP test”). The

ACP test compares the actual deferral percentages (“ACPs”) of the highly compensated

employee group and the nonhighly compensated employee group. The ACP for each group

generally is the average of the contribution percentages separately calculated for the employees in

the group who are eligible to make after-tax employee contributions or who are eligible for an

allocation of matching contributions for all or a portion of the relevant plan year. Each eligible

employee’s contribution percentage generally is the employee’s aggregate after-tax employee

contributions and matching contributions for the year divided by the employee’s compensation

for the year.

The plan generally satisfies the ACP test if the ACP of the highly compensated employee

group for the current plan year is either (1) not more than 125 percent of the ACP of the

nonhighly compensated employee group for the prior plan year, or (2) not more than 200 percent

of the ACP of the nonhighly compensated employee group for the prior plan year and not more

than 2 percentage points greater than the ACP of the nonhighly compensated employee group for

the prior plan year.

For any year in which (1) at least one highly compensated employee is eligible to

participate in an employer’s plan or plans that are subject to both the ADP test and the ACP test,

(2) the plan subject to the ADP test satisfies the ADP test but the ADP of the highly compensated

employee group exceeds 125 percent of the ADP of the nonhighly compensated employee group,

and (3) the plan subject to the ACP test satisfies the ACP test but the ACP of the highly

compensated employee group exceeds 125 percent of the ACP of the nonhighly compensated

employee group, an additional special nondiscrimination test (“multiple use test”) applies to the
-53-

elective deferrals, employer matching contributions, and after-tax employee contributions. The

plan or plans generally satisfy the multiple use test if the sum of the ADP and the ACP of the

highly compensated employee group does not exceed the greater of (1) the sum of (A) 1.25 times

the greater of the ADP or the ACP of the nonhighly compensated employee group, and (B) 2

percentage points plus (but not more than 2 times) the lesser of the ADP or the ACP of the

nonhighly compensated employee group, or (2) the sum of (A) 1.25 times the lesser of the ADP

or the ACP of the nonhighly compensated employee group, and (B) 2 percentage points plus (but

not more than 2 times) the greater of the ADP or the ACP of the nonhighly compensated

employee group.

Description of Proposal

The proposal would repeal the multiple use test.

Effective Date

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

9. Flexibility in nondiscrimination and line of business rules

Present Law

A plan is not a qualified retirement plan if the contributions or benefits provided under

the plan discriminate in favor of highly compensated employees (sec. 401(a)(4)). The applicable

Treasury regulations set forth the exclusive rules for determining whether a plan satisfies the

nondiscrimination requirement. These regulations state that the form of the plan and the effect of

the plan in operation determine whether the plan is nondiscriminatory and that intent is

irrelevant.

Similarly, a plan is not a qualified retirement plan if the plan does not benefit a minimum

number of employees (sec. 410(b)). A plan satisfies this minimum coverage requirement if and

only if it satisfies one of the tests specified in the applicable Treasury regulations. If an employer

is treated as operating separate lines of business, the employer may apply the minimum coverage

requirements to a plan separately with respect to the employees in each separate line of business

(sec. 414(r)). Under a so-called “gateway” requirement, however, the plan must benefit a

classification of employees that does not discriminate in favor of highly compensated employees

in order for the employer to apply the minimum coverage requirements separately for the

employees in each separate line of business. A plan satisfies this gateway requirement only if it

satisfies one of the tests specified in the applicable Treasury regulations.

Description of Proposal
-54-

The Secretary of the Treasury would be directed to modify, on or before December 31,

2000, the existing regulations issued under section 414(r) in order to expand (to the extent that

the Secretary may determine to be appropriate) the ability of a plan to demonstrate compliance

with the line of business requirements based upon the facts and circumstances surrounding the

design and operation of the plan, even though the plan is unable to satisfy the mechanical tests

currently used to determine compliance.

The Secretary of the Treasury would be directed to provide by regulation applicable to

years beginning after December 31, 2000, that a plan is deemed to satisfy the nondiscrimination

requirements of section 401(a)(4) if the plan satisfies the pre-1994 facts and circumstances test,

satisfies the conditions prescribed by the Secretary to appropriately limit the availability of such

test, and is submitted to the Secretary for a determination of whether it satisfies such test (to the

extent provided by the Secretary).

Similarly, a plan would comply with the minimum coverage requirement of section

410(b) if the plan satisfies the pre-1989 coverage rules, is submitted to the Secretary for a

determination of whether it satisfies the pre-1989 coverage rules (to the extent provided by the

Secretary), and satisfies conditions prescribed by the Secretary by regulation that appropriately

limit the availability of the pre-1989 coverage rules.

Effective Date

The proposal would be effective on the date of enactment.

10. Extension to all governmental plans of moratorium on application of certain

nondiscrimination rules applicable to State and local government plans

Present Law

A qualified retirement plan maintained by a State or local government is exempt from the

rules concerning nondiscrimination (sec. 401(a)(4)) and minimum participation (sec. 401(a)(26)). 

All other governmental plans are not exempt from the nondiscrimination and minimum

participation rules.

Description of Proposal

The proposal would exempt all governmental plans (as defined in sec. 414(d)) from the

nondiscrimination and minimum participation rules.

Effective Date

The proposal would be effective for plan years beginning after December 31, 2000.
49 Similar provisions are contained in Title I of ERISA.

-55-

11. Notice and consent period regarding distributions

Present Law

Notice and consent requirements apply to certain distributions from qualified retirement

plans. These requirements relate to the content and timing of information that a plan must

provide to a participant prior to a distribution, and to whether the plan must obtain the

participant’s consent to the distribution. The nature and extent of the notice and consent

requirements applicable to a distribution depend upon the value of the participant’s vested

accrued benefit and whether the joint and survivor annuity requirements (sec. 417) apply to the

participant.49

If the present value of the participant’s vested accrued benefit exceeds $5,000, the plan

may not distribute the participant’s benefit without the written consent of the participant. The

participant’s consent to a distribution is not valid unless the participant has received from the

plan a notice that contains a written explanation of (1) the material features and the relative

values of the optional forms of benefit available under the plan, (2) the participant’s right, if any,

to have the distribution directly transferred to another retirement plan or IRA, and (3) the rules

concerning the taxation of a distribution. If the joint and survivor annuity requirements apply to

the participant, this notice also must contain a written explanation of (1) the terms and conditions

of the qualified joint and survivor annuity (“QJSA”), (2) the participant’s right to make, and the

effect of, an election to waive the QJSA, (3) the rights of the participant’s spouse with respect to

a participant’s waiver of the QJSA, and (4) the right to make, and the effect of, a revocation of a

waiver of the QJSA. The plan generally must provide this notice to the participant no less than

30 and no more than 90 days before the date distribution commences.

If the participant’s vested accrued benefit does not exceed $5,000, the terms of the plan

may provide for distribution without the participant’s consent. The plan generally is required,

however, to provide to the participant a notice that contains a written explanation of (1) the

participant’s right, if any, to have the distribution directly transferred to another retirement plan

or IRA, and (2) the rules concerning the taxation of a distribution. The plan generally must

provide this notice to the participant no less than 30 and no more than 90 days before the date

distribution commences.

Description of Proposal

A qualified retirement plan would be required to provide the applicable distribution

notice no less than 30 days and no more than 180 days before the date distribution commences. 

The Secretary of the Treasury would be directed to modify the applicable regulations to reflect

the extension of the notice period to 180 days and to provide that the description of a
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participant’s right, if any, to defer receipt of a distribution shall also describe the consequences of

failing to defer such receipt.

Effective Date

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

F. Provisions Relating to Plan Amendments

Present Law

Plan amendments to reflect amendments to 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.

Description of 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 last day of the first plan year beginning on or after January 1, 2005. The delayed

amendment date would not apply to any amendment required or permitted by the proposal unless,

during the period beginning on the date the applicable section of the proposal takes effect and

ending on the delayed amendment date, (1) the plan or annuity contract is operated as if such

amendment were in effect, and (2) such amendment applies retroactively for such period.

Effective Date

The proposal would be effective on the date of enactment.