DESCRIPTION OF THE 

CHAIRMAN’S MODIFICATION OF THE 

“RETIREMENT ENHANCEMENT AND SAVINGS ACT OF 2016” 

Scheduled for Markup 

by the 

SENATE COMMITTEE ON FINANCE 

on September 21, 2016 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

 

September 21, 2016 

JCX-87-16 
i 

CONTENTS 

Page 

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

I. MODIFICATION TO THE CHAIRMAN’S MARK ......................................................... 2

A. Shrinking Emergency Account Losses ......................................................................... 2

II. ADDITIONS TO THE CHAIRMAN’S MARK ................................................................ 3

A. Multiple-Employer Plans .............................................................................................. 3

B. Clarification of Retirement Income Account Rules.................................................... 15

C. Fiduciary Safe Harbor for Selection of Lifetime Income Provider ............................ 17

D. Nondiscrimination Flexibility with Respect to Certain Plans ..................................... 20

E. PBGC Premiums for CSEC Plans .............................................................................. 26

F. IRA Ownership of S Corporation Banks .................................................................... 28

G. Benefits for Volunteer Firefighters and Emergency Medical Responders ................. 30

H. Treatment of Qualified Equity Grants ........................................................................ 32

I. Modifications to Required Minimum Distribution Rules ........................................... 40

J. Modification of Hardship Withdrawal Rules .............................................................. 49

K. Increased Penalties for Failure to File Retirement Plan Returns ................................ 50

L. Modification of User Fee Requirements for Installment Agreements ........................ 53

M. Increase Information Sharing to Administer Excise Taxes ........................................ 55

N. Repeal of Partnership Technical Terminations ........................................................... 57
1 

INTRODUCTION 

The Senate Committee on Finance has scheduled a committee markup on September 21, 

2016, of an original bill, the Retirement Enhancement and Savings Act of 2016. This 

document,1

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

the Chairman’s modification of the bill. 

 

 1

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

Modification of the Retirement Enhancement and Savings Act of 2016 (JCX-87-16), September 21, 2016. This 

document can also be found on the Joint Committee on Taxation website at www.jct.gov. All section references 

herein are to the Internal Revenue Code of 1986, as amended, unless otherwise indicated. 
2 

I. MODIFICATION TO THE CHAIRMAN’S MARK 

A. Shrinking Emergency Account Losses 

The Chairman’s modification amends the proposal under which tax-favored 

employer-sponsored plans are prohibited from making loans through credit cards and other 

arrangements. As modified, the proposal prohibits such loans, except to the extent provided 

through electronic card systems through which such loans are provided as of September 21, 

2016. In addition, any purchase made with such a card must exceed $1,000 (indexed to inflation 

starting in 2018), and the card cannot be used to engage in any commercial transaction in a liquor 

store, casino, gaming establishment, or any retail establishment that provides adult-oriented 

entertainment. 

In addition, the proposal directs the Government Accountability Office (“GAO”) to 

conduct a study analyzing the impact of such loans on the use of retirement savings for other 

purposes (referred to as “leakage”). GAO is to report its findings to the Chairman and Ranking 

Member of the Senate Committee on Finance and the House Committee on Ways and Means, 

and, if the study shows that such loans, after being subject to the restrictions described above, 

result in greater leakage than other loans from retirement plans, the report is to include 

recommendations to reduce leakage. 

 
3 

II. ADDITIONS TO THE CHAIRMAN’S MARK 

A. Multiple-Employer Plans 

Present Law 

Retirement savings under the Code and ERISA 

Tax-favored arrangements 

The Internal Revenue Code (“Code”) provides two general vehicles for tax-favored 

retirement savings: employer-sponsored plans and individual retirement arrangements (“IRAs”). 

Code provisions are generally within the jurisdiction of the Secretary of the Treasury 

(“Secretary”), through his or her delegate, the Internal Revenue Service (“IRS”). 

The most common type of tax-favored employer-sponsored retirement plan is a qualified 

retirement plan,2

 which may be a defined contribution plan or a defined benefit plan. Under a 

defined contribution plan, separate individual accounts are maintained for participants, to which 

accumulated contributions, earnings and losses are allocated, and participants’ benefits are based 

on the value of their accounts.3 Defined contribution plans commonly allow participants to 

direct the investment of their accounts, usually by choosing among investment options offered 

under the plan. Under a defined benefit plan, benefits are determined under a plan formula and 

paid from general plan assets, rather than individual accounts.4 Besides qualified retirement 

plans, certain tax-exempt employers and public schools may maintain tax-deferred annuity 

plans.5 

An IRA is generally established by the individual for whom the IRA is maintained.6 

However, in some cases, an employer may establish IRAs on behalf of employees and provide 

 2

 Sec. 401(a). A qualified annuity plan under section 403(a) is similar to and subject to requirements 

similar to those applicable to qualified retirement plans. 

3

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

include a qualified cash or deferred arrangement under section 401(k) (commonly called a “section 401(k) plan”), 

under which employees may elect to contribute to the plan. 

4

 Sec. 414(j). 

5

 Sec. 403(b). Private and governmental employers that are exempt from tax under section 501(c)(3), 

including tax-exempt private schools, may maintain tax-deferred annuity plans. State and local governmental 

employers may maintain another type of tax-favored retirement plan, an eligible deferred compensation plan under 

section 457(b). 

6

 Sections 219, 408 and 408A provide rules for IRAs. Under section 408(a)(2) and (n), only certain 

entities are permitted to be the trustee of an IRA. The trustee of an IRA generally must be a bank, an insured credit 

union, or a corporation subject to supervision and examination by the Commissioner of Banking or other officer in 

charge of the administration of the banking laws of the State in which it is incorporated. Alternatively, an IRA 

trustee may be another person who demonstrates to the satisfaction of the Secretary that the manner in which the 

person will administer the IRA will be consistent with the IRA requirements. 
4 

retirement contributions to the IRAs.7

 In addition, IRA treatment may apply to accounts 

maintained for employees under a trust created by an employer (or an employee association) for 

the exclusive benefit of employees or their beneficiaries, provided that the trust complies with 

the relevant IRA requirements and separate accounting is maintained for the interest of each 

employee or beneficiary (referred to herein as an “IRA trust”).8 In that case, the assets of the 

trust may be held in a common fund for the account of all individuals who have an interest in the 

trust. 

ERISA 

Retirement plans of private employers, including qualified retirement plans and 

tax-deferred annuity plans, are generally subject to requirements under the Employee Retirement 

Income Security Act of 1974 (“ERISA”).9 A plan covering only business owners (or business 

owners and their spouses) - that is, it covers no other employees - is exempt from ERISA.10 

Thus, a plan covering only self-employed individuals is exempt from ERISA. Tax-deferred 

annuity plans that provide solely for salary reduction contributions by employees may be exempt 

from ERISA.11 IRAs are generally exempt from ERISA. 

The provisions of Title I of ERISA are under the jurisdiction of the Secretary of Labor.12 

Many of the requirements under Title I of ERISA parallel Code requirements for qualified 

retirement plans. Under ERISA, in carrying out provisions relating to the same subject matter, 

the Secretary (of the Treasury) and the Secretary of Labor are required to consult with each other 

and develop rules, regulations, practices, and forms which, to the extent appropriate for efficient 

administration, are designed to reduce duplication of effort, duplication of reporting, conflicting 

or overlapping requirements, and the burden of compliance by plan administrators, employers, 

and participants and beneficiaries.13 In addition, interpretive jurisdiction over parallel Code and 

 7

 Simplified employee pension (“SEP”) plans under section 408(k) and SIMPLE IRA plans under 

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

8

 Sec. 408(c). 

9

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

to employer-sponsored retirement (or pension) plans. Employer-sponsored welfare and pension plans are both 

referred to under ERISA as employee benefit plans. Under ERISA sec. 4(b)(1) and (2), governmental plans and 

church plans are generally exempt from ERISA. 

10 29 C.F.R. sec. 2510.3-3(b)-(c). 

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

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

defined benefit plans of private employers are generally covered by the Pension Benefit Guaranty Corporation’s 

pension insurance program. 

13 ERISA sec. 3004. 
5 

ERISA provisions relating to retirement plans is divided between the two Secretaries by 

Executive Order, referred to as the Reorganization Plan No. 4 of 1978.14

Multiple-employer plans under the Code 

In general 

Qualified retirement plans, either defined contribution or defined benefit plans, are 

categorized as single-employer plans or multiple-employer plans. A single-employer plan is a 

plan maintained by one employer. For this purpose, businesses and organizations that are 

members of a controlled group of corporations, a group under common control, or an affiliated 

service group are treated as one employer (referred to as “aggregation”).15 

A multiple-employer plan generally is a single plan maintained by two or more unrelated 

employers (that is, employers that are not treated as a single employer under the aggregation 

rules).16 Multiple-employer plans are commonly maintained by employers in the same industry 

and are used also by professional employer organizations (“PEOs”) to provide qualified 

retirement plan benefits to employees working for PEO clients.17

Application of Code requirements to multiple-employer plans and EPCRS 

Some requirements are applied to a multiple-employer plan on a plan-wide basis.18 For 

example, all employees covered by the plan are treated as employees of all employers 

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

service with all participating employers is taken into account in applying the minimum 

participation and vesting requirements. In applying the limits on contributions and benefits, 

compensation, contributions and benefits attributable to all employers are taken into account.19 

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

nondiscrimination requirements (both the general requirements and the special tests for section 

401(k) plans) and the top-heavy rules.20 However, the qualified status of the plan as a whole is 

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

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

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

sec. 414(f) as a plan maintained pursuant to one or more collective bargaining agreements with two or more 

unrelated employers and to which the employers are required to contribute under the collective bargaining 

agreement(s). Multiemployer plans are also known as Taft-Hartley plans. 

17 Rev. Proc. 2003-86, 2003-2 C.B. 1211, and Rev. Proc. 2002-21, 2002-1 C.B. 911, address the 

application of the multiple-employer plan rules to qualified defined contribution plans maintained by PEOs. 

18 Sec. 413(c). 

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

20 Treas. Reg. secs. 1.413-2(a)(3)(ii)-(iii) and 1.416-1, G-2. 
6 

determined with respect to all employers maintaining the plan, and the failure by one employer 

(or by the plan itself) to satisfy an applicable qualification requirement may result in 

disqualification of the plan with respect to all employers.21

Because of the complexity of the requirements for qualified retirement plans, errors in 

plan documents, as well as plan operation and administration, commonly occur. Under a strict 

application of these requirements, such an error would cause a plan to lose its tax-favored status, 

which would fall most heavily on plan participants because of the resulting current income 

inclusion of vested amounts under the plan. As a practical matter, therefore, the IRS rarely 

disqualifies a plan. Instead, the IRS has established the Employee Plans Compliance Resolution 

System (“EPCRS”), a formal program under which employers and other plan sponsors can 

correct compliance failures and continue to provide their employees with retirement benefits on a 

tax-favored basis.22

EPCRS has three components, providing for self-correction, voluntary correction with 

IRS approval, and correction on audit. The Self-Correction Program (“SCP”) generally permits 

a plan sponsor that has established compliance practices and procedures to correct certain 

insignificant failures at any time (including during an audit), and certain significant failures 

generally within a two-year period, without payment of any fee or sanction. The Voluntary 

Correction Program (“VCP”) permits an employer, at any time before an audit, to pay a limited 

fee and receive IRS approval of a correction. For a failure that is discovered on audit and 

corrected, the Audit Closing Agreement Program (“Audit CAP”) provides for a sanction that 

bears a reasonable relationship to the nature, extent, and severity of the failure and that takes into 

account the extent to which correction occurred before audit. 

Multiple-employer plans are eligible for EPCRS, and certain special procedures apply.23 

A VCP request with respect to a multiple-employer plan must be submitted to the IRS by the 

plan administrator, rather than an employer maintaining the plan, and must be made with respect 

to the entire plan, rather than a portion of the plan affecting any particular employer. In addition, 

if a failure applies to fewer than all of the employers under the plan, the plan administrator may 

choose to have a VCP compliance fee or audit CAP sanction calculated separately for each 

employer based on the participants attributable to that employer, rather than having the 

compliance fee calculated based on the participants of the entire plan. For example, the plan 

administrator may choose this option when the failure is attributable to the failure of an employer 

to provide the plan administrator with full and complete information. 

 21 Treas. Reg. secs. 1.413-2(a)(3)(iv) and 1.416-1, G-2. 

22 Rev. Proc. 2013-12, 2013-04 I.R.B. 313, modified by Rev. Proc. 2015-27, 2015-16 I.R.B. 914, and Rev. 

Proc. 2015-28, 2015-16 I.R.B. 920. 

23 Section 10.12 of Rev. Proc. 2013-12. 
7 

ERISA 

Fiduciary and bonding requirements 

Among other requirements, ERISA requires a plan to be established and maintained 

pursuant to a written instrument (that is, a plan document) that contains certain terms.24 The 

terms of the plan must provide for one or more named fiduciaries that jointly or severally have 

authority to control and manage the operation and administration of the plan.25 Among other 

required plan terms are a procedure for the allocation of responsibilities for the operation and 

administration of the plan and a procedure for amending the plan and for identifying the persons 

who have authority to amend the plan. Among other permitted terms, a plan may provide also 

that any person or group of persons may serve in more than one fiduciary capacity with respect 

to the plan (including service both as trustee and administrator) and that a person who is a named 

fiduciary with respect to the control or management of plan assets may appoint an investment 

manager or managers to manage plan assets. 

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

ERISA section 404(c) provides a special rule in the case of a defined contribution plan that 

permits participants to direct the investment of their individual accounts.26 Under the special 

rule, if various requirements are met, a participant is not deemed to be a fiduciary by reason of 

directing the investment of the participant’s account and no person who is otherwise a fiduciary 

is liable for any loss, or by reason of any breach, that results from the participant’s investments. 

Defined contribution plans that provide for participant-directed investments commonly offer a 

set of investment options among which participants may choose. The selection of investment 

options to be offered under a plan is subject to ERISA fiduciary requirements. 

Under ERISA, any plan fiduciary or person that handles plan assets is required to be 

bonded, generally for an amount not to exceed $500,000.27 In some cases, the maximum bond 

amount is $1 million, rather than $500,000. 

Multiple-employer plan status under ERISA 

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

a different concept of multiple-employer plan applies under ERISA. 

 24 ERISA sec. 402. 

25 Fiduciary is defined in ERISA section 3(21), and named fiduciary is defined in ERISA 

section 402(a)(2). 

26 ERISA sec. 404(c). Under ERISA, a defined contribution plans is also referred to as an individual 

account plan. 

27 ERISA sec. 412. 

28 ERISA sec. 210(a). 
8 

Under ERISA, an employee benefit plan (whether a pension plan or a welfare plan) must 

be sponsored by an employer, by an employee organization, or by both.29 The definition of 

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

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

employers acting for an employer in such capacity.30

These definitional provisions of ERISA are interpreted as permitting a multiple-employer 

plan to be established or maintained by a cognizable, bona fide group or association of 

employers, acting in the interests of its employer members to provide benefits to their 

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

plan is tied to the employers and employees that participate in the plan by some common 

economic or representational interest or genuine organizational relationship unrelated to the 

provision of benefits. Based on the facts and circumstances, the employers that participate in the 

benefit program must, either directly or indirectly, exercise control over that program, both in 

form and in substance, in order to act as a bona fide employer group or association with respect 

to the program. However, an employer association does not exist where several unrelated 

employers merely execute participation agreements or similar documents as a means to fund 

benefits, in the absence of any genuine organizational relationship between the employers. In 

that case, each participating employer establishes and maintains a separate employee benefit plan 

for the benefit of its own employees, rather than a multiple-employer plan. 

Form 5500 reporting 

Under the Code, an employer maintaining a qualified retirement plan generally is 

required to file an annual return containing information required under regulations with respect 

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

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

information to the Department of Labor (“DOL”).33 These filing requirements are met by filing 

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

30 ERISA sec. 3(5). 

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

1994-07A, and other authorities cited therein. 

32 Sec. 6058. In addition, under section 6059, the plan administrator of a defined benefit plan subject to the 

minimum funding requirements is required to file an annual actuarial report. Under Code section 414(g) and ERISA 

section 3(16), plan administrator generally means the person specifically so designated by the terms of the plan 

document. In the absence of a designation, the plan administrator generally is (1) in the case of a plan maintained by 

a single employer, the employer, (2) in the case of a plan maintained by an employee organization, the employee 

organization, or (3) in the case of a plan maintained by two or more employers or jointly by one or more employers 

and one or more employee organizations, the association, committee, joint board of trustees, or other similar group 

of representatives of the parties that maintain the plan. Under ERISA, the party described in (1), (2) or (3) is 

referred to as the “plan sponsor.” 

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

plans must provide information to the PBGC. 
9 

a completed Form 5500, Annual Return/Report of Employee Benefit Plan. Forms 5500 are filed 

with DOL, and information from Forms 5500 is shared with the IRS.34 In the case of a 

multiple-employer plan, the annual report must include a list of participating employers and a 

good faith estimate of the percentage of total contributions made by the participating employers 

during the plan year. Certain small plans, that is, plans covering fewer than 100 participants, are 

eligible for simplified reporting requirements, which are met by filing Form 5500-SF, Short 

Form Annual Return/Report of Small Employee Benefit Plan.35 

Description of Proposal 

In general 

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

certain defined contribution plans will not fail to meet the Code requirements applicable for 

tax-favored treatment merely because one or more employers of employees covered by the plan 

(“participating employers”) fail to take the actions that are required of employers for the plan to 

meet such requirements. The proposal applies to a multiple-employer qualified defined 

contribution plan (“covered multiple-employer plan”) that either (1) is sponsored by employers 

that both have a common interest other than having adopted the plan and control the plan, or 

(2) in the case of a plan not described in (1), has a pooled plan provider. The proposal applies 

also to such a plan that consists of IRAs (an IRA plan), including under an IRA trust. 

In addition, under the proposal, a qualified defined contribution plan that is established or 

maintained for the purpose of providing benefits to the employees of two or more employers and 

that meets certain requirements (“pooled employer plan”) is treated for purposes of ERISA as a 

single plan that is a multiple-employer plan. 

Tax-favored status under the Code 

In general 

The proposal provides relief from disqualification (or other loss of tax-favored status) of 

the entire plan merely because one or more participating employers fail to take actions required 

with respect to the plan. 

Relief under the proposal does not apply to a plan unless the terms of the plan provide 

that, in the case of an employer failing to take required actions (“noncompliant employer”)-- 

 plan assets attributable to employees of the noncompliant employer will be 

transferred to a plan maintained only by that employer (or its successor), to a tax-

 34 Information is shared also with the PBGC, as applicable. Form 5500 filings are also publicly released in 

accordance with section 6104(b) and Treas. Reg. sec. 301.6104(b)-1 and ERISA secs. 104(a)(1) and 106(a). 

35 ERISA sec. 104(b). 
10 

favored retirement plan for each individual whose account is transferred,36 or to any 

other arrangement that the Secretary determines is appropriate,37 and 

 the noncompliant employer (and not the plan with respect to which the failure 

occurred or any other participating employer) is, except to the extent provided by the 

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

employer. 

 In addition, if the pooled plan provider does not perform substantially all the 

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

Secretary, in his or her discretion, may provide that the determination as to whether the plan 

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

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

Pooled plan provider 

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

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

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

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

participating employer) that are reasonably necessary to ensure that the plan meets the 

Code requirements for tax-favored treatment and the requirements of ERISA and to 

ensure that each participating employer takes actions as the Secretary or the pooled 

plan provider determines necessary for the plan to meet Code and ERISA 

requirements, including providing to the pooled plan provider any disclosures or other 

information that the Secretary may require or that the pooled plan provider otherwise 

determines is necessary to administer the plan or to allow the plan to meet Code and 

ERISA requirements, 

 registers with the Secretary as a pooled plan provider and provides any other 

information that the Secretary may require, before beginning operations as a pooled 

plan provider, 

 acknowledges in writing its status as a named fiduciary under ERISA and as the plan 

administrator, and 

 is responsible for ensuring that all persons who handle plan assets or are plan 

fiduciaries are bonded in accordance with ERISA requirements. 

 36 For this purpose, a tax-favored retirement plan means an eligible retirement plan as defined in section 

402(c)(8)(B), that is, an IRA, a qualified retirement plan, a tax-deferred annuity plan under section 403(b), or an 

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

37 In appropriate circumstances, the IRS may waive the requirement that plan assets attributable to 

employees of the noncompliant employer be transferred if the IRS determines it is in the best interests of the 

employees to retain the assets in the plan. 
11 

The proposal specifies that the Secretary may perform audits, examinations, and 

investigations of pooled plan providers as may be necessary to enforce and carry out the 

purposes of the proposal. 

Guidance 

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

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

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

procedures to be taken to terminate a plan that fails to meet the requirements to be a covered 

multiple-employer plan, including the proper treatment of, and actions needed to be taken by, 

any participating employer and plan assets and liabilities attributable to employees of that 

employer, and (3) to identify appropriate cases in which corrective action will apply with respect 

to noncompliant employers. For purposes of (3), the Secretary is to take into account whether 

the failure of an employer or pooled plan provider to provide any disclosures or other 

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

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

demonstrates a lack of commitment to compliance. Any guidance issued by the Secretary under 

the proposal will not apply to any action or failure occurring before the issuance of the guidance. 

The proposal also directs the Secretary, in consultation with the Secretary of Labor when 

appropriate, to publish model plan language that meets the Code and ERISA requirements under 

the proposal and that may be adopted to be treated as a pooled provider plan and pooled 

employer plan under ERISA. 

Pooled employer plans under ERISA 

In general 

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

ERISA as a single plan that is a multiple-employer plan. “Pooled employer plan” is defined as a 

plan (1) that is a defined contribution plan established or maintained for the purpose of providing 

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

IRA plan, and (3) the terms of which meet the requirements described below. Pooled employer 

plan does not include a plan with respect to which the participating employers both share a 

common interest other than participation in the plan and control the plan. 

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

 designate a pooled plan provider and provide that the pooled plan provider is a named 

fiduciary of the plan, 

 designate one or more trustees (other than a participating employer)38 to be 

responsible for collecting contributions to, and holding the assets of, the plan, and 

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

require the trustees to implement written contribution collection procedures that are 

reasonable, diligent, and systematic, 

 provide that each participating employer retains fiduciary responsibility for the 

selection and monitoring, in accordance with ERISA fiduciary requirements, of the 

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

designated as a named fiduciary of the plan, and, to the extent not otherwise delegated 

to another fiduciary by the pooled plan provider (and subject to the ERISA rules 

relating to self-directed investments), the investment and management of the portion 

of the plan’s assets attributable to the employees of that participating employer, 

 provide that a participating employer, or a participant or beneficiary, is not subject to 

unreasonable restrictions, fees, or penalties with regard to ceasing participation, 

receipt of distributions, or otherwise transferring assets of the plan in accordance with 

applicable rules for plan mergers and transfers, 

 require the pooled plan provider to provide to participating employers any disclosures 

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

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

plan provider by participating employers, and require each participating employer to 

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

necessary to administer the plan or to allow for the plan to meet the ERISA and Code 

requirements applicable to the plan, including providing any disclosures or other 

information that the Secretary of Labor may require or that the pooled plan provider 

otherwise determines is necessary to administer the plan or to allow the plan to meet 

ERISA and Code requirements, and 

 provide that any disclosure or other information required to be provided as described 

above may be provided in electronic form and will be designed to ensure only 

reasonable costs are imposed on pooled plan providers and participating employers. 

Under the proposal, however, a pooled employer plan does not include a plan established 

before January 1, 2016, unless the plan administrator elects that the plan will be treated as a 

pooled employer plan and the plan meets the requirements of ERISA applicable to a pooled 

employer plan established on or after such date.39

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

pooled employer plan, the maximum bond amount under ERISA is $1 million. 

Pooled plan provider 

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

definition under the Code portion of the proposal, described above.40 The ERISA definition 

 39 A pooled employer plan also does not include a multiemployer plan. 

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

plan, all persons that are members of the same controlled group or group under common control and that perform 

services for the plan are treated as one person. 
13 

requires a person to register as a pooled plan provider with the Secretary of Labor and provide 

any other information that the Secretary of Labor may require, before beginning operations as a 

pooled plan provider. 

The proposal specifies that the Secretary of Labor may perform audits, examinations, and 

investigations of pooled plan providers as may be necessary to enforce and carry out the 

purposes of the proposal. 

Guidance 

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

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

administrative duties and other actions required to be performed by a pooled plan provider, and 

(2) that requires, in appropriate cases of a noncompliant employer, plan assets attributable to 

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

employer (or its successor), to a tax-favored retirement plan for each individual whose account is 

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

appropriate,41 and the noncompliant employer (and not the plan with respect to which the failure 

occurred or any other participating employer) to be liable for any plan liabilities attributable to 

employees of the noncompliant employer, except to the extent provided in the guidance. For 

purposes of (2), the Secretary of Labor is to take into account whether the failure of an employer 

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

action, necessary to administer a plan or to allow a plan to meet the requirements of ERISA and 

the Code requirements for tax-favored treatment, has continued over a period of time that clearly 

demonstrates a lack of commitment to compliance. 

Form 5500 reporting 

Under the proposal, the Form 5500 of a pooled employer plan must include the 

identifying information for the person designated under the terms of the plan as the pooled plan 

provider. In addition, with respect to annual reports required under ERISA, the Secretary of 

Labor may by regulation prescribe simplified reporting for a multiple-employer plan that covers 

fewer than 1,000 participants, but only if no single participating employer has more than 100 

participants covered by the plan. 

Effective Date 

The proposal applies to years beginning after December 31, 2019, and to Forms 5500 for 

plan years beginning after December 31, 2019. 

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

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

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

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

noncompliant employer to retain the assets in the pooled employer plan. 
14 

treatment of a failure to meet any Code requirement with respect to any employer (and its 

employees) in a multiple-employer plan. 

 
15 

B. Clarification of Retirement Income Account Rules 

Present Law 

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

in annuity contracts or mutual funds.42 However, the restrictions on investments do not apply to 

a retirement income account, which is a defined contribution program established or maintained 

by a church, or a convention or association of churches, to provide benefits under the plan to 

employees of a religious, charitable or similar tax-exempt organization.43

Certain rules prohibiting discrimination in favor of highly compensated employees, 

which apply to section 403(b) plans generally, do not apply to a plan maintained by a church or 

qualified church-controlled organization.44 For this purpose, church means a church, a 

convention or association of churches, or an elementary or secondary school that is controlled, 

operated, or principally supported by a church or by a convention or association of churches, and 

includes a qualified church-controlled organization. A qualified church-controlled organization 

is any church-controlled tax-exempt organization other than an organization that (1) offers 

goods, services, or facilities for sale, other than on an incidental basis, to the general public, 

other than goods, services, or facilities that are sold at a nominal charge substantially less than 

the cost of providing the goods, services, or facilities, and (2) normally receives more than 25 

percent of its support from either governmental sources, or receipts from admissions, sales of 

merchandise, performance of services, or furnishing of facilities, in activities that are not 

unrelated trades or businesses, or from both. Church-controlled organizations that are not 

qualified church-controlled organizations are generally referred to as “nonqualified churchcontrolled organizations.” 

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

income account. 

Description of Proposal 

The proposal clarifies that employees of nonqualified church-controlled organizations, in 

addition to employees of churches and qualified church-controlled organizations, may be 

covered under a section 403(b) plan that consists of a retirement income account. 

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

43 Sec. 403(b)(9)(B), referring to organizations exempt from tax under section 501(c)(3). For this purpose, 

a church or a convention or association of churches includes an organization described in section 414(e)(3)(A), that 

is, an organization, the principal purpose or function of which is the administration or funding of a plan or program 

for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or 

association of churches, provided that the organization is controlled by or associated with a church or a convention 

or association of churches. 

44 Sec. 403(b)(1)(D) and (12). 
16 

Effective Date 

The proposal is effective on the date of enactment. 
17 

C. Fiduciary Safe Harbor for Selection of Lifetime Income Provider 

Present Law 

ERISA imposes certain standards of care with respect to the actions of a plan fiduciary. 

Specifically, a fiduciary is required to discharge its duties with respect to the plan solely in the 

interest of the participants and beneficiaries, for the exclusive purpose of providing benefits to 

participants and beneficiaries and defraying reasonable administration expenses of the plan, with 

the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent 

man acting in a like capacity and familiar with relevant matters would use in the conduct of an 

enterprise of a like character and with like aims (the “prudent man” requirement), by diversifying 

plan investments so as to minimize the risk of large losses unless, under the circumstances, it is 

clearly prudent not to do so, and in accordance with plan documents and governing instruments 

insofar as the documents and instruments are consistent with ERISA. 

Department of Labor regulations provide a safe harbor for a fiduciary to satisfy the 

prudent man requirement in selecting an annuity provider and a contract for benefit distributions 

from a defined contribution plan.45

Description of Proposal 

The proposal specifies measures that a plan fiduciary may take with respect to the 

selection of an insurer and a guaranteed retirement income contract in order to assure that the 

fiduciary meets the prudent man requirement. The measures under the proposal are an optional 

means by which a fiduciary will be considered to satisfy the prudent man requirement with 

respect to the selection of insurers and guaranteed retirement income contracts and do not 

establish minimum requirements or the exclusive means for satisfying the prudent man 

requirement. 

For purposes of the proposal, an insurer is an insurance company, insurance service or 

insurance organization qualified to do business in a State and includes affiliates of those entities 

to the extent the affiliate is licensed to offer guaranteed retirement income contracts. A 

guaranteed retirement income contract is an annuity contract for a fixed term or a contract (or 

provision or feature thereof) designed to provide a participant guaranteed benefits annually (or 

more frequently) for at least the remainder of the life of the participant or joint lives of the 

participant and the participant's designated beneficiary as part of a defined contribution plan. 

With respect to the selection of an insurer and a guaranteed retirement income contract 

(as defined below), the prudent man requirement will be deemed met if a fiduciary─

 engages in an objective, thorough and analytical search for the purpose of identifying 

insurers from which to purchase guaranteed retirement income contracts, 

 with respect to each insurer identified through the search, considers the financial 

capability of the insurer to satisfy its obligations under the guaranteed retirement 

 45 29 C.F.R. sec. 2550.404a-4. 
18 

income contract and considers the cost (including fees and commissions) of the 

guaranteed retirement income contract offered by the insurer in relation to the 

benefits and product features of the contract and administrative services to be 

provided under the contract, and 

 on the basis of the foregoing, concludes that, at the time of the selection (as described 

below), the insurer is financially capable of satisfying its obligations under the 

guaranteed retirement income contract and that the cost (including fees and 

commissions) of the selected guaranteed retirement income contract is reasonable in 

relation to the benefits and product features of the contract and the administrative 

services to be provided under the contract. 

A fiduciary will be deemed to satisfy the requirements above with respect to the financial 

capability of the insurer if─

 the fiduciary obtains written representations from the insurer that it is licensed to 

offer guaranteed retirement income contracts; that the insurer, at the time of selection 

and for each of the immediately preceding seven years operates under a certificate of 

authority from the Insurance Commissioner of its domiciliary State that has not been 

revoked or suspended, has filed audited financial statements in accordance with the 

laws of its domiciliary State under applicable statutory accounting principles, 

maintains (and has maintained) reserves that satisfy all the statutory requirements of 

all States where the insurer does business, and is not operating under an order of 

supervision, rehabilitation, or liquidation; and that the insurer undergoes, at least 

every five years, a financial examination (within the meaning of the law of its 

domiciliary State) by the Insurance Commissioner of the domiciliary State (or 

representative, designee, or other party approved thereby); 

 in the case that, following the issuance of the insurer representations described above, 

there is any change that would preclude the insurer from making the same 

representations at the time of issuance of the guaranteed retirement income contract, 

the insurer is required to notify the fiduciary, in advance of the issuance of any 

guaranteed retirement income contract, that the fiduciary can no longer rely on one or 

more of the representations; and 

 the fiduciary has not received such a notification and has no other facts that would 

cause it to question the insurer representations. 

The proposal specifies that nothing in these requirements is to be construed to require a 

fiduciary to select the lowest cost contract. Accordingly, a fiduciary may consider the value, 

including features and benefits of the contract and attributes of the insurer in conjunction with 

the contract's cost. For this purpose, attributes of the insurer that may be considered include, 

without limitation, the issuer's financial strength. 

For purposes of the proposal, the time of selection may be either the time that the insurer 

and contract are selected for distribution of benefits to a specific participant or beneficiary or the 

time that the insurer and contract are selected to provide benefits at future dates to participants or 

beneficiaries, provided that the selecting fiduciary periodically reviews the continuing 
19 

appropriateness of its conclusions with respect to the insurer’s financial capability and cost, 

taking into account the considerations described above.46 A fiduciary will be deemed to have 

conducted a periodic review of the financial capability of the insurer if the fiduciary obtains the 

written representations described above on an annual basis unless, in the interim, the fiduciary 

has received notification from the insurer that representations cannot be relied on or the fiduciary 

otherwise becomes aware of facts that would cause it to question the representations. 

A fiduciary that satisfies the requirements of the proposal is not liable following the 

distribution of any benefit, or the investment by or on behalf of a participant or beneficiary 

pursuant to the selected guaranteed retirement income contract, for any losses that may result to 

the participant or beneficiary due to an insurer's inability to satisfy its financial obligations under 

the terms of the contract. 

Effective Date 

The proposal is effective on the date of enactment. 

 

 46 However, a fiduciary is not required to review the appropriateness of its conclusions following the 

purchase of any contract or contracts for specific participants or beneficiaries. 
20 

D. Nondiscrimination Flexibility with Respect to Certain Plans 

Present Law 

In general 

Qualified retirement plans are subject to nondiscrimination requirements, under which 

the group of employees covered by a plan and the contributions or benefits provided to 

employees, including benefits, rights, and features under the plan, must not discriminate in favor 

of highly compensated employees.47 In addition, in the case of a defined benefit plan, the plan 

must benefit at least the lesser of (1) 50 employees and (2) the greater of 40 percent of all 

employees and two employees (or one employee if the employer has only one employee), 

referred to as the “minimum participation” requirements.48 These nondiscrimination 

requirements are designed to help ensure that qualified retirement plans achieve the goal of 

retirement security for both lower and higher paid employees. 

For nondiscrimination purposes, an employee generally is treated as highly compensated 

if the employee (1) was a five-percent owner of the employer at any time during the year or the 

preceding year, or (2) had compensation for the preceding year in excess of $120,000 (for 

2016).49 Employees who are not highly compensated are referred to as nonhighly compensated 

employees. 

Nondiscriminatory plan coverage 

Whether plan coverage of employees is nondiscriminatory is determined by calculating 

the plan’s ratio percentage, that is, the ratio of the percentage of nonhighly compensated 

employees covered under the plan to the percentage of highly compensated employees covered. 

The plan’s coverage is nondiscriminatory if the ratio percentage is 70 percent or greater. If ratio 

percentage is less than 70 percent, a multi-part test applies. First, the plan must cover a group of 

employees that is reasonable and established under objective business criteria (“reasonable 

classification requirement”), and the plan’s ratio percentage must be at or above a level specified 

in the regulations, which varies depending on the percentage of nonhighly compensated 

employees in the employer’s workforce. In addition, the average benefit percentage test must be 

 47 Secs. 401(a)(3)-(5) and 401(b). The timing of plan amendments must also not have the effect of 

discriminating significantly in favor of highly compensated employees. Detailed rules are provided in Treas. Reg. 

secs. 1.401(a)(4)-1 through -13 and secs. 1.410(b)-2 through -10. In applying the nondiscrimination requirements, 

certain employees, such as those under age 21 or with less than a year of service, generally may be disregarded. In 

addition, employees of controlled groups and affiliated service groups under section 414(b), (c), (m) and (o) are 

treated as employed by a single employer. In addition, if a plan does not satisfy the nondiscrimination requirements 

on its own, it may in some circumstances be aggregated with another plan, and the two plans tested together as a 

single plan. 

48 Sec. 401(a)(26). 

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

amount of their compensation may be limited to employees who were among the top 20 percent of employees based 

on compensation. 
21 

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

accruals for all nonhighly compensated employees under all plans of the employer must be at 

least 70 percent of the average contribution or accrual rate of all highly compensated 

employees.50 

Nondiscriminatory contributions or benefit accruals 

In general 

There are three general approaches to testing the amount of benefits under qualified 

retirement plans: (1) design-based safe harbors under which the plan’s contribution or benefit 

accrual formula satisfies certain uniformity standards, (2) a general test, described below, and 

(3) cross-testing of equivalent contributions or benefit accruals. Employee elective deferrals and 

employer matching contributions under defined contribution plans are subject to special testing 

rules.51

The nondiscrimination rules allow contributions and benefit accruals to be provided to 

highly compensated and nonhighly compensated employees at the same percentage of 

compensation.52 Thus, the various testing approaches described below are generally applied to 

the amount of contributions or accruals provided as a percentage of compensation, referred to as 

a contribution rate or accrual rate. In addition, in calculating an employee’s contribution or 

accrual rate, credit may be given for the employer paid portion of Social Security taxes or 

benefits.53

The general test is generally satisfied by measuring the rate of contribution or benefit 

accrual for each highly compensated employee to determine if the group of employees with the 

same or higher rate (a “rate” group) is a nondiscriminatory group, using the nondiscriminatory 

plan coverage standards described above. For this purpose, if the ratio percentage of a rate group 

is less than 70 percent, a simplified standard applies, which includes disregarding the reasonable 

classification requirement, but requires satisfaction of the average benefit percentage test. 

 50 The tests under the regulations are generally based on benefit accruals under a defined benefit plan and 

contributions allocated to participants’ accounts under a defined contribution plan, which are referred to as 

“allocations,” with the related rates referred to as “allocation rates.” However, as discussed below, benefit accruals 

can be converted to actuarially equivalent contributions, and contributions can be converted to actuarially equivalent 

benefit accruals. 

51 Secs. 401(k) and (m), the latter of which applies also to after-tax employee contributions under a defined 

contribution plan. 

52 For this purpose, under section 401(a)(17), compensation generally is limited to $265,000 per year (for 

2016). 

53 See sections 401(a)(5)(C) and (D) and 401 (l) and Treas. Reg. section 1. 401(a)(4)-7 and 1.401(l)-1 

through -6 for rules for determining the amount of contributions or benefits that can be attributed to the 

employer-paid portion of Social Security taxes or benefits. This attribution is referred to as permitted disparity. 
22 

Cross-testing 

Cross-testing involves the conversion of contributions under a defined contribution plan 

or benefit accruals under a defined benefit plan to actuarially equivalent accruals or 

contributions, with the resulting equivalencies tested under the general test. However, employee 

elective deferrals and employer matching contributions under defined contribution plans are not 

permitted to be taken into account for this purpose, and cross-testing of contributions under a 

defined contribution plan, or cross-testing of a defined contribution plan aggregated with a 

defined benefit plan, is permitted only if certain threshold requirements are satisfied. 

In order for a defined contribution plan to be tested on an equivalent benefit accrual basis, 

one of the following three threshold conditions must be met: 

 The plan has broadly available allocation rates, that is, each allocation rate under the 

plan is available to a nondiscriminatory group of employees (disregarding certain 

permitted additional contributions provided to employees as a replacement for 

benefits under a frozen defined benefit plan, as discussed below); 

 The plan provides allocations that meet prescribed designs under which allocations 

gradually increase with age or service or are expected to provide a target level of 

annuity benefit; or 

 The plan satisfies a minimum allocation gateway, under which each nonhighly 

compensated employee has an allocation rate of (a) at least one-third of the highest 

rate for any highly compensated employee, or (b) if less, at least five percent. 

In order for an aggregated defined contribution and defined benefit plan to be tested on 

an aggregate equivalent benefit accrual basis, one of the following three threshold conditions 

must be met: 

 The plan must be primarily defined benefit in character, that is, for more than fifty 

percent of the nonhighly compensated employees under the plan, their accrual rate 

under the defined benefit plan exceeds their equivalent accrual rate under the defined 

contribution plan; 

 The plan consists of broadly available separate defined benefit and defined 

contribution plans, that is, the defined benefit plan and the defined contribution plan 

would separately satisfy simplified versions of the minimum coverage and 

nondiscriminatory amount requirements; or 

 The plan satisfies a minimum aggregate allocation gateway, under which each 

nonhighly compensated employee has an aggregate allocation rate (consisting of 

allocations under the defined contribution plan and equivalent allocations under the 

defined benefit plan) of (a) at least one-third of the highest aggregate allocation rate 

for any nonhighly compensated employee, or (b) if less, at least five percent in the 

case of a highest nonhighly compensated employee’s rate up to 25 percent, increased 

by one percentage point for each five-percentage-point increment (or portion thereof) 

above 25 percent, subject to a maximum of 7.5 percent. 
23 

Benefits, rights, and features 

Each benefit, right, or feature offered under the plan generally must be available to a 

group of employees that has a ratio percentage that satisfies the minimum coverage 

requirements, including the reasonable classification requirement if applicable, except that the 

average benefit percentage test does not have to be met, even if the ratio percentage is less than 

70 percent. 

Closed and frozen defined benefit plans 

A defined benefit plan may be amended to limit participation in the plan to individuals 

who are employees as of a certain date. That is, employees hired after that date are not eligible 

to participate in the plan. Such a plan is sometimes referred to as a “closed” defined benefit plan 

(that is, closed to new entrants). In such a case, it is common for the employer also to maintain a 

defined contribution plan and to provide employer matching or nonelective contributions only to 

employees not covered by the defined benefit plan or at a higher rate to such employees. 

Over time, the group of employees continuing to accrue benefits under the defined 

benefit plan may come to consist more heavily of highly compensated employees, for example, 

because of greater turnover among nonhighly compensated employees or because increasing 

compensation causes nonhighly compensated employees to become highly compensated. In that 

case, the defined benefit plan may have to be combined with the defined contribution plan and 

tested on a benefit accrual basis. However, under the regulations, if none of the threshold 

conditions is met, testing on a benefits basis may not be available. Notwithstanding the 

regulations, recent IRS guidance provides relief for a limited period, allowing certain closed 

defined benefit plans to be aggregated with a defined contribution plan and tested on an 

aggregate equivalent benefits basis without meeting any of the threshold conditions.54 When the 

group of employees continuing to accrue benefits under a closed defined benefit plan consists 

more heavily of highly compensated employees, the benefits, rights, and features provided under 

the plan may also fail the tests under the existing nondiscrimination rules. 

In some cases, if a defined benefit plan is amended to cease future accruals for all 

participants, referred to as a “frozen” defined benefit plan, additional contributions to a defined 

contribution plan may be provided for participants, in particular for older participants, in order to 

make up in part for the loss of the benefits they expected to earn under the defined benefit plan 

(“make-up” contributions). As a practical matter, testing on a benefit accrual basis may be 

required in that case, but may not be available because the defined contribution plan does not 

meet any of the threshold conditions. 

 54 Notice 2014-5, 2014-2 I.R.B. 276, extended by Notice 2016-57 (released September 19, 2016). 

Proposed regulations revising the nondiscrimination requirements for closed plans were also issued earlier this year, 

subject to various conditions. 81 Fed. Reg. 4976 (January 29, 2016). 
24 

Description of Proposal 

Closed defined benefit plans 

The proposal provides nondiscrimination relief with respect to benefit accruals and 

benefits, rights, and features for a closed class of participants under a defined benefit plan 

(“closed class”). Under the proposal, the defined benefit plan may be aggregated with one or 

more defined contribution plans and tested on a benefit accruals basis, without having to satisfy 

the threshold conditions, and benefits, rights, and features under the plan do not fail the 

nondiscrimination requirements for a year if the following conditions are met: 55

 For the year the class closed and the two preceding years the plan satisfied the 

nondiscrimination requirements, 

 Either the class was closed before September 21, 2016, or the plan (or predecessor 

plan) has been in effect for at least five years before the class is closed and, during 

that five-year period, there has not been a substantial increase (as defined under the 

proposal) in the coverage or the benefits or other rights or features under the plan, 

other than in connection with certain transactions, and 

 After the class was closed, either no discriminatory amendment is adopted to modify 

the class or the benefit accruals or benefits, rights, and features for the closed class, or 

the nondiscrimination requirements are otherwise met. 

In addition, under the proposal a closed defined benefit plan, or a frozen defined benefit 

plan, that meets similar requirements is deemed to satisfy the minimum participation 

requirements. 

Make-up contributions under a defined contribution plan 

Under the proposal, a defined contribution is permitted to be tested on an equivalent 

benefit accruals basis, without having to satisfy the threshold conditions, if the following 

conditions are met:56

 The plan provides make-up contributions to a class of participants whose benefits 

under a defined benefit plan were reduced or frozen (“frozen class”), 

 Either the class was frozen before September 21, 2016, or the plan (or predecessor 

plan) has been in effect for at least five years before the class is frozen and, during 

that five-year period, there has not been a substantial increase (as defined under the 

proposal) in the coverage or the benefits or other rights or features under the plan, 

other than in connection with certain transactions, and 

 55 The proposal also provides additional testing rules, such as allowing matching contributions to be taken 

into account. 

56 The proposal also provides additional testing rules, such as allowing matching contributions to be taken 

into account. 
25 

 After the class was frozen, either no discriminatory amendment is adopted to modify 

the class or the contributions or benefit accruals or benefits, rights, and features for 

the frozen class, or the nondiscrimination requirements are otherwise met. 

Effective Date 

The proposal is generally effective on the date of enactment of the proposal, without 

regard to whether any plan modifications referred to in the proposal are adopted or effective 

before, on, or after the date of enactment, except that an employer may elect to apply the 

proposal to plan years beginning after December 31, 2013. 

 
26 

E. PBGC Premiums for CSEC Plans 

Present Law 

Qualified retirement plans, including defined benefit plans, are categorized as singleemployer plans or multiple-employer plans. A single-employer plan is a plan maintained by one 

employer.57 A multiple-employer plan generally is a single plan maintained by two or more 

unrelated employers (that is, employers that are not treated as a single employer under the 

aggregation rules).58

Defined benefit plans maintained by private employers are generally subject to minimum 

funding requirements.59 Although single-employer and multiple-employer plans are generally 

subject to the same funding requirements, multiple-employer plans that are CSEC (cooperative 

and small employer charity) plans are subject to different rules.60

Private defined benefit plans are also covered by the Pension Benefit Guaranty 

Corporation (“PBGC”) insurance program and are required to pay annual premiums to the 

PBGC.61 Single-employer and multiple-employer plans, including CSEC plans, are subject to 

the same PBGC premium requirements, consisting of flat-rate, per participant premiums and 

variable rate premiums, based on the unfunded vested benefits under the plan. For 2016, flat-rate 

premiums are $64 per participant, and variable rate premiums are $30 for each $1,000 of 

unfunded vested benefits, subject to a limit of $500 multiplied by the number of plan 

participants.62

Description of Proposal 

Under the proposal, for CSEC plans, flat-rate premiums are $19 per participant, and 

variable rate premiums are $9 for each $1,000 of unfunded vested benefits.63

 57 For this purpose, businesses and organizations that are members of a controlled group of corporations, a 

group under common control, or an affiliated service group are treated as one employer (referred to as 

“aggregation”). Secs. 414(b), (c), (m) and (o). 

58 Sec. 413(c). Multiple-employer status does not apply if the plan is a multiemployer plan, defined under 

sec. 414(f) as a plan maintained pursuant to one or more collective bargaining agreements with two or more 

unrelated employers and to which the employers are required to contribute under the collective bargaining 

agreement(s). Multiemployer plans are also known as Taft-Hartley plans. 

59 Secs. 412 and 430-433 and ERISA secs. 301-306. Unless a funding waiver is obtained, an employer 

may be subject to a two-tier excise tax under section 4971 if the funding requirements are not met. 

60 Funding rules for CSEC plans were enacted by the Cooperative and Small Employer Charity Pension 

Flexibility Act, Pub. L. No. 113-197. CSEC plan is defined in section 414(y) and ERISA section 210(f). 

61 Title IV of ERISA. 

62 These premiums rates have been increased several times by legislation since 2005. 

63 These are the premium rates that applied to single-employer and multiple-employer plans in 2005. 
27 

Effective Date 

The proposal applies to plan years beginning after December 31, 2015. 

 
28 

F. IRA Ownership of S Corporation Banks 

Present Law 

IRAs 

An individual retirement account (“IRA”) is a tax-exempt trust or account established for 

the exclusive benefit of an individual and his or her beneficiaries.64 There are two general types 

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

made, and Roth IRAs, contributions to which are not deductible. In general, amounts held in a 

traditional IRA are includible in income when withdrawn (except to the extent the withdrawal is 

a return of nondeductible contributions). Amounts held in a Roth IRA that are withdrawn as a 

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

qualified distributions are includible in income to the extent attributable to earnings. A qualified 

distribution is a distribution that is made (1) after the five-taxable year period beginning with the 

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

attainment of age 591⁄2, on account of death or disability, or for first-time homebuyer expenses of 

up to $10,000. 

S corporations and permissible shareholders 

In general, an S corporation is not subject to corporate-level income tax on its items of 

income and loss.65 Instead, an S corporation passes through its items of income and loss to its 

shareholders. The shareholders take into account separately their shares of these items on their 

individual income tax returns. 

Only certain tax-exempt organizations are permitted to be shareholders of an S 

corporation, including qualified retirement plans. Under present law, an IRA, including a Roth 

IRA, is permitted to be a shareholder of an S corporation only if the S corporation is a bank and 

only to the extent of bank stock held by the IRA on October 22, 2004.66 In the case of a taxexempt S corporation shareholder, including an IRA, the shareholder’s interest in the S 

corporation is treated as an unrelated trade or business and its share of S corporation items of 

income and loss (and gain or loss on disposition of the S corporation stock) is taken into account 

in determining its unrelated business taxable income.67

 64 Secs. 408 and 408A. 

65 The rules for S corporations are in Subchapter S of the Code, sections 1361-1379. 

66 This is the date of enactment of the American Jobs Creation Act, Pub. L. No. 108-357, which allowed an 

IRA to be a shareholder of an S corporation that is a bank. A related exemption under section 4975(d)(16) of the 

prohibited transaction rules allowed stock held by an IRA at the time a bank elected to become an S corporation to 

be sold to the IRA owner. 

67 Sec. 512(e). This rule does not apply to employee stock ownership plans. 
29 

Description of Proposal 

Under the proposal, an IRA, including a Roth IRA, is permitted to be a shareholder of an 

S corporation that is a bank without regard to whether the IRA held the bank stock on 

October 22, 2004. Thus, any IRA is permitted to be a shareholder of any S corporation that is a 

bank.68 As under present law, an IRA’s interest in an S corporation is treated as an unrelated 

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

disposition of the S corporation stock) is taken into account in determining its unrelated business 

taxable income. 

Effective Date 

The proposal applies to taxable years beginning after December 31, 2015. 

 

 68 The proposal also amends the exemption under section 4975(d)(16) of the prohibited transaction rules to 

allow stock held by an IRA at the time a bank elects to become an S corporation to be sold to the IRA owner. 
30 

G. Benefits for Volunteer Firefighters and Emergency Medical Responders 

Present Law 

Benefits for volunteer firefighters and emergency medical responders 

In general, a reduction in property tax by persons who volunteer their services as 

emergency responders under a State law program is includible in gross income.69 However, for 

taxable years beginning after December 31, 2007, and before January 1, 2011, an exclusion 

applied for any qualified State or local tax benefit and any qualified reimbursement payment 

provided to members of qualified volunteer emergency response organizations.70

A qualified volunteer emergency response organization is a volunteer organization that is 

organized and operated to provide firefighting or emergency medical services for persons in a 

State or a political subdivision and is required (by written agreement) by the State or political 

subdivision to furnish firefighting or emergency medical services in the State or political 

subdivision. 

A qualified State or local tax benefit is any reduction or rebate of certain taxes provided 

by a State or local government on account of services performed by individuals as members of a 

qualified volunteer emergency response organization. These taxes are limited to State or local 

income taxes, State or local real property taxes, and State or local personal property taxes. A 

qualified reimbursement payment is a payment provided by a State or political subdivision 

thereof on account of reimbursement for expenses incurred in connection with the performance 

of services as a member of a qualified volunteer emergency response organization. The amount 

of excludible qualified reimbursement payments is limited to $30 for each month during which a 

volunteer performs services. 

Itemized deductions 

Individuals are allowed itemized deductions for (1) State and local income taxes, real 

property taxes, and personal property taxes, and (2) subject to certain limitations, contributions to 

charitable organizations, including unreimbursed expenses incurred in performing volunteer 

services for such an organization.71

 The amount of State or local taxes taken into account in determining the deduction for 

taxes is reduced by the amount of any excludible qualified State or local tax benefit. Similarly, 

expenses paid or incurred by an individual in connection with the performance of services as a 

member of a qualified volunteer emergency response organization are taken into account for 

 69 IRS Chief Counsel Advice 200302045 (December 3, 2002). 

70 Sec. 139B. Under section 3121(a)(23), the exclusion applied also for purposes of taxes under the 

Federal Insurance Contributions Act (“FICA”). 

71 Secs. 164(a) and 170. 
31 

purposes of the charitable deduction only to the extent the expenses exceed the amount of any 

excludible qualified reimbursement payment. 

Description of Proposal 

The proposal reinstates for one year the exclusions for qualified State or local tax benefits 

and qualified reimbursement payments provided to members of qualified volunteer emergency 

response organizations. The proposal also increases the exclusion for qualified reimbursement 

payments to $50 for each month during which a volunteer performs services. Under the 

proposal, the exclusions for qualified State or local tax benefits and qualified reimbursement 

payments do not apply for taxable years beginning after December 31, 2017. 

Effective Date 

The proposal is effective for taxable years beginning after December 31, 2016. As 

described above, the exclusions do not apply for taxable years beginning after December 31, 

2017. Thus, the exclusions apply only for taxable years beginning during 2017. 

 
32 

H. Treatment of Qualified Equity Grants 

Present Law 

Income tax treatment of employer stock transferred to an employee 

Specific rules apply to property, including employer stock, transferred to an employee in 

connection with the performance of services.72 These rules govern the amount and timing of 

income inclusion by the employee and the amount and timing of the employer’s compensation 

deduction. 

Under these rules, an employee generally must recognize income for the taxable year in 

which the employee’s right to the stock is transferable or is not subject to a substantial risk of 

forfeiture (referred to herein as “substantially vested”). Thus, if the employee’s right to the stock 

is substantially vested when the employee receives the stock, income is recognized for the 

taxable year in which received. If the employee’s right to the stock is not substantially vested at 

the time of receipt, in general, income is recognized for the taxable year in which the employee’s 

right becomes substantially vested.73 The amount includible in the employee’s income is the 

excess of the fair market value of the stock (at the time of receipt if substantially vested at that 

time or, if not, at the time of substantial vesting) over the amount, if any, paid by the employee 

for the stock. 

In general, an employee’s right to stock or other property is subject to a substantial risk of 

forfeiture if the employee’s right to full enjoyment of the property is subject to a condition, such 

as the future performance of substantial services.74 An employee’s right to stock or other 

property is transferable if the employee can transfer an interest in the property to any person 

other than the transferor of the property.75 Thus, generally, employer stock transferred to an 

employee by an employer is not transferable merely because the employee can sell it back to the 

employer. 

In the case of stock transferred to an employee, the employer is allowed a deduction (to 

the extent a deduction for a business expense is otherwise allowable) equal to the amount 

 72 Sec. 83. Section 83 applies generally to transfers of any property, not just employer stock, in connection 

with the performance of services by any service provider, not just an employee. However, the proposal described 

herein applies only with respect to certain employer stock transferred to employees. 

73 Under section 83(b), if an employee’s right to the stock is not substantially vested at the time of receipt 

(nonvested stock), the employee may nevertheless elect within 30 days of receipt to recognize income for the 

taxable year of receipt, referred to as a “section 83(b)” election. Under Treas. Reg. sec. 1.83-2, the employee makes 

an election by filing with the Internal Revenue Service a written statement that includes the fair market value of the 

property at the time of receipt and the amount (if any) paid for the property. The employee must also provide a copy 

of the statement to the employer. 

74 See section 83(c)(1) and Treas. Reg. sec. 1.83-3(c) for the definition of substantial risk of forfeiture. 

75 Treas. Reg. sec. 1.83-3(d). In addition, under section 83(c)(2), the right to stock is transferable only if 

any transferee’s right to the stock would not be subject to a substantial risk of forfeiture. 
33 

included in the employee’s income as a result of receipt of the stock.76 The deduction is allowed 

for the employer’s taxable year in which or with which ends the taxable year for which the 

amount is included in the employee’s income. 

These rules do not apply to the grant to an employee of a nonqualified option on 

employer stock unless the option has a readily ascertainable fair market value.77 Instead, these 

rules apply to the receipt of employer stock by the employee on exercise of the option. That is, if 

the right to the stock is substantially vested on receipt, income recognition applies for the taxable 

year of receipt. If the right to the stock is not substantially vested on receipt, the timing of 

income inclusion is determined under the rules applicable to the receipt of nonvested stock. In 

either case, the amount includible in income by the employee is the excess of the fair market 

value of the stock as of the time of income inclusion, less the exercise price paid by the 

employee and the amount, if any, paid by the employee for the option. The employer’s 

deduction is also determined under these rules. 

In some cases, the transfer of employer stock to an employee may be in settlement of 

restricted stock units. Restricted stock unit (“RSU”) is a term used for an arrangement under 

which an employee has the right to receive at a specified time in the future an amount 

determined by reference to the value of one or more shares of employer stock. An employee’s 

right to receive the future amount may be subject to a condition, such as continued employment 

for a certain period or the attainment of certain performance goals. The payment to the 

employee of the amount due under the arrangement is referred to as settlement of the RSU. The 

arrangement may provide for the settlement amount to be paid in cash or in employer stock (or 

either). The receipt of employer stock in settlement of an RSU is subject to the same rules as 

other receipts of employer stock with respect to the timing and amount of income inclusion by 

the employee and the employer’s deduction. 

Employment taxes and reporting 

Employment taxes generally consist of taxes under the Federal Insurance Contributions 

Act (“FICA”), tax under the Federal Unemployment Tax Act (“FUTA”), and income taxes 

required to be withheld by employers from wages paid to employees (“income tax 

withholding”).78 Unless an exception applies under the applicable rules, compensation provided 

to an employee constitutes wages subject to these taxes. 

FICA imposes tax on employers and employees, generally based on the amount of wages 

paid to an employee during the year. The tax imposed on the employer and on the employee is 

 76 Sec. 83(h). 

77 See section 83(e)(3) and Treas. Reg. sec. 1.83-7. A nonqualified option is an option on employer stock 

that is not a statutory option, discussed below. 

78 Secs. 3101-3128 (FICA), 3301-3311 (FUTA), and 3401-3404 (income tax withholding). Instead of 

FICA taxes, railroad employers and employees are subject, under the Railroad Retirement Tax Act (“RRTA”), 

sections 3201-3241, to taxes equivalent to FICA taxes with respect to compensation as defined for RRTA purposes. 

Sections 3501-3510 provide additional rules relating to all these taxes. 
34 

each composed of two parts: (1) the Social Security or old age, survivors, and disability 

insurance (“OASDI”) tax equal to 6.2 percent of covered wages up to the OASDI wage base 

($118,500 for 2016); and (2) the Medicare or hospital insurance (“HI”) tax equal to 1.45 percent 

of all covered wages.79 The employee portion of FICA tax generally must be withheld and 

remitted to the Federal government by the employer. FICA tax withholding applies regardless of 

whether compensation is provided in the form of cash or a noncash form, such as a transfer of 

property (including employer stock) or in-kind benefits.80

FUTA imposes a tax on employers of six percent of wages up to the FUTA wage base of 

$7,000. 

Income tax withholding generally applies when wages are paid by an employer to an 

employee, based on graduated withholding rates set out in tables published by the Internal 

Revenue Service (“IRS”).81 Like FICA tax withholding, income tax withholding applies 

regardless of whether compensation is provided in the form of cash or a noncash form, such as a 

transfer of property (including employer stock) or in-kind benefits. 

An employer is required to furnish each employee with a statement of compensation 

information for a calendar year, including taxable compensation, FICA wages, and withheld 

income and FICA taxes.82 In addition, information relating to certain nontaxable items must be 

reported, such as certain retirement and health plan contributions. The statement, made on 

Form W-2, Wage and Tax Statement, must be provided to each employee by January 31 of the 

succeeding year.83

Statutory options 

Two types of statutory options apply with respect to employer stock: incentive stock 

options (“ISOs”) and options provided under an employee stock purchase plan (“ESPP”).84 

 79 The employee portion of the HI tax under FICA (not the employer portion) is increased by an additional 

tax of 0.9 percent on wages received in excess of a threshold amount. The threshold amount is $250,000 in the case 

of a joint return, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other 

case. 

80 Under section 3501(b), employment taxes with respect to noncash fringe benefits are to be collected (or 

paid) by the employer at the time and in the manner prescribed by the Secretary of the Treasury (“Treasury”). 

Announcement 85-113, 1985-31 I.R.B. 31, provides guidance on the application of employment taxes with respect 

to noncash fringe benefits. 

81 Sec. 3402. Specific withholding rates apply in the case of supplemental wages. 

82 Secs. 6041 and 6051. 

83 Employers send Form W-2 information to the Social Security Administration, which records 

information relating to Social Security and Medicare and forwards the Form W-2 information to the IRS. 

Employees include a copy of Form W-2 with their income tax returns. 

84 Sections 421-424 govern statutory options. 
35 

Stock received pursuant to a statutory option is subject to special rules, rather than the rules for 

nonqualified options, discussed above. No amount is includible in an employee’s income on the 

grant or exercise of a statutory option.85 In addition, no deduction is allowed to the employer 

with respect to the option or the stock transferred to an employee on exercise. 

If a holding requirement is met with respect to the stock received on exercise of a 

statutory option and the employee later disposes of the stock, the employee’s gain generally is 

treated as capital gain rather than ordinary income. Under the holding requirement, the 

employee must not dispose of the stock within two years after the date the option is granted or 

one year after the date the option is exercised. If a disposition occurs before the end of the 

required holding periods (a “disqualifying disposition”), statutory option treatment no longer 

applies. Instead, the income realized on the disqualifying disposition, up to the amount of 

income that would have applied if the option had been a nonqualified option, is includible in 

income by the employee as compensation received in the taxable year in which the disposition 

occurs and a corresponding deduction is allowable to the employer for the taxable year in which 

the disposition occurs. 

Employment taxes do not apply with respect to the grant of a statutory option, the receipt 

of stock pursuant to the option, or a disqualifying disposition of the stock.86

Nonqualified deferred compensation 

Compensation is generally includible in an employee’s income when paid to the 

employee. However, in the case of a nonqualified deferred compensation plan,87 unless the 

arrangement meets certain requirements, the amount of deferred compensation is includible in 

income for the taxable year when earned (or, if later, when not subject to a substantial risk of 

forfeiture) even if payment will not occur until a later year.88 In general, under these 

requirements, the time when nonqualified deferred compensation will be paid must be specified 

at the time of deferral with limits on further deferral after the time for payment. 

Nonqualified options on employer stock may be structured so as not to be considered 

nonqualified deferred compensation and thus not subject to these rules.89 An arrangement 

 85 Under section 56(b)(3), this income tax treatment with respect to stock received on exercise of an ISO 

does not apply for purposes of the alternative minimum tax under section 55. 

86 Secs. 3121(a)(22), 3306(b)(19), and the last sentence of section 421(b). 

87 Compensation earned by an employee is generally paid to the employee shortly after being earned. 

However, in some cases, payment is deferred to a later period, referred to as “deferred compensation.” Deferred 

compensation may be provided through a plan that receives tax-favored treatment, such as a qualified retirement 

plan under section 401(a). Deferred compensation provided through a plan that is not eligible for tax-favored 

treatment is referred to as “nonqualified” deferred compensation. 

88 Section 409A and the regulations thereunder provide rules for nonqualified deferred compensation. 

89 Treas. Reg. sec. 1.409A-1(b)(5). In addition, statutory option arrangements are not nonqualified 

deferred compensation arrangements. 
36 

providing RSUs is considered a nonqualified deferred compensation plan and is subject to these 

rules, including the limits 

Description of Proposal 

In general 

The proposal allows a qualified employee to elect to defer, for income tax purposes, the 

inclusion in income of the amount of income attributable to qualified stock transferred to the 

employee by the employer.90 An election to defer income inclusion (“inclusion deferral 

election”) with respect to qualified stock must be made no later than 30 days after the first time 

the employee’s right to the stock is substantially vested.91 Absent an inclusion deferral election 

under the proposal, the income is includable for the taxable year in which the qualified 

employee’s right to the qualified stock is substantially vested under present law. 

If an employee elects to defer income inclusion, the income must be included in the 

employee’s income for the taxable year that includes the earliest of (1) the first date the qualified 

stock becomes transferable, including transferable to the employer;92 (2) the date the employee 

first becomes an excluded employee (as described below); (3) the first date on which any stock 

of the employer becomes readily tradable on an established securities market;93 (4) the date five 

years after the date the employee’s right to the stock becomes substantially vested; and (5) the 

date on which the employee revokes his or her inclusion deferral election.94

An employee may not make an inclusion deferral election for a year with respect to 

qualified stock if, in the preceding calendar year, the corporation purchased any of its 

outstanding stock unless at least 25 percent of the total dollar amount of the stock so purchased is 

stock with respect to which an inclusion deferral election is in effect (“deferral stock”) and the 

determination of which individuals from whom deferral stock is purchased is made on a 

reasonable basis.95 For purposes of this requirement, stock purchased from an individual is not 

treated as deferral stock (and the purchase is not treated as a purchase of deferral stock) if, 

 90 The proposal does not apply to income with respect to nonvested stock that is includible as a result of a 

section 83(b) election. 

91 An inclusion deferral election is made in a manner similar to the manner in which a section 83(b) 

election is made. Thus, as in the case of a section 83(b) election under present law, the employee must provide a 

copy of the inclusion deferral election to the employer. 

92 Thus, for this purpose, the qualified stock is considered transferable if the employee has the ability to 

sell the stock to the employer (or any other person). 

93 An established securities market is determined for this purpose by the Secretary, but does not include 

any market unless the market is recognized as an established securities market for purposes of another Code 

provision. 

94 An inclusion deferral election is revoked at the time and in the manner as the Secretary provides. 

95 This requirement is met if the stock purchased by the corporation includes all the corporation’s 

outstanding deferral stock. 
37 

immediately after the purchase, the individual holds any deferral stock with respect to which an 

inclusion deferral election has been in effect for a longer period than the election with respect to 

the purchased stock. Thus, in general, in applying the purchase requirement, an individual’s 

deferral stock with respect to which an inclusion deferral election has been in effect for the 

longest periods must be purchased first. A corporation that has deferral stock outstanding as of 

the beginning of any calendar year and that purchases any of its outstanding stock during the 

calendar year must report on its income tax return for the taxable year in which, or with which, 

the calendar year ends the total dollar amount of the outstanding stock purchased during the 

calendar year and such other information as the Secretary may require for purposes of 

administering this requirement. 

A qualified employee may make an inclusion deferral election with respect to qualified 

stock attributable to a statutory option. In that case, the option is not treated as a statutory option 

and the rules relating to statutory options and related stock do not apply. In addition, an 

arrangement under which an employee may receive qualified stock is not treated as a 

nonqualified deferred compensation plan solely because of an employee’s ability to make an 

inclusion deferral election. 

Deferred income inclusion applies also for purposes of the employer’s deduction of the 

amount of income attributable to the qualified stock. That is, if an employee makes an inclusion 

deferral election, the employer’s deduction is deferred until the employer’s taxable year in which 

or with which ends the taxable year of the employee for which the amount is included in the 

employee’s income as described in (1)-(5) above. 

Qualified employee and qualified stock 

Under the proposal, a qualified employee means an individual who is not an excluded 

employee and who agrees, in the inclusion deferral election, to meet the requirements necessary 

(as determined by the Secretary) to ensure the income tax withholding requirements of the 

employer corporation with respect to the qualified stock (as described below) are met. For this 

purpose, an excluded employee with respect to a corporation is any individual (1) who is, or has 

been at any time during the 10 preceding calendar years, a one-percent owner of the 

corporation,96 (2) who is, or has been at any prior time, the chief executive officer or chief 

financial officer of the corporation or an individual acting in either capacity, (3) who is a family 

member of an individual described in (1) or (2),97 or (4) who is, or has been for any of the 

10 preceding taxable years, one of the four highest compensated officers of the corporation.98

 96 One-percent owner status is determined under the top-heavy rules for qualified retirement plans, that is, 

section 416(i)(1)(B)(ii). 

97 In the case of one-percent owners, this results from application of the attribution rules of section 318 

under section 416(i)(1)(B)(i)(II). Family members are determined under section 318(a)(1) and generally include an 

individual’s spouse, children, grandchildren and parents. 

98 Highest paid employee status is determined at the close of the corporation’s taxable year. 
38 

Qualified stock is any stock of a corporation if-- 

 an employee receives the stock in connection with the exercise of an option or in 

settlement of an RSU, and 

 the option or RSU was provided by the corporation to the employee in connection 

with the performance of services and in a year in which the corporation was an 

eligible corporation (as described below). 

However, qualified stock does not include any stock if, at the time the employee’s right 

to the stock becomes substantially vested, the employee may sell the stock to, or otherwise 

receive cash in lieu of stock from, the corporation. 

A corporation is an eligible corporation with respect to a calendar year if (1) no stock of 

the employer corporation (or any predecessor) is readily tradable on an established securities 

market during any preceding calendar year,99 and (2) the corporation has a written plan under 

which, in the calendar year, not less than 80 percent of all employees who provide services to the 

corporation in the United States (or any U.S. possession) are granted stock options, or restricted 

stock units (“RSUs”), with the same rights and privileges to receive qualified stock (“80-percent 

requirement”).100 For this purpose, in general, the determination of rights and privileges with 

respect to stock is determined in a similar manner as provided under the present-law ESPP 

rules.101 However, employees will not fail to be treated as having the same rights and privileges 

to receive qualified stock solely because the number of shares available to all employees is not 

equal in amount, provided that the number of shares available to each employee is more than a 

de minimis amount. In addition, rights and privileges with respect to the exercise of a stock 

option are not treated for this purpose as the same as rights and privileges with respect to the 

settlement of an RSU.102

For purposes of the proposal, corporations that are members of the same controlled group 

are treated as one corporation. 

Notice, withholding and reporting requirements 

Under the proposal, a corporation that transfers qualified stock to a qualified employee 

must provide a notice to the qualified employee at the time (or a reasonable period before) the 

 99 This requirement continues to apply up to the time an inclusion deferral election is made. That is, under 

the proposal, no inclusion deferral election may be made with respect to qualified stock if any stock of the 

corporation is readily tradable on an established securities market at any time before the election is made. 

100 In applying the requirement that 80 percent of employees receive stock options or RSUs, excluded 

employees and part-time employees are not taken into account. For this purpose, part-time employee is defined as 

under section 4980E(d)(4), that is, an employee customarily employed for fewer than 30 hours per week. 

101 Sec. 423(b)(5). 

102 Under a transition rule, in the case of a calendar year beginning before January 1, 2017, the 80-percent 

requirement is applied without regard to whether the rights and privileges with respect to the qualified stock are the 

same. 
39 

employee’s right to the qualified stock is substantially vested (and income attributable to the 

stock would be includible absent an inclusion deferral election). The notice must (1) certify to 

the employee that the stock is qualified stock, and (2) notify the employee (a) that the employee 

may elect to defer income inclusion with respect to the stock and (b) that, if the employee makes 

an inclusion deferral election, the amount of income required to be included at the end of the 

deferral period will be based on the value of the stock at the time the employee’s right to the 

stock is substantially vested, notwithstanding whether the value of the stock has declined during 

the deferral period, and the amount of income to be included at the end of the deferral period will 

be subject to withholding as provided under the proposal, as well as of the employee’s 

responsibilities with respect to required withholding. Failure to provide the notice may result in 

the imposition of a penalty of $100 for each failure, subject to a maximum penalty of $50,000 for 

all failures during any calendar year. 

An inclusion deferral election applies only for income tax purposes. The application of 

FICA and FUTA are not affected. The proposal includes specific income tax withholding and 

reporting requirements with respect to income subject to an inclusion deferral election. 

For the taxable year for which income subject to an inclusion deferral election is required 

to be included in income by the employee (as described above), the amount required to be 

included in income is treated as wages with respect to which the employer is required to 

withhold income tax at a rate not less than the highest income tax rate applicable to individual 

taxpayers.103 The employer must report on Form W-2 the amount of income covered by an 

inclusion deferral election (1) for the year of deferral and (2) for the year the income is required 

to be included in income by the employee. In addition, for any calendar year, the employer must 

report on Form W-2 the aggregate amount of income covered by inclusion deferral elections, 

determined as of the close of the calendar year. 

Effective Date 

The proposal generally applies with respect to stock attributable to options exercised or 

RSUs settled after December 31, 2016. Under a transition rule, until the Secretary (or the 

Secretary’s delegate) issues regulations or other guidance implementing the 80-percent and 

employer notice requirements under the proposal, a corporation will be treated as complying 

with those requirements (respectively) if it complies with a reasonable good faith interpretation 

of the requirements. The penalty for a failure to provide the notice required under the proposal 

applies to failures after December 31, 2016. 

 103 That is, the maximum rate of tax in effect for the year under section 1. The proposal specifies that 

qualified stock is treated as a noncash fringe benefit for income tax withholding purposes. 
40 

I. Modifications to Required Minimum Distribution Rules 

Present Law 

Minimum distribution rules apply to tax-favored employer-sponsored retirement plans 

and IRAs.104 Employer-sponsored retirement plans are of two general types: defined benefit 

plans, under which benefits are determined under a plan formula and paid from general plan 

assets, rather than individual accounts; and defined contribution plans, under which benefits are 

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

and losses. 

In general, under the minimum distribution rules, distribution of minimum benefits must 

begin to an employee (or IRA owner) no later than a required beginning date and a minimum 

amount must be distributed each year (sometimes referred to as “lifetime” minimum distribution 

requirements). These lifetime requirements do not apply to a Roth IRA.105 Minimum 

distribution rules also apply to benefits payable with respect to an employee (or IRA owner) who 

has died (sometimes referred to as “after-death” minimum distribution requirements). The 

regulations provide a methodology for calculating the required minimum distribution from an 

individual account under a defined contribution plan or from an IRA.106 In the case of annuity 

payments under a defined benefit plan or an annuity contract, the regulations provide 

requirements that the stream of annuity payments must satisfy. 

Failure to comply with the minimum distribution requirement results in an excise tax 

imposed on the individual who was required to take the distributions equal to 50 percent of the 

required minimum amount not distributed for the year.107 The excise tax may be waived in 

certain cases. For qualified retirement plans, satisfying the minimum distribution requirement 

under the plan terms and in operation is also a qualification requirement for the trust of the plan 

to remain tax-exempt. 

Required beginning date 

For traditional IRAs, the required beginning date is April 1 following the calendar year in 

which the employee (or IRA owner) attains age 701⁄2. For employer-sponsored retirement plans, 

 104 Sections 401(a)(9), 403(b)(1), 408(a)(6), 408(b)(3), and 457(d)(2). Tax-favored employer-sponsored 

retirement plans include qualified retirement plans and annuities under sections 401(a) and 403(a), tax-deferred 

annuity plans under section 403(b), and governmental eligible deferred compensation plans under section 457(b). 

Minimum distribution requirements also apply to eligible deferred compensation plans under section 457(b) of taxexempt employers. 

105 Sec. 408A(c)(5). 

106 Reflecting the directive in section 823 of the Pension Protection Act of 2006 (Pub. L. No. 109-280), 

pursuant to Treas. Reg. sec. 1.401(a)(9)-1, A-2(d), a governmental plan within the meaning of section 414(d) or a 

governmental eligible deferred compensation plan is treated as having complied with the statutory minimum 

distribution rules if the plan complies with a reasonable and good faith interpretation of those rules. 

107 Section 4974. 
41 

for an employee other than an employee who is a five-percent owner in the year the employee 

attains age 701⁄2, the required beginning date is April 1 after the later of the calendar year in 

which the employee attains age 701⁄2 or retires. For an employee who is a five-percent owner 

under an employer-sponsored tax-favored retirement plan in the year the employee attains age 

701⁄2, the required beginning date is the same as for IRAs even if the employee continues to work 

past age 701⁄2. 

Lifetime rules 

While an employee (or IRA owner) is alive, distributions of the individual’s interest are 

required to be made (in accordance with regulations) over the life or life expectancy of the 

employee (or IRA owner), or over the joint lives or joint life expectancy of the employee (or IRA 

owner) and a designated beneficiary.108 For defined contribution plans and IRAs, the required 

minimum distribution for each year is determined by dividing the account balance as of the end 

of the prior year by a distribution period which, while the employee (or IRA owner) is alive, is 

the factor for the employee (or IRA owner’s) age from the uniform lifetime table included in the 

Treasury regulations.109 The distribution period for annuity payments under a defined benefit 

plan or annuity contract (to the extent not limited to the life of the employee (or IRA owner) or 

the joint lives of the employee (or IRA owner) and a designated beneficiary) is generally subject 

to the same limitations as apply to individual accounts. 

After-death rules 

Payments over a distribution period 

The after-death minimum distributions rules vary depending on (i) whether an employee 

(or IRA owner) dies on or after the required beginning date or before the required beginning 

date, and (ii) whether there is a designated beneficiary for the benefit.110 Under the regulations, a 

 108 Section 401(a)(9)(A). 

109 Treas. Reg. sec. 1.401(a)(9)-5. This table is based on the joint life and last survivor expectancy of the 

individual and a hypothetical beneficiary 10 years younger. For an individual with a spouse as designated 

beneficiary who is more than 10 years younger (and thus the number of years in the couple’s joint life and last 

survivor expectancy is greater than the uniform lifetime table), the joint life expectancy and last survivor expectancy 

of the couple (calculated using the table in the regulations) is used. For this purpose and other special rules that 

apply to the surviving spouse as beneficiary, a former spouse to whom all or a portion of an employee’s benefit is 

payable pursuant to a qualified domestic relations order (within the meaning of section 414(p)) is treated as the 

spouse (including a surviving spouse) of the employee for purposes of section 401(a)(9). 

110 In the case of amounts for which the employee or IRA owner’s surviving spouse is the beneficiary, the 

surviving spouse generally is permitted to do a tax-free rollover of such amounts into an IRA (or account of a taxfavored employer-sponsored plan of the spouse’s employer) established in the surviving spouse’s name as IRA 

owner or employee. The rules applicable to the rollover account, including the minimum distribution rules, are the 

same rules that apply to an IRA owner or employee. In the case of an IRA for which the spouse is sole beneficiary, 

this is can be accomplished by simply renaming the IRA as an IRA held by the spouse as IRA owner rather than as a 

beneficiary. 
42 

designated beneficiary is an individual designated as a beneficiary under the plan or IRA.111

Similar to the lifetime rules, for defined contribution plans and IRAs (“individual accounts”), the 

required minimum distribution for each year after the death of the employee (or IRA owner) is 

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

distribution period. 

If an employee (or IRA owner) dies on or after the required beginning date, the basic 

statutory rule is that the remaining interest must be distributed at least as rapidly as under the 

method of distribution being used before death.112 Under the regulations, for individual 

accounts, this rule is also interpreted as requiring the minimum required distribution to be 

calculated using a distribution period. If there is no designated beneficiary, the distribution 

period is equal to the remaining years of the employee’s (or IRA owner’s) life, as of the year of 

death.113 If there is a designated beneficiary, the distribution period (if longer) is the 

beneficiary’s life expectancy calculated using the life expectancy table in the regulations, 

determined in the year after the year of death.114 

If an employee (or IRA owner) dies before the required beginning date and any portion of 

the benefit is payable to a designated beneficiary, the statutory rule is that distributions are 

generally required to begin within one year of the employee’s (or IRA owner’s) death (or such 

later date as prescribed in regulations) and are permitted to be paid (in accordance with 

regulations) over the life or life expectancy of the designated beneficiary. If the beneficiary of 

the employee (or IRA owner) is the individual’s surviving spouse, distributions are not required 

to commence until the year in which the employee (or IRA owner) would have attained age 701⁄2. 

If the surviving spouse dies before the employee (or IRA owner) would have attained age 701⁄2, 

the after-death rules apply after the death of the spouse as though the spouse were the employee 

(or IRA owner). Under the regulations, for individual accounts, the required minimum 

distribution for each year is determined using a distribution period and the period is measured by 

the designated beneficiary’s life expectancy, calculated in the same manner as if the individual 

died on or after the required beginning date.115 

In cases where distribution after death is based on life expectancy (either the remaining 

life expectancy of the employee (or IRA owner) or a designated beneficiary), the distribution 

period generally is fixed at the employee’s (or IRA owner’s) death and then reduced by one for 

 111 Treas. Reg. sec. 1.401(a)(9)-4, A-1. The individual need not be named as long as the individual is 

identifiable under the terms of the plan (or IRA). There are special rules for multiple beneficiaries and for trusts 

named as beneficiary (where the beneficiaries of the trust are individuals). However, the fact that an interest under a 

plan or IRA passes to a certain individual under a will or otherwise under State law does not make that individual a 

designated beneficiary unless the individual is designated as a beneficiary under the plan or IRA. 

112 Section 401(a)(9)(B)(i). 

113 Treas. Reg. sec. 1.401(a)(9)-5, A-5(a)(2). 

114 Treas. Reg. sec. 1.401(a)(9)-5, A-5(a)(1). 

115 Treas. Reg. sec. 1.401(a)(9)-5, A-5(b). 
43 

each year that elapses after the year in which it is calculated. If the designated beneficiary dies 

during the distribution period, distributions continue to the subsequent beneficiaries over the 

remaining years in the distribution period.116 

The distribution period for annuity payments under a defined benefit plan or annuity 

contract (to the extent not limited to the life of a designated beneficiary) is generally subject to 

the same limitations as apply to individual accounts. 

Five-year rule 

If an employee (or IRA owner) dies before the required beginning date and there is no 

designated beneficiary, then the entire remaining interest of the employee (or IRA owner) must 

generally be distributed by the end of the fifth calendar year following the individual’s death.117

Defined benefit plans and annuity distributions 

The regulations provide rules for the amount of annuity distributions from a defined 

benefit plan, or from an annuity purchased by the plan from an insurance company, that are paid 

over life or life expectancy. Annuity distributions are generally required to be nonincreasing with 

certain exceptions, which include, for example, (i) increases to the extent of certain specified 

cost-of-living indices, (ii) a constant percentage increase (for a qualified defined benefit plan, the 

constant percentage cannot exceed five percent per year), (iii) certain accelerations of payments, 

and (iv) increases to reflect when an annuity is converted to a single life annuity after the death 

of the beneficiary under a joint and survivor annuity or after termination of the survivor annuity 

under a qualified domestic relations order.118 If distributions are in the form of a joint and 

survivor annuity and the survivor annuitant both is not the surviving spouse and is younger than 

the employee (or IRA owner), the survivor annuity benefit is limited to a percentage of the life 

annuity benefit for the employee (or IRA owner). The survivor benefit as a percentage of the 

benefit of the primary annuitant is required to be smaller (but not required to be less than 52 

percent) as the difference in the ages of the primary annuitant and the survivor annuitant become 

greater. 

 116 If the distribution period is based on the surviving spouse’s life expectancy (whether the employee or 

IRA owner’s death is before or after the required beginning date), the spouse’s life expectancy generally is 

recalculated each year while the spouse is alive and then fixed the year after the spouse’s death. 

117 Section 401(a)(9) (B)(ii) provides that the entire interest must be distributed within five years of the 

employee’s death. Treas. Reg. sec. 1.401(a)(9)-3, A-2, provides that this requirement is satisfied if the entire 

interest is distributed by the end of the fifth calendar year following the employee’s death. There are provisions in 

the regulations allowing a designated beneficiary to take advantage of the five-year rule. See Treas. Reg. secs. 

1.401(a)(9)-4, A-4, and 1.4974-2, A-7(b). 

118 Treas. Reg. sec. 1.401(a)(9)-6, A-14. 
44 

Plan amendment and anti-cut-back requirements 

Present law provides a remedial amendment period during which, under certain 

circumstances, a qualified retirement plan may be amended retroactively in order to comply with 

the qualification requirements.119 In general, plan amendments to reflect changes in the law 

generally must be made by the time prescribed by law for filing the income tax return of the 

employer for the employer’s taxable year in which the change in law occurs. The Secretary may 

extend the time by which plan amendments need to be made. 

The Code and ERISA generally prohibit plan amendment that reduce accrued benefits, 

including amendments that eliminate or reduce optional forms of benefit with respect to benefits 

already accrued except to the extent prescribed in regulations.120 This prohibition on the 

reduction of accrued benefits is commonly referred to as the “anti-cut-back rule.” 

Description of Proposal 

Change in after-death rules for defined contribution plans and IRAs 

The proposal changes the after-death required minimum distribution rules applicable to 

defined contribution plans and IRAs, as described below. However, the proposal only applies to 

the extent that the amount of an individual’s aggregate account balances under all IRAs and 

defined contributions plans, determined as of the date of death, exceeds $450,000 (indexed for 

inflation). Thus for example if an individual dies with aggregate account balances of $600,000, 

as of the date of death, present law continues to apply to $450,000, and the proposal applies to 

the remaining $150,000. 

If the individual has more than one beneficiary, the portion of the amount above 

$450,000 that is subject to the proposal with respect to each beneficiary is the amount that is the 

same proportion of the excess as the portion of the total to which the individual is entitled. The 

result is the same whether or not the beneficiary is an eligible beneficiary (as described below). 

Thus, under the example above, if the individual has two beneficiaries, one who is an eligible 

designated beneficiary, as discussed below, and one who is not an eligible designated 

beneficiary, each with a right to 50 percent of the aggregate amount, then present law applies for 

determining required minimum distributions for each beneficiary with respect to $225,000 and 

the proposal applies to $75,000. 

The proposal does not apply for determining after-death required minimum distributions 

from defined benefit plans. 

Expansion of five-year after-death rule for defined contributions plans 

Under the proposal, the five-year rule is the general rule for all distributions after death 

(regardless of whether the employee (or IRA owner) dies before, on, or after the required 

 119 Section 401(b). 

120 Section 411(d)(6) and ERISA section 204(g). 
45 

beginning date) unless the designated beneficiary is an eligible beneficiary as defined in the 

proposal. Thus, in the case of an ineligible beneficiary, distribution of the employee (or IRA 

owner’s) entire benefit is required to be distributed by the end of the fifth calendar year 

following the year of the employee or IRA owner’s death. 

Eligible beneficiaries 

For eligible beneficiaries, an exception to the five-year rule (for death before the required 

beginning date under present law) applies whether or not the employee (or IRA owner) dies 

before, on, or after the required beginning date. The exception (similar to present law) generally 

allows distributions over life or life expectancy of an eligible beneficiary beginning in the year 

following the year of death. Eligible beneficiaries includes any beneficiary who, as of the date of 

death, is the surviving spouse of the employee (or IRA owner),121 is disabled, is a chronically ill 

individual, is an individual who is not more than 10 years younger than the employee (or IRA 

owner), or is a child of the employee (or IRA owner) who has not reached the age of majority. 

In the case of a child who has not reached the age of majority, calculation of the minimum 

required distribution under this exception is only allowed through the year that the child reaches 

the age of majority. 

Further, under the proposal, the five-year rule also applies after the death of an eligible 

beneficiary or after a child reaches the age of majority. Thus, for example, if a disabled child of 

an employee (or IRA owner) is an eligible beneficiary of a parent who dies when the child is age 

20 and the child dies at age 30, even though 52.1 years remain in measurement period,122 the 

disabled child’s remaining beneficiary interest must be distributed by the end of the fifth year 

following the death of the disabled child. If a child is an eligible beneficiary based on having not 

reached the age of majority before the employee’s (or IRA owner’s) death, the five-year rule 

applies beginning with the earlier of the date of the child’s death or the date that the child reaches 

the age of majority. The child’s entire interest must be distributed by the end of the fifth year 

following that date. 

As under present law, if the surviving spouse is the beneficiary, a special rule allows the 

commencement of distribution to be delayed until end of the year that the employee (or IRA 

owner) would have attained age 701⁄2. If the spouse dies before distributions were required to 

 121 As in the case of the present law special rule in section 401(a)(9)(B)(iv) for surviving spouses, spouse is 

not defined in the proposal. Under Treas. Reg. sec. 1.401(a)(9)-8, A-5, a spouse is the employee's spouse under 

applicable State law. In the case of a special rule for a surviving spouse, that determination is generally made based 

on the employee's marital status on the date of death. An exception is provided in Treas. Reg. sec. 1.401(a)(9)-6, A6, under which a former spouse to whom all or a portion of the employee's benefits is payable pursuant to a qualified 

domestics relations order as defined in section 414(p) is treated as the employee's spouse (including a surviving 

spouse). In the case of a qualified joint and survivor annuity under section 401(a)(11) and 417, the spouse is 

generally determined as of the annuity starting date. 

122 The measurement period is the life expectancy of the child calculated for the child’s age in the year 

after the employee’s (or IRA owner’s) death (age 21 (20 plus 1)). 
46 

begin to the spouse, the surviving spouse is treated as the employee (or IRA owner) in 

determining the required distributions to beneficiaries of the surviving spouse. 

Definitions of disabled and chronically ill individual 

Under the proposal, disabled means unable to engage in any substantial gainful activity 

by reason of any medically determinable physical or mental impairment which can be expected 

to end in death or to be for long-continued and indefinite duration.123 Further, under the 

definition, an individual is not considered to be disabled unless proof of the disability is 

furnished in such form and manner as the Secretary may require. Substantial gainful activity for 

this purpose is the activity, or a comparable activity, in which the individual customarily engaged 

prior to the arising of the disability (or prior to retirement if the individual was retired at the time 

the disability arose).124

Under the proposal, the definition of a chronically ill individual for purposes of qualified 

long-term care insurance125 is incorporated by reference with a modification. Under this 

definition, a chronically ill individual is any individual who (1) is unable to perform (without 

substantial assistance from another individual) at least two activities of daily living for an 

indefinite period (expected to be lengthy in nature)126 due to a loss of functional capacity, (2) has 

a level of disability similar (as determined under regulations prescribed by the Secretary in 

consultation with the Secretary of Health and Human Services) to the level of disability 

described above requiring assistance with daily living based on loss of functional capacity, or (3) 

requires substantial supervision to protect the individual from threats to health and safety due to 

severe cognitive impairment. The activities of daily living for which assistance is needed for 

purposes of determining loss of functional capacity are eating, toileting, transferring, bathing, 

dressing, and continence. 

Annuity payments under commercial annuities 

The proposal applies to after-death required minimum distributions under defined 

contribution plans and IRAs, including annuity contracts purchased from insurance companies 

under defined contribution plans or IRAs. 

 123 The definition of disabled in section 72(m)(7) is incorporated by reference. 

124 Treas. Reg. sec. 1.72-17(f). Under the regulations, in determining whether an individual is disabled, 

primary consideration is given to the nature and severity of the individual’s impairment. However, consideration is 

also given to other factors such as the individual’s education, training, and work experience. Whether an impairment 

in a particular case constitutes a disability is determined with reference to all the facts in the case. 

125 Section 7702B(c)(2). 

126 Section 7702B(c) only requires this period to be at least 90 days. 
47 

Effective Date 

General effective date 

In determining required minimum distributions after the death of an employee (or IRA 

owner), the proposal is generally effective for required minimum distributions with respect to 

employees (or IRA owners) with a date of death after December 31, 2016. 

Delayed effective date for governmental and collectively bargained plans 

In the case of a governmental plan (as defined in section 414(d)), in determining required 

minimum distributions after the death of an employee, the proposal applies to distributions with 

respect to employees who die after December 31, 2018. 

In the case of a collectively bargained plan,127 in determining required minimum 

distributions after the death of an employee, the proposal applies to distributions with respect to 

employees who die in calendar years beginning after the earlier of two dates. The first date is the 

later of (1) the date on which the last collective bargaining agreement ratified before date of 

enactment of the proposal terminates,128 or (2) December 31, 2016. The second date is 

December 31, 2018. 

Five-year rule after the death of a beneficiary 

In the case of an employee (or IRA owner) who dies before the effective date (as 

described below) for the plan (or IRA), if the designated beneficiary of the employee (or IRA 

owner) dies on or after the effective date, the proposal applies to any beneficiary of the 

designated beneficiary as though the designated beneficiary were an eligible beneficiary. Thus, 

the entire interest must be distributed by the end of the fifth calendar year after the death of the 

designated beneficiary. For this purpose, the effective date is the date of death of the employee 

(or IRA owner) used to determine when the proposal applies to the plan (or IRA), for example, 

before January 1, 2017 under the general effective date. 

Certain annuities grandfathered 

The modification to the after-death minimum distribution rules does not apply to a 

commercial annuity129 which is a binding annuity contract in effect on the date of enactment of 

this proposal and at all times thereafter. 

 127 A collectively bargained plan is a plan maintained pursuant to one or more collective bargaining 

agreements between employee representatives and one or more employers. 

128 The date that the last agreement terminates is determined without regard to any extension thereof 

agreed to on or after the date of enactment of this proposal. Further, any plan amendment made pursuant to a 

collective bargaining agreement relating to the plan that amends the plan solely to conform to any requirement 

added by this proposal shall not be treated as a termination of the collective bargaining agreement. 

129 See section 3405(e)(6) for the definition of commercial annuity. 
48 

Plan amendments made pursuant to the proposal 

A plan amendment made pursuant to the proposal (or regulations issued thereunder) may 

be retroactively effective and (except as provided by the Secretary) will not violate the anti-cutback rule, if, in addition to meeting the other applicable requirements described below, the 

amendment is made on or before the last day of the first plan year beginning after December 31, 

2018 (or in the case of a governmental or collectively bargained plan, December 31, 2020), or a 

later date prescribed by the Secretary. In addition, the plan will be treated as operated in 

accordance with plan terms during the period beginning with the date of the proposal or 

regulations take effect (or the date specified by the plan if the amendment is not required by the 

proposal or regulations) and ending on the last permissible date for the amendment (or, if earlier, 

the date the amendment is adopted). 

A plan amendment will not be considered to be pursuant to the proposal (or applicable 

regulations) if it has an effective date before the effective date of the provision under the 

proposal (or regulations) to which it relates. Similarly, the proposal does not provide relief from 

the anti-cut-back rule for periods prior to the effective date of the relevant portion of the proposal 

(or regulations) or the plan amendment. In order for an amendment to be retroactively effective 

and not violate the anti-cut-back rule, the plan amendment must apply retroactively for the 

period described in the preceding paragraph, and the plan must be operated in accordance with 

the amendment during that period. 

 
49 

J. Modification of Hardship Withdrawal Rules 

Present Law 

Subject to limits, a qualified defined contribution plan may allow employees to elect to 

have contributions made to the plan (referred to as “elective deferrals”) rather than receive the 

same amount as current compensation (referred to as a “section 401(k) plan”).130 Amounts 

attributable to elective deferrals generally are subject to distribution restrictions. Such amounts 

cannot be distributed before the earliest of the employee's severance from employment, death, 

disability or attainment of age 591⁄2 or termination of the plan. However, subject to certain 

conditions, elective deferrals, but not associated earnings, can also be distributed on account of 

hardship.131 

An employer may also make nonelective and matching contributions for employees 

under a section 401(k) plan. Elective deferrals, and matching contributions and after-tax 

employee contributions, are subject to special tests (“nondiscrimination tests”) to prevent 

discrimination in favor of highly compensated employees. Nonelective contributions and 

matching contributions that satisfy certain requirements (“qualified nonelective contributions and 

qualified matching contributions”) may be used to enable the plan to satisfy these 

nondiscrimination tests. One of the requirements is that these contributions be subject to the 

same distribution restrictions as elective deferrals except that these contributions (and 

attributable earnings) are not permitted to be distributed on account of hardship. 

Under present law, 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 need. Generally, the determination of whether these two requirements are met is 

based on the relevant facts and circumstances. However, a safe harbor applies under which a 

distribution may be deemed to be on account of hardship. One requirement of this safe harbor is 

that the employee represent that the need cannot be satisfied through currently available plan 

loans. 

Description of Proposal 

The proposal allows earnings on elective deferrals under a section 401(k) plan, as well as 

qualified nonelective contributions and qualified matching contributions (and attributable 

earnings), to be distributed on account of hardship. Further, a distribution is not treated as failing 

to be on account of hardship solely because the employee does not take any available plan loan. 

Effective Date 

The proposal is effective for plan years beginning after December 31, 2016. 

 130 Sec. 401(k). 

131 Distributions on account of hardship may be subject to an additional 10-percent early distribution tax 

under section 72(t). 
50 

K. Increased Penalties for Failure to File Retirement Plan Returns 

Present Law 

Form 5500 

An employer that maintains a pension, annuity, stock bonus, profit-sharing or other 

funded deferred compensation plan (or the plan administrator of the plan) is required to file an 

annual return containing information required under regulations with respect to the qualification, 

financial condition, and operation of the plan.132 The plan administrator of a defined benefit plan 

subject to the minimum funding requirements133 is required to file an annual actuarial report.134

These filing requirements are met by filing an Annual Return/Report of Employee Benefit Plan, 

Form 5500 series, and providing the information as required on the form and related 

instructions.135 A failure to file Form 5500 generally results in a penalty of $25 for each day 

during which the failure continues, subject to a maximum penalty of $15,000.136

Annual registration statement and notification of changes 

In the case of a plan subject to the vesting requirements under the Employee Retirement 

Income Security Act of 1974 (“ERISA”), the plan administrator is required to file a registration 

statement with the IRS with respect to any plan participant who (1) separated from service 

during the year and (2) has a vested benefit under the plan, but who was not paid the benefit 

during the year (a “deferred vested” benefit).137 The registration statement must include the name 

of the plan, the name and address of the plan administrator, the name and taxpayer identification 

number of the separated participant, and the nature, amount, and form of the participant’s 

deferred vested benefit. A failure to file a registration statement as required generally results in a 

penalty of $1 for each participant with respect to whom the failure applies, multiplied by the 

number of days during which the failure continues, subject to a maximum penalty of $5,000 for a 

failure with respect to any plan year.138

A plan administrator is also required to notify the IRS if certain information in a 

registration changes, specifically, any change in the name of the plan or in the name or address 

 132 Sec. 6058. 

133 Sec. 412. Most governmental plans (defined in section 414(d)) and church plans (defined in section 

414(e)) are exempt from the minimum funding requirements. 

134 Sec. 6059. 

135 Treas. Reg. secs. 301.6058-1(a) and 301.6059-1. 

136 Sec. 6652(e). 

137 Code sec. 6057(a). Under Code section 6057(e) and ERISA section 105(c), similar information must be 

provided to the separated participant. 

138 Sec. 6652(d)(1). 
51 

of the plan administrator, the termination of the plan, or the merger or consolidation of the plan 

with any other plan or its division into two or more plans. A failure to file a required notification 

of change generally results in a penalty of $1 for each day during which the failure continues, 

subject to a maximum penalty of $1,000 for any failure.139

Withholding notices 

Withholding requirements apply to distributions from tax-favored employer-sponsored 

retirement plans and IRAs, but, except in the case of certain distributions, payees may generally 

elect not to have withholding apply.140 A plan administrator or IRA custodian is required to 

provide payees with notices of the right to elect no withholding. A failure to provide a required 

notice generally results in a penalty of $10 for each failure, subject to a maximum penalty of 

$5,000 for all failures during any calendar year.141

Description of Proposal 

Form 5500 

Under the proposal, a failure to file Form 5500 generally results in a penalty of $100 for 

each day during which the failure continues, subject to a maximum but the total amount imposed 

under this subsection on any person for failure to file any return shall not exceed $50,000. 

Annual registration statement and notification of changes 

Under the proposal, a failure to file a registration statement as required generally results 

in a penalty of $2 for each participant with respect to whom the failure applies, multiplied by the 

number of days during which the failure continues, subject to a maximum penalty of $10,000 for 

a failure with respect to any plan year. A failure to file a required notification of change 

generally results in a penalty of $2 for each day during which the failure continues, subject to a 

maximum penalty of $5,000 for any failure. 

Withholding notices 

Under the proposal, a failure to provide a required withholding notice generally results in 

a penalty of $100 for each failure, subject to a maximum penalty of $50,000 for all failures 

during any calendar year. 

 139 Sec. 6652(d)(2). 

140 Sec. 3405. 

141 Sec. 6652(h). 
52 

Effective Date 

The proposal is effective for returns, statements and notifications required to be filed, and 

withholding notices required to be provided, in calendar years beginning after December 31, 

2016. 

 
53 

L. Modification of User Fee Requirements for Installment Agreements 

Present Law 

The Code authorizes the IRS to enter into written agreements with any taxpayer under 

which the taxpayer agrees to pay taxes owed, as well as interest and penalties, in installments 

over an agreed schedule, if the IRS determines that doing so will facilitate collection of the 

amounts owed.142 This agreement provides for a period during which IRS enforcement actions 

are held in abeyance while payments are made.143 An installment agreement generally does not 

reduce the amount of taxes, interest, or penalties owed. However, the IRS is authorized to enter 

into installment agreements with taxpayers which do not provide for full payment of the 

taxpayer’s liability over the life of the agreement. The IRS is required to review such partial 

payment installment agreements at least every two years to determine whether the financial 

condition of the taxpayer has significantly changed so as to warrant an increase in the value of 

the payments being made. 

Taxpayers can request an installment agreement by filing Form 9465, Installment 

Agreement Request.144 If the request for an installment agreement is approved by the IRS, the 

IRS charges a user fee.145 Under sections 300.1 and 300.2 of the Treasury Regulations, the IRS 

currently charges $120 for entering into an installment agreement.146 If the application is for a 

direct debit installment agreement, whereby the taxpayer authorizes the IRS to request the 

monthly electronic transfer of funds from the taxpayer’s bank account to the IRS, the fee is 

reduced to $52. In addition, regardless of the method of payment, the fee is $43 for low-income 

taxpayers. For this purpose, low-income is defined as a person who falls below 250 percent of 

the Federal poverty guidelines published annually. Finally, there is no user fee if the agreement 

is for a term of 120 days or less (i.e., a short-term agreement). 

 142 Sec. 6159. 

143 Sec. 6331(k). 

144 The IRS accepts applications for installment agreements online, from individuals and businesses, if the 

total tax, penalties and interest is below $50,000 for the former, and $25,000 for the latter. 

145 31 U.S.C. sec. 9701; Treas. Reg. sec. 300.1. The Independent Offices Appropriations Act of 1952 

(IOAA), 65 Stat. B70, (June 27, 1951). A discussion of the IRS practice regarding user fees and a list of actions for 

which fees are charged is included in the Internal Revenue Manual. See “User Fees,” paragraph 1.32.19 IRM, 

available at https://www.irs.gov/irm/part1/irm_01-032-019.html. 

146 On August 22, 2016, Treasury issued proposed changes) to the schedule of user fees for installment 

agreements, effective January 2017, based on a biennial review of the costs of administering the program. 

https://www.irs.gov/uac/irs-proposes-revised-fees-for-installment-agreements. A public hearing on the proposed 

regulations is scheduled for October 19, 2016. If finalized, the revised schedule imposes user fees in the following 

amounts: $225 for a regular installment agreement; $107 for a regular direct debit installment agreement; $149 for 

online payment agreement; $31 for a direct debit online payment agreement; $89 for a restructured or reinstated 

agreement; and $43 for an agreement with a low-income taxpayer. 
54 

Description of Proposal 

The proposal generally prohibits increases in the amount of user fees charged by the IRS 

for installment agreements. For low-income taxpayers (those whose adjusted gross income, as 

determined for the most recent year for which such information is available, does not exceed 250 

percent of the applicable poverty level as determined by the Secretary), it alleviates the user fee 

requirement in two ways. First, it waives the user fee if the low-income taxpayer enters into an 

installment agreement under which the taxpayer agrees to make automated installment payments 

through a debit account. Second, it provides that low-income taxpayers who are unable to make 

payments electronically remain subject to the required user fee, but the fee is reimbursed upon 

completion of the installment agreement. 

Effective Date 

The proposal applies to agreements entered into on or after the date that is 60 days after 

the date of enactment. 
55 

M. Increase Information Sharing to Administer Excise Taxes 

Present Law 

Generally, tax returns and return information (“tax information”) are confidential and 

may not be disclosed unless authorized in the Code.147 Return information includes data 

received, collected or prepared by the Secretary with respect to the determination of the 

existence or possible existence of liability of any person under the Code for any tax, penalty, 

interest, fine, forfeiture, or other imposition or offense. Criminal penalties apply for the 

unauthorized inspection or disclosure of tax information. Willful unauthorized disclosure is a 

felony under section 7213 and the willful unauthorized inspection of tax information is a 

misdemeanor under section 7213A. Taxpayers may also pursue a civil cause of action for 

disclosures and inspections not authorized by section 6103.148 

Section 6103 provides exceptions to the general rule of confidentiality, detailing 

permissible disclosures. Under section 6103(h)(1), tax information is open to inspection by or 

disclosure to Treasury officers and employees whose official duties require the inspection or 

disclosure for tax administration purposes. 

Under section 6103(o), tax information with respect to taxes on alcohol, tobacco and 

firearms is open to inspection by or disclosure to officers and employees of a Federal agency 

whose official duties require such inspection or disclosure. The Alcohol and Tobacco Tax and 

Trade Bureau (“TTB”) is a bureau under the Treasury. The TTB collects Federal excise taxes on 

alcohol, tobacco, firearms, and ammunition and ensures compliance with Federal tobacco and 

alcohol permitting, labeling, and marketing. 

Prior to 2003, customs officials who had responsibilities for enforcing and/or collecting 

excise taxes on imports were employees of the Treasury Department. Thus, prior to 2003, section 

6103(h)(1) allowed disclosure of tax information by the IRS and TTB to these customs officials 

in the performance of their duties. In 2003, U.S. Customs and Border Protection became an 

official agency of the U.S. Department of Homeland Security.149 At that time, Customs and 

Border Protection employees (“customs officials”) were transferred from Treasury to the 

Department of Homeland Security. While the U.S. Customs Service moved from Treasury to the 

Department of Homeland Security, the authority to collect excise taxes remains with Treasury.150 

 147 Sec. 6103(a). 

148 Sec. 7431. 

149 The Homeland Security Act of 2002, Pub. L. 107-296 (“Homeland Security Act”), enacted November 

25, 2002 established the U.S. Department of Homeland Security. Several agencies were combined under this new 

department. 

150 Sec. 412 of the Homeland Security Act. 
56 

The heavy vehicle use tax, an annual highway use tax, is imposed on the use of any 

highway motor vehicle that has a gross weight of 55,000 pounds or more.151 Proof of payment 

of the heavy vehicle use tax must be presented to customs officials upon entry into the United 

States of any highway motor vehicle subject to the tax and that has a base in a contiguous foreign 

country.152 If the operator of the vehicle is unable to present proof of payment of the tax with 

respect to the vehicle, entry into the United States may be denied.153 

Description of Proposal 

The proposal would allow employees of the U.S. Customs and Border Protection to have 

access to returns and return information related to the heavy vehicle use tax. 

Effective Date 

The proposal is effective for disclosures made on or after the date of enactment. 

 

 151 Sec. 4481(a). 

152 Treas. Reg. 41.6001-3(a). 

153 Treas. Reg. 41.6001-3(b). 
57 

N. Repeal of Partnership Technical Terminations 

Present Law 

Present law provides that a partnership is terminated under specified circumstances.154 

Rules are also provided for the merger, consolidation, or division of a partnership.155

A partnership is considered as terminated if no part of any business, financial operation, 

or venture of the partnership continues to be carried on by any of its partners in a partnership.156 

A partnership is treated as terminated if within any 12-month period, there is a sale or 

exchange of 50 percent or more of the total interest in partnership capital and profits.157 This is 

sometimes referred to as a technical termination. Under regulations, the technical termination 

gives rise to a deemed contribution of all the partnership’s assets and liabilities to a new 

partnership in exchange for an interest in the new partnership, followed by a deemed distribution 

of interests in the new partnership to the purchasing partners and the other remaining partners.158

The effect of a technical termination is not necessarily the end of the partnership’s 

existence, but rather, the termination of some tax attributes. Upon a technical termination, the 

partnership’s taxable year closes, potentially resulting in short taxable years.159 Partnership-level 

elections generally cease to apply following a technical termination. A technical termination 

generally results in the restart of partnership depreciation recovery periods. 

Description of Proposal 

The proposal repeals the section 708(b)(1)(B) rule providing for technical terminations of 

partnerships. The proposal does not change the present-law rule of section 708(b)(1)(A) that a 

partnership is considered as terminated if no part of any business, financial operation, or venture 

of the partnership continues to be carried on by any of its partners in a partnership. 

Effective Date 

The proposal applies to transfers after December 31, 2016. 

 154 Sec. 708(b)(1). 

155 Sec. 708(b)(2). Mergers, consolidations, and divisions of partnerships take either an assets-over form 

or an assets-up form pursuant to Treas. Reg. sec. 1.708-1(c). 

156 Sec. 708(b)(1)(A). 

157 Sec. 708(b)(1)(B). 

158 Treas. Reg. sec. 1.708-1(b)(4). 

159 Sec. 706(c)(1); Treas. Reg. sec. 1.708-1(b)(3).