-1l1-

The bill also provides that the compensation of
participants in such plans includes, in addition to the usual
amounts, amounts contributed pursuant to a salary reduction
agreement that are not includible in the participant's
income.

Under the bill, governmental plans are treated as
satisfying the limits on contributions and benefits for all
taxable years beginning before the date of enactment.

Effective date.--Taxable years beginning after date of
enactment.

7. Simplified employee pensions (SEPs) (sec. 307 of the
bill)

Description of Bill

a. Salary reduction SEPs

The bill provides that employers with 100 or fewer
employees may maintain salary reduction SEPs and repeals the
50-percent participation requirement for such SEPs. The bill
also provides that the safe harbors available to qualified
cash or deferred arrangements under the bill apply to salary
reduction SEPs if employees are notified of the provisions of
the SEP.

b. Eligibility requirements

The bill replaces the 3-out-of-5 years service
requirement under present law with a requirement that
employees who have at least 1 year of service must be
eligible to participate.

Effective date.--Years beginning after December 31,
1992.

8. Contributions on behalf of disabled employees (sec. 308
of the bill)

Description of Bill

Under present law, an employer may elect to continue
making contributions on behalf of employees other than highly
compensated employees who become disabled. The bill extends
present-law treatment to disabled highly compensated
employees if continuing contributions to the plan are
available to all disabled participants. The employer need
not make an election to have the special rule apply.

Effective date.--Years beginning after December 31,
1992.



-2-
2. Cost-of-living adjustments (sec. 102 of the bill)

Description of Bill

The biil provides that the adjustments with respect to a
year are based on the increase in the applicable index as of
the close of the calendar quarter ending September 30 of the
preceding year. Thus, adjusted dollar limits will be
published before the beginning of the year to which they
apply. Also, dollar limits are generally rounded to the
nearest $1,000, except that the limits that relate to
elective deferrals and elective contributions to a simplified
employee pension plan (SEP) are rounded to the nearest $100.

Effective date.--Years beginning after December 31,
1992,

3. Election to treat base pay as compensation (sec. 103
of the bill)

Description of Bill

The bill provides that an employer may elect to define
compensation as an employee's base pay. This election must
apply to all employees of the employer, and may be revoked
only with permission of the Secretary.

Effective date.--Years beginning after December 31,
1992.

4. Modification of additional participation requirements
(sec. 104 of the bill)

Description of Bill

The bill provides that the minimum participation rule
applies only to defined benefit plans (not defined
contribution plans). Under the bill, a plan is not a
qualified plan unless the plan, on each day of the plan year,
benefits no fewer than the lesser of 25 employees or 40
percent of all employees of the employer. However, a plan
maintained by an employer with only 2 employees must cover
both.

Effective date.--Years beginning after December 31,
1991. An employer may elect to apply the provision modifying
the minimum participation rule as if included in the Tax
Reform Act of 1986.


-15 -
in applying the general nondiscrimination rule to a nonunion
plan (sec. 401(a)(4)), and in determining separate lines of
business (sec. 414(a)) if the union employees benefit under
the same plan on the same terms.

Effective date.--Years beginning after December 31,
1992.

4. Uniform retirement age
Description of Bill
No provision.

Proposed Modification

Provide that, for purposes of the general
nondiscrimination rule (sec. 401(a)(4)), the social security
retirement age (as defined under sec. 415(b)(8)) is treated
as a uniform retirement age, and that subsidized early
retirement benefits and joint and survivor annuities that are
based on social security retirement age are treated as being
available on the same terms.

Effective date.--Years beginning after December 31,
1992.

5. Use of excess assets of black lung benefit trusts
for retire health care benefits

Description of Bill
No provision.

Proposed Modification

Allow excess assets in qualified black lung benefit
trusts to be used to pay accident and health benefits or
premiums for insurance for such benefits (including
administrative and other incidental expenses relating to such
benefits) for retired coal miners and their spouses and
dependents. The amount of assets available for such purpose
would be subject to a yearly limit as well as an aggregate
limit. The yearly limit would be the amount of assets in
excess of 110 percent of the present value of the liability
for black lung benefits determined as of the close of the
preceding taxable year of the trust. The aggregate limit
would be the amount of assets in excess of 110 percent of the
present value of the liability for black lung benefits
determined as of the close of the taxable year of the trust
ending prior to the effective date, plus earnings thereon.
Each of these determinations would be required to be made by
an independent actuary.



Effective date.--Digtributions in plan years beginning
after December 31, 1993.

3° This provision of the bill was originally effective for
distributions in plan years beginning after December 31,
1992.



-4-

contributions of elective deferrals in excess of 6 percent of
compensation.

Effective date.--Plan years beginning after December 31,
1992.

Proposed Modification

Adopt provision of the bill, but also provide that, in
applying the present-law nondiscrimination test, the amount
that highly compensated employees can defer in a year is
based on the previous year's average deferral percentage
(ADP) for nonhighly compensated employees. A special rule
would apply in the first year a cash or deferred arrangement
is maintained. A corresponding change would be made to the
nondiscrimination test applicable to employer matching and
after-tax employee contributions.


-3-

Proposed Modification

Adopt provision of the bill, but also provide that, for
purposes of the rule that permits the minimum participation
requirement to be satisfied separately with respect to each
line of business of an employer, an employer could
demonstrate that a separate line of business exists even if
that line of business employs less than 50 employees.

5. Nondiscrimination rules relating to qualified cash
or deferred arrangements, matching contributions,
and after-tax employee contributions (sec. 105 of
the bill)

Description of Bill
a. Qualified cash or deferred arrangements

The bill adds an alternative safe harbor method of
satisfying the special nondiscrimination test for qualified
cash or deferred arrangements. Under the bill, the
nondiscrimination test is deemed to be satisfied if the
employer either (1) makes a matching contribution on behalf
of each nonhighly compensated employee of at least (a) 100
percent of the employee's elective contributions up to 3
percent of compensation and (b) 50 percent of the employee's
elective contributions up to 6 percent of compensation, or
(2) makes a nonelective contribution to a defined
contribution plan of at least 3 percent of each nonhighly
compensated employee's compensation, without regard to
whether the employee elects to contribute to the cash or
deferred arrangement.

The matching contributions and the nonelective
contributions must be 100-percent vested. In addition, the
employer is required to notify employees of the employees’
rights and obligations under the arrangement.

The bill also modifies the method of determining excess
contributions under the present-law nondiscrimination test.
Under the bill, excess contributions are allocated among
highly compensated employees beginning with the employees
with the highest dollar amount of contributions.

b. Employer matching contributions

Under the bill, the special nondiscrimination test for
employer matching contributions (but not for after-tax
employee contributions) is deemed satisfied if (1) the plan
meets the nonelective contribution or matching contribution
requirements applicable to the cash or deferred arrangement
safe harbor, (2) employees are notified of the plan, and (3)
matching contributions are not made with respect to employee



- 16 -

The amounts used to pay retiree accident or health
benefits would not be includible in the income of the
company, nor would a deduction be allowed for such amounts.

Effective date.--Taxable years beginning after
December 31, 1991.

6. Special coverage rule for airline pilots
Description of Bill
No provision.

Proposed Modification

Extend the present-law treatment of plans maintained for
union pilots to plans maintained for nonunion pilots who are
employed by one or more common carriers or by carriers
transporting mail for, or under contract with, the United
States Government.

Effective date.--Years beginning after December 31,
1992.

7. Establish commission on retirement income policy
Description of Bill
No provision.

Proposed Modification

Establish a commission to study national retirement
income policy. The commission would be directed to submit a
report to the Congress by Labor Day 1994, the 20th
anniversary of the enactment of the Employee Retirement
Income Security Act of 1974.



-6-

Proposed Modifications |

Excise tax on excess distributions

Provide that a taxpayer may elect to determine whether
he or she receives excess distributions during any calendar
year by applying the special higher ceiling (i.e., $750,000
in 1992) that applies to lump-sum distributions under present
law. Not more than one such election may be made with
respect to any taxpayer. A taxpayer that has applied the
$750,000 limit under present law may not elect to have this
provision apply. The provision would be effective for
distributions after December 31, 1992.

$5,000 death benefit exclusion

Repeal the exclusion from gross income of up to $5,000
of employer-provided death benefits effective for
distributions after December 31, 1992.

Recovery of basis

Provide that the portion of an annuity distribution from
a qualified retirement plan that represents nontaxable return
of basis generally is determined under a method similar to
the present-law simplified alternative method provided by the
Internal Revenue Service (IRS Notice 88-118). However, the
simplified method would not apply if the primary annuitant
has attained age 75 on the annuity starting date unless there
are at least 5 years of guaranteed payments under the
annuity. The provision would be effective for annuity
starting dates after December 31, 1992.

3. Trustee-to-trustee transfers (sec. 202 of the bill)

Description of Bill

The bill generally requires that distributions in excess
of $500 be transferred directly to an IRA or to a qualified
defined contribution plan that provides for the acceptance of
the transfer. Annuity distributions, distributions after age
55, distributions on account of the death of the employee
(other than distributions to the surviving spouse), and
hardship distributions are not subject to the transfer
requirement.


DESCRIPTION OF S. 1364
(EMPLOYEE BENEFITS SIMPLIFICATION AND EXPANSION ACT OF 1991)

AND PROPOSED MODIFICATIONS

Scheduled for Markup
by the
SENATE COMMITTEE ON FINANCE

on March 3, 1992

Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
March 3, 1992

JCX-5-92


C. Miscellaneous Provisions

1. Modification to definition of leased employee (sec. 301
of the bill)

Description of Bill

The bill replaces the "historically performed" test with
a new rule defining who must be considered a leased employee.
Under the bill, an individual is not considered a leased
employee unless the services are performed under the control
of the service recipient.

Effective date.--Years beginning after December 31,
1983.

Proposed Modification

Clarify that the provision is not intended to expand the
scope of the leased employee rule.

2. Half-year requirements (sec. 302 of the bill)

Description of Bill

The bill changes age 70-1/2 to age 70, and age 59-1/2 to
age 59 for purposes of the qualified plan rules.

Effective date.--Years beginning after December 31,
1992.

3. Plans for self-employed individuals (sec. 303 of the
bill)

Description of Bill

The bill eliminates the special aggregation rule for
plans maintained by self-employed individuals.

Effective date.--Years beginning after December 31,
1992. ,

4. Full-funding limitation of multiemployer plans (sec. 304
of the bill)

Description of Bill

The bill provides that multiemployer plans are not
subject to the 150 percent of current liability full funding
limitation and that an actuarial valuation need only be
performed every 3 years in the case of a multiemployer plan.



-B8-

4. Minimum required distributions (sec. 203 of the bill)

Description of Bill

The bill provides that,.except in the case of 5-percent
owners of an employer and IRA owners, distributions are
required to begin by the April 1 of the calendar year
following the later of the gatendar year in which (1) the
employee attains age 70-1/2" or (2) the employee retires. As
under present.law, distributions to 5-percent owners and IRA
owners are required to begin by the April 1 following the
year in which the individual attains age 70-1/2.

The benefits of participants who continue to work for an
employer after attaining age 70-1/2 are required to be
actuarially increased to take into account the period after
age 70-1/2 during which the employee receives no benefits
under the plan.

Effective date.--Years beginning after December 31,
1992.

4 Age 70-1/2 would be changed to age 70 under another
provision of the bill, described below.



B. Distributions

1. Rollovers of qualified plan distributions (sec. 201
of the bill)

Description of Bill

The bill allows an employee or surviving spouse to roll
over any portion of a qualified plan distribution, other than
{1) a minimum required distribution or (2) a distribution
attributable to after-tax employee contributions. If any
portion of a lump-sum distribution is rolled over, averaging
is not available with respect to the rest of the
distribution.

Effective date.--Distributions after December 31, 1991.

Proposed Modification

Modify the bill to provide that an employee or surviving
spouse of an employee would be permitted to roll over any
portion of a qualified plan distribution received, other than
a distribution that is (1) a minimum required distribution,
(2) attributable to after-tax employee contributions, or (3)
part of a stream of periodic payments payable over a period
of 10 years or more, or over the life (or life expectancy) of
the employee or the joint lives (or joint life expectancies)
of the employee and his or her beneficiary.

Effective date.--Distributions after date of enactment.

2. Rules relating to lump-sum distributions (sec. 201 of
the bill)

Description of Bill

Income averaging

The bill repeals 5-year forward income averaging for
lump~sum distributions. The bill retains the special
grandfather rules under the Tax Reform Act of 1986 for
individuals who had attained age 50 by January 1, 1986.

Excise tax on excess distributions

The bill technically repeals the special higher ceiling
(i.e., $750,000) applicable to lump-sum distributions for
purposes of determining whether an individual receives excess
distributions during any calendar year.



DESCRIPTION OF S. 1364 AND PROPOSED MODIFICATIONS
(Employee Benefits Simplification and Expansion Act of 1991)

A. Nondiscrimination Provisions

1. Definition of highly compensated employee (sec. 101
of the bill)

Description of Bill

The bill provides that an employee is highly compensated
if (1) at any time during the preceding year, the employee
was a S-percent owner; or (2) during the current year, the
employee is (i) a 5-percent owner or (ii) earns more than
$50,000 (indexed; $62,345 in 1992). If no employee is
treated as highly compensated under this rule, the highest
paid officer is treated as highly compensated except (1)
for purposes of applying the nondiscrimination requirements
applicable to qualified cash or deferred arrangements (sec.
401(k)) and employer matching and after-tax employee
contributions (sec. 401(m)), and (2) for plans maintained by
State and local governments and tax-exempt organizations.

The bill modifies the family aggregation rules to
provide that if an employee is a family member of a 5-percent
owner, the employee and the family member are treated as one
highly compensated employee.

Effective date.--Years beginning after December 31,
1992. An employer may elect not to have the amendmgnts made
by this provision apply to years beginning in 1993.

Proposed Modifications

Clarify that the determination of whether an employee
earns in excess of $50,000 (indexed) would be made based on
the preceding, rather than the current, year's compensation.
Similarly, the applicable dollar limit for determining if an
employee is highly compensated is the prior year's limit.

Repeal the present-law rule that provides that certain
family members are aggregated and treated as a single highly
compensated employee.

2 In the description of the bill, all effective dates that
were originally years beginning after December 31, 1991, have
been changed to years beginning after December 31, 1992,
except as otherwise indicated.



-12-

9. In-service distributions from rural cooperative plans
(sec. 309 of the bill)

Description of Bill

The bill conforms the rules for distributions from cash
or deferred arrangements maintained by rural cooperatives to
the rules applicable to other cash or deferred arrangements
by permgtting distributions after the attainment of age
59-1/2.

Effective date.--Effective as if included in section
1011(k)(9) of the Technical and Miscellaneous Revenue Act of
19

10. Reports of pension and annuity payments (sec. 310 of
the bill)

Description of Bill

The bill incorporates into the general penalty structure
the penalties for failure to provide information reports to
the IRS and to participants relating to pension payments.
Generally, the penalty is $50 for each return with respect to
which a failure occurs, up to a maximum of $250,000 per year.
The bill does not require reports of pension and annuity
payments of less than $10.

Effective date.--Returns and statements required to be
filed after December 31, 1992. :

11. Repeal of limitation on ability of tax-exempt employers
to maintain cash or deferred arrangements (sec. 311
of the bill)

Description of Bill

The bill permits nongovernmental tax-exempt
organizations to maintain qualified cash or deferred
arrangements.

Effective date.--Years beginning after December 31,
1989.

5 Age 59-1/2 would be changed to age 59 under another
provision of the bill, described above.

6 this provision is also included in section 702 of S. 1394,
the Tax Simplification Act of 1991.



-14-

D. Additional Provisions
1. Alternative full funding limitation
Description of Bill
No provision.

Proposed Modification

Provide that an employer may elect to disregard the 150
percent of current liability full funding limitation if each
plan in the employer's controlled group is not top heavy and
the average accrued liability of active participants is at
least 80 percent of the plan's total accrued liability (the
“alternative full funding limitation"). The Secretary would
be required to adjust the 150 percent of current liability
full funding limitation (but not below 140 percent) for
employers that do not use the alternative full funding limit
to ensure that the election by employers to disregard the
150-percent limit does not result in a substantial reduction
in Federal revenues for any fiscal year.

Effective date.--Date of enactment.
2. Duties of master and prototype plan sponsors
Description of Bill
No provision.

Proposed Modification

Authorize the IRS to define the duties of organizations
that sponsor master and prototype, regional prototype, and
other preapproved plans. Also provide that the Secretary
could relax the rules prohibiting cutbacks in accrued
benefits when an employer replaces an individually designed
plan with a preapproved plan.

Effective date.--January 1, 1993.
3. Disaggregation of union plans
Description of Bill
No provision.

Proposed Modification

Provide that employers may elect to take employees
covered by a collective bargaining agreement into account in
applying the coverage tests to a nonunion plan (sec. 410(6)),



INTRODUCTION

This document, + prepared by the staff of the Joint
Committee on Taxation, provides a brief description of the
provisions of S. 1364 ("Employee Benefits Simplification and
Expansion Act of 1991") and proposed modifications. These
provisions are scheduled for markup by the Senate Committee
on Finance on March 3, 1992.

1 his document may be cited as follows: Joint Committee on
Taxation, Description of S. 1364 (Employee Benefits
Simplification and Expansion Act of 1991) and Proposed

Modifications (JCX-5-92), March 3, 1992.

-ii-


SUMMARY CONTENTS

Page
INTRODUCTION. 6c. sce e eee c cece cece cece ne cececcees di

DESCRIPTION OF S. 1364 AND PROPOSED
MODIFICATIONS... ... ccc ccc cee cece eee wee e eens 1

A. Nondiscrimination Provisions............ 1
B. Distributions... ..... ccc cece e eee e eee 5
C. Miscellaneous Provisions..........eeeeee 9

D. Additional*Provisions........e.eeeeeee0- 14



-10-

Effective date.--Years beginning after December 31,
1991.

Proposed Modification

Modify the multiemployer full funding limit in the
Internal Revenue Code.

5. Affiliation requirements for employers jointly
maintaining a voluntary employees' beneficiary
association (VEBAs) (sec. 305 of the bill)

Description of Bill

The bill provides that employers are affiliated for
purposes of the VEBA requirements under the regulations if
(1) the employers are in the same line of business, (2) the
employers act jointly to perform tasks that are integral to
the activities of each of the employers, and (3) these joint
activities are sufficiently extensive that maintenance of a
common VEBA is not a major part of such joint activity. This
clarification of present law applies retroactively.

Effective date.--Years beginning before, on, or after

the date of enactment.

Proposed Modification

In addition to the requirements that must be satisfied
under the bill, add the requirement that a substantial number
of the employers who contribute to the VEBA are exempt from
tax under the Internal Revenue Code.

Effective date.--Clarify that the provision is intended
to be a clarification of present law.

6. Treatment of governmental plans (sec. 306 of the bill)

Description of Bill

The bill makes a number of modifications to the limits
on contributions and benefits as applied to plans maintained
by State and local governments. The bill exempts
participants of State and local government defined benefit
plans from the 100 percent of high 3-year average
compensation limitation. Also, benefits provided under a
“qualified excess benefit arrangement" (which is treated as a
nonqualified deferred compensation plan for tax purposes) are
not taken into account for purposes of applying the limits on
contributions and benefits. Survivor and disability benefits
provided under State and local government plans are also
exempt from the limits on contributions and benefits.


-13-

Proposed Modification

Effective date.--Years beginning after December 31,
1992.

12. Date for adoption of plan amendments (sec. 312 of
the bill)

Description of Bill

The bill provides that if any provision of the bill
requires a plan amendment, the amendment is not required to
be made before the first plan year beginning on or after
January 1, 1993, if (1) during the period after the provision
takes effect, the plan is operated in accordance with the
requirements of the provision, and (2) the plan amendment
applies retroactively to the provision's effective date.

Effective date.--Date of enactment.