99–006

107TH CONGRESS REPT. 107–382 " ! HOUSE OF REPRESENTATIVES 2d Session Part 1

EMPLOYEE RETIREMENT SAVINGS BILL OF RIGHTS

MARCH 20, 2002.—Ordered to be printed

Mr. THOMAS, from the Committee on Ways and Means,

submitted the following

R E P O R T

together with

ADDITIONAL VIEWS

[To accompany H.R. 3669]

[Including cost estimate of the Congressional Budget Office]

The Committee on Ways and Means, to whom was referred the

bill (H.R. 3669) to amend the Internal Revenue Code of 1986 to empower employees to control their retirement savings accounts

through new diversification rights, new disclosure requirements,

and new tax incentives for retirement education, having considered

the same, report favorably thereon with an amendment and recommend that the bill as amended do pass.

CONTENTS

Page

I. Summary and Background ........................................................................... 16

A. Purpose and Summary .................................................................... 16

B. Background and Need for Legislation ............................................ 19

C. Legislative History ........................................................................... 19

II. Explanation of the Bill .................................................................................. 20

Title I: Defined Contribution Plan Protections ........................................... 20

A. Excise Tax on Failure to Provide Investment Education Notices

to Participants (sec. 101 of the bill and new Code sec. 4980G) .. 20

B. Excise Tax on Failure to Provide Notice to Participants of

Transaction Restriction Periods (sec. 102 of the bill and new

sec. 4980H of the Code) .................................................................. 21

C. Diversification Requirements for Defined Contribution Plans

that Hold Employer Securities (sec. 103 of the bill and new

sec. 401(a)(35) of the Code) ............................................................ 24

D. Employer-Provided Qualified Retirement Planning Services

(sec. 104 of the bill and sec. 132 of the Code) .............................. 28

E. Special Rules (sec. 105 of the bill) .................................................. 30

Title II: Other Tax Provisions Relating to Pensions ................................... 30

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A. Amendments to Retirement Protection Act of 1994 (sec. 201

of the bill and sec. 412 of the Code) .............................................. 30

B. Pension Plan Reporting Simplification (sec. 202 of the bill) ........ 32

C. Improvement of Employee Plans Compliance Resolution System

(sec. 203 of the bill) ........................................................................ 33

D. Flexibility in Nondiscrimination, Coverage, and Line of Business Rules (sec. 204 of the bill and secs. 401(a)(4), 410(b)

and 414(r) of the Code) .................................................................. 35

E. Extension to all Governmental Plans of Moratorium on Application of Certain Nondiscrimination Rules Applicable to State

and Local Government Plans (sec. 205 of the bill, sec. 1505

of the Taxpayer Relief Act of 1997, and secs. 401(a) and 401(k)

of the Code) ..................................................................................... 36

F. Notice and Consent Period Regarding Distributions (sec. 206

of the bill and sec. 417 of the Code) .............................................. 37

G. Reduced PBGC Premiums for Small and New Plans (secs. 207–

208 of the bill and sec. 4006 of ERISA) ........................................ 38

H. Authorization for PBGC to Pay Interest on Premium Overpayment Refunds (sec. 209 of the bill and sec. 4007(b) of ERISA) .. 40

I. Rules for Substantial Owner Benefits in Terminated Plans (sec.

210 of the bill and secs. 4021, 4022, 4043 and 4044 of ERISA) . 40

J. Studies (sec. 211 of the bill) ............................................................. 41

K. Interest Rate Range for Additional Funding Requirements (sec.

212 of the bill and sec. 412(l) of the Code) ................................... 42

L. Provisions Relating to Plan Amendments (sec. 213 of the bill) .... 45

Title III: Stock Options .................................................................................. 46

A. Exclusion of Incentive Stock Options and Employee Stock Purchase Plan Stock Options from Wages (sec. 301 of the bill

and secs. 421(b), 423(c), 3121(a), 3231, and 3306(b) of the

Code) ................................................................................................ 46

Title IV: Social Security Held Harmless ...................................................... 49

A. No Impact on Social Security and Medicare Trust Funds (sec.

401 of the bill) ................................................................................. 49

III. Votes of the Committee ................................................................................. 49

IV. Budget Effects of the Bill .............................................................................. 51

A. Committee Estimate of Budgetary Effects ..................................... 51

B. Statement Regarding New Budget Authority and Tax Expenditures Budget Authority .................................................................. 54

C. Cost Estimate Prepared by the Congressional Budget Office ....... 54

V. Other Matters To Be Discussed Under the Rules of the House ................ 57

A. Committee Oversight Findings and Recommendations ................ 57

B. Statement of General Performance Goals and Objectives ............ 57

C. Constitutional Authority Statement ............................................... 57

D. Information Relating to Unfunded Mandates ............................... 57

E. Applicability of House Rule XXI 5(b) .............................................. 58

F. Tax Complexity Analysis ................................................................. 58

VI. Changes in Existing Law Made by the Bill, as Reported ........................... 58

VII. Additional Views ............................................................................................ 83

The amendment is as follows:

Strike all after the enacting clause and insert the following:

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

(a) SHORT TITLE.—This Act may be cited as the ‘‘Employee Retirement Savings

Bill of Rights’’. (b) TABLE OF CONTENTS.—

Sec. 1. Short title; table of contents.

TITLE I—DEFINED CONTRIBUTION PLAN PROTECTIONS

Sec. 101. Excise tax on failure of pension plans to provide investment education notices to participants.

Sec. 102. Excise tax on failure of pension plans to provide notice of transaction restriction periods.

Sec. 103. Diversification requirements for defined contribution plans that hold employer securities.

Sec. 104. Treatment of qualified retirement planning services.

Sec. 105. Special rules.

TITLE II—OTHER TAX PROVISIONS RELATING TO PENSIONS

Sec. 201. Amendments to Retirement Protection Act of 1994.

Sec. 202. Reporting simplification.

Sec. 203. Improvement of Employee Plans Compliance Resolution System.

Sec. 204. Flexibility in nondiscrimination, coverage, and line of business rules.

Sec. 205. Extension to all governmental plans of moratorium on application of certain nondiscrimination rules

applicable to State and local plans.

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Sec. 206. Notice and consent period regarding distributions.

Sec. 207. Reduced PBGC premium for new plans of small employers.

Sec. 208. Reduction of additional PBGC premium for new and small plans.

Sec. 209. Authorization for PBGC to pay interest on premium overpayment refunds.

Sec. 210. Substantial owner benefits in terminated plans.

Sec. 211. Studies.

Sec. 212. Interest rate range for additional funding requirements.

Sec. 213. Provisions relating to plan amendments.

TITLE III—STOCK OPTIONS

Sec. 301. Exclusion of incentive stock options and employee stock purchase plan stock options from wages.

TITLE IV—SOCIAL SECURITY AND MEDICARE HELD HARMLESS

Sec. 401. Protection of Social Security and Medicare.

TITLE I—DEFINED CONTRIBUTION PLAN

PROTECTIONS

SEC. 101. EXCISE TAX ON FAILURE OF PENSION PLANS TO PROVIDE INVESTMENT EDUCATION

NOTICES TO PARTICIPANTS.

(a) IN GENERAL.—Chapter 43 of the Internal Revenue Code of 1986 (relating to

qualified pension, etc., plans) is amended by adding at the end the following new

section:

‘‘SEC. 4980G. FAILURE OF APPLICABLE PLANS TO PROVIDE INVESTMENT EDUCATION NOTICES TO PARTICIPANTS.

‘‘(a) IMPOSITION OF TAX.—There is hereby imposed a tax on the failure of any applicable pension plan to meet the requirements of subsection (e) with respect to any

applicable individual.

‘‘(b) AMOUNT OF TAX.—The amount of the tax imposed by subsection (a) on any

failure with respect to any applicable individual shall be $100.

‘‘(c) LIMITATIONS ON AMOUNT OF TAX.—

‘‘(1) TAX NOT TO APPLY TO FAILURES CORRECTED WITHIN 30 DAYS.—No tax shall

be imposed by subsection (a) on any failure if—

‘‘(A) any person subject to liability for the tax under subsection (d) exercised reasonable diligence to meet the requirements of subsection (e), and

‘‘(B) such person provides the notice described in subsection (e) during the

30-day period beginning on the first date such person knew, or exercising

reasonable diligence should have known, that such failure existed.

‘‘(2) OVERALL LIMITATION FOR UNINTENTIONAL FAILURES.—

‘‘(A) IN GENERAL.—If the person subject to liability for tax under subsection (d) exercised reasonable diligence to meet the requirements of subsection (e), the tax imposed by subsection (a) for failures during the taxable

year of the employer (or, in the case of a multiemployer plan, the taxable

year of the trust forming part of the plan) shall not exceed $500,000. For

purposes of the preceding sentence, all multiemployer plans of which the

same trust forms a part shall be treated as 1 plan.

‘‘(B) TAXABLE YEARS IN THE CASE OF CERTAIN CONTROLLED GROUPS.—For

purposes of this paragraph, if all persons who are treated as a single employer for purposes of this section do not have the same taxable year, the

taxable years taken into account shall be determined under principles similar to the principles of section 1561.

‘‘(3) WAIVER BY SECRETARY.—In the case of a failure which is due to reasonable cause and not to willful neglect, the Secretary may waive part or all of the

tax imposed by subsection (a) to the extent that the payment of such tax would

be excessive or otherwise inequitable relative to the failure involved.

‘‘(d) LIABILITY FOR TAX.—The following shall be liable for the tax imposed by subsection (a):

‘‘(1) In the case of a plan other than a multiemployer plan, the employer.

‘‘(2) In the case of a multiemployer plan, the plan.

‘‘(e) NOTICE REGARDING INVESTMENT EDUCATION.—

‘‘(1) IN GENERAL.—The plan administrator of an applicable pension plan shall

provide to each applicable individual an investment education notice described

in paragraph (2) at the time of the enrollment of the applicable individual in

the plan and not less often than quarterly thereafter.

‘‘(2) INVESTMENT EDUCATION NOTICE.—An investment education notice is described in this paragraph if such notice contains—

‘‘(A) an explanation, for the long-term retirement security of participants

and beneficiaries, of generally accepted investment principles, including

principles of risk management and diversification, and

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‘‘(B) a discussion of the risk of holding substantial portions of a portfolio

in the security of any one entity, such as employer securities. ‘‘(3) UNDERSTANDABILITY.—Each notice required by paragraph (1) shall be

written in a manner calculated to be understood by the average plan participant

and shall provide sufficient information (as determined in accordance with guidance provided by the Secretary) to allow recipients to understand such notice. ‘‘(4) FORM AND MANNER OF NOTICES.—The notices required by this subsection

shall be in writing, except that such notices may be in electronic or other form

to the extent that such form is reasonably accessible to the applicable individual. ‘‘(f) DEFINITIONS.—For purposes of this section— ‘‘(1) APPLICABLE INDIVIDUAL.—The term ‘applicable individual’ means— ‘‘(A) any participant in the applicable pension plan,

‘‘(B) any beneficiary who is an alternate payee (within the meaning of

section 414(p)(8)) under a qualified domestic relations order (within the

meaning of section 414(p)(1)(A)), and ‘‘(C) any beneficiary of a deceased participant or alternate payee. ‘‘(2) APPLICABLE PENSION PLAN.—The term ‘applicable pension plan’ means— ‘‘(A) a plan described in clause (i), (ii), or (iv) of section 219(g)(5)(A), and

‘‘(B) an eligible deferred compensation plan (as defined in section 457(b))

of an eligible employer described in section 457(e)(1)(A),

which permits any participant to direct the investment of some or all of his account in the plan or under which the accrued benefit of any participant depends

in whole or in part on hypothetical investments directed by the participant.

Such term shall not include a one-participant retirement plan.

‘‘(3) ONE-PARTICIPANT RETIREMENT PLAN DEFINED.—The term ‘one-participant

retirement plan’ means a retirement plan that—

‘‘(A) on the first day of the plan year—

‘‘(i) covered only the employer (and the employer’s spouse) and the

employer owned the entire business (whether or not incorporated), or

‘‘(ii) covered only one or more partners (and their spouses) in a business partnership (including partners in an S or C corporation),

‘‘(B) meets the minimum coverage requirements of section 410(b) without

being combined with any other plan of the business that covers the employees of the business,

‘‘(C) does not provide benefits to anyone except the employer (and the employer’s spouse) or the partners (and their spouses),

‘‘(D) does not cover a business that is a member of an affiliated service

group, a controlled group of corporations, or a group of businesses under

common control, and

‘‘(E) does not cover a business that leases employees.’’.

(b) CLERICAL AMENDMENT.—The table of sections for chapter 43 of such Code is

amended by adding at the end the following new item:

‘‘Sec. 4980G. Failure of applicable plans to provide investment education notices to participants.’’.

(c) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendments made by this section shall apply with respect to plan years beginning after December 31, 2002.

(2) MODEL INVESTMENT PRINCIPLES.—Not later than the earlier of January 1,

2003, or 120 days after the date of the enactment of this Act, the Secretary of

the Treasury, in consultation with the Secretary of Labor, shall issue guidance

and model notices which meet the requirements of section 4980G of the Internal

Revenue Code of 1986 (as added by this section).

SEC. 102. EXCISE TAX ON FAILURE OF PENSION PLANS TO PROVIDE NOTICE OF TRANSACTION RESTRICTION PERIODS.

(a) IN GENERAL.—Chapter 43 of the Internal Revenue Code of 1986 (relating to

qualified pension, etc., plans) is amended by adding at the end the following new

section:

‘‘SEC. 4980H. FAILURE OF APPLICABLE PLANS TO PROVIDE NOTICE OF TRANSACTION RESTRICTION PERIODS.

‘‘(a) IMPOSITION OF TAX.—There is hereby imposed a tax on the failure of any applicable pension plan to meet the requirements of subsection (e) with respect to any

applicable individual.

‘‘(b) AMOUNT OF TAX.—The amount of the tax imposed by subsection (a) on any

failure with respect to any applicable individual shall be $100.

‘‘(c) LIMITATIONS ON AMOUNT OF TAX.—

‘‘(1) TAX NOT TO APPLY TO FAILURES CORRECTED AS SOON AS REASONABLY PRACTICABLE.—No tax shall be imposed by subsection (a) on any failure if—

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‘‘(A) any person subject to liability for the tax under subsection (d) exercised reasonable diligence to meet the requirements of subsection (e), and

‘‘(B) such person provides the notice described in subsection (e) as soon

as reasonably practicable after the first date such person knew, or exercising reasonable diligence should have known, that such failure existed

and at least 1 business day before the beginning of the transaction restriction period.

‘‘(2) OVERALL LIMITATION FOR UNINTENTIONAL FAILURES.—

‘‘(A) IN GENERAL.—If the person subject to liability for tax under subsection (d) exercised reasonable diligence to meet the requirements of subsection (e), the tax imposed by subsection (a) for failures during the taxable

year of the employer (or, in the case of a multiemployer plan, the taxable

year of the trust forming part of the plan) shall not exceed $500,000. For

purposes of the preceding sentence, all multiemployer plans of which the

same trust forms a part shall be treated as 1 plan.

‘‘(B) TAXABLE YEARS IN THE CASE OF CERTAIN CONTROLLED GROUPS.—For

purposes of this paragraph, if all persons who are treated as a single employer for purposes of this section do not have the same taxable year, the

taxable years taken into account shall be determined under principles similar to the principles of section 1561.

‘‘(3) WAIVER BY SECRETARY.—In the case of a failure which is due to reasonable cause and not to willful neglect, the Secretary may waive part or all of the

tax imposed by subsection (a) to the extent that the payment of such tax would

be excessive or otherwise inequitable relative to the failure involved.

‘‘(d) LIABILITY FOR TAX.—The following shall be liable for the tax imposed by subsection (a):

‘‘(1) In the case of a plan other than a multiemployer plan, the employer.

‘‘(2) In the case of a multiemployer plan, the plan.

‘‘(e) NOTICE OF TRANSACTION RESTRICTION PERIOD.—

‘‘(1) IN GENERAL.—The plan administrator of an applicable pension plan shall

provide written notice of any transaction restriction period to each applicable

individual to whom the transaction restriction period applies (and to each employee organization representing such applicable individuals).

‘‘(2) UNDERSTANDABILITY.—The notice required by paragraph (1) shall be written in a manner calculated to be understood by the average plan participant

and shall provide sufficient information (as determined in accordance with guidance provided by the Secretary) to allow recipients to understand the timing

and effect of such transaction restriction period.

‘‘(3) TIMING OF NOTICE.—

‘‘(A) IN GENERAL.—Except as provided in subparagraphs (B) and (C), the

notice required by paragraph (1) shall be provided at least 30 days before

the beginning of the transaction restriction period.

‘‘(B) DISPOSITION OF STOCK OR ASSETS.—

‘‘(i) IN GENERAL.—If, in connection with the major corporate disposition by a corporation maintaining an applicable pension plan, there is

the possibility of a transaction restriction period—

‘‘(I) the notice required by paragraph (1) shall be provided at

least 30 days before the date of such disposition, and

‘‘(II) no other notice shall be required by paragraph (1) with respect to such period if notice is provided pursuant to subclause (I)

and such period begins not more than 30 days after the date of

such disposition.

Subclause (I) shall not apply if the plan administrator has a substantial basis to believe that there will be no transaction restriction period

in connection with the disposition.

‘‘(ii) MAJOR CORPORATE DISPOSITION.—For purposes of clause (i), the

term ‘major corporate disposition’ means, with respect to a

corporation—

‘‘(I) the disposition of substantially all of the stock of such corporation or a subsidiary thereof, or

‘‘(II) the disposition of substantially all of the assets used in a

trade or business of such corporation or subsidiary.

‘‘(iii) NONCORPORATE ENTITIES.—Rules similar to the rules of this

subparagraph shall apply to entities that are not corporations.

‘‘(C) EXCEPTION FOR UNFORESEEABLE EVENTS.—In the case of a transaction restriction period resulting from the occurrence of an unforeseeable

event, such notice shall be provided as soon as reasonably practicable after

the occurrence of such event.

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‘‘(4) FORM AND MANNER OF NOTICE.—The notice required by this subsection

shall be in writing, except that such notice may be in electronic or other form

to the extent that such form is reasonably accessible to the applicable individual.

‘‘(f ) DEFINITIONS AND SPECIAL RULES.—For purposes of this section—

‘‘(1) APPLICABLE INDIVIDUAL.—The term ‘applicable individual’ means—

‘‘(A) any participant in the applicable pension plan, and

‘‘(B) any beneficiary who is an alternate payee (within the meaning of

section 414(p)(8)) under a qualified domestic relations order (within the

meaning of section 414(p)(1)(A)), and

‘‘(C) any beneficiary of a deceased participant or alternate payee.

‘‘(2) APPLICABLE PENSION PLAN.—

‘‘(A) IN GENERAL.—The term ‘applicable pension plan’ means—

‘‘(i) a plan described in clause (i), (ii), or (iv) of section 219(g)(5)(A),

and

‘‘(ii) an eligible deferred compensation plan (as defined in section

457(b)) of an eligible employer described in section 457(e)(1)(A),

which maintains accounts for participants under the plan or under which

the accrued benefit of any participant depends in whole or in part on hypothetical investments directed by the participant.

‘‘(B) EXCEPTION.—Such term shall not include a one-participant retirement plan (as defined in section 4980G(f)(3)).

‘‘(3) TRANSACTION RESTRICTION PERIOD.—

‘‘(A) IN GENERAL.—The term ‘transaction restriction period’ means a temporary or indefinite period of at least 3 consecutive days during which

rights otherwise provided under the plan to 1 or more applicable individuals to direct investments in the applicable pension plan, obtain loans from

such plan, or obtain distributions from such plan are substantially reduced

(other than by reason of the application of securities laws or other circumstances specified by the Secretary in regulations). In determining consecutive days, days on which such rights are not normally available shall

be disregarded.

‘‘(B) SPECIAL RULE FOR EMPLOYER SECURITIES.—

‘‘(i) IN GENERAL.—For purposes of subparagraph (A), rights shall be

treated as substantially reduced with respect to directing investments

out of employer securities if rights in effect are significantly restricted

for at least 3 consecutive business days.

‘‘(ii) BUSINESS DAY.—For purposes of clause (i), under regulations prescribed by the Secretary, the term ‘business day’ means—

‘‘(I) in the case of a security which is traded on an established

security market, any day on which such security may be traded on

the principal securities market of such security, and

‘‘(II) in the case of a security which is not traded on an established security market, any calendar day.

‘‘(4) EMPLOYER SECURITIES.—The term ‘employer securities’ shall have the

meaning given such term by section 407(d)(1) of the Employee Retirement Income Security Act of 1974.’’.

(b) CLERICAL AMENDMENT.—The table of sections for chapter 43 of such Code is

amended by adding at the end the following new item:

‘‘Sec. 4980H. Failure of applicable plans to provide notice of transaction restriction periods.’’.

(c) EFFECTIVE DATE.—

(1) IN GENERAL.—The amendments made by this section shall apply to plan

years beginning after December 31, 2002.

(2) GUIDANCE.—The Secretary of the Treasury, in consultation with the Secretary of Labor, shall issue guidance in carrying out section 4980H of the Internal Revenue Code of 1986 (as added by this section). Such guidance—

(A) in the case of a reduction of rights relating to the direction of investments out of employer securities, shall be issued by November 1, 2002 (or,

if later, the 60th day after the date of the enactment of this Act), and

(B) in any other case shall be issued not later than 120 days after the

date of the enactment of this Act.

SEC. 103. DIVERSIFICATION REQUIREMENTS FOR DEFINED CONTRIBUTION PLANS THAT

HOLD EMPLOYER SECURITIES.

(a) IN GENERAL.—Subsection (a) of section 401 of the Internal Revenue Code of

1986 (relating to requirements for qualification) is amended by adding at the end

the following new paragraph:

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‘‘(35) DIVERSIFICATION REQUIREMENTS FOR DEFINED CONTRIBUTION PLANS THAT

HOLD EMPLOYER SECURITIES.—

‘‘(A) IN GENERAL.—In the case of a defined contribution plan described in

this subsection that includes a trust which is exempt from tax under section

501(a) and which holds employer securities that are readily tradable on an

established securities market, such trust shall not constitute a qualified

trust under this section unless such plan meets the requirements of subparagraphs (B), (C), and (D).

‘‘(B) ELECTIVE DEFERRALS AND EMPLOYEE CONTRIBUTIONS INVESTED IN EMPLOYER SECURITIES.—In the case of the portion of the account attributable

to elective deferrals and employee contributions which is invested in employer securities, a plan meets the requirements of this subparagraph if

each applicable individual in such plan may elect to direct the plan to divest up to the applicable percentage of such securities in the individual’s

account and to reinvest an equivalent amount in other investment options

which meet the requirements of subparagraph (E).

‘‘(C) MATCHING AND CERTAIN OTHER CONTRIBUTIONS.—

‘‘(i) IN GENERAL.—In the case of the portion of the account attributable to contributions to which this subparagraph applies and which

is invested in employer securities, a plan meets the requirements of

this subparagraph if each applicable 3-year individual in the plan may

elect to direct the plan to divest up to the applicable percentage of such

securities in the individual’s account and to reinvest an equivalent

amount in other investment options which meet the requirements of

subparagraph (E).

‘‘(ii) CONTRIBUTIONS TO WHICH THIS SUBPARAGRAPH APPLIES.—This

subparagraph shall apply to—

‘‘(I) matching contributions (as defined in subsection (m)(4)(A)),

‘‘(II) qualified nonelective contributions (as defined in subsection

(m)(4)(C)), and

‘‘(III) contributions made in order to meet the requirements of

subsection (k)(12)(C).

‘‘(iii) APPLICABLE 3-YEAR INDIVIDUAL.—For purposes of clause (i), the

term ‘applicable 3-year individual’ means any individual who would be

an applicable individual if only participants in the plan who have completed at least 3 years of service (as determined under section 411(a))

were taken into account under subparagraph (G)(i)(I).

‘‘(D) OTHER EMPLOYER CONTRIBUTIONS.—

‘‘(i) IN GENERAL.—In the case of the portion of the account attributable to employer contributions (other than contributions to which

subparagraph (B) or (C) applies) which is invested in employer securities, a plan meets the requirements of this subparagraph if each applicable 5-year individual described in clause (ii) may elect to direct the

plan to divest up to the applicable percentage of such securities in the

individual’s account and to reinvest an equivalent amount in other investment options which meet the requirements of subparagraph (E).

‘‘(ii) APPLICABLE 5-YEAR INDIVIDUAL.—For purposes of clause (i), the

term ‘5-year individual’ means any individual who would be an applicable individual if only participants in the plan who have completed at

least 5 years of service (as determined under section 411(a)) were taken

into account under subparagraph (G)(i)(I).

‘‘(E) INVESTMENT OPTIONS.—The requirements of this subparagraph are

met if the plan offers not less than 3 investment options (not inconsistent

with regulations prescribed by the Secretary) other than employer securities.

‘‘(F) ELECTION.—Elections under this paragraph may be made not less

frequently than quarterly.

‘‘(G) OTHER DEFINITIONS AND RULES.—For purposes of this paragraph—

‘‘(i) APPLICABLE INDIVIDUAL.—The term ‘applicable individual’

means—

‘‘(I) any participant in the plan,

‘‘(II) any beneficiary who is an alternate payee (within the meaning of section 414(p)(8)) under an applicable qualified domestic relations order (within the meaning of section 414(p)(1)(A)), and

‘‘(III) any beneficiary of a deceased participant or alternate

payee.

‘‘(ii) ELECTIVE DEFERRALS.—The term ‘elective deferrals’ means an

employer contribution described in section 402(g)(3)(A).

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‘‘(iii) EMPLOYER SECURITIES.—The term ‘employer securities’ shall

have the meaning given such term by section 407(d)(1) of the Employee

Retirement Income Security Act of 1974. ‘‘(iv) EMPLOYEE STOCK OWNERSHIP PLAN.—The term ‘employee stock

ownership plan’ shall have the same meaning given to such term by

section 4975(e)(7). ‘‘(v) APPLICABLE PERCENTAGE.— ‘‘(I) IN GENERAL.—The applicable percentage shall be as follows: ‘‘Plan years Applicable

beginning in: percentage:

2003 .......................................................................................................................... 20 2004 .......................................................................................................................... 40 2005 .......................................................................................................................... 60 2006 .......................................................................................................................... 80 2007 or thereafter .................................................................................................... 100.

‘‘(II) ELECTIVE DEFERRALS TREATED AS SEPARATE PLAN NOT INDI- VIDUAL ACCOUNT PLAN.—In the case of elective deferrals and employee contributions (and any earnings allocable thereto) held within a plan treated as a separate plan as of the date of the enactment

of this paragraph under section 407(b)(2) of the Employee Retirement Income Security Act of 1974, for purposes of subparagraph

(B) the applicable percentage shall be 100 percent. ‘‘(III) CONTRIBUTIONS HELD WITHIN AN ESOP.—In the case of contributions (other than elective deferrals and employee contributions) held within an employee stock ownership plan, in the case

of years 2003 and 2004, the applicable percentage shall be the

greater of the amount determined under subclause (I) or the percentage determined under paragraph (28) (determined as if paragraph (28) applied to a plan described in this paragraph). ‘‘(vi) COORDINATION WITH PARAGRAPH (28).—Subparagraphs (B), (C),

and (D) shall apply to the extent that the amount attributable to the

applicable percentage under such subparagraph exceeds the amount to

which a prior election under such subparagraph or paragraph (28) applies.

‘‘(H) EXCEPTION FOR CERTAIN ESOPS.—This paragraph shall apply to an

employee stock ownership plan only if the plan holds amounts attributable

to deferrals or contributions to which subparagraph (B) or (C) apply.’’.

(b) CONFORMING AMENDMENTS.—

(1) Section 401(a)(28) of such Code is amended by adding at the end the following new subparagraph:

‘‘(D) APPLICATION.—This paragraph shall not apply to a plan to which

paragraph (35) applies.’’.

(2) Section 409(h)(7) of such Code is amended by inserting before the period

at the end ‘‘or subparagraph (B), (C), or (D) of section 401(a)(35)’’.

(3) Section 4980(c)(3)(A) of such Code is amended by striking ‘‘if—’’ and all

that follows and inserting ‘‘if the requirements of subparagraphs (B), (C), and

(D) are met.’’.

(c) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made

by this section shall apply to plan years beginning after December 31, 2002.

(2) EXCEPTION.—The amendments made by this section shall not apply to employer securities held by an employee stock ownership plan which are not subject to section 401(a)(28) of the Internal Revenue Code of 1986 by reason of section 1175(a)(2) of the Tax Reform Act of 1986 (100 Stat. 2519).

SEC. 104. TREATMENT OF QUALIFIED RETIREMENT PLANNING SERVICES.

(a) IN GENERAL.—Subsection (m) of section 132 of the Internal Revenue Code of

1986 (defining qualified retirement services) is amended by adding at the end the

following new paragraph:

‘‘(4) NO CONSTRUCTIVE RECEIPT.—No amount shall be included in the gross income of any employee solely because the employee may choose between any

qualified retirement planning services provided by a qualified investment advisor and compensation which would otherwise be includible in the gross income

of such employee. The preceding sentence shall apply to highly compensated

employees only if the choice described in such sentence is available on substantially the same terms to each member of the group of employees normally provided education and information regarding the employer’s qualified employer

plan.’’.

(b) CONFORMING AMENDMENTS.—

(1) Section 403(b)(3)(B) of such Code is amended by inserting ‘‘132(m)(4),’’

after ‘‘132(f)(4),’’.

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(2) Section 414(s)(2) of such Code is amended by inserting ‘‘132(m)(4),’’ after ‘‘132(f)(4),’’. (3) Section 415(c)(3)(D)(ii) of such Code is amended by inserting ‘‘132(m)(4),’’ after ‘‘132(f)(4),’’. (c) EFFECTIVE DATE.—The amendment made by this section shall apply to taxable

years beginning after December 31, 2002.

SEC. 105. SPECIAL RULES.

(a) SPECIAL RULE FOR COLLECTIVELY BARGAINED PLANS.—In the case of a plan

maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers ratified on or before the date of the

enactment of this Act, the amendments made by this title shall not apply to plan

years beginning before the earlier of— (1) the later of— (A) January 1, 2004, or

(B) the date on which the last of such collective bargaining agreements

terminates (determined without regard to any extension thereof after the

date of the enactment of this Act), or

(2) January 1, 2005.

(b) PLAN AMENDMENTS.—If the amendments made by this title require an amendment to any plan, such plan amendment shall not be required to be made before

the first plan year beginning on or after January 1, 2005, if— (1) during the period after such amendments made by this title take effect

and before such first plan year, the plan is operated in accordance with the requirements of such amendments made by this title, and

(2) such plan amendment applies retroactively to the period after such

amendments made by this Act take effect and before such first plan year.

TITLE II—OTHER TAX PROVISIONS RELATING

TO PENSIONS

SEC. 201. AMENDMENTS TO RETIREMENT PROTECTION ACT OF 1994.

(a) TRANSITION RULE MADE PERMANENT.—Paragraph (1) of section 769(c) of the

Retirement Protection Act of 1994 is amended— (1) by striking ‘‘transition’’ each place it appears in the heading and the text,

and

(2) by striking ‘‘for any plan year beginning after 1996 and before 2010’’. (b) SPECIAL RULES.—Paragraph (2) of section 769(c) of the Retirement Protection

Act of 1994 is amended to read as follows: ‘‘(2) SPECIAL RULES.—The rules described in this paragraph are as follows: ‘‘(A) For purposes of section 412(l)(9)(A) of the Internal Revenue Code of

1986, the funded current liability percentage for any plan year shall be

treated as not less than 90 percent. ‘‘(B) For purposes of section 412(m) of the Internal Revenue Code of 1986,

the funded current liability percentage for any plan year shall be treated

as not less than 100 percent.’’.

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to plan

years beginning after December 31, 2001.

SEC. 202. REPORTING SIMPLIFICATION.

(a) SIMPLIFIED ANNUAL FILING REQUIREMENT FOR OWNERS AND THEIR SPOUSES.—

(1) IN GENERAL.—The Secretary of the Treasury and the Secretary of Labor

shall modify the requirements for filing annual returns with respect to one-participant retirement plans to ensure that such plans with assets of $250,000 or

less as of the close of the plan year need not file a return for that year.

(2) ONE-PARTICIPANT RETIREMENT PLAN DEFINED.—For purposes of this subsection, the term ‘‘one-participant retirement plan’’ means a retirement plan

that—

(A) on the first day of the plan year—

(i) covered only the employer (and the employer’s spouse) and the employer owned the entire business (whether or not incorporated); or

(ii) covered only one or more partners (and their spouses) in a business partnership (including partners in an S or C corporation);

(B) meets the minimum coverage requirements of section 410(b) of the Internal Revenue Code of 1986 without being combined with any other plan

of the business that covers the employees of the business;

(C) does not provide benefits to anyone except the employer (and the employer’s spouse) or the partners (and their spouses);

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(D) does not cover a business that is a member of an affiliated service

group, a controlled group of corporations, or a group of businesses under

common control; and

(E) does not cover a business that leases employees.

(3) OTHER DEFINITIONS.—Terms used in paragraph (2) which are also used in

section 414 of the Internal Revenue Code of 1986 shall have the respective

meanings given such terms by such section.

(4) EFFECTIVE DATE.—The provisions of this subsection shall apply to plan

years beginning on or after January 1, 2002.

(b) SIMPLIFIED ANNUAL FILING REQUIREMENT FOR PLANS WITH FEWER THAN 25

EMPLOYEES.—In the case of plan years beginning after December 31, 2003, the Secretary of the Treasury and the Secretary of Labor shall provide for the filing of a

simplified annual return for any retirement plan which covers less than 25 employees on the first day of a plan year and which meets the requirements described in

subparagraphs (B), (D), and (E) of subsection (a)(2).

SEC. 203. IMPROVEMENT OF EMPLOYEE PLANS COMPLIANCE RESOLUTION SYSTEM.

The Secretary of the Treasury shall continue to update and improve the Employee

Plans Compliance Resolution System (or any successor program) giving special attention to— (1) increasing the awareness and knowledge of small employers concerning

the availability and use of the program;

(2) taking into account special concerns and circumstances that small employers face with respect to compliance and correction of compliance failures;

(3) extending the duration of the self-correction period under the Self-Correction Program for significant compliance failures;

(4) expanding the availability to correct insignificant compliance failures

under the Self-Correction Program during audit; and

(5) assuring that any tax, penalty, or sanction that is imposed by reason of

a compliance failure is not excessive and bears a reasonable relationship to the

nature, extent, and severity of the failure.

The Secretary of the Treasury shall have full authority to effectuate the foregoing

with respect to the Employee Plans Compliance Resolution System (or any successor

program) and any other employee plans correction policies, including the authority

to waive income, excise, or other taxes to ensure that any tax, penalty, or sanction

is not excessive and bears a reasonable relationship to the nature, extent, and severity of the failure.

SEC. 204. FLEXIBILITY IN NONDISCRIMINATION, COVERAGE, AND LINE OF BUSINESS RULES.

(a) NONDISCRIMINATION.— (1) IN GENERAL.—The Secretary of the Treasury shall, by regulation, provide

that a plan shall be deemed to satisfy the requirements of section 401(a)(4) of

the Internal Revenue Code of 1986 if such plan satisfies the facts and circumstances test under section 401(a)(4) of such Code, as in effect before January 1, 1994, but only if—

(A) the plan satisfies conditions prescribed by the Secretary to appropriately limit the availability of such test; and

(B) the plan is submitted to the Secretary for a determination of whether

it satisfies such test.

Subparagraph (B) shall only apply to the extent provided by the Secretary.

(2) EFFECTIVE DATES.—

(A) REGULATIONS.—The regulation required by paragraph (1) shall apply

to years beginning after December 31, 2003.

(B) CONDITIONS OF AVAILABILITY.—Any condition of availability prescribed by the Secretary under paragraph (1)(A) shall not apply before the

first year beginning not less than 120 days after the date on which such

condition is prescribed.

(b) COVERAGE TEST.—

(1) IN GENERAL.—Section 410(b)(1) of the Internal Revenue Code of 1986 (relating to minimum coverage requirements) is amended by adding at the end the

following:

‘‘(D) In the case that the plan fails to meet the requirements of subparagraphs (A), (B) and (C), the plan—

‘‘(i) satisfies subparagraph (B), as in effect immediately before the enactment of the Tax Reform Act of 1986,

‘‘(ii) is submitted to the Secretary for a determination of whether it

satisfies the requirement described in clause (i), and

‘‘(iii) satisfies conditions prescribed by the Secretary by regulation

that appropriately limit the availability of this subparagraph.

Clause (ii) shall apply only to the extent provided by the Secretary.’’.

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(2) EFFECTIVE DATES.—

(A) IN GENERAL.—The amendment made by paragraph (1) shall apply to

years beginning after December 31, 2003.

(B) CONDITIONS OF AVAILABILITY.—Any condition of availability prescribed by the Secretary under regulations prescribed by the Secretary

under section 410(b)(1)(D) of the Internal Revenue Code of 1986 shall not

apply before the first year beginning not less than 120 days after the date

on which such condition is prescribed.

(c) LINE OF BUSINESS RULES.—The Secretary of the Treasury shall, on or before

December 31, 2003, modify the existing regulations issued under section 414(r) of

the Internal Revenue Code of 1986 in order to expand (to the extent that the Secretary determines appropriate) the ability of a pension plan to demonstrate compliance with the line of business requirements based upon the facts and circumstances

surrounding the design and operation of the plan, even though the plan is unable

to satisfy the mechanical tests currently used to determine compliance.

SEC. 205. EXTENSION TO ALL GOVERNMENTAL PLANS OF MORATORIUM ON APPLICATION OF

CERTAIN NONDISCRIMINATION RULES APPLICABLE TO STATE AND LOCAL PLANS.

(a) IN GENERAL.—

(1) Subparagraph (G) of section 401(a)(5) of the Internal Revenue Code of

1986 and subparagraph (H) of section 401(a)(26) of such Code are each amended

by striking ‘‘section 414(d))’’ and all that follows and inserting ‘‘section 414(d)).’’.

(2) Subparagraph (G) of section 401(k)(3) of the Internal Revenue Code of

1986 and paragraph (2) of section 1505(d) of the Taxpayer Relief Act of 1997

are each amended by striking ‘‘maintained by a State or local government or

political subdivision thereof (or agency or instrumentality thereof)’’.

(b) CONFORMING AMENDMENTS.—

(1) The heading for subparagraph (G) of section 401(a)(5) of such Code is

amended to read as follows: ‘‘GOVERNMENTAL PLANS.—’’.

(2) The heading for subparagraph (H) of section 401(a)(26) of such Code is

amended to read as follows: ‘‘EXCEPTION FOR GOVERNMENTAL PLANS.—’’.

(3) Subparagraph (G) of section 401(k)(3) of such Code is amended by inserting ‘‘GOVERNMENTAL PLANS.—’’ after ‘‘(G)’’.

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to years

beginning after December 31, 2002.

SEC. 206. NOTICE AND CONSENT PERIOD REGARDING DISTRIBUTIONS.

(a) EXPANSION OF PERIOD.—

(1) AMENDMENT OF INTERNAL REVENUE CODE.—

(A) IN GENERAL.—Subparagraph (A) of section 417(a)(6) of the Internal

Revenue Code of 1986 is amended by striking ‘‘90-day’’ and inserting ‘‘180-

day’’.

(B) MODIFICATION OF REGULATIONS.—The Secretary of the Treasury shall

modify the regulations under sections 402(f), 411(a)(11), and 417 of the Internal Revenue Code of 1986 to substitute ‘‘180 days’’ for ‘‘90 days’’ each

place it appears in Treasury Regulations sections 1.402(f)–1, 1.411(a)–11(c),

and 1.417(e)–1(b).

(2) EFFECTIVE DATE.—The amendment made by paragraph (1)(A) and the

modifications required by paragraph (1)(B) shall apply to years beginning after

December 31, 2002.

(b) CONSENT REGULATION INAPPLICABLE TO CERTAIN DISTRIBUTIONS.—

(1) IN GENERAL.—The Secretary of the Treasury shall modify the regulations

under section 411(a)(11) of the Internal Revenue Code of 1986 to provide that

the description of a participant’s right, if any, to defer receipt of a distribution

shall also describe the consequences of failing to defer such receipt.

(2) EFFECTIVE DATE.—

(A) IN GENERAL.—The modifications required by paragraph (1) shall apply

to years beginning after December 31, 2002.

(B) REASONABLE NOTICE.—In the case of any description of such consequences made before the date that is 90 days after the date on which the

Secretary of the Treasury issues a safe harbor description under paragraph

(1), a plan shall not be treated as failing to satisfy the requirements of section 411(a)(11) of such Code by reason of the failure to provide the information required by the modifications made under paragraph (1) if the Administrator of such plan makes a reasonable attempt to comply with such requirements.

SEC. 207. REDUCED PBGC PREMIUM FOR NEW PLANS OF SMALL EMPLOYERS.

(a) IN GENERAL.—Subparagraph (A) of section 4006(a)(3) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1306(a)(3)(A)) is amended—

12

(1) in clause (i), by inserting ‘‘other than a new single-employer plan (as defined in subparagraph (F)) maintained by a small employer (as so defined),’’

after ‘‘single-employer plan,’’,

(2) in clause (iii), by striking the period at the end and inserting ‘‘, and’’, and

(3) by adding at the end the following new clause:

‘‘(iv) in the case of a new single-employer plan (as defined in subparagraph

(F)) maintained by a small employer (as so defined) for the plan year, $5 for

each individual who is a participant in such plan during the plan year.’’.

(b) DEFINITION OF NEW SINGLE-EMPLOYER PLAN.—Section 4006(a)(3) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1306(a)(3)) is amended

by adding at the end the following new subparagraph:

‘‘(F)(i) For purposes of this paragraph, a single-employer plan maintained by a

contributing sponsor shall be treated as a new single-employer plan for each of its

first 5 plan years if, during the 36-month period ending on the date of the adoption

of such plan, the sponsor or any member of such sponsor’s controlled group (or any

predecessor of either) did not establish or maintain a plan to which this title applies

with respect to which benefits were accrued for substantially the same employees

as are in the new single-employer plan.

‘‘(ii)(I) For purposes of this paragraph, the term ‘small employer’ means an employer which on the first day of any plan year has, in aggregation with all members

of the controlled group of such employer, 100 or fewer employees.

‘‘(II) In the case of a plan maintained by two or more contributing sponsors that

are not part of the same controlled group, the employees of all contributing sponsors

and controlled groups of such sponsors shall be aggregated for purposes of determining whether any contributing sponsor is a small employer.’’.

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to plans

established after December 31, 2001.

SEC. 208. REDUCTION OF ADDITIONAL PBGC PREMIUM FOR NEW AND SMALL PLANS.

(a) NEW PLANS.—Subparagraph (E) of section 4006(a)(3) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1306(a)(3)(E)) is amended by adding

at the end the following new clause:

‘‘(v) In the case of a new defined benefit plan, the amount determined under

clause (ii) for any plan year shall be an amount equal to the product of the amount

determined under clause (ii) and the applicable percentage. For purposes of this

clause, the term ‘applicable percentage’ means—

‘‘(I) 0 percent, for the first plan year.

‘‘(II) 20 percent, for the second plan year.

‘‘(III) 40 percent, for the third plan year.

‘‘(IV) 60 percent, for the fourth plan year.

‘‘(V) 80 percent, for the fifth plan year.

For purposes of this clause, a defined benefit plan (as defined in section 3(35)) maintained by a contributing sponsor shall be treated as a new defined benefit plan for

each of its first 5 plan years if, during the 36-month period ending on the date of

the adoption of the plan, the sponsor and each member of any controlled group including the sponsor (or any predecessor of either) did not establish or maintain a

plan to which this title applies with respect to which benefits were accrued for substantially the same employees as are in the new plan.’’.

(b) SMALL PLANS.—Paragraph (3) of section 4006(a) of the Employee Retirement

Income Security Act of 1974 (29 U.S.C. 1306(a)), as amended by section 207(b), is

amended—

(1) by striking ‘‘The’’ in subparagraph (E)(i) and inserting ‘‘Except as provided

in subparagraph (G), the’’, and

(2) by inserting after subparagraph (F) the following new subparagraph:

‘‘(G)(i) In the case of an employer who has 25 or fewer employees on the first day

of the plan year, the additional premium determined under subparagraph (E) for

each participant shall not exceed $5 multiplied by the number of participants in the

plan as of the close of the preceding plan year.

‘‘(ii) For purposes of clause (i), whether an employer has 25 or fewer employees

on the first day of the plan year is determined taking into consideration all of the

employees of all members of the contributing sponsor’s controlled group. In the case

of a plan maintained by two or more contributing sponsors, the employees of all contributing sponsors and their controlled groups shall be aggregated for purposes of

determining whether the 25-or-fewer-employees limitation has been satisfied.’’.

(c) EFFECTIVE DATES.—

(1) SUBSECTION (a).—The amendments made by subsection (a) shall apply to

plans established after December 31, 2001.

(2) SUBSECTION (b).—The amendments made by subsection (b) shall apply to

plan years beginning after December 31, 2002.

13

SEC. 209. AUTHORIZATION FOR PBGC TO PAY INTEREST ON PREMIUM OVERPAYMENT REFUNDS.

(a) IN GENERAL.—Section 4007(b) of the Employment Retirement Income Security

Act of 1974 (29 U.S.C. 1307(b)) is amended—

(1) by striking ‘‘(b)’’ and inserting ‘‘(b)(1)’’, and

(2) by inserting at the end the following new paragraph:

‘‘(2) The corporation is authorized to pay, subject to regulations prescribed by the

corporation, interest on the amount of any overpayment of premium refunded to a

designated payor. Interest under this paragraph shall be calculated at the same rate

and in the same manner as interest is calculated for underpayments under paragraph (1).’’.

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to interest accruing for periods beginning not earlier than the date of the enactment of

this Act.

SEC. 210. SUBSTANTIAL OWNER BENEFITS IN TERMINATED PLANS.

(a) MODIFICATION OF PHASE-IN OF GUARANTEE.—Section 4022(b)(5) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1322(b)(5)) is amended

to read as follows:

‘‘(5)(A) For purposes of this paragraph, the term ‘majority owner’ means an individual who, at any time during the 60-month period ending on the date the determination is being made—

‘‘(i) owns the entire interest in an unincorporated trade or business,

‘‘(ii) in the case of a partnership, is a partner who owns, directly or indirectly,

50 percent or more of either the capital interest or the profits interest in such

partnership, or

‘‘(iii) in the case of a corporation, owns, directly or indirectly, 50 percent or

more in value of either the voting stock of that corporation or all the stock of

that corporation.

For purposes of clause (iii), the constructive ownership rules of section 1563(e) of

the Internal Revenue Code of 1986 shall apply (determined without regard to section 1563(e)(3)(C)).

‘‘(B) In the case of a participant who is a majority owner, the amount of benefits

guaranteed under this section shall equal the product of—

‘‘(i) a fraction (not to exceed 1) the numerator of which is the number of years

from the later of the effective date or the adoption date of the plan to the termination date, and the denominator of which is 10, and

‘‘(ii) the amount of benefits that would be guaranteed under this section if the

participant were not a majority owner.’’.

(b) MODIFICATION OF ALLOCATION OF ASSETS.—

(1) Section 4044(a)(4)(B) of the Employee Retirement Income Security Act of

1974 (29 U.S.C. 1344(a)(4)(B)) is amended by striking ‘‘section 4022(b)(5)’’ and

inserting ‘‘section 4022(b)(5)(B)’’.

(2) Section 4044(b) of such Act (29 U.S.C. 1344(b)) is amended—

(A) by striking ‘‘(5)’’ in paragraph (2) and inserting ‘‘(4), (5),’’, and

(B) by redesignating paragraphs (3) through (6) as paragraphs (4)

through (7), respectively, and by inserting after paragraph (2) the following

new paragraph:

‘‘(3) If assets available for allocation under paragraph (4) of subsection (a) are

insufficient to satisfy in full the benefits of all individuals who are described in

that paragraph, the assets shall be allocated first to benefits described in subparagraph (A) of that paragraph. Any remaining assets shall then be allocated

to benefits described in subparagraph (B) of that paragraph. If assets allocated

to such subparagraph (B) are insufficient to satisfy in full the benefits described

in that subparagraph, the assets shall be allocated pro rata among individuals

on the basis of the present value (as of the termination date) of their respective

benefits described in that subparagraph.’’.

(c) CONFORMING AMENDMENTS.—

(1) Section 4021 of the Employee Retirement Income Security Act of 1974 (29

U.S.C. 1321) is amended—

(A) in subsection (b)(9), by striking ‘‘as defined in section 4022(b)(6)’’, and

(B) by adding at the end the following new subsection:

‘‘(d) For purposes of subsection (b)(9), the term ‘substantial owner’ means an individual who, at any time during the 60-month period ending on the date the determination is being made—

‘‘(1) owns the entire interest in an unincorporated trade or business,

‘‘(2) in the case of a partnership, is a partner who owns, directly or indirectly,

more than 10 percent of either the capital interest or the profits interest in such

partnership, or

14

‘‘(3) in the case of a corporation, owns, directly or indirectly, more than 10

percent in value of either the voting stock of that corporation or all the stock

of that corporation.

For purposes of paragraph (3), the constructive ownership rules of section 1563(e)

of the Internal Revenue Code of 1986 shall apply (determined without regard to section 1563(e)(3)(C)).’’.

(2) Section 4043(c)(7) of such Act (29 U.S.C. 1343(c)(7)) is amended by striking

‘‘section 4022(b)(6)’’ and inserting ‘‘section 4021(d)’’.

(d) EFFECTIVE DATES.—

(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made

by this section shall apply to plan terminations—

(A) under section 4041(c) of the Employee Retirement Income Security

Act of 1974 (29 U.S.C. 1341(c)) with respect to which notices of intent to

terminate are provided under section 4041(a)(2) of such Act (29 U.S.C.

1341(a)(2)) after December 31, 2002, and

(B) under section 4042 of such Act (29 U.S.C. 1342) with respect to which

proceedings are instituted by the corporation after such date.

(2) CONFORMING AMENDMENTS.—The amendments made by subsection (c)

shall take effect on January 1, 2003.

SEC. 211. STUDIES.

(a) MODEL SMALL EMPLOYER GROUP PLANS STUDY.—As soon as practicable after

the date of the enactment of this Act, the Secretary of Labor, in consultation with

the Secretary of the Treasury, shall conduct a study to determine—

(1) the most appropriate form or forms of—

(A) employee pension benefit plans which would—

(i) be simple in form and easily maintained by multiple small employers, and

(ii) provide for ready portability of benefits for all participants and

beneficiaries,

(B) alternative arrangements providing comparable benefits which may

be established by employee or employer associations, and

(C) alternative arrangements providing comparable benefits to which employees may contribute in a manner independent of employer sponsorship,

and

(2) appropriate methods and strategies for making pension plan coverage described in paragraph (1) more widely available to American workers.

(b) MATTERS TO BE CONSIDERED.—In conducting the study under subsection (a),

the Secretary of Labor shall consider the adequacy and availability of existing employee pension benefit plans and the extent to which existing models may be modified to be more accessible to both employees and employers.

(c) REPORT.—Not later than 18 months after the date of the enactment of this Act,

the Secretary of Labor shall report the results of the study under subsection (a), together with the Secretary’s recommendations, to the Committee on Education and

the Workforce and the Committee on Ways and Means of the House of Representatives and the Committee on Health, Education, Labor, and Pensions and the Committee on Finance of the Senate. Such recommendations shall include one or more

model plans described in subsection (a)(1)(A) and model alternative arrangements

described in subsections (a)(1)(B) and (a)(1)(C) which may serve as the basis for appropriate administrative or legislative action.

(d) STUDY ON EFFECT OF LEGISLATION.—Not later than 5 years after the date of

the enactment of this Act, the Secretary of Labor shall submit to the Committee on

Education and the Workforce of the House of Representatives and the Committee

on Health, Education, Labor, and Pensions of the Senate a report on the effect of

the provisions of this Act and title VI of the Economic Growth and Tax Relief Reconciliation Act of 2001 on pension plan coverage, including any change in—

(1) the extent of pension plan coverage for low and middle-income workers,

(2) the levels of pension plan benefits generally,

(3) the quality of pension plan coverage generally,

(4) workers’ access to and participation in pension plans, and

(5) retirement security.

SEC. 212. INTEREST RATE RANGE FOR ADDITIONAL FUNDING REQUIREMENTS.

(a) IN GENERAL.—Subclause (III) of section 412(l)(7)(C)(i) of the Internal Revenue

Code of 1986 is amended—

(1) by striking ‘‘2002 or 2003’’ in the text and inserting ‘‘2001, 2002, or 2003’’,

and

(2) by striking ‘‘2002 AND 2003’’ in the heading and inserting ‘‘2001, 2002, AND

2003’’.

15

(b) EFFECTIVE DATE.—The amendments made by this section shall take effect as

if included in the amendments made by section 405 of the Job Creation and Worker

Assistance Act of 2002.

SEC. 213. PROVISIONS RELATING TO PLAN AMENDMENTS.

(a) IN GENERAL.—If this section applies to any plan or contract amendment—

(1) such plan or contract shall be treated as being operated in accordance with

the terms of the plan for purposes of the Internal Revenue Code of 1986 during

the period described in subsection (b)(2)(A), and

(2) except as provided by the Secretary of the Treasury, such plan shall not

fail to meet the requirements of section 411(d)(6) of the Internal Revenue Code

of 1986 by reason of such amendment.

(b) AMENDMENTS TO WHICH SECTION APPLIES.—

(1) IN GENERAL.—This section shall apply to any amendment to any plan or

annuity contract which is made—

(A) pursuant to any amendment made by this title or title VI of the Economic Growth and Tax Relief Reconciliation Act of 2001, or pursuant to any

regulation issued by the Secretary of the Treasury under this title or such

title VI, and

(B) on or before the last day of the first plan year beginning on or after

January 1, 2005.

In the case of a governmental plan (as defined in section 414(d) of the Internal

Revenue Code of 1986), this paragraph shall be applied by substituting ‘‘2007’’

for ‘‘2005’’.

(2) CONDITIONS.—This section shall not apply to any amendment unless—

(A) during the period—

(i) beginning on the date the legislative or regulatory amendment described in paragraph (1)(A) takes effect (or in the case of a plan or contract amendment not required by such legislative or regulatory amendment, the effective date specified by the plan), and

(ii) ending on the date described in paragraph (1)(B) (or, if earlier,

the date the plan or contract amendment is adopted),

the plan or contract is operated as if such plan or contract amendment were

in effect; and

(B) such plan or contract amendment applies retroactively for such period.

TITLE III—STOCK OPTIONS

SEC. 301. EXCLUSION OF INCENTIVE STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE

PLAN STOCK OPTIONS FROM WAGES.

(a) EXCLUSION FROM EMPLOYMENT TAXES.—

(1) SOCIAL SECURITY TAXES.—

(A) Section 3121(a) of the Internal Revenue Code of 1986 (relating to definition of wages) is amended by striking ‘‘or’’ at the end of paragraph (20),

by striking the period at the end of paragraph (21) and inserting ‘‘; or’’, and

by inserting after paragraph (21) the following new paragraph:

‘‘(22) remuneration on account of—

‘‘(A) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined in section 422(b)) or under an

employee stock purchase plan (as defined in section 423(b)), or

‘‘(B) any disposition by the individual of such stock.’’.

(B) Section 209(a) of the Social Security Act is amended by striking ‘‘or’’

at the end of paragraph (17), by striking the period at the end of paragraph

(18) and inserting ‘‘; or’’, and by inserting after paragraph (18) the following

new paragraph:

‘‘(19) Remuneration on account of—

‘‘(A) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined in section 422(b) of the Internal

Revenue Code of 1986) or under an employee stock purchase plan (as defined in section 423(b) of such Code), or

‘‘(B) any disposition by the individual of such stock.’’.

(2) RAILROAD RETIREMENT TAXES.—Subsection (e) of section 3231 of such Code

is amended by adding at the end the following new paragraph:

‘‘(11) QUALIFIED STOCK OPTIONS.—The term ‘compensation’ shall not include

any remuneration on account of—

16

‘‘(A) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined in section 422(b)) or under an

employee stock purchase plan (as defined in section 423(b)), or ‘‘(B) any disposition by the individual of such stock.’’. (3) UNEMPLOYMENT TAXES.—Section 3306(b) of such Code (relating to definition of wages) is amended by striking ‘‘or’’ at the end of paragraph (16), by

striking the period at the end of paragraph (17) and inserting ‘‘; or’’, and by inserting after paragraph (17) the following new paragraph: ‘‘(18) remuneration on account of— ‘‘(A) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined in section 422(b)) or under an

employee stock purchase plan (as defined in section 423(b)), or ‘‘(B) any disposition by the individual of such stock.’’. (b) WAGE WITHHOLDING NOT REQUIRED ON DISQUALIFYING DISPOSITIONS.—Section

421(b) of such Code (relating to effect of disqualifying dispositions) is amended by

adding at the end the following new sentence: ‘‘No amount shall be required to be

deducted and withheld under chapter 24 with respect to any increase in income attributable to a disposition described in the preceding sentence.’’. (c) WAGE WITHHOLDING NOT REQUIRED ON COMPENSATION WHERE OPTION PRICE

IS BETWEEN 85 PERCENT AND 100 PERCENT OF VALUE OF STOCK.—Section 423(c) of

such Code (relating to special rule where option price is between 85 percent and 100

percent of value of stock) is amended by adding at the end the following new sentence: ‘‘No amount shall be required to be deducted and withheld under chapter 24

with respect to any amount treated as compensation under this subsection.’’. (d) EFFECTIVE DATE.—The amendments made by this section shall apply to stock

acquired pursuant to options exercised after the date of the enactment of this Act.

TITLE IV—SOCIAL SECURITY AND MEDICARE

HELD HARMLESS

SEC. 401. PROTECTION OF SOCIAL SECURITY AND MEDICARE.

The amounts transferred to any trust fund under the Social Security Act shall be

determined as if this Act had not been enacted.

I. SUMMARY AND BACKGROUND

A. PURPOSE AND SUMMARY

PURPOSE

The bill, H.R. 3669, as amended (the ‘‘Employee Retirement Savings Bill of Rights’’), provides for (1) new protections for participants in retirement plans and new tax incentives for retirement

education (Title I), (2) reducing regulatory burdens with respect to

retirement plans (Title II), (3) exclusions from wages with respect

to incentive stock options and employee stock purchase plans (Title

III), and (4) holding social security trust funds harmless (Title IV).

The bill provides net tax reductions of over $10 billion over fiscal

years 2002–2007. The bill will provide strengthened retirement income security and certainty in the employment tax treatment of incentive stock options and employee stock purchase plans.

SUMMARY

I. Defined contribution plan protections

Excise tax on failure to provide investment education notice.—In

the case of a plan that permits a participant to direct the investment of his or her account, or a plan under which a participant’s

accrued benefit depends on hypothetical investments directed by

the participant, the bill requires that participants and certain

beneficiaries be provided with investment education notices on a

quarterly basis and on enrollment in the plan. An excise tax of

17

$100 per individual applies in the case of a failure to provide the

required notice.

Excise tax on failure to provide notice of transaction restriction

periods.—In the case of a plan that maintains accounts for participants, or a plan under which a participant’s accrued benefit depends on hypothetical investments directed by the participant, the

bill requires that participants and certain beneficiaries be provided

with 30 days advance notice of a transaction restriction period. A

transaction restriction period generally means a temporary or indefinite period of at least three consecutive days during which the

rights otherwise provided under the plan to direct investments, or

obtain loans or distributions from the plan, are substantially reduced. An excise tax of $100 per individual applies in the case of

a failure to provide the required notice.

Diversification requirements for defined contribution plans holding employer securities.—The bill requires a defined contribution

plan that holds publicly-traded employer securities to permit certain participants and beneficiaries at least quarterly to direct that

the applicable percentage of employer securities in their accounts

be invested in alternative investments. The participants and beneficiaries who must be permitted to diversify and the applicable percentage depend on the type of contribution involved. The diversification requirement does not apply to an ESOP unless the ESOP

holds elective deferrals, employee after-tax contributions, matching

contributions, or other contributions used to satisfy the special nondiscrimination tests for elective deferrals (i.e., qualified nonelective

contributions and nonelective contributions under safe harbor

plans).

Treatment of qualified retirement planning services.—The bill

permits employers to offer employees a choice between cash compensation and qualified retirement planning services provided by a

qualified investment advisor. As a result, such qualified retirement

planning services may be provided on a salary-reduction basis.

Special rules.—The bill provides a delayed effective date for collectively bargained plans for the provisions of the bill relating to

notices and diversification. In addition, if an employer-sponsored

retirement plan must be amended as a result of the bill, the

amendment is not required to be made before the first plan year

beginning on or after January 1, 2005, provided certain requirements are met.

II. Other tax provisions relating to pensions

Amendments to Retirement Protection Act of 1994.—The bill

modifies the special funding rule under the Retirement Protection

Act of 1994 for plans sponsored by a company engaged primarily

in interurban or interstate passenger bus service by making the

rule permanent and treating the plan as meeting certain levels of

funded.

Pension plan reporting simplification.—The bill directs the Secretary of the Treasury to provide an exemption from the annual return requirement for a plan that covers only the sole owner of a

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

partners in a partnership that maintains the plan (and such partners’ spouses), if the total value of the plan assets as of the end

of the plan year does not exceed $250,000 and the plan meets cerVerDate 11-MAY-2000 03:51 Mar 22, 2002 Jkt 099006 PO 00000 Frm 00017 Fmt 6659 Sfmt 6602 E:\HR\OC\HR382P1.XXX pfrm02 PsN: HR382P1
18

tain other requirements. In addition, the Secretary of the Treasury

and the Secretary of Labor are directed to provide simplified reporting requirements for plans with fewer than 25 employees.

Improvement of Employee Plans Compliance Resolution System.— The bill directs the Secretary of the Treasury to continue to update

and improve EPCRS, giving special attention to (1) increasing the

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

and circumstances that small employers face with respect to compliance and correction of compliance failures, (3) extending the duration of the self-correction period under SCP for significant compliance failures, (4) expanding the availability to correct insignificant compliance failures under SCP during audit, and (5) assuring

that any tax, penalty, or sanction that is imposed by reason of a

compliance failure is not excessive and bears a reasonable relationship to the nature, extent, and severity of the failure. The bill also

clarifies the scope of the Secretary’s authority with respect to

EPCRS.

Flexibility in nondiscrimination, coverage, and line of business

rules.—The bill directs the Secretary of the Treasury to modify the

regulations dealing with line of business, nondiscrimination, and

minimum coverage, so that plans may use facts and circumstances

and prior-law tests to satisfy these rules.

Extension to all governmental plans of moratorium on application

of certain nondiscrimination rules applicable to State and local government plans.—Under the bill, a plan maintained by any governmental entity is exempt from the nondiscrimination and minimum

participation rules.

Notice and consent period regarding distributions.—Under the

bill, a qualified retirement plan is required to provide the applicable distribution notice no less than 30 days and no more than 180

days before the date distribution commences. The Secretary of the

Treasury is directed to modify the applicable regulations to reflect

the extension of the notice period to 180 days and to provide that

the description of a participant’s right, if any, to defer receipt of a

distribution shall also describe the consequences of failing to defer

such receipt.

Reduced PBGC premiums for small and new plans.—Under the

bill the flat-rate PBGC premium is $5 per plan participant for the

first five years of a new single-employer plan of an employer with

100 or fewer employees. The bill also provides that, for a new defined benefit plan, the variable-rate premium is phased in over a

six-year period and, for a plan maintained by an employer with 25

or fewer employees, the variable-rate premium is no more than $5

multiplied by the number of plan participants at the end of the preceding year.

Authorization for PBGC to pay interest on premium overpayment

refunds.—The bill allows the PBGC to pay interest on overpayments made by premium payors.

Rules for substantial owner benefits in terminated plans.—The

bill reduces the phase-in periods for guaranteed benefits for a 10-

percent or more owner (‘‘substantial owner’’) in the case of plan termination. The bill also applies the allocation of asset rules to a substantial owner with less than 50 percent ownership in the same

manner as other participants.

19

Studies.—The bill directs the Secretary of Labor to conduct studies regarding (1) possible new pension plan structures (and changes

to existing structures) to improve pension plan coverage and (2) the

effect of the bill and title VI of the Economic Growth and Tax Relief Reconciliation Act of 2001 on pension coverage.

Interest rate range for additional funding requirements.—The bill

expands the special interest rate rule for determining additional

plan contributions for 2002 and 2003 under section 405 of the Job

Creation and Worker Assistance Act of 2002. Under the bill, the

special rule applies in determining the amount of additional contributions for plan years beginning in 2001 to the extent of contributions that are required to be made within 81⁄2 months after

the end of the plan year.

Provisions relating to plan amendments.—Plan amendments required to be made as a result of the bill or title VI of the Economic

Growth and Tax Relief Reconciliation Act of 2001 are not required

to be made before the last day of the first plan year beginning on

or after January 1, 2005 (January 1, 2007 in the case of a governmental plan), provided certain requirements are met. The bill also

authorizes the Secretary of Treasury to provide appropriate exceptions to the relief from the prohibition on reductions in accrued

benefits.

III. Stock options

Exclusion of incentive stock options and employee stock purchase

plan stock options from wages.—The bill provides exclusions from

wages for purposes of the Federal Insurance Contribution Act and

the Federal Unemployment Tax Act for remuneration on account of

the transfer of stock pursuant to the exercise of an incentive stock

option or under an employee stock purchase plan, or any disposition of such stock. The bill also provides that Federal income tax

withholding is not required on a disposition of stock acquired pursuant to the exercise of an incentive stock option or under an employee stock purchase plan.

IV. Social Security held harmless

No impact on Social Security trust funds.—The bill contains a

provision to ensure that the income and balances of the Social Security trust funds are not reduced as a result of the bill.

B. BACKGROUND AND NEED FOR LEGISLATION

The provisions approved by the Committee will strengthen retirement income security by providing new protections for participants,

facilitating the provision of retirement education, reducing regulatory burdens with respect to retirement plans, and providing certainty in the employment tax treatment of incentive stock options

and employee stock purchase plans.

C. LEGISLATIVE HISTORY

COMMITTEE ACTION

The Committee on Ways and Means marked up the provisions of

the bill on March 14, 2002, and ordered the bill reported, as

amended, on March 14, 2002, by a roll call vote of 36 yeas and 2

nays, with a quorum present.

20

1The right to direct investments includes the right of an applicable individual in an employee

stock ownership plan to direct the investment of a portion of his or her account under present

law and the right of an applicable individual to direct the plan to divest the individual’s account

of employer securities as provided under another provision of the bill. 2 A one-person plan is a plan that (1) on the first day of the plan year, covers only the employer (and the employer’s spouse) and the employer owns the entire business (whether or not

incorporated) or covers only one or more partners (and their spouses) in a business partnership,

(2) meets the minimum coverage requirements without being combined with any other plan that

covers employees of the business, (3) does not provide benefits to anyone except the employer

(and the employer’s spouse) or the partners (and their spouses), (4) does not cover a business

that is a member of an affiliated service group, a controlled group of corporations, or a group

of corporations under common control, and (5) does not cover a business that leases employees.

II. EXPLANATION OF THE BILL

TITLE I: DEFINED CONTRIBUTION PLAN PROTECTIONS

A. EXCISE TAX ON FAILURE TO PROVIDE INVESTMENT EDUCATION

NOTICES TO PARTICIPANTS

(Sec. 101 of the bill and new Code sec. 4980G)

PRESENT LAW

Present law does not require that participants be given specific

information relating to investment education.

REASONS FOR CHANGE

Under some employer-sponsored retirement plans, participants

are responsible for directing the investment of the assets in their

accounts under the plan. Awareness of investment principles, including the need for diversification, is fundamental to making investment decisions consistent with long-term retirement income security. The Committee believes participants should be provided

with investment education to enable them to make sound investment decisions.

EXPLANATION OF PROVISION

Under the provision, in the case of a plan that permits a participant to direct the investment of his or her account, or a plan (including a qualified defined benefit plan) under which a participant’s accrued benefit depends on hypothetical investments directed by the participant, applicable individuals generally have to

be provided with investment education notices on at least a quarterly basis and on enrollment in the plan.1 Applicable individuals

include plan participants, alternate payees under a qualified domestic relations order, and beneficiaries of a deceased participant

or alternate payee. The notice requirement does not apply to oneperson plans.2

The investment education notice is required to contain an explanation, for the long-term retirement security of participants and

beneficiaries, of generally accepted investment principles, including

risk management and diversification, and a discussion of the risk

of holding substantial portions of a portfolio in securities of any one

entity, such as employer securities.

The notice has to be written in a manner calculated to be understood by the average plan participant and provide sufficient information (as determined under Treasury guidance) to allow recipients to understand the notice. The notice is required to be in writVerDate 11-MAY-2000 03:51 Mar 22, 2002 Jkt 099006 PO 00000 Frm 00020 Fmt 6659 Sfmt 6602 E:\HR\OC\HR382P1.XXX pfrm02 PsN: HR382P1
21

3 In the case of a multiemployer plan, the excise tax is imposed on the plan.

ing and can be provided in electronic or other form to the extent

that such form is reasonably accessible to the applicable individual.

In the case of a failure to comply with the notice requirement, an excise tax of $100 for each applicable individual with respect to

whom the failure occurred is generally imposed on the employer.3

If the employer exercises reasonable diligence to meet the notice requirements, the total excise tax imposed during a taxable year will

not exceed $500,000. No tax is imposed with respect to a failure if

the employer exercises reasonable diligence to comply and the failure is corrected within 30 days. In the case of a failure due to reasonable cause and not to willful neglect, the Secretary of the Treasury is authorized to waive the excise tax to the extent that the payment of the tax would be excessive or otherwise inequitable relative to the failure involved.

EFFECTIVE DATE

The proposal is effective for plan years beginning after December

31, 2002. Within 120 days after the date of enactment (or by January 1, 2003, if earlier), the Secretary of the Treasury, in consultation with the Secretary of Labor, is required to issue guidance and

model notices that comply with the new requirements.

B. EXCISE TAX ON FAILURE TO PROVIDE NOTICE TO PARTICIPANTS

OF TRANSACTION RESTRICTION PERIODS

(Sec. 102 of the bill and new sec. 4980H of the Code)

PRESENT LAW

Present law does not require that participants be given advance

notice of temporary periods during which the ability to direct investments or to obtain loans or distributions from the plan is restricted.

REASONS FOR CHANGE

In the course of normal plan operation, periods may occur during

which a plan participant’s ability to direct the investment of his or

her account or obtain loans or distributions from the plan is restricted (a so-called ‘‘blackout’’ period). These periods usually occur

in connection with administrative changes, such as a change in recordkeepers or in the investment options offered under a plan. Such

a period may result also from changes in the plan in connection

with a corporate transaction, such as a sale or merger. The Committee believes that plan participants should be given advance notice of such a period, before the period begins, in order to give participants the opportunity to prepare for any restrictions that will

occur. For example, if the ability to direct investments will be restricted, a participant may wish to make investment changes before the restriction period begins.

EXPLANATION OF PROVISION

In general

Under the provision, a qualified retirement plan or annuity, a

tax-sheltered annuity plan, or an eligible deferred compensation

22

4The term ‘‘one-person plan’’ is defined as under the provision of the bill relating to investment education notices (sec. 101 of the bill).

plan of a governmental employer is required to provide advance notice of a transaction restriction period to applicable individuals to

whom the transaction restriction period applies. The notice must be

provided to such individuals at least 30 days before the beginning

of the transaction restriction period. Applicable individuals include

plan participants, alternate payees under a qualified domestic relations order, and beneficiaries of a deceased participant or alternate

payee.

The notice requirement applies to a plan that maintains accounts

for participants or a plan (including a defined benefit plan) under

which a participant’s accrued benefit depends in whole or in part

on hypothetical investments directed by the participant. The notice

requirement does not apply to one-person plans.4

Definition of transaction restriction period

A transaction restriction period means a temporary or indefinite

period of at least three consecutive days during which the rights

otherwise provided under the plan to one or more applicable individuals to direct investments, or obtain loans or distributions from

the plan, are substantially reduced (other than because of the application of securities laws or other circumstances specified in regulations). For this purpose, rights are treated as substantially reduced with respect to directing investments out of employer securities if rights are significantly restricted for at least three consecutive business days. In the case of a publicly-traded security, ‘‘business day’’ means any day on which the security may be traded on

its principal market, and, in the case of a security that is not publicly traded, ‘‘business day’’ means any calendar day.

Whether an individual’s right to direct investments or obtain

loans or distributions from the plan is substantially reduced, or

whether the right to direct investments out of employer securities

is significantly restricted, is generally determined by reference to

the normal rights and procedures provided under the plan. A variety of factors may be relevant in making this determination. For

example, if, in connection with a change in plan recordkeepers, no

investment directions, loans, or distributions can be executed over

a three-day weekend (i.e., a Saturday, a Sunday, and a Monday

that is a Federal holiday), then no transaction restriction period results if the participants would not, under the terms of the plan,

have been able to engage in such transactions during that period

in any event. In addition, if a plan provides that a participant’s

ability to make investment changes, or obtain a loan or a distribution, is limited for a certain period in connection with a qualified

domestic relations order with respect to the participant’s account,

that limitation generally does not result in a transaction restriction

period. Factors in addition to the time period involved may also be

relevant. For example, suppose a plan offers a variety of investment options, including three options that have similar characteristics (e.g., similar risk and return characteristics). If the ability to

transfer funds into only one of these options is restricted, this may

not result in a transaction restriction period for purposes of the

23

5 In the case of a multiemployer plan, the excise tax is imposed on the plan.

provision, because participants have the right to transfer funds into

similar investment options.

Timing of notice

Notice of a transaction restriction period generally has to be provided at least 30 days before the beginning of the period. In the

case of a transaction restriction period resulting from an unforeseeable event, the notice has to be provided as soon as reasonably

practicable after the event.

If there is the possibility of a transaction restriction period in

connection with a major corporate disposition by a corporation

maintaining the plan, the notice must be provided at least 30 days

before the date of the disposition unless the plan administrator has

a substantial basis to believe that no transaction restriction period

will occur. If notice is provided at least 30 days before the disposition, no other notice is required if the transaction restriction period

begins within 30 days after the disposition. A ‘‘major corporate disposition’’ means the disposition of substantially all of the stock of

the corporation, or a subsidiary thereof, or the disposition of substantially all of the assets used in a trade or business of the corporation or subsidiary. Similar rules apply in the case of an entity

that is not a corporation.

It is intended that participants will be given the opportunity to

execute investment changes with respect to their accounts, or obtain loans or distributions otherwise permitted under the plan, before the transaction restriction period begins.

Form of notice

Notice of a transaction restriction period has to be written in a

manner calculated to be understood by the average plan participant and provide sufficient information (as determined under

Treasury guidance) to allow the recipients to understand the timing and effect of the transaction restriction period. The notice is required to be provided in writing and can be provided in electronic

or other form to the extent that such form is reasonably accessible

to the applicable individual.

Excise tax

In the case of a failure to comply with the notice requirement,

an excise tax of $100 for each applicable individual with respect to

whom the failure occurred is generally imposed on the employer.5

If the employer exercises reasonable diligence to meet the notice requirements, the total excise tax imposed during a taxable year will

not exceed $500,000. No tax is imposed with respect to a failure if

the employer exercises reasonable diligence to comply and the failure is corrected within 30 days (and before the beginning of the

transaction restriction period). In the case of a failure due to reasonable cause and not to willful neglect, the Secretary of the Treasury is authorized to waive the excise tax to the extent that the payment of the tax would be excessive or otherwise inequitable relative to the failure involved.

24

6 Code sec. 401(a)(28); IRS Notice 88–56, 1988–1 CB 540, Q&A 16.

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2002. The Secretary of the Treasury, in consultation with

the Secretary of Labor, is required to issue guidance for carrying

out the new notice requirements within 120 days after the date of

enactment. Guidance concerning a reduction of rights relating to

the direction of investments out of employer securities is required

to be issued by November 1, 2002 (or within 60 days after the date

of enactment, if later).

C. DIVERSIFICATION REQUIREMENTS FOR DEFINED CONTRIBUTION

PLANS THAT HOLD EMPLOYER SECURITIES

(Sec. 103 of the bill and new sec. 401(a)(35) of the Code)

PRESENT LAW

In general

Whether and the extent to which present law places limits on defined contribution plan investment in employer securities depends

on the type of plan.

Diversification requirements applicable to employee stock ownership

plans (‘‘ESOPs’’)

Under the Internal Revenue Code, ESOPs are subject to a requirement that a participant who has attained age 55 and who has

at least 10 years of participation in the plan must be permitted to

diversify the investment of the participant’s account in assets other

than employer securities. The diversification requirement applies to

a participant for six years, starting with the year in which the individual first meets the eligibility requirements (i.e., age 55 and 10

years of participation). The participant must be allowed to elect to

diversify up to 25 percent of the participant’s account (50 percent

in the sixth year), reduced by the portion of the account diversified

in prior years.

The participant must be given 90 days after the end of each plan

year in the election period to make the election to diversify. In the

case of participants who elect to diversify, the plan satisfies the diversification requirement if (1) the plan distributes the applicable

amount to the participant within 90 days after the election period,

(2) the plan offers at least three investment options (not inconsistent with Treasury regulations) and, within 90 days of the election period, invests the applicable amount in accordance with the

participant’s election, or (3) the applicable amount is transferred

within 90 days of the election period to another qualified defined

contribution plan of the employer providing investment options in

accordance with (2).6

10-percent limit on the acquisition of employer securities

ERISA prohibits money purchase pension plans (other than certain plans in existence before the enactment of ERISA) from acquiring employer securities if, after the acquisition, more than 10

percent of the assets of the plan would be invested in employer

25

7This 10-percent limitation also applies to defined benefit plans.

8 Under ERISA, plans that are not subject to the 10-percent limitation on the acquisition of

employer securities are referred to as ‘‘eligible individual account plans.’’

stock.7 This 10-percent limitation does not apply to other types of

defined contribution plans. Thus, most defined contribution plans,

such as profit-sharing plans, stock bonus plans, and ESOPs, are

not subject to any limit on the amount of employer securities that

can be invested in employer securities. In addition, a fiduciary generally is deemed not to violate the requirement that plan assets be

diversified with respect to the acquisition or holding of employer

securities in such plans.8

Under ERISA, the 10-percent limitation on the acquisition of employer securities, described above, applies separately to the portion

of a plan consisting of elective deferrals (and earnings thereon) if

any portion of an individual’s elective deferrals (or earnings thereon) are required to be invested in employer securities pursuant to

plan terms or the direction of a person other than the participant.

This restriction does not apply if (1) the amount of elective deferrals required to be invested in employer securities does not exceed

more than one percent of any employee’s compensation, (2) the fair

market value of all defined contribution plans maintained by the

employer is no more than 10-percent of the fair market value of all

retirement plans of the employer, or (3) the plan is an ESOP.

REASONS FOR CHANGE

The Committee understands that employer securities are one

possible investment for defined contribution plans. In some cases,

the plan may offer employer securities as one of several investment

options made available to plan participants. In other cases, the

plan may provide that certain contributions are invested in employer securities. For example, many plans provide that employer

matching contributions with respect to employee elective deferrals

under a qualified cash or deferred arrangement are to be invested

in employer securities.

Present law has facilitated and encouraged the acquisition of employer securities by qualified plans, particularly in the case of

ESOPs. Thus, for example, present law provides that the dividends

paid on employer securities held by an ESOP are deductible under

certain circumstances and also allows an ESOP to borrow to acquire the employer securities. Present law recognizes that employer

securities can be a profitable investment for employees as well as

a corporate financing tool for employers. Employees who hold employer securities through a defined contribution plan often feel that

they have a stake in the business, leading to increased profitability.

On the other hand, the Committee recognizes that diversification

of assets is a basic principle of sound investment policy and that

requiring that certain contributions be invested in employer securities may create tension with the objectives of diversification. Failure to appropriately diversify defined contribution plan investments may jeopardize retirement security.

The Committee believes that allowing participants greater opportunity to diversify plan investments in employer stock will help

participants achieve their retirement security goals, while continuing to allow employers and employees the freedom to choose

their own investments. Thus, the Committee bill requires defined

26

9 As under the present-law ESOP diversification rules, it is intended that the portion of a plan

that is diversified pursuant to the provision would not be considered to be part of the ESOP

and therefore generally would not be subject to the rules applicable to ESOPs. This same principle applies to the extent the employer provides for more diversification than required under

the bill.

contribution plans that hold employer securities that are publicly

traded to permit qualified plan participants to direct the plan to reinvest employer securities in other assets. The Committee bill generally requires diversification in accordance with the present-law

rules regarding vesting.

The Committee believes that the current role of ESOPs should

be preserved; thus, the bill does not apply additional diversification

requirements to ‘‘stand alone’’ ESOPs, meaning ESOPs that do not

hold elective deferrals and related contributions. Again, the Committee believes this strikes an appropriate balance between the

principle of diversification and the goals served by ESOPs. For example, some ESOPs hold a controlling interest in the employer.

EXPLANATION OF PROVISION

In general

Under the bill, defined contribution plans that hold employer securities that are readily tradable on an established securities market are required to permit applicable individuals to direct that the

applicable percentage of employer securities in the individual’s account be invested in alternative investments. In order to satisfy

this diversification requirement, applicable individuals must be

given a choice of at least three investment options (not inconsistent

with regulations prescribed by the Secretary) other than employer

securities. In addition, applicable individuals must be given the

right to direct the reinvestment of employer securities in alternative investments not less frequently than quarterly. The definition of applicable individual and applicable percentage depends on

the type of contribution involved. In all cases, the election applies

only to the extent that the amount attributable to the applicable

percentage exceeds the amount to which a prior election under the

ESOP diversification rules or under the provision applies.9

The diversification requirement does not apply to an ESOP unless the ESOP holds elective deferrals, employee after-tax contributions, matching contributions, or other contributions used to satisfy

the special nondiscrimination tests for elective deferrals (i.e., qualified nonelective contributions and nonelective contributions under

safe harbor plans). The present-law ESOP diversification rules do

not apply to employer securities which are readily tradable on an

established securities market and subject to the requirements of

the bill.

Elective deferrals and other employee contributions

In the case of elective deferrals under a qualified cash or deferred arrangement and employee after-tax contributions, an applicable individual means (1) any plan participant, (2) any beneficiary

who is an alternate payee under a qualified domestic relations

order, and (3) any beneficiary of a deceased participant or alternate

payee.

With respect to elective deferrals (and earnings thereon) treated

as a separate plan for purposes of the ERISA 10-percent limitation

27

10The determination of whether elective deferrals are treated as a separate plan and thus are

subject to the 100 percent diversification rule (rather than the phase-in) is made on the date

of enactment, and applies to all employer securities held by the plan, whether acquired on or

after the date of enactment. 11 Years of service are defined as under the rules relating to vesting (sec. 411(a)).

on the acquisition of employer securities, the applicable percentage

is 100 percent.10 With respect to other elective deferrals and employee contributions (and earnings thereon), the applicable percentage is as follows:

TABLE 1.—APPLICABLE PERCENTAGE FOR ELECTIVE DEFERRALS NOT TREATED AS SEPARATE

PLAN UNDER ERISA

Plan years beginning in Applicable percentage

2003 ......................................................... Greater of amount that would be required under present-law ESOP diversification

rule or 20 percent.

2004 ......................................................... Greater of amount that would be required under present-law ESOP diversification

rule or 40 percent.

2005 ......................................................... 60 percent.

2006 ......................................................... 80 percent.

2007 or thereafter ................................... 100 percent.

Matching and other contributions taken into account in applying

nondiscrimination rules applicable to elective deferrals

In the case of matching contributions and employer contributions

used to satisfy the special nondiscrimination test applicable to elective deferrals (i.e., qualified nonelective contributions and nonelective contributions under the section 401(k) safe harbor rules), an

applicable individual is (1) any plan participant with three years

of service,11 (2) any beneficiary with respect to a participant described in (1) who is an alternate payee under a qualified domestic

relations order, and (3) any beneficiary of a deceased participant

described in (1) or alternate payee described in (2).

With respect to such matching contributions and contributions

used to satisfy the special nondiscrimination test applicable to elective deferrals that are not part of an ESOP, the applicable percentage is as follows:

TABLE 2.—APPLICABLE PERCENTAGE FOR MATCHING AND OTHER CONTRIBUTIONS USED TO

SATISFY 401(k) NONDISCRIMINATION RULES THAT ARE NOT PART OF AN ESOP

Plan years beginning in Applicable

percentage

2003 ......................................................................................................................................................................... 20

2004 ......................................................................................................................................................................... 40

2005 ......................................................................................................................................................................... 60

2006 ......................................................................................................................................................................... 80

2007 and thereafter ................................................................................................................................................. 100

In the case of matching contributions and other contributions

used to satisfy the special section 401(k) nondiscrimination rules

that are part of an ESOP, the applicable percentage is the same

as in Table 2 above, except that for plan years beginning in 2003

and 2004, the applicable percentage is not less than the amount required under the present-law ESOP diversification requirement.

28

12 Years of service are defined as under the rules relating to vesting (sec. 411(a)). 13Secs. 132 and 3121(a)(20).

Other employer contributions

In the case of employer contributions other than those described

above (i.e., contributions unrelated to employee elective deferrals or

employee contributions) an applicable individual is (1) any plan

participant with five years of service,12 (2) any beneficiary with respect to a participant described in (1) who is an alternate payee

under a qualified domestic relations order, and (3) any beneficiary

of a deceased participant described in (1) or alternate payee described in (2).

The applicable percentage for such contributions is the same as

for matching contributions. Thus, in the case of contributions that

are not part of an ESOP, the applicable percentage is as described

in Table 2. In addition, in the case of such contributions that are

part of an ESOP, the applicable percentage would be as described

in Table 2, except that for plan years beginning in 2003 and 2004,

the applicable percentage is not less than the amount required

under the present-law ESOP diversification requirement.

EFFECTIVE DATE

The provision generally is effective with respect to plan years beginning after December 31, 2002. The provision does not apply to

employer securities held by an ESOP that are not subject to the

present-law diversification requirement, i.e., the provision does not

apply to stock acquired before January 1, 1987.

D. EMPLOYER-PROVIDED QUALIFIED RETIREMENT PLANNING

SERVICES

(Sec. 104 of the bill and sec. 132 of the Code)

PRESENT LAW

Under present law, certain employer-provided fringe benefits are

excludable from gross income and wages for employment tax purposes.13 These excludable fringe benefits include qualified retirement planning services provided to an employee and his or her

spouse by an employer maintaining a qualified employer plan. A

qualified employer plan includes a qualified retirement plan or annuity, a tax-sheltered annuity, a simplified employee pension, a

SIMPLE retirement account, or a governmental plan, including an

eligible deferred compensation plan maintained by a governmental

employer.

Qualified retirement planning services are retirement planning

advice and information. The exclusion is not limited to information

regarding the qualified employer plan, and, thus, for example, applies to advice and information regarding retirement income planning for an individual and his or her spouse and how the employer’s plan fits into the individual’s overall retirement income plan.

On the other hand, the exclusion does not apply to services that

may be related to retirement planning, such as tax preparation, accounting, legal or brokerage services.

The exclusion does not apply with respect to highly compensated

employees unless the services are available on substantially the

29

14 14 12 U.S.C. 92(a).

same terms to each member of the group of employees normally

provided education and information regarding the employer’s qualified plan.

REASONS FOR CHANGE

The Committee believes that it is important for all employees to

have access to retirement planning advice and information. In

order to plan adequately for retirement, individuals must anticipate retirement income needs and understand how their retirement

income goals can be achieved. The Committee believes that allowing employees to purchase qualified retirement planning services

on a salary-reduction basis will help many more employees obtain

advice and assistance when making retirement decisions.

EXPLANATION OF PROVISION

The provision permits employers to offer employees a choice between cash compensation and eligible qualified retirement planning

services. The provision only applies to qualified retirement planning services provided by a qualified investment advisor. It is intended that qualified investment advisors will be certified and regulated under applicable laws and regulations. In addition, qualified

investment advisors also include investment advisors within a financial institution’s trust or custody department chartered under

the National Bank Act.14 As under present law, the provision applies only to amounts for retirement planning advice and information and does not apply to services that may be related to retirement planning, such as tax preparation, accounting, legal or brokerage services.

Under the provision, no amount is includible in gross income or

wages merely because the employee is offered the choice of cash in

lieu of eligible qualified retirement planning services. Also, no

amount is includible in income or wages merely because the employee is offered a choice among eligible qualified retirement planning services. The amount of cash offered is includible in income

and wages only to the extent the employee elects cash. The exclusion does not apply to highly compensated employees unless the

salary reduction option is available on substantially the same

terms to all employees normally provided education and information about the plan.

Under the provision, salary reduction amounts used to provide

eligible qualified retirement planning services are generally treated

for pension plan purposes the same as other salary reduction contributions. Thus, such amounts are included for purposes of applying the limits on contributions and benefits, and an employer is

able to elect whether or not to include such amounts in compensation for nondiscrimination testing.

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2002.

30

E. SPECIAL RULES

(Sec. 105 of the bill)

PRESENT LAW

Plan amendments to reflect amendments to the law generally

must be made by the time prescribed by law for filing the income

tax return of the employer for the employer’s taxable year in which

the change in law occurs.

REASONS FOR CHANGE

The Committee believes it appropriate to delay the effective date

of certain provisions of the bill for collectively bargained plans in

order to accommodate the collective bargaining process. In addition, the Committee believes it is appropriate to allow additional

time for the making of plan amendments, provided the plan complies with applicable provisions.

EXPLANATION OF PROVISION

Delayed effective date for collectively bargained plans

The provision provides a delayed effective date for collectively

bargained plans for certain provisions relating to retirement savings. Under the provision, in the case of a plan maintained pursuant to one or more collective bargaining agreements ratified on or

before the date of enactment, the amendments made by provisions

relating to notices and diversification are applied beginning with

the first plan year beginning on or after the earlier of:

(1) The later of: (a) January 1, 2004, or (b) the date on which

the last of such collective bargaining agreements terminates

(determined without regard to any extension thereof after the

date of enactment), or

(2) January 1, 2005.

Time for making plan amendments

If any of the provisions of the bill relating to defined contribution

plan protections require an amendment to the plan, such plan

amendment is not required to be made before the first plan year

beginning on or after January 1, 2005, if, during the period after

the provisions of the proposal take effect and before such first plan

year, the plan is operated in accordance with the provisions of the

bill and the plan amendment applies retroactively.

EFFECTIVE DATE

The provision is effective on the date of enactment.

TITLE II: OTHER TAX PROVISIONS RELATING TO PENSIONS

A. AMENDMENTS TO RETIREMENT PROTECTION ACT OF 1994

(Sec. 201 of the bill and sec. 412 of the Code)

PRESENT LAW

Under present law, defined benefit pension plans are required to

meet certain minimum funding rules. In some cases, additional

contributions are required if a defined benefit pension plan is unVerDate 11-MAY-2000 03:51 Mar 22, 2002 Jkt 099006 PO 00000 Frm 00030 Fmt 6659 Sfmt 6602 E:\HR\OC\HR382P1.XXX pfrm02 PsN: HR382P1
31

derfunded. Additional contributions generally are not required in

the case of a plan with a funded current liability percentage of at

least 90 percent. A plan’s funded current liability percentage is the

value of plan assets as a percentage of current liability. In general,

a plan’s current liability means all liabilities to employees and

their beneficiaries under the plan. Quarterly minimum funding

contributions are required in the case of certain underfunded plans.

The Pension Benefit Guaranty Corporation (‘‘PBGC’’) insures

benefits under most defined benefit pension plans in the event the

plan is terminated with insufficient assets to pay for plan benefits.

The PBGC is funded in part by a flat-rate premium per plan participant, and a variable rate premium based on plan underfunding.

Under present law, a special rule modifies the minimum funding

requirements in the case of certain plans. The special rule applies

in the case of plans that (1) were not required to pay a variable

rate PBGC premium for the plan year beginning in 1996, (2) do

not, in plan years beginning after 1995 and before 2009, merge

with another plan (other than a plan sponsored by an employer

that was a member of the controlled group of the employer in

1996), and (3) are sponsored by a company that is engaged primarily in interurban or interstate passenger bus service.

The special rule treats a plan to which it applies as having a

funded current liability percentage of at least 90 percent for plan

years beginning after 1996 and before 2005 if for such plan year

the funded current liability percentage is at least 85 percent. If the

funded current liability of the plan is less than 85 percent for any

plan year beginning after 1996 and before 2005, the relief from the

minimum funding requirements applies only if certain specified

contributions are made.

For plan years beginning after 2004 and before 2010, the funded

current liability percentage will be deemed to be at least 90 percent

if the actual funded current liability percentage is at least at certain specified levels.

The relief from the minimum funding requirements applies for

the plan year beginning in 2005, 2006, 2007, and 2008 only if contributions to the plan equal at least the expected increase in current liability due to benefits accruing during the plan year.

REASONS FOR CHANGE

The present-law funding rules for plans maintained by certain

interstate bus companies were enacted because the generally applicable funding rules required greater contributions for such plans

than were warranted give the special characteristics of such plans.

In particular, these plans are closed to new participants and have

demonstrated mortality significantly greater than that predicted

under mortality tables that the plans would otherwise be required

to use for minimum funding purposes. The Committee believes that

further changes to the special minimum funding rules for such

plans are appropriate to ensure that a suitable level of funding for

such plans is maintained.

EXPLANATION OF PROVISION

The provision modifies the special funding rule for plans sponsored by a company engaged primarily in interurban or interstate

passenger bus service by making the rule permanent.

32

15Treas. Reg. sec. 301.6058–1(a).

In addition, the provision modifies the rule by providing that (1)

the funded current liability percentage of a plan to which the rule

applies is treated as not less than 90 percent for purposes of the

minimum funding rules applicable to underfunded plans, and (2)

the funded current liability percentage of a plan to which the rule

applies is treated as not less than 100 percent for purposes of the

quarterly contribution requirement.

EFFECTIVE DATE

The provision is effective with respect to plan years beginning

after December 31, 2001.

B. PENSION PLAN REPORTING SIMPLIFICATION

(Sec. 202 of the bill)

PRESENT LAW

A plan administrator of a pension, annuity, stock bonus, profitsharing or other funded plan of deferred compensation generally

must file with the Secretary of the Treasury an annual return for

each plan year containing certain information with respect to the

qualification, financial condition, and operation of the plan. Title I

of ERISA also may require the plan administrator to file annual reports concerning the plan with the Department of Labor and the

Pension Benefit Guaranty Corporation (‘‘PBGC’’). The plan administrator must use the Form 5500 series as the format for the required annual return.15 The Form 5500 series annual return/report, which consists of a primary form and various schedules, includes the information required to be filed with all three agencies.

The plan administrator satisfies the reporting requirement with respect to each agency by filing the Form 5500 series annual return/

report with the Department of Labor, which forwards the form to

the Internal Revenue Service and the PBGC.

The Form 5500 series consists of 2 different forms: Form 5500

and Form 5500–EZ. Form 5500 is the more comprehensive of the

forms and requires the most detailed financial information. A plan

administrator generally may file Form 5500–EZ, which consists of

only one page, if (1) the only participants in the plan are the sole

owner of a business that maintains the plan (and such owner’s

spouse), or partners in a partnership that maintains the plan (and

such partners’ spouses), (2) the plan is not aggregated with another

plan in order to satisfy the minimum coverage requirements of section 410(b), (3) the employer is not a member of a related group

of employers, and (4) the employer does not receive the services of

leased employees. If the plan satisfies the eligibility requirements

for Form 5500–EZ and the total value of the plan assets as of the

end of the plan year and all prior plan years beginning on or after

January 1, 1994, does not exceed $100,000, the plan administrator

is not required to file a return.

With respect to a plan that does not satisfy the eligibility requirements for Form 5500–EZ, the characteristics and the size of

the plan determine the amount of detailed financial information

that the plan administrator must provide on Form 5500. If the plan

33

16 Rev. Proc. 2001–17, 2001–7 I.R.B. 589.

has more than 100 participants at the beginning of the plan year,

the plan administrator generally must provide more information.

REASONS FOR CHANGE

The Committee believes that simplification of the reporting requirements applicable to plans of small employers will encourage

such employers to provide retirement benefits for their employees.

EXPLANATION OF PROVISION

The Secretary of the Treasury and the Secretary of Labor are directed to modify the annual return filing requirements with respect

to plans that satisfy the eligibility requirements for Form 5500–EZ

(referred to as a ‘‘one-participant plan’’) to provide that if the total

value of the plan assets of such a plan as of the end of the plan

year does not exceed $250,000, the plan administrator is not required to file a return. In addition, the provision directs the Secretary of the Treasury and the Secretary of Labor to provide simplified reporting requirements for plan years beginning after December 31, 2003, for certain plans with fewer than 25 employees.

EFFECTIVE DATE

The provision relating to one-participant plans is effective for

plans beginning on or after January 1, 2002. The provision relating

to simplified reporting for plans with fewer than 25 employees is

effective on the date of enactment.

C. IMPROVEMENT OF EMPLOYEE PLANS COMPLIANCE RESOLUTION

SYSTEM

(Sec. 203 of the bill)

PRESENT LAW

A retirement plan that is intended to be a tax-qualified plan provides retirement benefits on a tax-favored basis if the plan satisfies

all of the requirements of section 401(a). Similarly, an annuity that

is intended to be a tax-sheltered annuity provides retirement benefits on a tax-favored basis if the program satisfies all of the requirements of section 403(b). Failure to satisfy all of the applicable

requirements of section 401(a) or section 403(b) may disqualify a

plan or annuity for the intended tax-favored treatment.

The Internal Revenue Service (‘‘IRS’’) has established the Employee Plans Compliance Resolution System (‘‘EPCRS’’), which is a

comprehensive system of correction programs for sponsors of retirement plans and annuities that are intended, but have failed, to satisfy the requirements of section 401(a), section 403(a), or section

403(b), as applicable.16 EPCRS permits employers to correct compliance failures and continue to provide their employees with retirement benefits on a tax-favored basis.

The IRS has designed EPCRS to (1) encourage operational and

formal compliance, (2) promote voluntary and timely correction of

compliance failures, (3) provide sanctions for compliance failures

identified on audit that are reasonable in light of the nature, extent, and severity of the violation, (4) provide consistent and uniVerDate 11-MAY-2000 03:51 Mar 22, 2002 Jkt 099006 PO 00000 Frm 00033 Fmt 6659 Sfmt 6602 E:\HR\OC\HR382P1.XXX pfrm02 PsN: HR382P1
34

form administration of the correction programs, and (5) permit employers to rely on the availability of EPCRS in taking corrective actions to maintain the tax-favored status of their retirement plans

and annuities.

The basic elements of the programs that comprise EPCRS are

self-correction, voluntary correction with IRS approval, and correction on audit. The Self-Correction Program (‘‘SCP’’) generally permits a plan sponsor that has established compliance practices to

correct certain insignificant failures at any time (including during

an audit), and certain significant failures within a 2-year period,

without payment of any fee or sanction. The Voluntary Correction

Program (‘‘VCP’’) program 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.

The IRS has expressed its intent that EPCRS will be updated

and improved periodically in light of experience and comments

from those who use it.

REASONS FOR CHANGE

The Committee commends the IRS for the establishment of

EPCRS and agrees with the IRS that EPCRS should be updated

and improved periodically. The Committee believes that future improvements should facilitate use of the compliance and correction

programs by small employers and expand the flexibility of the programs.

EXPLANATION OF PROVISION

The Secretary of the Treasury is directed to continue to update

and improve EPCRS, giving special attention to (1) increasing the

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

and circumstances that small employers face with respect to compliance and correction of compliance failures, (3) extending the duration of the self-correction period under SCP for significant compliance failures, (4) expanding the availability to correct insignificant compliance failures under SCP during audit, and (5) assuring

that any tax, penalty, or sanction that is imposed by reason of a

compliance failure is not excessive and bears a reasonable relationship to the nature, extent, and severity of the failure.

The provision clarifies that the Secretary has the full authority

to effectuate the foregoing with respect to EPCRS (or similar program or policies), including the authority to waive income, excise

or other taxes to ensure that any tax, penalty or sanction is not excessive and bears a reasonable relationship to the nature, extent

and severity of the failure.

EFFECTIVE DATE

The provision is effective on the date of enactment.

35

D. FLEXIBILITY IN NONDISCRIMINATION, COVERAGE, AND LINE OF

BUSINESS RULES

(Sec. 204 of the bill and secs. 401(a)(4), 410(b) and 414(r) of the

Code)

PRESENT LAW

A plan is not a qualified retirement plan if the contributions or

benefits provided under the plan discriminate in favor of highly

compensated employees (sec. 401(a)(4)). The applicable Treasury

regulations set forth the exclusive rules for determining whether a

plan satisfies the nondiscrimination requirement. These regulations state that the form of the plan and the effect of the plan in

operation determine whether the plan is nondiscriminatory and

that intent is irrelevant.

Similarly, a plan is not a qualified retirement plan if the plan

does not benefit a minimum number of employees (sec. 410(b)). A

plan satisfies this minimum coverage requirement if and only if it

satisfies one of the tests specified in the applicable Treasury regulations. If an employer is treated as operating separate lines of

business, the employer may apply the minimum coverage requirements to a plan separately with respect to the employees in each

separate line of business (sec. 414(r)). Under a so-called ‘‘gateway’’

requirement, however, the plan must benefit a classification of employees that does not discriminate in favor of highly compensated

employees in order for the employer to apply the minimum coverage requirements separately for the employees in each separate

line of business. A plan satisfies this gateway requirement only if

it satisfies one of the tests specified in the applicable Treasury regulations.

REASONS FOR CHANGE

It has been brought to the attention of the Committee that some

plans are unable to satisfy the mechanical tests used to determine

compliance with the nondiscrimination and line of business requirements solely as a result of relatively minor plan provisions.

The Committee believes that, in such cases, it may be appropriate

to expand the consideration of facts and circumstances in the application of the mechanical tests.

EXPLANATION OF PROVISION

The Secretary of the Treasury is directed to modify, on or before

December 31, 2003, the existing regulations issued under section

414(r) in order to expand (to the extent that the Secretary may determine to be appropriate) the ability of a plan to demonstrate compliance with the line of business requirements based upon the facts

and circumstances surrounding the design and operation of the

plan, even though the plan is unable to satisfy the mechanical tests

currently used to determine compliance.

The Secretary of the Treasury is directed to provide by regulation

applicable to years beginning after December 31, 2003, that a plan

is deemed to satisfy the nondiscrimination requirements of section

401(a)(4) if the plan satisfied the pre-1994 facts and circumstances

test, satisfied the conditions prescribed by the Secretary to appropriately limit the availability of such test, and is submitted to the

36

Secretary for a determination of whether it satisfies such test (to

the extent provided by the Secretary).

Similarly, a plan will comply with the minimum coverage requirement of section 410(b) if the plan satisfied the pre-1989 coverage rules, is submitted to the Secretary for a determination of

whether it satisfied the pre-1989 coverage rules (to the extent provided by the Secretary), and satisfies conditions prescribed by the

Secretary by regulation that appropriately limit the availability of

the pre-1989 coverage rules.

EFFECTIVE DATE

The provision relating to the line of business requirements under

section 414(r) is effective on the date of enactment. The provision

relating to the nondiscrimination requirements under section

401(a)(4) is effective on the date of enactment, except that any condition of availability prescribed by the Secretary will not be effective before the first year beginning not less than 120 days after the

date on which such condition is prescribed. The provision relating

to the minimum coverage requirements under section 410(b) is effective for years beginning after December 31, 2003, except that

any condition of availability prescribed by the Secretary by regulation will not apply before the first year beginning not less than 120

days after the date on which such condition is prescribed.

E. EXTENSION TO ALL GOVERNMENTAL PLANS OF MORATORIUM ON

APPLICATION OF CERTAIN NONDISCRIMINATION RULES APPLICABLE

TO STATE AND LOCAL GOVERNMENT PLANS

(Sec. 205 of the bill, sec. 1505 of the Taxpayer Relief Act of 1997,

and secs. 401(a) and 401(k) of the Code)

PRESENT LAW

A qualified retirement plan maintained by a State or local government is exempt from the rules concerning nondiscrimination

(sec. 401(a)(4)) and minimum participation (sec. 401(a)(26)). All

other governmental plans are not exempt from the nondiscrimination and minimum participation rules.

REASONS FOR CHANGE

The Committee believes that application of the nondiscrimination

and minimum participation rules to governmental plans is unnecessary and inappropriate in light of the unique circumstances

under which such plans and organizations operate. Further, the

Committee believes that it is appropriate to provide for consistent

application of the minimum coverage, nondiscrimination, and minimum participation rules for governmental plans.

EXPLANATION OF PROVISION

The provision exempts all governmental plans (as defined in sec.

414(d)) from the nondiscrimination and minimum participation

rules.

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2002.

37

F. NOTICE AND CONSENT PERIOD REGARDING DISTRIBUTIONS

(SEC. 206 OF THE BILL AND SEC. 417 OF THE CODE)

PRESENT LAW

Notice and consent requirements apply to certain distributions

from qualified retirement plans. These requirements relate to the

content and timing of information that a plan must provide to a

participant prior to a distribution, and to whether the plan must

obtain the participant’s consent to the distribution. The nature and

extent of the notice and consent requirements applicable to a distribution depend upon the value of the participant’s vested accrued

benefit and whether the joint and survivor annuity requirements

(sec. 417) apply to the participant.

If the present value of the participant’s vested accrued benefit

exceeds $5,000, the plan may not distribute the participant’s benefit without the written consent of the participant. The participant’s consent to a distribution is not valid unless the participant

has received from the plan a notice that contains a written explanation of (1) the material features and the relative values of the

optional forms of benefit available under the plan, (2) the participant’s right, if any, to have the distribution directly transferred to

another retirement plan or IRA, and (3) the rules concerning the

taxation of a distribution. If the joint and survivor annuity requirements apply to the participant, this notice also must contain a

written explanation of (1) the terms and conditions of the qualified

joint and survivor annuity (‘‘QJSA’’), (2) the participant’s right to

make, and the effect of, an election to waive the QJSA, (3) the

rights of the participant’s spouse with respect to a participant’s

waiver of the QJSA, and (4) the right to make, and the effect of,

a revocation of a waiver of the QJSA. The plan generally must provide this notice to the participant no less than 30 and no more than

90 days before the date distribution commences.

If the participant’s vested accrued benefit does not exceed $5,000,

the terms of the plan may provide for distribution without the participant’s consent. The plan generally is required, however, to provide to the participant a notice that contains a written explanation

of (1) the participant’s right, if any, to have the distribution directly transferred to another retirement plan or IRA, and (2) the

rules concerning the taxation of a distribution. The plan generally

must provide this notice to the participant no less than 30 and no

more than 90 days before the date distribution commences.

REASONS FOR CHANGE

The Committee understands that an employee is not always able

to evaluate distribution alternatives, select the most appropriate

alternative, and notify the plan of the selection within a 90-day period. The Committee believes that requiring a plan to furnish multiple distribution notices to an employee who does not make a distribution election within 90 days is administratively burdensome.

In addition, the Committee believes that participants who are entitled to defer distributions should be informed of the impact of a decision not to defer distribution on the taxation and accumulation of

their retirement benefits.

38

EXPLANATION OF PROVISION

Under the provision, a qualified retirement plan is required to

provide the applicable distribution notice no less than 30 days and

no more than 180 days before the date distribution commences.

The Secretary of the Treasury is directed to modify the applicable

regulations to reflect the extension of the notice period to 180 days

and to provide that the description of a participant’s right, if any,

to defer receipt of a distribution shall also describe the consequences of failing to defer such receipt. In the case of a description of such consequences that is made before the date 90 days

after the date on which the Secretary of the Treasury issues a safe

harbor description, the plan administrator will be required to make

a reasonable attempt to comply with the requirements of the provision.

EFFECTIVE DATE

The provision is effective for years beginning after December 31,

2002.

G. REDUCED PBGC PREMIUMS FOR SMALL AND NEW PLANS

(Secs. 207–208 of the bill and sec. 4006 of ERISA)

PRESENT LAW

Under present law, the Pension Benefit Guaranty Corporation

(‘‘PBGC’’) provides insurance protection for participants and beneficiaries under certain defined benefit pension plans by guaranteeing certain basic benefits under the plan in the event the plan

is terminated with insufficient assets to pay benefits promised

under the plan. The guaranteed benefits are funded in part by premium payments from employers who sponsor defined benefit plans.

The amount of the required annual PBGC premium for a singleemployer plan is generally a flat rate premium of $19 per participant and an additional variable-rate premium based on a charge

of $9 per $1,000 of unfunded vested benefits. Unfunded vested benefits under a plan generally means (1) the unfunded current liability for vested benefits under the plan, over (2) the value of the

plan’s assets, reduced by any credit balance in the funding standard account. No variable-rate premium is imposed for a year if contributions to the plan were at least equal to the full funding limit.

The PBGC guarantee is phased in ratably in the case of plans

that have been in effect for less than five years, and with respect

to benefit increases from a plan amendment that was in effect for

less than five years before termination of the plan.

REASONS FOR CHANGE

The Committee believes that reducing the PBGC premiums for

new plans and small plans will help encourage the establishment

of defined benefit pension plans, particularly by small employers.

39

EXPLANATION OF PROVISION

Reduced flat-rate premiums for new plans of small employers

Under the provision, for the first five plan years of a new singleemployer plan of a small employer, the flat-rate PBGC premium is

$5 per plan participant.

A small employer would be a contributing sponsor that, on the

first day of the plan year, has 100 or fewer employees. For this

purpose, all employees of the members of the controlled group of

the contributing sponsor are to be taken into account. In the case

of a plan to which more than one unrelated contributing sponsor

contributes, employees of all contributing sponsors (and their controlled group members) are to be taken into account in determining

whether the plan was a plan of a small employer.

A new plan means a defined benefit plan maintained by a contributing sponsor if, during the 36-month period ending on the date

of adoption of the plan, such contributing sponsor (or controlled

group member or a predecessor of either) has not established or

maintained a plan subject to PBGC coverage with respect to which

benefits were accrued for substantially the same employees as in

the new plan.

Reduced variable-rate PBGC premium for new plans

The provision provides that the variable-rate premium is phased

in for new defined benefit plans over a six-year period starting with

the plan’s first plan year. The amount of the variable-rate premium

is a percentage of the variable premium otherwise due, as follows:

zero percent of the otherwise applicable variable-rate premium in

the first plan year; 20 percent in the second plan year; 40 percent

in the third plan year; 60 percent in the fourth plan year; 80 percent in the fifth plan year; and 100 percent in the sixth plan year

(and thereafter).

A new defined benefit plan is defined as described above under

the flat-rate premium provision of the provision relating to new

small employer plans.

Reduced variable-rate PBGC premium for small plans

In the case of a plan of a small employer, the variable-rate premium is no more than $5 multiplied by the number of plan participants in the plan at the end of the preceding plan year. For purposes of the provision, a small employer is a contributing sponsor

that, on the first day of the plan year, has 25 or fewer employees.

For this purpose, all employees of the members of the controlled

group of the contributing sponsor are to be taken into account. In

the case of a plan to which more than one unrelated contributing

sponsor contributed, employees of all contributing sponsors (and

their controlled group members) are to be taken into account in determining whether the plan was a plan of a small employer.

EFFECTIVE DATE

The reduction of the flat-rate premium for new plans of small

employers and the reduction of the variable-rate premium for new

plans is effective with respect to plans established after December

31, 2001. The reduction of the variable-rate premium for small

40

plans is effective with respect to plan years beginning after December 31, 2002.

H. AUTHORIZATION FOR PBGC TO PAY INTEREST ON PREMIUM

OVERPAYMENT REFUNDS

(Sec. 209 of the bill and sec. 4007(b) of ERISA)

PRESENT LAW

The PBGC charges interest on underpayments of premiums, but

is not authorized to pay interest on overpayments.

REASONS FOR CHANGE

The Committee believes that an employer or other person who

overpays PBGC premiums should receive interest on a refund of

the overpayment.

EXPLANATION OF PROVISION

The provision allows the PBGC to pay interest on overpayments

made by premium payors. Interest paid on overpayments is to be

calculated at the same rate and in the same manner as interest

charged on premium underpayments.

EFFECTIVE DATE

The provision is effective with respect to interest accruing for periods beginning not earlier than the date of enactment.

I. RULES FOR SUBSTANTIAL OWNER BENEFITS IN TERMINATED PLANS

(Sec. 210 of the bill and secs. 4021, 4022, 4043 and 4044 of ERISA)

PRESENT LAW

Under present law, the Pension Benefit Guaranty Corporation

(‘‘PBGC’’) provides participants and beneficiaries in a defined benefit pension plan with certain minimal guarantees as to the receipt

of benefits under the plan in case of plan termination. The employer sponsoring the defined benefit pension plan is required to

pay premiums to the PBGC to provide insurance for the guaranteed benefits. In general, the PBGC will guarantee all basic benefits which are payable in periodic installments for the life (or lives)

of the participant and his or her beneficiaries and are non-forfeitable at the time of plan termination. The amount of the guaranteed

benefit is subject to certain limitations. One limitation is that the

plan (or an amendment to the plan which increases benefits) must

be in effect for 60 months before termination for the PBGC to guarantee the full amount of basic benefits for a plan participant, other

than a substantial owner. In the case of a substantial owner, the

guaranteed basic benefit is phased in over 30 years beginning with

participation in the plan. A substantial owner is one who owns, directly or indirectly, more than 10 percent of the voting stock of a

corporation or all the stock of a corporation. Special rules restricting the amount of benefit guaranteed and the allocation of assets

also apply to substantial owners.

41

REASONS FOR CHANGE

The Committee believes that the present-law rules concerning

limitations on guaranteed benefits for substantial owners are overly complicated and restrictive and thus may discourage some small

business owners from establishing defined benefit pension plans.

EXPLANATION OF PROVISION

The provision provides that the 60-month phase-in of guaranteed

benefits applies to a substantial owner with less than 50 percent

ownership interest. For a substantial owner with a 50 percent or

more ownership interest (‘‘majority owner’’), the phase-in occurs

over a 10-year period and depends on the number of years the plan

has been in effect. The majority owner’s guaranteed benefit is limited so that it cannot be more than the amount phased in over 60

months for other participants. The rules regarding allocation of assets applies to substantial owners, other than majority owners, in

the same manner as other participants.

EFFECTIVE DATE

The provision is effective for plan terminations with respect to

which notices of intent to terminate are provided, or for which proceedings for termination are instituted by the PBGC, after December 31, 2002.

J. STUDIES

(Sec. 211 of the bill)

PRESENT LAW

No provision.

REASONS FOR CHANGE

The Committee believes it is appropriate to conduct a study of

new arrangements that might encourage small employers to adopt

pension plans and a study of the effect of recent legislation on coverage.

EXPLANATION OF PROVISION

Study on small employer group plans

The provision directs the Secretary of Labor, in consultation with

the Secretary of the Treasury, to conduct a study to determine (1)

the most appropriate form(s) of pension plans that would be simple

to create and easy to maintain by multiple small employers, while

providing ready portability of benefits for all participants and beneficiaries, (2) how such arrangements could be established by employer or employee associations, (3) how such arrangements could

provide for employees to contribute independent of employer sponsorship, and (4) appropriate methods and strategies for making

such pension plan coverage more widely available to American

workers.

The Secretary of Labor is required to consider the adequacy and

availability of existing pension plans and the extent to which existing models may be modified to be more accessible to both employees and employers. The Secretary of Labor is required to issue a

42

17The maximum funding requirement for a defined benefit plan is referred to as the full funding limitation. Additional contributions are not required if a plan has reached the full funding

limitation. 18Plans with no more than 100 participants on any day in the preceding plan year are not

subject to the special funding rule. Plans with more than 100 but not more than 150 participants are generally subject to lower contribution requirements under the special funding rule. 19 Under an alternative test, a plan is not considered underfunded if (1) the value of the plan

assets is at least 80 percent of current liability and (2) the value of the plan assets was at least

90 percent of current liability for each of the two immediately preceding years or each of the

second and third immediately preceding years.

report within 18 months, including recommendations for one or

more model plans or arrangements as described above which may

serve as the basis for appropriate administrative or legislative action.

Study on effect of legislation

The provision also directs the Secretary of Labor to report to the

Committee on Education and the Workforce of the House of Representatives and the Committee on Health, Education, Labor and

Pensions of the Senate regarding the effect of the bill and title VI

of the Economic Growth and Tax Relief Reconciliation Act of 2001

(‘‘the 2001 Act’’) on pension coverage, including any change in the

extent of pension plan coverage for low and middle-income workers,

the levels of pension plan benefits generally, the quality of pension

plan coverage generally, workers’ access to and participation in

pension plans, and retirement security. This report is required to

be submitted no later than five years after the date of enactment.

EFFECTIVE DATE

The provision is effective on the date of enactment.

K. INTEREST RATE RANGE FOR ADDITIONAL FUNDING

REQUIREMENTS

(Sec. 212 of the bill and sec. 412(l) of the Code)

PRESENT LAW

In general

ERISA and the Code impose both minimum and maximum 17

funding requirements with respect to defined benefit pension plans.

The minimum funding requirements are designed to provide at

least a certain level of benefit security by requiring the employer

to make certain minimum contributions to the plan. The amount

of contributions required for a plan year is generally the amount

needed to fund benefits earned during that year plus that year’s

portion of other liabilities that are amortized over a period of years,

such as benefits resulting from a grant of past service credit.

Additional contributions for underfunded plans

Additional contributions are required under a special funding

rule if a single-employer defined benefit pension plan is underfunded.18 Under the special rule, a plan is considered underfunded

for a plan year if the value of the plan assets is less than 90 percent of the plan’s current liability.19 The value of plan assets as a

percentage of current liability is the plan’s ‘‘funded current liability

percentage.’’

43

20The interest rate used under the plan must be consistent with the assumptions which reflect the purchase rates which would be used by insurance companies to satisfy the liabilities

under the plan (section 412(b)(5)(B)(iii)(II)). 21 No additional quarterly contributions are due once the plan’s funded current liability percentage for the plan year reaches 100 percent.

If a plan is underfunded, the amount of additional required contributions is based on certain elements, including whether the plan

has an unfunded liability related to benefits accrued before 1988 or

1995 or to changes in the mortality table used to determine contributions, and whether the plan provides for unpredictable contingent event benefits (that is, benefits that depend on contingencies

that are not reliably and reasonably predictable, such as facility

shutdowns or reductions in workforce). However, the amount of additional contributions cannot exceed the amount needed to increase

the plan’s funded current liability percentage to 100 percent.

Required interest rate

In general, a plan’s current liability means all liabilities to employees and their beneficiaries under the plan. The interest rate

used to determine a plan’s current liability must be within a permissible range of the weighted average of the interest rates on 30-

year Treasury securities for the four-year period ending on the last

day before the plan year begins.20 The permissible range is from

90 percent to 105 percent. As a result of debt reduction, the Department of the Treasury does not currently issue 30-year Treasury

securities.

Timing of plan contributions

In general, plan contributions required to satisfy the funding

rules must be made within 81⁄2 months after the end of the plan

year. If the contribution is made by such due date, the contribution

is treated as if it were made on the last day of the plan year.

In the case of a plan with a funded current liability percentage

of less than 100 percent for the preceding plan year, estimated contributions for the current plan year must be made in quarterly installments during the current plan year. The amount of each required installment is 25 percent of the lesser of (1) 90 percent of

the amount required to be contributed for the current plan year or

(2) 100 percent of the amount required to be contributed for the

preceding plan year.21

PBGC premiums

Because benefits under a defined benefit pension plan may be

funded over a period of years, plan assets may not be sufficient to

provide the benefits owed under the plan to employees and their

beneficiaries if the plan terminates before all benefits are paid. In

order to protect employees and their beneficiaries, the Pension Benefit Guaranty Corporation (‘‘PBGC’’) generally insures the benefits

owed under defined benefit pension plans. Employers pay premiums to the PBGC for this insurance coverage.

In the case of an underfunded plan, additional PBGC premiums

are required based on the amount of unfunded vested benefits.

These premiums are referred to as ‘‘variable rate premiums.’’ In determining the amount of unfunded vested benefits, the interest rate

used is 85 percent of the interest rate on 30-year Treasury securiVerDate 11-MAY-2000 03:51 Mar 22, 2002 Jkt 099006 PO 00000 Frm 00043 Fmt 6659 Sfmt 6602 E:\HR\OC\HR382P1.XXX pfrm02 PsN: HR382P1
44

22Public Law 107–147. 23 Under a related special rule, the interest rate used in determining the amount of unfunded

vested benefits for PBGC variable rate premium purposes is increased to 100 percent of the interest rate on 30-year Treasury securities for the month preceding the month in which the applicable plan year begins.

ties for the month preceding the month in which the plan year begins.

Special interest rate for 2002 and 2003

Section 405 of the Job Creation and Worker Assistance Act of

2002,22 enacted March 9, 2002, provides a special interest rate rule

applicable in determining the amount of additional contributions

for plan years beginning after December 31, 2001, and before January 1, 2004 (the ‘‘applicable plan years’’).23

The special rule expands the permissible range of the statutory

interest rate used in calculating a plan’s current liability for purposes of applying the additional contribution requirements for the

applicable plan years. The permissible range is from 90 percent to

120 percent for these years. Use of a higher interest rate under the

expanded range will affect the plan’s current liability, which may

in turn affect the need to make additional contributions and the

amount of any additional contributions.

Because the quarterly contributions requirements are based on

current liability for the preceding plan year, a special rule is provided for applying these requirements for plan years beginning in

2002 (when the expanded range first applies) and 2004 (when the

expanded range no longer applies). In each of those years (‘‘present

year’’), current liability for the preceding year is redetermined,

using the permissible range applicable to the present year. This redetermined current liability will be used for purposes of the plan’s

funded current liability percentage for the preceding year, which

may affect the need to make quarterly contributions and for purposes of determining the amount of any quarterly contributions in

the present year, which is based in part on the preceding year.

REASONS FOR CHANGE

Additional contributions are due within 81⁄2 months after the end

of the plan year, rather than on a quarterly basis during the plan

year, if the plan was sufficiently funded in the preceding plan year.

The Committee believes that the special interest rate rule provided

under the Job Creation and Worker Assistance Act of 2002 should

be extended to contributions for the 2001 plan year that are due

within 81⁄2 months after the end of the plan year.

EXPLANATION OF PROVISION

Under the provision, the special interest rate rule for 2002 and

2003 applies also in determining the amount of additional contributions for the 2001 plan year that must be contributed to the plan

within 81⁄2 months after the end of the plan year (e.g., by September 15, 2002). The provision does not affect quarterly contributions required to be made for the 2001 plan year.

EFFECTIVE DATE

The provision is effective as if included in section 405 of the Job

Creation and Worker Assistance Act of 2002.

45

L. PROVISIONS RELATING TO PLAN AMENDMENTS

(Sec. 213 of the bill)

PRESENT LAW

Plan amendments to reflect amendments to the law generally

must be made by the time prescribed by law for filing the income

tax return of the employer for the employer’s taxable year in which

the change in law occurs.

REASONS FOR CHANGE

The Committee believes that employers should have adequate

time to amend their plans to reflect amendments to the law while

operating their plans in compliance with such amendments.

EXPLANATION OF PROVISION

The provision permits certain plan amendments made pursuant

to the changes made by title II of the bill or by title VI of the Economic Growth and Tax Relief Reconciliation Act of 2001 (or regulations issued thereunder) to be retroactively effective. If the plan

amendment meets the requirements of the bill, then the plan will

be treated as being operated in accordance with its terms and the

amendment will not violate the prohibition of reductions of accrued

benefits for purposes of the Internal Revenue Code. In order for

this treatment to apply, the plan amendment is required to be

made on or before the last day of the first plan year beginning on

or after January 1, 2005 (January 1, 2007, in the case of a governmental plan). If the amendment is required to be made to retain

qualified status as a result of the changes in the law (or regulations), the amendment is required to be made retroactively effective

as of the date on which the change became effective with respect

to the plan and the plan is required to be operated in compliance

until the amendment is made. Amendments that are not required

to retain qualified status but that are made pursuant to the

changes made by the bill or the 2001 Act (or applicable regulations)

could be made retroactive as of the first day the plan is operated

in accordance with the amendment.

A plan amendment will not be considered to be pursuant to the

bill or the 2001 Act (or applicable regulations) if it has an effective

date before the effective date of the provision of the bill or Act (or

regulations) to which it related. Similarly, the provision does not

provide relief from section 411(d)(6) for periods prior to the effective date of the relevant provision (or regulations) or the plan

amendment.

The Secretary is authorized to provide exceptions to the relief

from the prohibition on reductions in accrued benefits. It is intended that the Secretary will not permit inappropriate reductions

in contributions or benefits that are not directly related to the provisions of the bill or the 2001 Act. For example, it is intended that

a plan that incorporates the section 415 limits by reference can be

retroactively amended to impose the section 415 limits in effect beVerDate 11-MAY-2000 03:51 Mar 22, 2002 Jkt 099006 PO 00000 Frm 00045 Fmt 6659 Sfmt 6602 E:\HR\OC\HR382P1.XXX pfrm02 PsN: HR382P1
46

24See also, section 411(j)(3) of the Job Creation and Worker Assistance Act of 2002, which

provides a special rule for plan amendments adopted on or before June 30, 2002, in connection

with the Economic Growth and Tax Relief Reconciliation Act of 2001 (the ‘‘2001 Act’’), in the

case of a plan that incorporated the section 415 limits by reference on June 7, 2001, the date

of enactment of the 2001 Act. 25Sec. 421. 26The amount that must be included in income is the lesser of (1) the excess of the fair market value of the stock at the time of disposition over the amount paid for the stock, or (2) the

excess of the fair market value of the stock at the time the option was granted over the option

price.

fore the 2001 Act.24 On the other hand, suppose a plan incorporates the section 401(a)(17) limit on compensation by reference

and provides for an employer contribution of three percent of compensation. It is expected that the Secretary will provide that the

plan cannot be amended retroactively to reduce the contribution

percentage for those participants not affected by the section

401(a)(17) limit, even though the reduction will result in the same

dollar level of contributions for some participants because of the increase in compensation taken into account under the plan as a result of the increase in the section 401(a)(17) limit under the 2001

Act. As another example, suppose that under present law a plan

is top-heavy and therefore a minimum benefit is required under

the plan, and that under the provisions of the 2001 Act, the plan

is not be considered to be top-heavy. It is expected that the Secretary will generally permit plans to be retroactively amended to

reflect the new top-heavy provisions of the 2001 Act.

EFFECTIVE DATE

The provision is effective on the date of enactment.

TITLE III: STOCK OPTIONS

A. EXCLUSION OF INCENTIVE STOCK OPTIONS AND EMPLOYEE STOCK

PURCHASE PLAN STOCK OPTIONS FROM WAGES

(Sec. 301 of the bill and secs. 421(b), 423(c), 3121(a), 3231, and

3306(b) of the Code)

PRESENT LAW

Generally, when an employee exercises a compensatory option on

employer stock, the difference between the option price and the fair

market value of the stock (i.e., the ‘‘spread’’) is includible in income

as compensation. In the case of an incentive stock option or an option to purchase stock under an employee stock purchase plan (collectively referred to as ‘‘statutory stock options’’), the spread is not

included in income at the time of exercise.25

If the statutory holding period requirements are satisfied with

respect to stock acquired through the exercise of a statutory stock

option, the spread, and any additional appreciation, will be taxed

as capital gain upon disposition of such stock. Compensation income is recognized, however, if there is a disqualifying disposition

(i.e., if the statutory holding period is not satisfied) of stock acquired pursuant to the exercise of a statutory stock option. Compensation income is also recognized in the case of a qualifying disposition of employee stock purchase plan stock if the option price

reflected a discount.26 Even though compensation income is recogVerDate 11-MAY-2000 03:51 Mar 22, 2002 Jkt 099006 PO 00000 Frm 00046 Fmt 6659 Sfmt 6602 E:\HR\OC\HR382P1.XXX pfrm02 PsN: HR382P1
47

27Secs. 3101, 3111 and 3301. 28Secs. 3121 and 3306. 29 Rev. Rul. 71–52, 1971–1 C.B. 278. 30 Notice 2001–14, 2001–6 I.R.B. 516.

nized upon such dispositions, employers are generally not required

to withhold income taxes.

Federal Insurance Contribution Act (‘‘FICA’’) and Federal Unemployment Tax Act (‘‘FUTA’’) taxes (collectively referred to as ‘‘employment taxes’’) are generally imposed in an amount equal to a

percentage of wages paid by the employer with respect to employment.27 The applicable Code provisions 28 do not provide an exception from FICA and FUTA taxes for wages paid to an employee

arising from the exercise of a statutory stock option, i.e., for the excess of the fair market value of the stock at the time of exercise

over the amount paid for the stock by the individual.

In 1971, the Internal Revenue Service issued a revenue ruling

addressing the withholding obligations of a company upon the exercise of a qualified stock option (the predecessor to incentive stock

options).29 The ruling concluded that there is no payment of wages

for purposes of FICA, FUTA, or income tax withholding at the time

of exercise. There has been uncertainty as to the extent to which

a similar result applies on exercise of an incentive stock option or

employee stock purchase plan.

In January 2001, the Internal Revenue Service issued notice of

its intent to clarify, through future guidance, the application of

FICA, FUTA, and Federal income tax withholding to statutory

stock options.30 The notice provided that in the case of a statutory

stock option exercised before January 1, 2003, the IRS would not

assess FICA or FUTA taxes upon the exercise of the option and

would not treat the disposition of stock acquired pursuant to the

exercise of a statutory stock option as subject to Federal income tax

withholding. The notice also provided that the Internal Revenue

Service would honor claims for refunds of FICA and FUTA taxes

paid. The notice also concluded that Revenue Ruling 71–52 is obsolete and that its holding does not apply to the exercise of statutory

stock options.

Proposed Treasury regulations issued in November 2001 provide

that the payment of FICA and FUTA taxes upon the exercise of

statutory stock options will apply to the exercise of statutory stock

options on or after January 1, 2003. Federal income tax withholding is not required under the proposed regulations. Consistent

with Notice 2001–14, the Internal Revenue Service will not assess

FICA or FUTA taxes upon the exercise of a statutory stock option

before 2003.

REASONS FOR CHANGE

The Committee believes that it is appropriate to clarify the treatment of statutory stock options for employment tax and income tax

withholding purposes. Until January 2001, the IRS had not published guidance with respect to the imposition of employment taxes

and income tax withholding on statutory stock options. Many taxpayers relied on guidance published with respect to qualified stock

options (the predecessor to incentive stock options) to take the position that no employment taxes and income tax withholding was required with respect to statutory stock options. Prior to its January

48

31The provision also provides a similar exclusion for wages under the Railroad Retirement

Tax Act.

2001 announcement, the IRS was inconsistent in its treatment of

taxpayers with respect to this issue and did not uniformly challenge taxpayers who did not collect employment taxes and withhold

income taxes on statutory stock options. In the mid-1990’s, some

IRS regional offices started to enforce the imposition of these taxes

and withholding with respect to statutory stock options, but the

issue was not enforced consistently throughout the country. It is

the Committee’s belief that a majority of taxpayers did not withhold employment and income taxes with respect to statutory stock

options. Thus, the announced IRS position with respect to this

issue would alter the treatment of statutory stock options for most

employers.

Because there is a specific income tax exclusion with respect to

statutory stock options, the Committee believes it is appropriate to

clarify that there is a conforming exclusion for employment taxes

and income tax withholding. This clarification will ensure that taxpayers are treated consistently for income and employment tax

purposes with respect to statutory stock options. Furthermore, this

clarification will ensure that employees will not be faced with a tax

increase that will reduce their net paychecks even though their

total compensation has not changed.

The clarification will also eliminate the administrative burden

and cost to employers who, in the absence of the Committee bill,

would be required to modify their payroll systems to provide for the

withholding of income and employment taxes on statutory stock options that they are not currently required to withhold.

EXPLANATION OF PROVISION

The provision provides specific exclusions from FICA and FUTA

wages for remuneration on account of the transfer of stock pursuant to the exercise of an incentive stock option or under an employee stock purchase plan, or any disposition of such stock. Thus,

under the provision, FICA and FUTA taxes do not apply upon the

exercise of a statutory stock option.31 The provision also provides

that such remuneration is not taken into account for purposes of

determining Social Security benefits.

Additionally, the provision provides that Federal income tax

withholding is not required on a disqualifying disposition, nor

when compensation is recognized in connection with an employee

stock purchase plan discount. Present law reporting requirements

continue to apply.

EFFECTIVE DATE

The provision applies to stock acquired pursuant to statutory

stock options exercised after the date of enactment. It is expected

that Treasury and the Internal Revenue Service will not attempt

to collect FICA or FUTA taxes attributable to exercises of statutory

stock options before the effective date.

49

TITLE IV: SOCIAL SECURITY HELD HARMLESS

A. NO IMPACT ON SOCIAL SECURITY AND MEDICARE TRUST FUNDS

(Sec. 401 of the bill)

PRESENT LAW

Present law provides for the transfer of employment taxes and

self-employment taxes to the Social Security and Medicare trust

funds. In addition, the income tax collected with respect to a portion of Social Security benefits included in gross income is transferred to the Social Security and Medicare trust funds.

REASONS FOR CHANGE

The Committee finds it appropriate to ensure that present-law

transfers to the Social Security and Medicare trust funds will not

be reduced as a result of the tax relief being provided under the

Committee bill.

EXPLANATION OF PROVISION

Under the bill, the amounts transferred to the Social Security

and Medicare trust funds are determined as if the bill is not enacted. Thus, there will be no reduction in transfers to these funds

as a result of the bill.

EFFECTIVE DATE

The provision is effective on the date of enactment.

III. VOTES OF THE COMMITTEE

In compliance with clause 3(b) of rule XIII of the Rules of the

House of Representatives, the following statements are made concerning the votes of the Committee on Ways and Means in its consideration of the bill, H.R. 3669.

MOTION TO REPORT THE BILL

The bill, H.R. 3669, as amended, was ordered favorably reported

by a rollcall vote of 36 yeas to 2 nays (with a quorum being

present). The vote was as follows:

Representatives Yea Nay Present Representative Yea Nay Present

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. X ........... ............. Mr. Stark .............................. ........... X .............

Mr. Shaw ............................... X ........... ............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... X ........... ............. Mr. Coyne ............................. X ........... .............

Mr. Houghton ........................ X ........... ............. Mr. Levin .............................. X ........... .............

Mr. Herger ............................. X ........... ............. Mr. Cardin ............................ X ........... .............

Mr. McCrery ........................... X ........... ............. Mr. McDermott ..................... X ........... .............

Mr. Camp .............................. X ........... ............. Mr. Kleczka ........................... X ........... .............

Mr. Ramstad ......................... X ........... ............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Nussle ............................. X ........... ............. Mr. Neal ............................... X ........... .............

Mr. Johnson ........................... X ........... ............. Mr. McNulty .......................... X ........... .............

Ms. Dunn .............................. ........... ........... ............. Mr. Jefferson ........................ ........... ........... .............

Mr. Collins ............................ X ........... ............. Mr. Tanner ............................ X ........... .............

Mr. Portman .......................... X ........... ............. Mr. Becerra .......................... ........... ........... .............

Mr. English ........................... X ........... ............. Mrs. Thurman ....................... X ........... .............

Mr. Watkins ........................... X ........... ............. Mr. Doggett .......................... ........... X .............

Mr. Hayworth ......................... X ........... ............. Mr. Pomeroy ......................... X ........... .............

Mr. Weller .............................. X ........... .............

50

Representatives Yea Nay Present Representative Yea Nay Present

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. X ........... .............

Mr. Ryan ............................... X ........... .............

VOTES ON AMENDMENTS

A rollcall vote was conducted on the following amendments to the

Chairman’s amendment in the nature of a substitute.

An amendment by Mr. Rangel, which would impose a 20-percent

excise tax on the proceeds from the sale of stock by executives who

were not restricted like plan participants with respect to the employee’s ability to transfer the stock, was defeated by a rollcall vote

of 16 yeas to 22 nays. The vote was as follows:

Representatives Yea Nay Present Representative Yea Nay Present

Mr. Thomas ........................... ........... X ............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. ........... X ............. Mr. Stark .............................. X ........... .............

Mr. Shaw ............................... ........... X ............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... X ........... ............. Mr. Coyne ............................. X ........... .............

Mr. Houghton ........................ X ........... ............. Mr. Levin .............................. X ........... .............

Mr. Herger ............................. ........... X ............. Mr. Cardin ............................ X ........... .............

Mr. McCrery ........................... ........... X ............. Mr. McDermott ..................... X ........... .............

Mr. Camp .............................. ........... X ............. Mr. Kleczka ........................... X ........... .............

Mr. Ramstad ......................... ........... X ............. Mr. Lewis (GA) ..................... ........... ........... .............

Mr. Nussle ............................. ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. McNulty .......................... X ........... .............

Ms. Dunn .............................. ........... X ............. Mr. Jefferson ........................ ........... ........... .............

Mr. Collins ............................ ........... X ............. Mr. Tanner ............................ ........... ........... .............

Mr. Portman .......................... ........... X ............. Mr. Becerra .......................... X ........... .............

Mr. English ........................... ........... X ............. Mrs. Thurman ....................... X ........... .............

Mr. Watkins ........................... ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. Hayworth ......................... ........... X ............. Mr. Pomeroy ......................... X ........... .............

Mr. Weller .............................. ........... X .............

Mr. Hulshof ........................... ........... X .............

Mr. McInnis ........................... ........... X .............

Mr. Lewis (KY) ...................... ........... X .............

Mr. Foley ............................... ........... X .............

Mr. Brady .............................. ........... X .............

Mr. Ryan ............................... ........... X .............

An amendment by Mr. Matsui, which would require deferred

compensation to be included in income of the employee in the year

earned if the benefit is secured (directly or indirectly) with assets

not owned by the employer and not subject to the claims of the

creditors, was defeated by a rollcall vote of 16 yeas to 23 nays. The

vote was as follows:

Representatives Yea Nay Present Representative Yea Nay Present

Mr. Thomas ........................... ........... X .............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. ........... X .............. Mr. Stark .............................. X ........... .............

Mr. Shaw ............................... ........... X .............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... ........... X .............. Mr. Coyne ............................. X ........... .............

Mr. Houghton ........................ ........... X .............. Mr. Levin .............................. X ........... .............

Mr. Herger ............................. ........... X .............. Mr. Cardin ............................ X ........... .............

Mr. McCrery ........................... ........... X .............. Mr. McDermott ..................... X ........... .............

Mr. Camp .............................. ........... X .............. Mr. Kleczka ........................... X ........... .............

Mr. Ramstad ......................... ........... X .............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Nussle ............................. ........... X .............. Mr. Neal ............................... X ........... .............

Mr. Johnson ........................... ........... X .............. Mr. McNulty .......................... X ........... .............

51

Representatives Yea Nay Present Representative Yea Nay Present

Ms. Dunn .............................. ........... X .............. Mr. Jefferson ........................ ........... ........... .............

Mr. Collins ............................ X ........... .............. Mr. Tanner ............................ ........... ........... .............

Mr. Portman .......................... ........... X .............. Mr. Becerra .......................... X ........... .............

Mr. English ........................... ........... X .............. Mrs. Thurman ....................... X ........... .............

Mr. Watkins ........................... ........... X .............. Mr. Doggett .......................... X ........... .............

Mr. Hayworth ......................... ........... X .............. Mr. Pomeroy ......................... X ........... .............

Mr. Weller .............................. ........... X ..............

Mr. Hulshof ........................... ........... X ..............

Mr. McInnis ........................... ........... X ..............

Mr. Lewis (KY) ...................... ........... X ..............

Mr. Foley ............................... ........... X ..............

Mr. Brady .............................. ........... X ..............

Mr. Ryan ............................... ........... X ..............

An amendment by Mr. Doggett, regarding notification of plan

and plan beneficiaries of certain insider stock transactions, was defeated by a rollcall vote of 14 yeas to 21 nays. The vote was as follows:

Representatives Yea Nay Present Representative Yea Nay Present

Mr. Thomas ........................... ........... X ............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. ........... X ............. Mr. Stark .............................. X ........... .............

Mr. Shaw ............................... ........... X ............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... ........... X ............. Mr. Coyne ............................. X ........... .............

Mr. Houghton ........................ ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Herger ............................. ........... X ............. Mr. Cardin ............................ X ........... .............

Mr. McCrery ........................... ........... X ............. Mr. McDermott ..................... X ........... .............

Mr. Camp .............................. ........... X ............. Mr. Kleczka ........................... X ........... .............

Mr. Ramstad ......................... ........... X ............. Mr. Lewis (GA) ..................... ........... ........... .............

Mr. Nussle ............................. ........... ........... ............. Mr. Neal ............................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. McNulty .......................... X ........... .............

Ms. Dunn .............................. ........... ........... ............. Mr. Jefferson ........................ ........... ........... .............

Mr. Collins ............................ ........... X ............. Mr. Tanner ............................ ........... ........... .............

Mr. Portman .......................... ........... X ............. Mr. Becerra .......................... X ........... .............

Mr. English ........................... ........... X ............. Mrs. Thurman ....................... X ........... .............

Mr. Watkins ........................... ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. Hayworth ......................... ........... X ............. Mr. Pomeroy ......................... X ........... .............

Mr. Weller .............................. ........... X .............

Mr. Hulshof ........................... ........... X .............

Mr. McInnis ........................... ........... X .............

Mr. Lewis (KY) ...................... ........... X .............

Mr. Foley ............................... ........... X .............

Mr. Brady .............................. ........... ........... .............

Mr. Ryan ............................... ........... X .............

IV. BUDGET EFFECTS OF THE BILL

A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS

In compliance with clause 3(d)(2) of the rule XIII of the Rules of

the House of Representatives, the following statement is made concerning the effects on the budget of the revenue provisions of the

bill, H.R. 3669 as reported.

The bill is estimated to have the following effects on budget receipts for fiscal years 2002–2006:

ESTIMATED REVENUE EFFECTS OF H.R. 3669, THE ‘‘EMPLOYEE RETIREMENT SAVINGS BILL OF RIGHTS,’’ AS REPORTED BY THE COMMITTEE ON WAYS AND M

[Fiscal years 2002–2007 in millions of dollars]

Provision Effective 2002 2003 2004 2005 2006 2007 

Defined Contribution Plan Protection Provisions:

1. Excise tax on failure of pension plans to provide notice to participants regarding investment education. pyba 12/31/02 Negligible Revenue Effect2. Excise tax on failure of pension plans to provide notice to participants of transaction restriction periods. pyba 12/31/02 Negligible Revenue Effect3. Diversification requirements for defined contributions plans that hold employer securities .... pyba 12/31/02 Negligible Revenue Effect4. Treatment of employer-provided qualified retirement planning services ................................... tyba 12/31/02 ................ ¥13 ¥24 ¥25 ¥22 ¥23 

5. Special rules ................................................................................................................................ DOE No Revenue Effect

Total of Defined Contribution Plan Protection Provisions ........................................................... ................ ¥13 ¥24 ¥25 ¥22 ¥23 

Other Tax Provisions Relating to Pensions:

1. Amendments to Retirement Protection Act of 1994 ................................................................... pyba 12/31/01 Negligible Revenue Effect2. Pension plan reporting simplification 1 ....................................................................................... pybo/a 1/1/02 No Revenue Effect

3. Improvement to Employee Plans Compliance Resolution System1 ............................................ DOE Negligible Revenue Effect4. Flexibility in nondiscrimination, coverage, and line of business rules 1 .................................... DOE Negligible Revenue Effect

5. Extension to all governmental plans of moratorium on application of certain nondiscrimination rules applicable to State and local government plans. pyba 12/31/02 Negligible Revenue Effect6. Notice and consent period regarding distributions .................................................................... yba 12/31/02 Negligible Revenue Effect7. Reduce flat-rate PBGC premiums for new plans of small employers 2 ..................................... pea 12/31/01 ................ (3) (3) (3) (3) (3) 

8. Reduce variable-rate PBGC premium for new and small plans 2 .............................................. pea 12/31/01 &

pyba 12/31/02

................ ¥7 ¥9 ¥9 ¥9 ¥9 

9. Authorization for PBGC to pay interest on premium overpayment refunds 2 ............................. iafpbnet DOE ................ ¥3 ¥3 ¥3 ¥3 ¥3 

10. Rules for substantial owner benefits in terminated plans 2 .................................................... (4) ................ (3) (3) (3) (3) (3) 

11. Studies ....................................................................................................................................... DOE No Revenue Effect12. Interest rate range for additional funding requirements ......................................................... (5) 994 994 ¥270 ¥593 ¥485 ¥327 

13. Provisions relating to plan amendments .................................................................................. DOE No Revenue Effect

Total of Other Tax Provisions Relating to Pensions .................................................................... 994 984 ¥282 ¥605 ¥497 ¥339 

Stock Options

—Exclusion of Incentive Stock Options and Employee Stock Purchase Plan Stock Options From Wages.6

(7) ................ ¥1,771 ¥2,283 ¥2,086 ¥2,224 ¥2,165 

Social Security Held Harmless .................................................................................................................. DOE No Revenue Effect

Net Total ...................................................................................................................................... 994 ¥800 ¥2,589 ¥2,716 ¥2,743 ¥2,527 

1 Directs the Secretary of the Treasury to modify rules through regulations.2 Estimate provided by the Congressional Budget Office and is preliminary and subject to change.3 Loss of less than $500,000.4 Effective for plan terminations with respect to which notices of intent to terminate are provided, or for which proceedings for termination are instituted by the PBGC, after December 31, 2002. 5 Effective as if included in section 405 of the ‘‘Job Creation and Worker Assistance Act of 2002.’’

6 There is uncertainty with respect to the potential revenue effects from the proposal. Due to the long-standing administrative position of the IRS with respect to the imposition of employment taxes on incentive stock options a

stock purchase plans, the level of compliance that can be expected with the revised IRS position is unclear. 7 Effective for stock acquired pursuant to statutory stock options exercised after the date of enactment.

Legend for ‘‘Effective’’ column: DOE = date of enactment; iafpbnet = interest accruing for periods beginning not earlier than; pea = plans established after; pyba = plan years beginning after; and pybo/a = plan years beg

after.

Note.

—Details may not add to totals due to rounding.

Source: Joint Committee on Taxation.

54

B. STATEMENT REGARDING NEW BUDGET AUTHORITY AND TAX

EXPENDITURES BUDGET AUTHORITY

In compliance with clause 3(c)(2) of rule XIII of the Rules of the

House of Representatives, the Committee states that the bill involves new or increased budget authority (as detailed in the statement by the Congressional Budget Office (‘‘CBO’’); see Part IV.C.,

below). The Committee further states that the revenue reducing

provisions involve increased tax expenditures (see amounts in table

in Part IV.A., above).

C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET

OFFICE

In compliance with clause 3(c)(3) of rule XIII of the Rules of the

House of Representatives, requiring a cost estimate prepared by

the CBO, the following statement by CBO is provided.

MARCH 20, 2002.

Hon. WILLIAM ‘‘BILL’’ M. THOMAS,

Chairman, Committee on Ways and Means,

House of Representatives, Washington, DC.

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 3669, the Employee Retirement Savings Bill of Rights.

If you wish further details on this estimate, we will be pleased

to provide them. The CBO staff contact is Erin Whitaker.

Sincerely,

DAN L. CRIPPEN,

Director.

Enclosure.

H.R. 3669—Employee Retirement Savings Bill of Rights

Summary: H.R. 3669 would impose an excise tax on pensions

plans if participants are not given certain information, and if the

plans do not allow participants greater diversification of assets in

contribution plans then is generally required under current law.

The bill would exclude incentive stock options and employee stock

purchase plan stock options from Federal Insurance Contribution

Act (FICA) and Federal Unemployment Tax Act (FUTA) wages if

exercised after the date of enactment. It also would make numerous changes to the Internal Revenue Code (IRC) and the Employee

Retirement Income Security Act of 1974 (ERISA) that would affect

the taxation and operation of private pension plans.

CBO and the Joint Committee on Taxation (JCT) estimate that

the bill would increase federal revenues by $994 million in 2002,

but reduce federal revenues by $10.3 billion over the 2002–2007 period and by $24.4 billion over the 2002–2012 period. CBO estimates

that the bill would increase direct spending by $6 million 2003, by

$46 million over the 2003–2007 period, and by $104 million over

the 2003–2012 period. Since this bill would affect direct spending

and revenues, pay-as-you-go procedures would apply.

JCT has determined that the tax provisions of H.R. 3369 contain

no intergovernmental or private-sector mandates as defined in the

Unfunded Mandates Reform Act (UMRA). CBO has determined

55

that the non-tax provisions of the bill contain no mandates and

would not affect the budgets of state, local, or tribal governments.

Estimated cost to the Federal Government: The estimated budgetary impact of H.R. 3669 is shown in the following table. The costs

of this legislation would fall within budget function 600 (income security).

By fiscal year, in millions of dollars—

2002 2003 2004 2005 2006 2007

CHANGES IN REVENUES

Treatment of Qualified Retirement Planning

Services ............................................................ 0 ¥13 ¥24 ¥25 ¥22 ¥23

Interest Rate Range for Additional Funding Requirements ....................................................... 994 994 ¥270 ¥593 ¥485 ¥327

Exclusion of Certain Stock Options from Wages 0 ¥1,771 ¥2,283 ¥2,086 ¥2,224 ¥2,165

Total Revenues ........................................ 994 ¥790 ¥2,577 ¥2,704 ¥2,731 ¥2,515

CHANGES IN DIRECT SPENDING

Reduced PBGC Flat-Rate Premiums .................... 0 1 1 2 2 2

Reduced PBGC Variable Premiums ...................... 0 2 4 5 6 6

Payment of Interest on PBGC Premium Overpayment ................................................................. 0 3 3 3 3 3

Benefits Paid to Substantial Owners ................... 0 (*) (*) (*) (*) (*)

Total Additional Outlays ......................... 0 6 8 10 11 11

TOTAL CHANGES

Net Decrease in Budget Surplus .......................... 0 ¥796 ¥2,585 ¥2,714 ¥2,742 ¥2,526

Notes.—Components may not sum to totals because of rounding. *=Less than $550,000.

Sources: CBO and Joint Committee on Taxation.

Basis of estimate

Revenues

All estimates of the revenue proposals in the bill were provided

by JCT. The provision that would exclude certain stock options

from wages would have the greatest effect on revenues if enacted,

with a loss of revenue of $10.5 billion over the 2002–2007 period and $23.2 billion over the 2002–2012 period.

The JCT estimate emphasizes that the potential revenue effects

from the proposal are uncertain. The JCT report (JCX–16–02) indicates that ‘‘due to the long-standing administrative position of the

IRS with respect to the imposition of employment taxes on incentive stock options and employee stock purchase plans, the level of

compliance that can be expected with the revised IRS position is

unclear.’’

Direct spending

Reduced Flat-Rate Premiums Paid to the PBGC. Under current

law, defined benefit pension plans operated by a single employer

pay two types of annual premiums to the Pension Benefit Guaranty

Corporation (PBGC). All covered plans are subject to a flat-rate

premium of $19 per participant. In addition, underfunded plans

must also pay a variable premium that depends on the amount by

which the plan’s liabilities exceed its assets.

The bill would reduce the flat-rate premium from $19 to $5 per

participant for plans established by employers with 100 or fewer

56

employees during the first five years of the plan’s operation. According to information obtained from the PBGC, approximately

7,500 plans would eventually qualify for this reduction. Those

plans cover an average of about 10 participants each. CBO estimates that the change would reduce the PBGC’s premium income,

which is classified as an offsetting collection, by about $1 million

in 2003 and by about $8 million over the 2003–2007 period.

Reduced Variable Premiums Paid to the PBGC. H.R. 3669 would

make two changes affecting the variable-rate premium paid by underfunded plans. First, for all new plans that are underfunded, the

bill would phase in the variable-rate premium. In the first year,

plans would pay nothing. In the succeeding four years, they would

pay 20 percent, 40 percent, 60 percent, and 80 percent, respectively, of the full amount. In the sixth and later years, they would

pay the full variable-rate premium determined by their funding

status. On the basis of information from the PBGC, CBO estimates

that this change would affect the premiums of approximately 250

plans each year. It would reduce the PBGC’s total premium receipts by about $19 million over the 2003–2007 period.

The bill would also reduce the variable-rate premium paid by all

underfunded plans (not just new plans) established by employers

with 25 or fewer employees. Under the bill, the variable-rate premium per participant paid by those plans would not exceed $5 multiplied by the number of participants in the plan. CBO estimates

that approximately 2,500 plans would have their premium payments to the PBGC reduced by this provision beginning in 2003.

As a result, premium receipts would decline by $1 million in 2004

and by $4 million over the 2004–2007 period.

Authorization for the PBGC to Pay Interest on Premium Overpayment Refunds. The legislation would authorize the PBGC to

pay interest to plan sponsors on premium overpayments. Interest

paid on overpayments would be calculated at the same rate as interest charged on premium underpayments. On average, PBGC receives $19 million per year in premium overpayments, charges an

interest rate of 8 percent for underpayments, and experiences a

two-year lag between the receipt of payments and the issuance of

refunds. Based on this information, CBO estimates that direct

spending would increase by $3 million annually.

Substantial Owner Benefits in Terminated Plans. H.R. 3669

would simplify the rules by which the PBGC pays benefits to substantial owners (those with an ownership interest of at least 10

percent) of terminated pension plans. Only about one-third of the

plans taken over by the PBGC involve substantial owners, and the

change in benefits paid to owner-employees under this provision

would be less than $500,000 annually.

Pay-as-you-go considerations: The Balanced Budget and Emergency Deficit Control Act sets up pay-as-you-go procedures for legislation affecting direct spending or receipts. The net changes in

outlays and governmental receipts that are subject to pay-as-yougo procedures are shown in the following table. For the purposes

of enforcing pay-as-you-go procedures, only the effects through

2006 are counted.

57

By fiscal year, in millions of dollars—

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Changes in receipts .. 994 ¥790 ¥2,577 ¥2,704 ¥2,731 ¥2,515 ¥2,866 ¥2,849 ¥2,800 ¥2,765 ¥2,845

Changes in outlays .... 0 6 8 10 11 11 11 11 12 12 12

Intergovernmental and private-sector impact: JCT has determined that the tax provisions of H.R. 3669 contain no intergovernmental or private-sector mandates as defined in UMRA. CBO has

determined that the non-tax provisions of the bill contain no mandates and would not affect the budgets of state, local, or tribal governments.

Estimate prepared by: Federal Revenues: Erin Whitaker; Pension

Benefit Guaranty Corporation: Geoff Gerhardt; Impact on State,

Local, and Tribal Governments: Leo Lex; and Impact on the Private Sector: Bruce Vavrichek.

Estimate approved by: Robert A. Sunshine, Assistant Director for

Budget Analysis and G. Thomas Woodward, Assistant Director for

Tax Analysis.

V. OTHER MATTERS TO BE DISCUSSED UNDER THE

RULES OF THE HOUSE

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

With respect to clause 3(c)(1) of rule XIII of the Rules of the

House of Representatives (relating to oversight findings), the Committee advises that it was a result of the Committee’s oversight review concerning the revenue laws applicable to retirement plans

and their affect of retirement security, as well as review of employment tax provisions, that the Committee concluded that it is appropriate and timely to enact the revenue provisions included in the

bill as reported.

B. STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

With respect to clause 3(c)(4) of rule XIII of the Rules of the

House of Representatives, the Committee advises that the bill contains no measure that authorizes funding, so no statement of general performance goals and objectives for any measure that authorizes funding is required.

C. CONSTITUTIONAL AUTHORITY STATEMENT

With respect to clause 3(d)(1) of the rule XIII of the Rules of the

House of Representatives (relating to Constitutional Authority), the

Committee states that the Committee’s action in reporting this bill

is derived from Article I of the Constitution, Section 8 (‘‘The Congress shall have Power To lay and collect Taxes, Duties, Imposts

and Excises * * * ’’), and from the 16th Amendment to the Constitution.

D. INFORMATION RELATING TO UNFUNDED MANDATES

This information is provided in accordance with section 423 of

the Unfunded Mandates Act of 1995 (P.L. 104–4).

The Committee has determined that the bill does not contain

Federal mandates on the private sector. The Committee has deterVerDate 11-MAY-2000 03:51 Mar 22, 2002 Jkt 099006 PO 00000 Frm 00057 Fmt 6659 Sfmt 6602 E:\HR\OC\HR382P1.XXX pfrm02 PsN: HR382P1
58

mined that the bill does not impose a Federal intergovernmental

mandate on State, local, or tribal governments.

E. APPLICABILITY OF HOUSE RULE XXI 5(b)

Rule XXI 5(b) of the Rules of the House of Representatives provides, in part, that ‘‘A bill or joint resolution, amendment, or conference report carrying a Federal income tax rate increase may not

be considered as passed or agreed to unless so determined by a

vote of not less than three-fifths of the Members voting, a quorum

being present.’’ The Committee has carefully reviewed the provisions of the bill, and states that the provisions of the bill do not

involve any Federal income tax rate increases within the meaning

of the rule.

F. TAX COMPLEXITY ANALYSIS

Section 4022(b) of the Internal Revenue Service Reform and Restructuring Act of 1998 (the ‘‘IRS Reform Act’’) requires the Joint

Committee on Taxation (in consultation with the Internal Revenue

Service and the Department of Treasury) to provide a tax complexity analysis. The complexity analysis is required for all legislation reported by the House Committee on Ways and Means, the

Senate Committee on Finance, or any committee of conference if

the legislation includes a provision that directly or indirectly

amends the Internal Revenue Code and has widespread applicability to individuals or small businesses.

The staff of the Joint Committee on Taxation has determined

that a complexity analysis is not required under section 4022(b) of

the IRS Reform Act because the bill contains no provisions that

amend the Internal Revenue Code and that have ‘‘widespread applicability’’ to individuals or small businesses.

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS

REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the

House of Representatives, changes in existing law made by the bill,

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic,

existing law in which no change is proposed is shown in roman):

INTERNAL REVENUE CODE OF 1986

* * * * * * *

Subtitle A—Income Taxes

* * * * * * *

CHAPTER 1—NORMAL TAXES AND SURTAXES

* * * * * * *

Subchapter B—Computation of Taxable Income

* * * * * * *

59

PART III—ITEMS SPECIFICALLY EXCLUDED FROM

GROSS INCOME

* * * * * * *

SEC. 132. CERTAIN FRINGE BENEFITS.

(a) * * *

* * * * * * *

(m) QUALIFIED RETIREMENT PLANNING SERVICES.— (1) * * *

* * * * * * *

(4) NO CONSTRUCTIVE RECEIPT.—No amount shall be included in the gross income of any employee solely because the

employee may choose between any qualified retirement planning

services provided by a qualified investment advisor and compensation which would otherwise be includible in the gross income of such employee. The preceding sentence shall apply to

highly compensated employees only if the choice described in

such sentence is available on substantially the same terms to

each member of the group of employees normally provided education and information regarding the employer’s qualified employer plan.

* * * * * * *

Subchapter D—Deferred compensation, etc.

* * * * * * *

PART I—PENSION, PROFIT-SHARING, STOCK BONUS

PLANS, ETC.

* * * * * * *

Subpart A—General rule

* * * * * * *

SEC. 401. QUALIFIED PENSION, PROFIT-SHARING, AND STOCK BONUS

PLANS.

(a) REQUIREMENTS FOR QUALIFICATION.—A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit

of his employees or their beneficiaries shall constitute a qualified

trust under this section—

(1) * * *

* * * * * * *

(5) SPECIAL RULES RELATING TO NONDISCRIMINATION REQUIREMENTS.—

(A) * * *

* * * * * * *

(G) øSTATE AND LOCAL GOVERNMENTAL PLANS¿ GOVERNMENTAL PLANS.—Paragraphs (3) and (4) shall not apply to

a governmental plan (within the meaning of øsection

414(d)) maintained by a State or local government or politVerDate 11-MAY-2000 03:51 Mar 22, 2002 Jkt 099006 PO 00000 Frm 00059 Fmt 6659 Sfmt 6601 E:\HR\OC\HR382P1.XXX pfrm02 PsN: HR382P1
60

ical subdivision thereof (or agency or instrumentality

thereof).¿ section 414(d)).

* * * * * * *

(26) ADDITIONAL PARTICIPATION REQUIREMENTS.—

(A) * * *

* * * * * * *

(H) øEXCEPTION FOR STATE AND LOCAL GOVERNMENTAL

PLANS¿ EXCEPTION FOR GOVERNMENTAL PLANS.—This paragraph shall not apply to a governmental plan (within the

meaning of øsection 414(d)) maintained by a State or local

government or political subdivision thereof (or agency or

instrumentality thereof).¿ section 414(d)).

* * * * * * *

(28) ADDITIONAL REQUIREMENTS RELATING TO EMPLOYEE

STOCK OWNERSHIP PLANS.—

(A) * * *

* * * * * * *

(D) APPLICATION.—This paragraph shall not apply to a

plan to which paragraph (35) applies.

* * * * * * *

(35) DIVERSIFICATION REQUIREMENTS FOR DEFINED CONTRIBUTION PLANS THAT HOLD EMPLOYER SECURITIES.—

(A) IN GENERAL.—In the case of a defined contribution

plan described in this subsection that includes a trust

which is exempt from tax under section 501(a) and which

holds employer securities that are readily tradable on an

established securities market, such trust shall not constitute

a qualified trust under this section unless such plan meets

the requirements of subparagraphs (B), (C), and (D).

(B) ELECTIVE DEFERRALS AND EMPLOYEE CONTRIBUTIONS

INVESTED IN EMPLOYER SECURITIES.—In the case of the portion of the account attributable to elective deferrals and employee contributions which is invested in employer securities, a plan meets the requirements of this subparagraph if

each applicable individual in such plan may elect to direct

the plan to divest up to the applicable percentage of such

securities in the individual’s account and to reinvest an

equivalent amount in other investment options which meet

the requirements of subparagraph (E).

(C) MATCHING AND CERTAIN OTHER CONTRIBUTIONS.—

(i) IN GENERAL.—In the case of the portion of the account attributable to contributions to which this subparagraph applies and which is invested in employer

securities, a plan meets the requirements of this subparagraph if each applicable 3-year individual in the

plan may elect to direct the plan to divest up to the applicable percentage of such securities in the individual’s account and to reinvest an equivalent amount in

other investment options which meet the requirements

of subparagraph (E).

(ii) CONTRIBUTIONS TO WHICH THIS SUBPARAGRAPH

APPLIES.—This subparagraph shall apply to—

61

(I) matching contributions (as defined in subsection (m)(4)(A)),

(II) qualified nonelective contributions (as defined in subsection (m)(4)(C)), and

(III) contributions made in order to meet the requirements of subsection (k)(12)(C).

(iii) APPLICABLE 3-YEAR INDIVIDUAL.—For purposes of

clause (i), the term ‘‘applicable 3-year individual’’ means any individual who would be an applicable individual if only participants in the plan who have completed at least 3 years of service (as determined under

section 411(a)) were taken into account under subparagraph (G)(i)(I).

(D) OTHER EMPLOYER CONTRIBUTIONS.— (i) IN GENERAL.—In the case of the portion of the account attributable to employer contributions (other

than contributions to which subparagraph (B) or (C)

applies) which is invested in employer securities, a

plan meets the requirements of this subparagraph if

each applicable 5-year individual described in clause

(ii) may elect to direct the plan to divest up to the applicable percentage of such securities in the individual’s account and to reinvest an equivalent amount in

other investment options which meet the requirements

of subparagraph (E).

(ii) APPLICABLE 5-YEAR INDIVIDUAL.—For purposes of

clause (i), the term ‘‘5-year individual’’ means any individual who would be an applicable individual if only

participants in the plan who have completed at least 5

years of service (as determined under section 411(a))

were taken into account under subparagraph (G)(i)(I).

(E) INVESTMENT OPTIONS.—The requirements of this subparagraph are met if the plan offers not less than 3 investment options (not inconsistent with regulations prescribed

by the Secretary) other than employer securities.

(F) ELECTION.—Elections under this paragraph may

made not less frequently than quarterly.

(G) OTHER DEFINITIONS AND RULES.—For purposes of

this paragraph— (i) APPLICABLE INDIVIDUAL.—The term ‘‘applicable

individual’’ means—

(I) any participant in the plan,

(II) any beneficiary who is an alternate payee

(within the meaning of section 414(p)(8)) under an

applicable qualified domestic relations order (within the meaning of section 414(p)(1)(A)), and

(III) any beneficiary of a deceased participant or

alternate payee.

(ii) ELECTIVE DEFERRALS.—The term ‘‘elective deferrals’’ means an employer contribution described in section 402(g)(3)(A).

(iii) EMPLOYER SECURITIES.—The term ‘‘employer securities’’ shall have the meaning given such term by

section 407(d)(1) of the Employee Retirement Income

Security Act of 1974.

62

(iv) EMPLOYEE STOCK OWNERSHIP PLAN.—The term

‘‘employee stock ownership plan’’ shall have the same

meaning given to such term by section 4975(e)(7).

(v) APPLICABLE PERCENTAGE.—

(I) IN GENERAL.—The applicable percentage

shall be as follows:

Plan years Applicable

beginning in: percentage:

2003 ............................................................................ 20

2004 ............................................................................ 40

2005 ............................................................................ 60

2006 ............................................................................ 80

2007 or thereafter ...................................................... 100.

(II) ELECTIVE DEFERRALS TREATED AS SEPARATE

PLAN NOT INDIVIDUAL ACCOUNT PLAN.—In the case

of elective deferrals and employee contributions

(and any earnings allocable thereto) held within a

plan treated as a separate plan as of the date of

the enactment of this paragraph under section

407(b)(2) of the Employee Retirement Income Security Act of 1974, for purposes of subparagraph (B)

the applicable percentage shall be 100 percent.

(III) CONTRIBUTIONS HELD WITHIN AN ESOP.—In

the case of contributions (other than elective deferrals and employee contributions) held within an

employee stock ownership plan, in the case of years

2003 and 2004, the applicable percentage shall be

the greater of the amount determined under subclause (I) or the percentage determined under

paragraph (28) (determined as if paragraph (28)

applied to a plan described in this paragraph).

(vi) COORDINATION WITH PARAGRAPH (28).—Subparagraphs (B), (C), and (D) shall apply to the extent that

the amount attributable to the applicable percentage

under such subparagraph exceeds the amount to which

a prior election under such subparagraph or paragraph (28) applies.

(H) EXCEPTION FOR CERTAIN ESOPS.—This paragraph

shall apply to an employee stock ownership plan only if the

plan holds amounts attributable to deferrals or contributions to which subparagraph (B) or (C) apply.

* * * * * * *

(k) CASH OR DEFERRED ARRANGEMENTS.—

(1) * * *

* * * * * * *

(3) APPLICATION OF PARTICIPATION AND DISCRIMINATION

STANDARDS.—

(A) * * *

* * * * * * *

(G) GOVERNMENTAL PLANS.—A governmental plan (within the meaning of section 414(d) ømaintained by a State

or local government or political subdivision thereof (or

63

agency or instrumentality thereof)¿ shall be treated as

meeting the requirements of this paragraph.

* * * * * * *

SEC. 403. TAXATION OF EMPLOYEE ANNUITIES.

(a) * * *

(b) TAXABILITY OF BENEFICIARY UNDER ANNUITY PURCHASED BY

SECTION 501(c)(3) ORGANIZATION OR PUBLIC SCHOOL.— (1) * * *

* * * * * * *

(B) in the second sentence by striking ‘‘or any amount

received by a former employee after the fifth taxable year

following the taxable year in which such employee was terminated’’.

(3) INCLUDIBLE COMPENSATION.—For purposes of this subsection, the term ‘‘includible compensation’’ means, in the case

of any employee, the amount of compensation which is received

from the employer described in paragraph (1)(A), and which is

includible in gross income (computed without regard to section

911) for the most recent period (ending not later than the close

of the taxable year) which under paragraph (4) may be counted

as one year of service, and which precedes the taxable year by

no more than five years. Such term does not include any

amount contributed by the employer for any annuity contract

to which this subsection applies. Such term includes—

(A) any elective deferral (as defined in section 402(g)(3),

and

(B) any amount which is contributed or deferred by the

employer at the election of the employee and which is not

includible in the gross income of the employee by reason

of section 125, 132(f)(4), 132(m)(4), or 457.

* * * * * * *

SEC. 409. QUALIFICATIONS FOR TAX CREDIT EMPLOYEE STOCK OWNERSHIP PLANS.

(a) * * *

* * * * * * *

(h) RIGHT TO DEMAND EMPLOYER SECURITIES; PUT OPTION.—

(1) * * *

* * * * * * *

(7) EXCEPTION WHERE EMPLOYEE ELECTED DIVERSIFICATION.—Paragraph (1)(A) shall not apply with respect to the

portion of the participant’s account which the employee elected

to have reinvested under section 401(a)(28)(B) or subparagraph

(B), (C), or (D) of section 401(a)(35).

* * * * * * *

Subpart B—Special Rules

* * * * * * *

SEC. 410. MINIMUM PARTICIPATION STANDARDS.

(a) * * *

(b) MINIMUM COVERAGE REQUIREMENTS.—

64

(1) IN GENERAL.—A trust shall not constitute a qualified

trust under section 401(a) unless such trust is designated by

the employer as part of a plan which meets 1 of the following

requirements:

(A) * * *

* * * * * * *

(D) In the case that the plan fails to meet the requirements of subparagraphs (A), (B) and (C), the plan—

(i) satisfies subparagraph (B), as in effect immediately before the enactment of the Tax Reform Act of

1986,

(ii) is submitted to the Secretary for a determination

of whether it satisfies the requirement described in

clause (i), and

(iii) satisfies conditions prescribed by the Secretary

by regulation that appropriately limit the availability

of this subparagraph.

Clause (ii) shall apply only to the extent provided by the

Secretary.

* * * * * * *

SEC. 412. MINIMUM FUNDING STANDARDS.

(a) * * *

* * * * * * *

(l) ADDITIONAL FUNDING REQUIREMENTS FOR PLANS WHICH ARE

NOT MULTIEMPLOYER PLANS.—

(1) * * *

* * * * * * *

(7) CURRENT LIABILITY.—For purposes of this subsection—

(A) * * *

* * * * * * *

(C) INTEREST RATE AND MORTALITY ASSUMPTIONS USED.—

Effective for plan years beginning after December 31,

1994—

(i) INTEREST RATE.—

(I) * * *

* * * * * * *

(III) SPECIAL RULE FOR ø2002 AND 2003¿ 2001,

2002, AND 2003.—For a plan year beginning in

ø2002 or 2003¿ 2001, 2002, or 2003, notwithstanding subclause (I), in the case that the rate of

interest used under subsection (b)(5) exceeds the

highest rate permitted under subclause (I), the

rate of interest used to determine current liability

under this subsection may exceed the rate of interest otherwise permitted under subclause (I); except that such rate of interest shall not exceed 120

percent of the weighted average referred to in subsection (b)(5)(B)(ii).

* * * * * * *

65

SEC. 414. DEFINITIONS AND SPECIAL RULES.

(a) * * *

* * * * * * *

(s) COMPENSATION.—For purposes of any applicable provision—

(1) * * *

(2) EMPLOYER MAY ELECT NOT TO TREAT CERTAIN DEFERRALS

AS COMPENSATION.—An employer may elect not to include as

compensation any amount which is contributed by the employer pursuant to a salary reduction agreement and which is

not includible in the gross income of an employee under section

125, 132(f)(4), 132(m)(4), 402(e)(3), 402(h), or 403(b).

* * * * * * *

SEC. 415. LIMITATIONS ON BENEFITS AND CONTRIBUTIONS UNDER

QUALIFIED PLANS.

(a) * * *

* * * * * * *

(c) LIMITATION FOR DEFINED CONTRIBUTION PLANS.—

(1) * * *

* * * * * * *

(3) PARTICIPANT’S COMPENSATION.—For purposes of paragraph (1)— (A) * * *

* * * * * * *

(D) CERTAIN DEFERRALS INCLUDED.—The term ‘‘participant’s compensation’’ shall include—

(i) any elective deferral (as defined in section

402(g)(3)), and

(ii) any amount which is contributed or deferred by

the employer at the election of the employee and

which is not includible in the gross income of the employee by reason of section 125, 132(f)(4), 132(m)(4), or

457.

* * * * * * *

SEC. 417. DEFINITIONS AND SPECIAL RULES FOR PURPOSES OF MINIMUM SURVIVOR ANNUITY REQUIREMENTS.

(a) ELECTION TO WAIVE QUALIFIED JOINT AND SURVIVOR ANNUITY OR QUALIFIED PRERETIREMENT SURVIVOR ANNUITY.—

(1) * * *

* * * * * * *

(6) APPLICABLE ELECTION PERIOD DEFINED.—For purposes of

this subsection, the term ‘‘applicable election period’’ means—

(A) in the case of an election to waive the qualified joint

and survivor annuity form of benefit, the ø90-day¿ 180-day

period ending on the annuity starting date, or

* * * * * * *

PART II—CERTAIN STOCK OPTIONS

* * * * * * *

66

SEC. 421. GENERAL RULES.

(a) * * *

* * * * * * *

(b) EFFECT OF DISQUALIFYING DISPOSITION.—If the transfer of a

share of stock to an individual pursuant to his exercise of an option

would otherwise meet the requirements of section 422(a) or 423(a)

except that there is a failure to meet any of the holding period requirements of section 422(a)(1) or 423(a)(1), then any increase in

the income of such individual or deduction from the income of his

employer corporation for the taxable year in which such exercise

occurred attributable to such disposition, shall be treated as an increase in income or a deduction from income in the taxable year

of such individual or of such employer corporation in which such

disposition occurred. No amount shall be required to be deducted

and withheld under chapter 24 with respect to any increase in income attributable to a disposition described in the preceding sentence.

* * * * * * *

SEC. 423. EMPLOYEE STOCK PURCHASE PLANS.

(a) * * *

* * * * * * *

(c) SPECIAL RULE WHERE OPTION PRICE IS BETWEEN 85 PERCENT

AND 100 PERCENT OF VALUE OF STOCK.—If the option price of a

share of stock acquired by an individual pursuant to a transfer to

which subsection (a) applies was less than 100 percent of the fair

market value of such share at the time such option was granted,

then, in the event of any disposition of such share by him which

meets the holding period requirements of subsection (a), or in the

event of his death (whenever occurring) while owning such share,

there shall be included as compensation (and not as gain upon the

sale or exchange of a capital asset) in his gross income, for the taxable year in which falls the date of such disposition or for the taxable year closing with his death, whichever applies, an amount

equal to the lesser of—

(1) * * *

* * * * * * *

If the option price is not fixed or determinable at the time the option is granted, then for purposes of this subsection, the option

price shall be determined as if the option were exercised at such

time. In the case of the disposition of such share by the individual,

the basis of the share in his hands at the time of such disposition

shall be increased by an amount equal to the amount so includible

in his gross income. No amount shall be required to be deducted

and withheld under chapter 24 with respect to any amount treated

as compensation under this subsection.

* * * * * * *

67

Subtitle C—Employment Taxes

CHAPTER 21—FEDERAL INSURANCE

CONTRIBUTIONS ACT

* * * * * * *

Subchapter C—General Provisions

* * * * * * *

SEC. 3121. DEFINITIONS.

(a) WAGES.—For purposes of this chapter, the term ‘‘wages’’

means all remuneration for employment, including the cash value

of all remuneration (including benefits) paid in any medium other

than cash; except that such term shall not include—

(1) * * *

* * * * * * *

(20) any benefit provided to or on behalf of an employee if

at the time such benefit is provided it is reasonable to believe

that the employee will be able to exclude such benefit from income under section 74(c), 117, or 132; øor¿

(21) in the case of a member of an Indian tribe, any remuneration on which no tax is imposed by this chapter by reason

of section 7873 (relating to income derived by Indians from exercise of fishing rights)ø.¿; or

(22) remuneration on account of—

(A) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined

in section 422(b)) or under an employee stock purchase plan

(as defined in section 423(b)), or

(B) any disposition by the individual of such stock.

* * * * * * *

CHAPTER 22—RAILROAD RETIREMENT TAX

ACT

* * * * * * *

Subchapter D—General Provisions

SEC. 3231. DEFINITIONS.

(a) * * *

* * * * * * *

(e) COMPENSATION.—For purposes of this chapter—

(1) * * *

* * * * * * *

(11) QUALIFIED STOCK OPTIONS.—The term ‘‘compensation’’ shall not include any remuneration on account of— (A) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined

68

in section 422(b)) or under an employee stock purchase plan

(as defined in section 423(b)), or

(B) any disposition by the individual of such stock.

* * * * * * *

CHAPTER 23—FEDERAL UNEMPLOYMENT TAX

ACT

* * * * * * *

SEC. 3306. DEFINITIONS.

(a) * * *

(b) WAGES.—For purposes of this chapter, the term ‘‘wages’’

means all remuneration for employment, including the cash value

of all remuneration (including benefits) paid in any medium other

than cash; except that such term shall not include—

(1) * * *

* * * * * * *

(16) any benefit provided to or on behalf of an employee if

at the time such benefit is provided it is reasonable to believe

that the employee will be able to exclude such benefit from income under section 74(c), 117, or 132; øor¿

(17) any payment made to or for the benefit of an employee

if at the time of such payment it is reasonable to believe that

the employee will be able to exclude such payment from income

under section 106(b)ø.¿; or

(18) remuneration on account of—

(A) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined

in section 422(b)) or under an employee stock purchase plan

(as defined in section 423(b)), or

(B) any disposition by the individual of such stock.

* * * * * * *

Subtitle D—Miscellaneous Excise Taxes

* * * * * * *

CHAPTER 43—QUALIFIED PENSION, ETC.,

PLANS

Sec. 4971. Taxes on failure to meet minimum funding standards.

* * * * * * *

Sec. 4980G. Failure of applicable plans to provide investment education notices to participants.

Sec. 4980H. Failure of applicable plans to provide notice of transaction restriction periods.

* * * * * * *

SEC. 4980. TAX ON REVERSION OF QUALIFIED PLAN ASSETS TO EMPLOYER.

(a) * * *

* * * * * * *

69

(c) DEFINITIONS AND SPECIAL RULES.—For purposes of this

section—

(1) * * *

* * * * * * *

(3) EXCEPTION FOR EMPLOYEE STOCK OWNERSHIP PLANS.— (A) IN GENERAL.—If, upon an employer reversion from a

qualified plan, any applicable amount is transferred from

such plan to an employee stock ownership plan described

in section 4975(e)(7) or a tax credit employee stock ownership plan (as described in section 409), such amount shall

not be treated as an employer reversion for purposes of

this section (or includible in the gross income of the employer) øif— ø(i) the requirements of subparagraphs (B), (C), and

(D) are met, and

ø(ii) under the plan, employer securities to which

subparagraph (B) applies must, except to the extent

necessary to meet the requirements of section

401(a)(28), remain in the plan until distribution to

participants in accordance with the provisions of such

plan.¿ if the requirements of subparagraphs (B), (C),

and (D) are met.

* * * * * * *

SEC. 4980G. FAILURE OF APPLICABLE PLANS TO PROVIDE INVESTMENT EDUCATION NOTICES TO PARTICIPANTS.

(a) IMPOSITION OF TAX.—There is hereby imposed a tax on the

failure of any applicable pension plan to meet the requirements of

subsection (e) with respect to any applicable individual.

(b) AMOUNT OF TAX.—The amount of the tax imposed by subsection (a) on any failure with respect to any applicable individual

shall be $100.

(c) LIMITATIONS ON AMOUNT OF TAX.—

(1) TAX NOT TO APPLY TO FAILURES CORRECTED WITHIN 30

DAYS.—No tax shall be imposed by subsection (a) on any failure

if—

(A) any person subject to liability for the tax under subsection (d) exercised reasonable diligence to meet the requirements of subsection (e), and

(B) such person provides the notice described in subsection (e) during the 30-day period beginning on the first

date such person knew, or exercising reasonable diligence

should have known, that such failure existed.

(2) OVERALL LIMITATION FOR UNINTENTIONAL FAILURES.—

(A) IN GENERAL.—If the person subject to liability for tax

under subsection (d) exercised reasonable diligence to meet

the requirements of subsection (e), the tax imposed by subsection (a) for failures during the taxable year of the employer (or, in the case of a multiemployer plan, the taxable

year of the trust forming part of the plan) shall not exceed

$500,000. For purposes of the preceding sentence, all multiemployer plans of which the same trust forms a part shall

be treated as 1 plan.

(B) TAXABLE YEARS IN THE CASE OF CERTAIN CONTROLLED GROUPS.—For purposes of this paragraph, if all

70

persons who are treated as a single employer for purposes

of this section do not have the same taxable year, the taxable years taken into account shall be determined under

principles similar to the principles of section 1561.

(3) WAIVER BY SECRETARY.—In the case of a failure which is

due to reasonable cause and not to willful neglect, the Secretary

may waive part or all of the tax imposed by subsection (a) to

the extent that the payment of such tax would be excessive or

otherwise inequitable relative to the failure involved.

(d) LIABILITY FOR TAX.—The following shall be liable for the tax

imposed by subsection (a):

(1) In the case of a plan other than a multiemployer plan, the

employer.

(2) In the case of a multiemployer plan, the plan.

(e) NOTICE REGARDING INVESTMENT EDUCATION.—

(1) IN GENERAL.—The plan administrator of an applicable

pension plan shall provide to each applicable individual an investment education notice described in paragraph (2) at the

time of the enrollment of the applicable individual in the plan

and not less often than quarterly thereafter.

(2) INVESTMENT EDUCATION NOTICE.—An investment education notice is described in this paragraph if such notice

contains—

(A) an explanation, for the long-term retirement security

of participants and beneficiaries, of generally accepted investment principles, including principles of risk management and diversification, and

(B) a discussion of the risk of holding substantial portions of a portfolio in the security of any one entity, such

as employer securities.

(3) UNDERSTANDABILITY.—Each notice required by paragraph

(1) shall be written in a manner calculated to be understood by

the average plan participant and shall provide sufficient information (as determined in accordance with guidance provided by

the Secretary) to allow recipients to understand such notice.

(4) FORM AND MANNER OF NOTICES.—The notices required by

this subsection shall be in writing, except that such notices may

be in electronic or other form to the extent that such form is reasonably accessible to the applicable individual.

(f) DEFINITIONS.—For purposes of this section—

(1) APPLICABLE INDIVIDUAL.—The term ‘‘applicable individual’’ means—

(A) any participant in the applicable pension plan,

(B) any beneficiary who is an alternate payee (within the

meaning of section 414(p)(8)) under a qualified domestic relations order (within the meaning of section 414(p)(1)(A)),

and

(C) any beneficiary of a deceased participant or alternate

payee.

(2) APPLICABLE PENSION PLAN.—The term ‘‘applicable pension

plan’’ means—

(A) a plan described in clause (i), (ii), or (iv) of section

219(g)(5)(A), and

71

(B) an eligible deferred compensation plan (as defined in

section 457(b)) of an eligible employer described in section

457(e)(1)(A),

which permits any participant to direct the investment of some

or all of his account in the plan or under which the accrued

benefit of any participant depends in whole or in part on hypothetical investments directed by the participant. Such term

shall not include a one-participant retirement plan.

(3) ONE-PARTICIPANT RETIREMENT PLAN DEFINED.—The term ‘‘one-participant retirement plan’’ means a retirement plan

that—(A) on the first day of the plan year— (i) covered only the employer (and the employer’s

spouse) and the employer owned the entire business

(whether or not incorporated), or

(ii) covered only one or more partners (and their

spouses) in a business partnership (including partners

in an S or C corporation),

(B) meets the minimum coverage requirements of section

410(b) without being combined with any other plan of the

business that covers the employees of the business,

(C) does not provide benefits to anyone except the employer (and the employer’s spouse) or the partners (and

their spouses),

(D) does not cover a business that is a member of an affiliated service group, a controlled group of corporations, or

a group of businesses under common control, and

(E) does not cover a business that leases employees.

SEC. 4980H. FAILURE OF APPLICABLE PLANS TO PROVIDE NOTICE OF

TRANSACTION RESTRICTION PERIODS.

(a) IMPOSITION OF TAX.—There is hereby imposed a tax on the

failure of any applicable pension plan to meet the requirements of

subsection (e) with respect to any applicable individual.

(b) AMOUNT OF TAX.—The amount of the tax imposed by subsection (a) on any failure with respect to any applicable individual

shall be $100.

(c) LIMITATIONS ON AMOUNT OF TAX.—

(1) TAX NOT TO APPLY TO FAILURES CORRECTED AS SOON AS

REASONABLY PRACTICABLE.—No tax shall be imposed by subsection (a) on any failure if—

(A) any person subject to liability for the tax under subsection (d) exercised reasonable diligence to meet the requirements of subsection (e), and

(B) such person provides the notice described in subsection (e) as soon as reasonably practicable after the first

date such person knew, or exercising reasonable diligence

should have known, that such failure existed and at least

1 business day before the beginning of the transaction restriction period.

(2) OVERALL LIMITATION FOR UNINTENTIONAL FAILURES.—

(A) IN GENERAL.—If the person subject to liability for tax

under subsection (d) exercised reasonable diligence to meet

the requirements of subsection (e), the tax imposed by subsection (a) for failures during the taxable year of the employer (or, in the case of a multiemployer plan, the taxable

72

year of the trust forming part of the plan) shall not exceed

$500,000. For purposes of the preceding sentence, all multiemployer plans of which the same trust forms a part shall

be treated as 1 plan.

(B) TAXABLE YEARS IN THE CASE OF CERTAIN CONTROLLED GROUPS.—For purposes of this paragraph, if all

persons who are treated as a single employer for purposes

of this section do not have the same taxable year, the taxable years taken into account shall be determined under

principles similar to the principles of section 1561.

(3) WAIVER BY SECRETARY.—In the case of a failure which is

due to reasonable cause and not to willful neglect, the Secretary

may waive part or all of the tax imposed by subsection (a) to

the extent that the payment of such tax would be excessive or

otherwise inequitable relative to the failure involved.

(d) LIABILITY FOR TAX.—The following shall be liable for the tax

imposed by subsection (a):

(1) In the case of a plan other than a multiemployer plan, the

employer.

(2) In the case of a multiemployer plan, the plan.

(e) NOTICE OF TRANSACTION RESTRICTION PERIOD.—

(1) IN GENERAL.—The plan administrator of an applicable

pension plan shall provide written notice of any transaction restriction period to each applicable individual to whom the

transaction restriction period applies (and to each employee organization representing such applicable individuals).

(2) UNDERSTANDABILITY.—The notice required by paragraph

(1) shall be written in a manner calculated to be understood by

the average plan participant and shall provide sufficient information (as determined in accordance with guidance provided by

the Secretary) to allow recipients to understand the timing and

effect of such transaction restriction period.

(3) TIMING OF NOTICE.—

(A) IN GENERAL.—Except as provided in subparagraphs

(B) and (C), the notice required by paragraph (1) shall be

provided at least 30 days before the beginning of the transaction restriction period.

(B) DISPOSITION OF STOCK OR ASSETS.—

(i) IN GENERAL.—If, in connection with the major

corporate disposition by a corporation maintaining an

applicable pension plan, there is the possibility of a

transaction restriction period—

(I) the notice required by paragraph (1) shall be

provided at least 30 days before the date of such

disposition, and

(II) no other notice shall be required by paragraph (1) with respect to such period if notice is

provided pursuant to subclause (I) and such period

begins not more than 30 days after the date of

such disposition.

Subclause (I) shall not apply if the plan administrator

has a substantial basis to believe that there will be no

transaction restriction period in connection with the

disposition.

73

(ii) MAJOR CORPORATE DISPOSITION.—For purposes

of clause (i), the term ‘‘major corporate disposition’’ means, with respect to a corporation— (I) the disposition of substantially all of the stock

of such corporation or a subsidiary thereof, or

(II) the disposition of substantially all of the assets used in a trade or business of such corporation

or subsidiary.

(iii) NONCORPORATE ENTITIES.—Rules similar to the

rules of this subparagraph shall apply to entities that

are not corporations.

(C) EXCEPTION FOR UNFORESEEABLE EVENTS.—In the

case of a transaction restriction period resulting from the

occurrence of an unforeseeable event, such notice shall be

provided as soon as reasonably practicable after the occurrence of such event.

(4) FORM AND MANNER OF NOTICE.—The notice required by

this subsection shall be in writing, except that such notice may

be in electronic or other form to the extent that such form is reasonably accessible to the applicable individual.

(f ) DEFINITIONS AND SPECIAL RULES.—For purposes of this

section—

(1) APPLICABLE INDIVIDUAL.—The term ‘‘applicable individual’’ means— (A) any participant in the applicable pension plan, and

(B) any beneficiary who is an alternate payee (within the

meaning of section 414(p)(8)) under a qualified domestic relations order (within the meaning of section 414(p)(1)(A)),

and

(C) any beneficiary of a deceased participant or alternate

payee.

(2) APPLICABLE PENSION PLAN.—

(A) IN GENERAL.—The term ‘‘applicable pension plan’’ means—

(i) a plan described in clause (i), (ii), or (iv) of section

219(g)(5)(A), and

(ii) an eligible deferred compensation plan (as defined in section 457(b)) of an eligible employer described in section 457(e)(1)(A),

which maintains accounts for participants under the plan

or under which the accrued benefit of any participant depends in whole or in part on hypothetical investments directed by the participant.

(B) EXCEPTION.—Such term shall not include a one-participant retirement plan (as defined in section 4980G(f)(3)).

(3) TRANSACTION RESTRICTION PERIOD.—

(A) IN GENERAL.—The term ‘‘transaction restriction period’’ means a temporary or indefinite period of at least 3

consecutive days during which rights otherwise provided

under the plan to 1 or more applicable individuals to direct

investments in the applicable pension plan, obtain loans

from such plan, or obtain distributions from such plan are

substantially reduced (other than by reason of the application of securities laws or other circumstances specified by

the Secretary in regulations). In determining consecutive

74

days, days on which such rights are not normally available

shall be disregarded.

(B) SPECIAL RULE FOR EMPLOYER SECURITIES.— (i) IN GENERAL.—For purposes of subparagraph (A),

rights shall be treated as substantially reduced with

respect to directing investments out of employer securities if rights in effect are significantly restricted for at

least 3 consecutive business days.

(ii) BUSINESS DAY.—For purposes of clause (i), under

regulations prescribed by the Secretary, the term ‘‘business day’’ means— (I) in the case of a security which is traded on

an established security market, any day on which

such security may be traded on the principal securities market of such security, and

(II) in the case of a security which is not traded

on an established security market, any calendar

day.

(4) EMPLOYER SECURITIES.—The term ‘‘employer securities’’ shall have the meaning given such term by section 407(d)(1) of

the Employee Retirement Income Security Act of 1974.

* * * * * * *

SECTION 769 OF THE RETIREMENT PROTECTION ACT

OF 1994

SEC. 769. SPECIAL FUNDING RULES FOR CERTAIN PLANS.

(a) * * *

* * * * * * *

(c) øTRANSITION¿ RULES FOR CERTAIN PLANS.—

(1) IN GENERAL.—In the case of a plan that—

(A) * * *

* * * * * * *

the øtransition¿ rules described in paragraph (2) shall apply

øfor any plan year beginning after 1996 and before 2010¿.

ø(2) TRANSITION RULES.—The transition rules described in

this paragraph are as follows:

ø(A) For purposes of section 412(l)(9)(A) of the Internal

Revenue Code of 1986 and section 302(d)(9)(A) of the Employee Retirement Income Security Act of 1974—

ø(i) the funded current liability percentage for any

plan year beginning after 1996 and before 2005 shall

be treated as not less than 90 percent if for such plan

year the funded current liability percentage is at least

85 percent, and

ø(ii) the funded current liability percentage for any

plan year beginning after 2004 and before 2010 shall

be treated as not less than 90 percent if for such plan

year the funded current liability percentage satisfies

the minimum percentage determined according to the

following table:

75

øIn the case of a plan year beginning in: The minimum percentage is:

2005 ............................................................................. 86 percent

2006 ............................................................................. 87 percent

2007 ............................................................................. 88 percent

2008 ............................................................................. 89 percent

2009 and thereafter ................................................... 90 percent.

ø(B) Sections 412(c)(7)(E)(i)(I) of such Code and

302(c)(7)(E)(i)(I) of such Act shall be applied—

ø(i) by substituting ‘‘85 percent’’ for ‘‘90 percent’’ for

plan years beginning after 1996 and before 2005, and

ø(ii) by substituting the minimum percentage specified in the table contained in subparagraph (A)(ii) for

‘‘90 percent’’ for plan years beginning after 2004 and

before 2010.

ø(C) In the event the funded current liability percentage

of a plan is less than 85 percent for any plan year beginning after 1996 and before 2005, the transition rules under

subparagraphs (A) and (B) shall continue to apply to the

plan if contributions for such a plan year are made to the

plan in an amount equal to the lesser of—

ø(i) the amount necessary to result in a funded current liability percentage of 85 percent, or

ø(ii) the greater of— ø(I) 2 percent of the plan’s current liability as of

the beginning of such plan year, or

ø(II) the amount necessary to result in a funded

current liability percentage of 80 percent as of the

end of such plan year.

For the plan year beginning in 2005 and for each of the

3 succeeding plan years, the transition rules under subparagraphs (A) and (B) shall continue to apply to the plan

for such plan year only if contributions to the plan for such

plan year equal at least the expected increase in current

liability due to benefits accruing during such plan year.¿

(2) SPECIAL RULES.—The rules described in this paragraph

are as follows:

(A) For purposes of section 412(l)(9)(A) of the Internal

Revenue Code of 1986, the funded current liability percentage for any plan year shall be treated as not less than 90

percent.

(B) For purposes of section 412(m) of the Internal Revenue Code of 1986, the funded current liability percentage

for any plan year shall be treated as not less than 100 percent.

SECTION 1505 OF THE TAXPAYER RELIEF ACT OF 1997

SEC. 1505. EXTENSION OF MORATORIUM ON APPLICATION OF CERTAIN NONDISCRIMINATION RULES TO STATE AND LOCAL

GOVERNMENTS.

(a) * * *

* * * * * * *

(d) EFFECTIVE DATES.—

76

(1) * * *

(2) TREATMENT FOR YEARS BEGINNING BEFORE DATE OF EN- ACTMENT.—A governmental plan (within the meaning of section 414(d) of the Internal Revenue Code of 1986) ømaintained

by a State or local government or political subdivision thereof

(or agency or instrumentality thereof)¿ shall be treated as satisfying the requirements of sections 401(a)(3), 401(a)(4),

401(a)(26), 401(k), 401(m), 403 (b)(1)(D) and (b)(12)(A)(i), and

410 of such Code for all taxable years beginning before the

date of enactment of this Act.

EMPLOYEE RETIREMENT INCOME SECURITY ACT OF

1974

* * * * * * *

TITLE IV—PLAN TERMINATION INSURANCE

SUBTITLE A—PENSION BENEFIT GUARANTY CORPORATION

* * * * * * *

PREMIUM RATES

SEC. 4006. (a)(1)***

* * * * * * *

(3)(A) Except as provided in subparagraph (C), the annual premium rate payable to the corporation by all plans for basic benefits

guaranteed under this title is—

(i) in the case of a single-employer plan, other than a new

single-employer plan (as defined in subparagraph (F)) maintained by a small employer (as so defined), for plan years beginning after December 31, 1990, an amount equal to the sum

of $19 plus the additional premium (if any) determined under

subparagraph (E) for each individual who is a participant in

such plan during the plan year;

* * * * * * *

(iii) in the case of a multiemployer plan, for plan years beginning after the date of enactment of the Multiemployer Pension Plan Amendments Act of 1980 [September 26, 1980], an

amount equal to— (I) * * *

* * * * * * *

(IV) $2.60 for each participant, for the ninth plan year,

and for each succeeding plan yearø.¿, and

(iv) in the case of a new single-employer plan (as defined in

subparagraph (F)) maintained by a small employer (as so defined) for the plan year, $5 for each individual who is a participant in such plan during the plan year.

* * * * * * *

(E)(i) øThe¿ Except as provided in subparagraph (G), the additional premium determined under this subparagraph with respect

to any plan for any plan year shall be an amount equal to the

77

amount determined under clause (ii) divided by the number of participants in such plan as of the close of the preceding plan year.

* * * * * * *

(v) In the case of a new defined benefit plan, the amount determined under clause (ii) for any plan year shall be an amount equal

to the product of the amount determined under clause (ii) and the

applicable percentage. For purposes of this clause, the term ‘‘applicable percentage’’ means— (I) 0 percent, for the first plan year.

(II) 20 percent, for the second plan year.

(III) 40 percent, for the third plan year.

(IV) 60 percent, for the fourth plan year.

(V) 80 percent, for the fifth plan year.

For purposes of this clause, a defined benefit plan (as defined in section 3(35)) maintained by a contributing sponsor shall be treated as

a new defined benefit plan for each of its first 5 plan years if, during the 36-month period ending on the date of the adoption of the

plan, the sponsor and each member of any controlled group including the sponsor (or any predecessor of either) did not establish or

maintain a plan to which this title applies with respect to which

benefits were accrued for substantially the same employees as are in

the new plan.

(F)(i) For purposes of this paragraph, a single-employer plan

maintained by a contributing sponsor shall be treated as a new single-employer plan for each of its first 5 plan years if, during the 36-

month period ending on the date of the adoption of such plan, the

sponsor or any member of such sponsor’s controlled group (or any

predecessor of either) did not establish or maintain a plan to which

this title applies with respect to which benefits were accrued for substantially the same employees as are in the new single-employer

plan.

(ii)(I) For purposes of this paragraph, the term ‘‘small employer’’ means an employer which on the first day of any plan year has, in

aggregation with all members of the controlled group of such employer, 100 or fewer employees.

(II) In the case of a plan maintained by two or more contributing

sponsors that are not part of the same controlled group, the employees of all contributing sponsors and controlled groups of such sponsors shall be aggregated for purposes of determining whether any

contributing sponsor is a small employer.

(G)(i) In the case of an employer who has 25 or fewer employees

on the first day of the plan year, the additional premium determined under subparagraph (E) for each participant shall not exceed

$5 multiplied by the number of participants in the plan as of the

close of the preceding plan year.

(ii) For purposes of clause (i), whether an employer has 25 or

fewer employees on the first day of the plan year is determined taking into consideration all of the employees of all members of the contributing sponsor’s controlled group. In the case of a plan maintained by two or more contributing sponsors, the employees of all

contributing sponsors and their controlled groups shall be aggregated for purposes of determining whether the 25-or-fewer-employees

limitation has been satisfied.

* * * * * * *

78

PAYMENT OF PREMIUMS

SEC. 4007. (a)***

(b)(1) If any basic benefit premium is not paid when it is due the

corporation is authorized to assess a late payment charge of not

more than 100 percent of the premium payment which was not

timely paid. The preceding sentence shall not apply to any payment

of premium made within 60 days after the date on which payment

is due, if before such date, the designated payor obtains a waiver

from the corporation based upon a showing of substantial hardship

arising from the timely payment of the premium. The corporation

is authorized to grant a waiver under this subsection upon application made by the designated payor, but the corporation may not

grant a waiver if it appears that the designated payor will be unable to pay the premium within 60 days after the date on which

it is due. If any premium is not paid by the last date prescribed

for a payment, interest on the amount of such premium at the rate

imposed under section 6601(a) of the Internal Revenue Code of

1986 (relating to interest on underpayment, nonpayment, or extensions of time for payment of tax) shall be paid for the period from

such last date to the date paid.

(2) The corporation is authorized to pay, subject to regulations

prescribed by the corporation, interest on the amount of any overpayment of premium refunded to a designated payor. Interest under

this paragraph shall be calculated at the same rate and in the same

manner as interest is calculated for underpayments under paragraph (1).

* * * * * * *

Subtitle B—Coverage

PLANS COVERED

SEC. 4021. (a)***

(b) This section does not apply to any plan— (1) * * *

* * * * * * *

(9) which is established and maintained exclusively for substantial owners øas defined in section 4022(b)(6)¿;

* * * * * * *

(d) For purposes of subsection (b)(9), the term ‘‘substantial owner’’ means an individual who, at any time during the 60-month period

ending on the date the determination is being made— (1) owns the entire interest in an unincorporated trade or

business,

(2) in the case of a partnership, is a partner who owns, directly or indirectly, more than 10 percent of either the capital

interest or the profits interest in such partnership, or

(3) in the case of a corporation, owns, directly or indirectly,

more than 10 percent in value of either the voting stock of that

corporation or all the stock of that corporation.

For purposes of paragraph (3), the constructive ownership rules of

section 1563(e) of the Internal Revenue Code of 1986 shall apply

(determined without regard to section 1563(e)(3)(C)).

79

SINGLE-EMPLOYER PLAN BENEFITS GUARANTEED

SEC. 4022. (a)***

(b)(1)***

* * * * * * *

ø(5)(A) For purposes of this title, the term ‘‘substantial owner’’

means an individual who—

ø(i) owns the entire interest in an unincorporated trade or

business,

ø(ii) in the case of a partnership, is a partner who owns, directly or indirectly, more than 10 percent of either the capital

interest or the profits interest in such partnership, or

ø(iii) in the case of a corporation, owns, directly or indirectly,

more than 10 percent in value of either the voting stock of that

corporation or all the stock of that corporation.

For purposes of clause (iii) the constructive ownership rules of section 1563(e) of the Internal Revenue Code of 1986 shall apply (determined without regard to section 1563(e)(3)(C)). For purposes of

this title an individual is also treated as a substantial owner with

respect to a plan if, at any time within the 60 months preceding

the date on which the determination is made, he was a substantial

owner under the plan.

ø(B) In the case of a participant in a plan under which benefits

have not been increased by reason of any plan amendments and

who is covered by the plan as a substantial owner, the amount of

benefits guaranteed under this section shall not exceed the product

of—

ø(i) a fraction (not to exceed 1) the numerator of which is the

number of years the substantial owner was an active participant in the plan, and the denominator of which is 30, and

ø(ii) the amount of the substantial owner’s monthly benefits

guaranteed under subsection (a) (as limited under paragraph

(3) of this subsection).

ø(C) In the case of a participant in a plan, other than a plan described in subparagraph (B), who is covered by the plan as a substantial owner, the amount of the benefit guaranteed under this

section shall, under regulations prescribed by the corporation, treat

each benefit increase attributable to a plan amendment as if it

were provided under a new plan. The benefits guaranteed under

this section with respect to all such amendments shall not exceed

the amount which would be determined under subparagraph (B) if

subparagraph (B) applied.¿

(5)(A) For purposes of this paragraph, the term ‘‘majority owner’’

means an individual who, at any time during the 60-month period

ending on the date the determination is being made—

(i) owns the entire interest in an unincorporated trade or

business,

(ii) in the case of a partnership, is a partner who owns, directly or indirectly, 50 percent or more of either the capital interest or the profits interest in such partnership, or

(iii) in the case of a corporation, owns, directly or indirectly,

50 percent or more in value of either the voting stock of that

corporation or all the stock of that corporation.

80

For purposes of clause (iii), the constructive ownership rules of section 1563(e) of the Internal Revenue Code of 1986 shall apply (determined without regard to section 1563(e)(3)(C)).

(B) In the case of a participant who is a majority owner, the

amount of benefits guaranteed under this section shall equal the

product of— (i) a fraction (not to exceed 1) the numerator of which is the

number of years from the later of the effective date or the adoption date of the plan to the termination date, and the denominator of which is 10, and

(ii) the amount of benefits that would be guaranteed under

this section if the participant were not a majority owner.

* * * * * * *

Subtitle C—Terminations

* * * * * * *

REPORTABLE EVENTS

SEC. 4043. (a)***

* * * * * * *

(c) For purposes of this section a reportable event occurs— (1) * * *

* * * * * * *

(7) when there is a distribution under the plan to a participant who is a substantial owner as defined in øsection

4022(b)(6)¿ section 4021(d) if—

(A) * * *

* * * * * * *

ALLOCATION OF ASSETS

SEC. 4044. (a) In the case of the termination of a single-employer

plan, the plan administrator shall allocate the assets of the plan

(available to provide benefits) among the participants and beneficiaries of the plan in the following order:

(1) * * *

* * * * * * *

(4) Fourth—

(A) * * *

(B) to the additional benefits (if any) which would be determined under subparagraph (A) if section 4022(b)(5)(B)

did not apply.

For purposes of this paragraph, section 4021 shall be applied

without regard to subsection (c) thereof.

(b) For purposes of subsection (a)—

(1) * * *

(2) If the assets available for allocation under any paragraph

of subsection (a) (other than paragraphs ø(5)¿ (4), (5), and (6))

are insufficient to satisfy in full the benefits of all individuals

which are described in that paragraph, the assets shall be allocated pro rata among such individuals on the basis of the

81

present value (as of the termination date) of their respective

benefits described in that paragraph.

(3) If assets available for allocation under paragraph (4) of

subsection (a) are insufficient to satisfy in full the benefits of all

individuals who are described in that paragraph, the assets

shall be allocated first to benefits described in subparagraph

(A) of that paragraph. Any remaining assets shall then be allocated to benefits described in subparagraph (B) of that paragraph. If assets allocated to such subparagraph (B) are insufficient to satisfy in full the benefits described in that subparagraph, the assets shall be allocated pro rata among individuals

on the basis of the present value (as of the termination date) of

their respective benefits described in that subparagraph.

ø(3)¿ (4) This paragraph applies if the assets available for allocation under paragraph (5) of subsection (a) are not sufficient

to satisfy in full the benefits of individuals described in that

paragraph.

(A) * * *

* * * * * * *

ø(4)¿ (5) If the Secretary of the Treasury determines that the

allocation made pursuant to this section (without regard to this

paragraph) results in discrimination prohibited by section

401(a)(4) of the Internal Revenue Code of 1986 then, if required to prevent the disqualification of the plan (or any trust

under the plan) under section 401(a) or 403(a) of such Code,

the assets allocated under subsections (a)(4)(B), (a)(5), and

(a)(6) shall be reallocated to the extent necessary to avoid such

discrimination.

ø(5)¿ (6) The term ‘‘mandatory contributions’’ means

amounts contributed to the plan by a participant which are required as a condition of employment, as a condition of participation in such plan, or as a condition of obtaining benefits

under the plan attributable to employer contributions. For this

purpose, the total amount of mandatory contributions of a participant is the amount of such contributions reduced (but not

below zero) by the sum of the amounts paid or distributed to

him under the plan before its termination.

ø(6)¿ (7) A plan may establish subclasses and categories

within the classes described in paragraphs (1) through (6) of

subsection (a) in accordance with regulations prescribed by the

corporation.

* * * * * * *

SECTION 209 OF THE SOCIAL SECURITY ACT

DEFINITION OF WAGES

SEC. 209. (a) For the purposes of this title, the term ‘‘wages’’ means remuneration paid prior to 1951 which was wages for the

purposes of this title under the law applicable to the payment of

such remuneration, and remuneration paid after 1950 for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that, in the case

of remuneration paid after 1950, such term shall not include—

82

(1) * * *

* * * * * * *

(17) Any benefit provided to or on behalf of an employee if

at the time such benefit is provided it is reasonable to believe

that the employee will be able to exclude such benefit from income under section 74(c), 117, or 132 of the Internal Revenue

Code of 1986; øor¿

(18) Remuneration consisting of income excluded from taxation under section 7873 of the Internal Revenue Code of 1986

(relating to income derived by Indians from exercise of fishing

rights)ø.¿; or

(19) Remuneration on account of—

(A) a transfer of a share of stock to any individual pursuant to an exercise of an incentive stock option (as defined

in section 422(b) of the Internal Revenue Code of 1986) or

under an employee stock purchase plan (as defined in section 423(b) of such Code), or

(B) any disposition by the individual of such stock.

* * * * * * *

(83)

VII. ADDITIONAL VIEWS

The collapse of Enron and the devastating impact it has had on

the retirement of thousands of Enron employees has forced us to

examine our pension laws, and in particular how our defined contribution system works. We have approached these concerns with

a common goal: the need to enact pension reforms that would enhance the security of retirement benefits for the 42 million workers

who currently participate in 401(k) plans.

While we agree that many approaches can be taken to achieve

this goal, we believe strongly that certain principles must be the

foundation of any meaningful reform. One thing that has been

clear in the collapse of Enron is the glaring disparity that existed

between the executives and the rank and file employees with respect to (1) the security of pension benefits, (2) the transferability

of company stock, and (3) the availability of important information

that affects the value of the stock.

We believe this Congress should do more than is proposed by the

underlying bill to address some of these issues.

We strongly support the provision of the bill that would require

the plan to provide the participants with much needed notice of

generally accepted investment principles, including principles of

risk management and diversification. We believe this information

would go a long way to help employees better manage their retirement accounts. In addition, we support the provision that would require the plan to provide the participants with adequate notice of

any transaction restriction period.

We would like to ensure that employees will have the right to

change their investment options prior to any transaction restriction

and that all such changes will be implemented before the restriction period begins. We hope the clarification, as agreed to by the

Chairman, will be made to the bill before it moves forward in the

House of Representatives. Also, we believe employees would be empowered if they received investment information on diversification

principles and risk management during this period.

The importance of workers’ ability to transfer stock contributed

by the employer to the employee’s retirement account is an issue

that has dominated discussion of Enron’s demise. Under the threeyear rule, employers would be required to allow workers to sell employer-contributed stock after they have participated in the plan for

three years. In addressing this issue, President Bush adopted a

three-year rule. President Bush based this rule on the fact that it

is important to give employees greater flexibility to diversify their

portfolios. Under the language contained in the bill, it is unclear

that this result is achieved.

An amendment offered by Mr. Neal would have made this clarification. It also would have provided transition relief for company

stock held in the plan prior to the effective date adopted in the bill.

84

We hope this clarification is adopted as the legislation moves forward.

In addition to the two perfecting amendments mentioned above,

we believe the bill could be made stronger in certain areas. The following amendments were offered to accomplish this goal. Unfortunately, all of these amendments were rejected by Republicans on

the Committee. The amendments would have modified the bill in

the following areas:

Parity between executives and rank-and-file workers on transferability of employer-company stock

The bill contains no provision that would create parity between

the executives and the rank-and-file workers with respect to the

ability to sell their company stock. The media reports of the glaring

disparity that existed between Enron executives and the rank-andfile workers in this area have left us in shock. While Enron restricted the ability to transfer company stock contributed to a participant’s 401(k) account until after the participant reached age 50,

no similar restrictions were imposed on the large amount of Enron

stock held by its executives. This flexibility greatly enabled the executives to secure their financial position while the rank and file

lost everything they had with the company, including their retirement benefits.

Democrats believe that we need to go beyond the talk of ‘‘making

sure companies have a single standard for their executives and

their employees.’’ We need to make every effort to make this a reality for every American worker who owns employer stock both in

and out of a pension plan. The absence of such a real standard will

continue to lead to the egregious results that have occurred for

Enron workers. At a time when rank and file workers were losing

their modest retirement savings in Enron stock due to trading restrictions, Enron executives benefitted from freely selling millions

of dollars worth of Enron stock.

Mr. Dery Ebright testified on March 5, 2002, before the Subcommittee on Oversight of the Committee on Ways and Means that

when he tried to transfer his Enron stock holdings under the pension plan prior to the official ‘‘lockdown’’ of the plan, he was barred

from doing so. This was the experience of many other employees.

In addition, any stock that Enron contributed to the participant account could not be transferred until the participant reached age 50.

Mr. Ebright’s retirement savings dropped from $1 million to

$2,300, the amount he received for his Enron stock when he was

permitted to sell it.

Other employees watched their lives unravel before them as the

secured retirement they believed they had disappeared. Mr.

Charles Prestwood, an employee who worked for 33 years as a

welder and machine operator and saved those many years for his

retirement, watched his retirement savings be reduced from $1.2

million to $5,300. Mr. Tim Ramsey, a 55-year-old employee, lost $1

million in pension benefits; Roy Rinard, a 53-year-old worker, lost

$472,000; Al Kasweter, a 43-year-old employee lost $318,000. This

list goes on. Each name represents a real family whose lives have

been shattered and financially ruined. These workers cannot regain

what was lost; many of them are too old to even try.

85

Compare these results with the experience of some of Enron’s

highest ranking executives. According to an article appearing in

Newsweek on January 21, 2002, Enron’s chairman, Ken Lay, made $205 million in stock option profit in the past four years alone;

$37.7 million was from sales between May 2000 and August 2000.

During that same period, Lou Pai, unit CEO, made $62.9 million,

and Jeff Skilling, former CEO, made $14.4 million. Other high

ranking executives and board members cashed out stock worth millions before the company collapsed. While the executives were feverishly unloading company stock, the rank-and-file workers were

barred from touching their modest, but vital retirement savings,

held in their Enron-heavy 401(k) plan.

The amendment offered by Representative Rangel would have

imposed an excise tax on the proceeds from the sale of company

stock by company executives during any time the rank and file

workers were barred from similarly selling their stock. We believe

this amendment is necessary to deter the kind of corporate greed

and callousness witnessed as the Enron case unfolded. Unfortunately, such behavior is not limited to Enron. According to a survey

of 428 employers conducted by the benefits consulting firm of Hewitt Associates, 34 percent of 401(k) plans that match employee contributions with employer stock restrict the transferability of the

stock, typically by age of the participant (age 50 or 55). However,

these companies do not similarly restrict the stock owned by their

executives through their stock options. This disparity in treatment

will continue unless prohibited through legislation. The 42 million

workers who participate in 401(k) plans must be protected from

such double standards. Their retirement security depends on it.

It is disappointing to us that an issue of such importance to the

retirement security of millions of American workers, and an issue

that received the attention of President Bush as a major area for

reform, has not been addressed in this bill. We disagree with the

Chairman that this should be taken care of by another Committee.

This Committee has jurisdiction over the very creation of pension

plans. We are charged with ensuring that the benefits promised

under these plans are secured for each worker. Thus, it is our inescapable responsibility to ensure that such measures are in place.

Some have rejected the amendment based on the theory that imposing an excise tax on certain behavior is not the way to resolve

this problem. It is the method available to the Members of this

Committee and has been used since the inception of the Internal

Revenue Code. The tax is paid only when the prohibited behavior

is executed. We do not agree that the problem should not be addressed within this Committee’s jurisdiction. What is more important is that we do everything within our power to reform the pension system and restore much needed confidence in the system. The

amendment offered by Representative Rangel would have gone a

long way in accomplishing this goal.

The secured golden nest eggs of executives compared to the empty

promise to rank-and-file employees

An amendment offered by Representative Matsui would have

closed a major loophole in today’s law with respect to the golden

parachute payments many company executives receive despite the

86

weak financial condition of their company. This is compared to the

often worthless retirement benefits many rank-and-file workers receive from a financially troubled company. This is the converse of

what is intended under the tax laws. The Employee Retirement Income Security Act of 1974 (ERISA) intended to insulate benefits

promised under a qualified pension plan from the financial uncertainty of the employer. The assets held in trust for a qualified pension plan are not intended to be the assets of the employers and

are not subject to the claims of the employer’s creditors. However,

in cases such as Enron’s where the employee’s retirement account

is invested in company stock, the financial decline of the company

can result in substantial loss of retirement benefits for plan participants. Any breach of fiduciary duty with respect to the employees’

investments in company stock will result in many employees standing in line with the bankruptcy creditors of the employer hoping to

recover some small fraction of their lost retirement benefits.

On the other hand, under current law, any non-qualified deferred

benefits an employer promises to a worker should be linked directly

to the financial health of the company. Non-qualified deferred compensation generally is received only by corporate executives. Mike

McNamee of Business Week Investor, in an article entitled ‘‘Crackdown on a Pension Perk,’’ noted that an employee can judge when

he/she is approaching the top of the corporate ladder through the

company’s willingness to begin discussions of providing benefits

under a split-dollar life insurance policy, one of the many methods

used to secure non-qualified deferred benefits for corporate executives. Unfortunately, there is more truth to this statement than

many of us are willing to accept.

Many major corporations continue to find ways to ensure that

the extremely generous deferred compensation packages awarded

to their top executives are secured. The rich golden parachute compensation packages many corporations are awarding their top executives were highlighted in an article appearing in the Wall Street

Journal, February 26, 2002 (‘‘As their Companies Crumbled, Some

CEOs Got Big-money Payouts’’), as well as the New York Times,

March 5, 2002 (‘‘For Executives, Nest Egg is Wrapped in a Security

Blanket’’). These packages often are awarded and secured at a time

when the company is reducing pension benefits for most of its other

employees.

We have seen how this disparity has resulted in a glaring injustice for the rank-and-file employees. According to recent Securities

Exchange Commission (SEC) filings, Enron increased retirement

benefits for its top executives at a time when it reduced retirement

benefits for its other workers. According to these filings, Ken Lay

will receive an annual benefit estimated at $475,042 for life. This

is in addition to benefits he received under a $12 million split-dollar life insurance policy Enron secured on Mr. Lay. In addition, according to an article appearing in Mother Jones Magazine, February 25, 2002 (‘‘Ken Lay’s Nest Egg’’), about $4 million—an

amount greater than his entire salary from Enron that year—was

paid for variable annuities that will, starting in 2007, guarantee

Mr. Lay and his wife an annual income of about $900,000. Such

compensation packages are not unique to Enron or to Mr. Lay.

87

Other top Enron executives received similar benefits. Many major

corporations offer similar benefits to their top executives.

There is something fundamentally wrong with a system that permits top executives to walk away from the bankruptcy of their companies with such large benefits which consume assets that under

current law should be the assets of the employer, and subject to the

claims of its creditors, while the retirement benefits under a qualified plan are totally lost. The workers whose benefits should have

been secured find themselves standing in line with all the other

creditors, hoping to recover a small amount of what was lost. We

should not allow sophisticated financial techniques to turn the pension system on its head—making that which is supposed to be unsecured, secured—and that which is supposed to be secured, as

Enron workers have discovered, unsecured.

It is very disappointing that this amendment was not accepted.

We must all agree that the use of creative planning techniques to

guarantee these non-qualified benefits for executives must be

stopped. Such actions by corporate leaders do a grave injustice to

millions of workers. We must do more to protect these workers.

Meaningful and accurate information to plan participants

Enron top executives feverishly unloaded millions of dollars

worth of Enron stock early in 2001 before the company collapsed.

At that same time, the rank-and-file workers were barred from

selling any Enron stock from their modest, but Enron-heavy, 401(k)

portfolios. While top executives were unloading their Enron stock,

they continued to advise workers to invest their 401(k) assets in

the company stock. Mr. Skilling made $14.4 million between May

2000 and August 2001 from the sale of his stock but continued to

advise employees that Enron stock was the best investment available to them. Mr. Skilling quit the company in August 2001, but

not before making millions from the sale of Enron stock and cashing out his benefits under non-qualified deferred plans.

We believe executives of public companies have legal and moral

responsibilities to produce honest books and records. We also believe that these responsibilities extend to providing workers and

shareholders with accurate information about the true liabilities of

the company so they can make informed decisions as to whether to

hold or sell that company’s stock. Because of the abuse that occurs

in this area, we believe it is important to have standards that do

not depend on the honesty and good nature of the key executives

at any company, but rather, we believe there should be uniform

standards to govern this disclosure of information.

Accordingly, Representative Doggett offered an amendment that

would require executives to disclose insider stock sales of more

than $100,000 to the plan administrator within twenty-four hours

of such sales. The plan administrator would be required to notify

the plan participants and beneficiaries within three days. The

amendment was intended to get the same information to plan participants that currently is required to be filed with the Securities

Exchange Commission. The amendment also was rejected.

We believe it is important to ensure that such critical information is available to all employees and shareholders. We have all

witnessed how the absence of such information affected Enron emVerDate 11-MAY-2000 03:51 Mar 22, 2002 Jkt 099006 PO 00000 Frm 00087 Fmt 6604 Sfmt 6602 E:\HR\OC\HR382P1.XXX pfrm02 PsN: HR382P1
88

ployees and their decisions to continue to invest in Enron stock.

None of us can doubt that the results would have been very different, and more favorable to the thousands of workers who lost

their retirement benefits when Enron finally collapsed, if this information had been publicly available.

Conclusion

The impact the collapse of Enron has had on the retirement security of many of its 20,000 employees has underscored the need for

additional reforms in this area. We must enact legislation that will

restore confidence in our defined contribution retirement plan system. As in the 1970s, our pension system is broken. In the 1970s

we responded by enacting ERISA. Today we must develop similar

legislation that would restore confidence in a system that has failed

thousands of workers. Otherwise, we will fail these workers a second time. The shame is on Enron now, but the shame will be on

us if we fail to act to stop it from happening again.

As employers seek ways to pass the cost of saving for retirement

on to employees, and as more and more workers are charged with

managing the assets in their own 401(k) plans, it is imperative

that we act in this area. The pension system has been undergoing

a sea of change for many years, yet we continue simply to patch

over holes in the dike. This legislation should be considered merely

a modest beginning of badly needed systematic reform of our pension system.

CHARLES B. RANGEL.

KAREN L. THURMAN.

JIM MCDERMOTT.

EARL POMEROY.

JERRY KLECZKA.

ROBERT T. MATSUI.

JOHN LEWIS.

MICHAEL R. MCNULTY.

RICHARD E. NEAL.

XAVIER BECERRA.

SANDER LEVIN.

WILLIAM J. COYNE.

LLOYD DOGGETT.

JOHN S. TANNER.

PETE STARK.

WM. J. JEFFERSON.

Æ