79–006

106TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 2d Session 106–753

COMPREHENSIVE RETIREMENT SECURITY AND PENSION

REFORM ACT OF 2000

JULY 17, 2000.—Committed to the Committee of the Whole House on the State of

the Union and ordered to be printed

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

submitted the following

REPORT

together with

ADDITIONAL VIEWS

[To accompany H.R. 4843]

[Including cost estimate of the Congressional Budget Office]

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

bill (H.R. 4843) to amend the Internal Revenue Code of 1986 to

provide for retirement security and pension reform, 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 ........................................................................... 30

A. Purpose and Summary .................................................................... 30

B. Background and Need for Legislation ............................................ 36

C. Legislative History ........................................................................... 36

II. Explanation of the Revenue Provisions of the Bill ..................................... 37

Title I. Individual Retirement Arrangements (‘‘IRAs’’) .............................. 37

Title II. Expanding Coverage ........................................................................ 39

A. Increase in benefit and contribution limits (sec. 201) ................... 39

B. Plans loans for Subchapter S shareholders, partners, and sole

proprietors (sec. 202) ...................................................................... 42

C. Modification of top-heavy rules (sec. 203) ...................................... 43

D. Elective deferrals not taken into account for purposes of deduction limits (sec. 204) ....................................................................... 47

E. Repeal of coordination requirements for deferred compensation

plans of State and local governments and tax-exempt organizations (sec. 205) ................................................................................ 48
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F. Eliminate IRS user fees for certain requests regarding employer

plans (sec. 206) ............................................................................... 49

G. Deduction limits (sec. 207) .............................................................. 50

H. Option to treat elective deferrals as after-tax contributions (sec.

208) .................................................................................................. 51

Title III. Enhancing Fairness for Women .................................................... 53

A. Additional salary catch-up contributions (sec. 301) ...................... 53

B. Equitable treatment for contributions of employees to defined

contribution plans (sec. 302) .......................................................... 54

C. Faster vesting of employer matching contributions (sec. 303) ..... 57

D. Simplify and update the minimum distribution rules (secs. 304

and 409) ........................................................................................... 58

E. Clarification of tax treatment of division of section 457 plan

benefits upon divorce (sec. 305) ..................................................... 60

F. Modification of safe harbor relief for hardship withdrawals from

401(k) plans (sec. 306) .................................................................... 61

Title IV. Increasing Portability for Participants ......................................... 62

A. Rollovers of retirement plan and IRA distributions (secs. 301–

403 and 409) ................................................................................... 62

B. Waiver of 60-day rule (sec. 404) ...................................................... 66

C. Treatment of forms of distribution (sec. 405) ................................ 67

D. Rationalization of restrictions on distributions (sec. 406) ............ 69

E. Purchase of service credit under governmental pension plans

(sec. 407) .......................................................................................... 70

F. Employers may disregard rollovers for purposes of cash-out

rules (sec. 408) ................................................................................ 71

Title V. Strengthening Pension Security and Enforcement ....................... 72

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

deduction for contributions to fund termination liability (secs.

501–502) .......................................................................................... 72

B. Excise tax relief for sound pension funding (sec. 503) .................. 73

C. Notice of significant reduction in plan benefit accruals (sec.

506) .................................................................................................. 75

D. Modifications to section 415 limits for multiemployer plans (sec.

507) .................................................................................................. 77

E. Prohibited allocations of stock in an S corporation ESOP (sec.

508) .................................................................................................. 78

Title VI. Reducing Regulatory Burdens ....................................................... 82

A. Modification of timing of plan valuations (sec. 601) ..................... 82

B. ESOP dividends may be reinvested without loss of dividend

deduction (sec. 602) ........................................................................ 82

C. Repeal transition rule relating to certain highly compensated

employees (sec. 603) ....................................................................... 83

D. Employees of tax-exempt entities (sec. 604) .................................. 84

E. Treatment of employer-provided retirement advice (sec. 605) ..... 85

F. Reporting simplification (sec. 606) .................................................. 86

G. Improvement to Employer Plans Compliance Resolution System

(sec. 607) .......................................................................................... 87

H. Repeal of the multiple use test (sec. 608) ...................................... 89

I. Flexibility in nondiscrimination, coverage, and line of business

rules (sec. 609) ................................................................................ 90

J. Extension to all governmental plans of moratorium on application of certain nondiscrimination rules applicable to State and

local government plans (sec. 610) .................................................. 91

K. Notice and consent period regarding distributions (sec. 611) ...... 92

Title VII. Provisions Relating to Plan Amendments ................................... 93

III. Votes of the Committee ................................................................................. 94

IV. Budget Effects of the Bill .............................................................................. 95

A. Committee Estimates of Budgetary Effects ................................... 95

B. Statement Regarding New Budget Authority and Tax Expenditures ................................................................................................. 100

C. Cost Estimate Prepared by the Congressional Budget Office ...... 100

V. Other Matters to be Discussed Under Rules of the House ........................ 103

A. Committee Oversight Findings and Recommendations ................ 103

B. Summary of Findings and Recommendations of the Committee

on Government Reform and Oversight ......................................... 103

C. Constitutional Authority Statement ............................................... 103

D. Information Relating to Unfunded Mandates ............................... 103
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E. Applicability of House Rule XX15(b) .............................................. 104

F. Tax Complexity Analysis ................................................................. 104

VI. Changes in Existing Law of the Bill as Reported ....................................... 104

VII. Additional Views ............................................................................................ 163

The amendment is as follows:

Strike all after the enacting clause and insert the following:

SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CONTENTS.

(a) SHORT TITLE.—This Act may be cited as the ‘‘Comprehensive Retirement Security and Pension Reform Act of 2000’’.

(b) AMENDMENT OF 1986 CODE.—Except as otherwise expressly provided, whenever

in this Act an amendment or repeal is expressed in terms of an amendment to, or

repeal of, a section or other provision, the reference shall be considered to be made

to a section or other provision of the Internal Revenue Code of 1986.

(c) TABLE OF CONTENTS.—The table of contents of this Act is as follows:

Sec. 1. Short title; references; table of contents.

TITLE I—INDIVIDUAL RETIREMENT ACCOUNT PROVISIONS

Sec. 101. Modification of IRA contribution limits.

TITLE II—EXPANDING COVERAGE

Sec. 201. Increase in benefit and contribution limits.

Sec. 202. Plan loans for subchapter S owners, partners, and sole proprietors.

Sec. 203. Modification of top-heavy rules.

Sec. 204. Elective deferrals not taken into account for purposes of deduction limits.

Sec. 205. Repeal of coordination requirements for deferred compensation plans of State and local governments

and tax-exempt organizations.

Sec. 206. Elimination of user fee for requests to IRS regarding pension plans.

Sec. 207. Deduction limits.

Sec. 208. Option to treat elective deferrals as after-tax contributions.

TITLE III—ENHANCING FAIRNESS FOR WOMEN

Sec. 301. Catch-up contributions for individuals age 50 or over.

Sec. 302. Equitable treatment for contributions of employees to defined contribution plans.

Sec. 303. Faster vesting of certain employer matching contributions.

Sec. 304. Simplify and update the minimum distribution rules.

Sec. 305. Clarification of tax treatment of division of section 457 plan benefits upon divorce.

Sec. 306. Modification of safe harbor relief for hardship withdrawals from cash or deferred arrangements.

TITLE IV—INCREASING PORTABILITY FOR PARTICIPANTS

Sec. 401. Rollovers allowed among various types of plans.

Sec. 402. Rollovers of IRAs into workplace retirement plans.

Sec. 403. Rollovers of after-tax contributions.

Sec. 404. Hardship exception to 60-day rule.

Sec. 405. Treatment of forms of distribution.

Sec. 406. Rationalization of restrictions on distributions.

Sec. 407. Purchase of service credit in governmental defined benefit plans.

Sec. 408. Employers may disregard rollovers for purposes of cash-out amounts.

Sec. 409. Minimum distribution and inclusion requirements for section 457 plans.

TITLE V—STRENGTHENING PENSION SECURITY AND ENFORCEMENT

Sec. 501. Repeal of 150 percent of current liability funding limit.

Sec. 502. Maximum contribution deduction rules modified and applied to all defined benefit plans.

Sec. 503. Excise tax relief for sound pension funding.

Sec. 504. Excise tax on failure to provide notice by defined benefit plans significantly reducing future benefit

accruals.

Sec. 505. Treatment of multiemployer plans under section 415.

Sec. 506. Prohibited allocations of stock in S corporation ESOP.

TITLE VI—REDUCING REGULATORY BURDENS

Sec. 601. Modification of timing of plan valuations.

Sec. 602. ESOP dividends may be reinvested without loss of dividend deduction.

Sec. 603. Repeal of transition rule relating to certain highly compensated employees.

Sec. 604. Employees of tax-exempt entities.

Sec. 605. Clarification of treatment of employer-provided retirement advice.

Sec. 606. Reporting simplification.

Sec. 607. Improvement of employee plans compliance resolution system.

Sec. 608. Repeal of the multiple use test.

Sec. 609. Flexibility in nondiscrimination, coverage, and line of business rules.

Sec. 610. Extension to all governmental plans of moratorium on application of certain nondiscrimination rules

applicable to State and local plans.

Sec. 611. Notice and consent period regarding distributions.

TITLE VII—PLAN AMENDMENTS

Sec. 701. Provisions relating to plan amendments.
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TITLE I—INDIVIDUAL RETIREMENT

ACCOUNTS

SEC. 101. MODIFICATION OF IRA CONTRIBUTION LIMITS.

(a) INCREASE IN CONTRIBUTION LIMIT.—

(1) IN GENERAL.—Paragraph (1)(A) of section 219(b) (relating to maximum

amount of deduction) is amended by striking ‘‘$2,000’’ and inserting ‘‘the deductible amount’’.

(2) DEDUCTIBLE AMOUNT.—Section 219(b) is amended by adding at the end the

following new paragraph:

‘‘(5) DEDUCTIBLE AMOUNT.—For purposes of paragraph (1)(A)—

‘‘(A) IN GENERAL.—The deductible amount shall be determined in accordance with the following table:

‘‘For taxable years The deductible

beginning in: amount is:

2001 ................................................................................................................................................. $3,000

2002 ................................................................................................................................................. $4,000

2003 and thereafter ........................................................................................................................ $5,000.

‘‘(B) CATCH-UP CONTRIBUTIONS FOR INDIVIDUALS 50 OR OLDER.—In the case

of an individual who has attained the age of 50 before the close of the taxable year, the deductible amount for taxable years beginning in 2001 or

2002 shall be $5,000.

‘‘(C) COST-OF-LIVING ADJUSTMENT.—

‘‘(i) IN GENERAL.—In the case of any taxable year beginning in a calendar year after 2003, the $5,000 amount under subparagraph (A) shall

be increased by an amount equal to—

‘‘(I) such dollar amount, multiplied by

‘‘(II) the cost-of-living adjustment determined under section

1(f )(3) for the calendar year in which the taxable year begins, determined by substituting ‘calendar year 2002’ for ‘calendar year

1992’ in subparagraph (B) thereof.

‘‘(ii) ROUNDING RULES.—If any amount after adjustment under clause

(i) is not a multiple of $500, such amount shall be rounded to the next

lower multiple of $500.’’.

(b) CONFORMING AMENDMENTS.—

(1) Section 408(a)(1) is amended by striking ‘‘in excess of $2,000 on behalf of

any individual’’ and inserting ‘‘on behalf of any individual in excess of the

amount in effect for such taxable year under section 219(b)(1)(A)’’.

(2) Section 408(b)(2)(B) is amended by striking ‘‘$2,000’’ and inserting ‘‘the

dollar amount in effect under section 219(b)(1)(A)’’.

(3) Section 408(b) is amended by striking ‘‘$2,000’’ in the matter following

paragraph (4) and inserting ‘‘the dollar amount in effect under section

219(b)(1)(A)’’.

(4) Section 408( j) is amended by striking ‘‘$2,000’’.

(5) Section 408(p)(8) is amended by striking ‘‘$2,000’’ and inserting ‘‘the dollar

amount in effect under section 219(b)(1)(A)’’.

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2000.

TITLE II—EXPANDING COVERAGE

SEC. 201. INCREASE IN BENEFIT AND CONTRIBUTION LIMITS.

(a) DEFINED BENEFIT PLANS.—

(1) DOLLAR LIMIT.—

(A) Subparagraph (A) of section 415(b)(1) (relating to limitation for defined benefit plans) is amended by striking ‘‘$90,000’’ and inserting

‘‘$160,000’’.

(B) Subparagraphs (C) and (D) of section 415(b)(2) are each amended by

striking ‘‘$90,000’’ each place it appears in the headings and the text and

inserting ‘‘$160,000’’.

(C) Paragraph (7) of section 415(b) (relating to benefits under certain collectively bargained plans) is amended by striking ‘‘the greater of $68,212

or one-half the amount otherwise applicable for such year under paragraph

(1)(A) for ‘$90,000’ ’’ and inserting ‘‘one-half the amount otherwise applicable for such year under paragraph (1)(A) for ‘$160,000’ ’’.

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(2) LIMIT REDUCED WHEN BENEFIT BEGINS BEFORE AGE 62.—Subparagraph (C)

of section 415(b)(2) is amended by striking ‘‘the social security retirement age’’

each place it appears in the heading and text and inserting ‘‘age 62’’.

(3) LIMIT INCREASED WHEN BENEFIT BEGINS AFTER AGE 65.—Subparagraph (D)

of section 415(b)(2) is amended by striking ‘‘the social security retirement age’’

each place it appears in the heading and text and inserting ‘‘age 65’’.

(4) COST-OF-LIVING ADJUSTMENTS.—Subsection (d) of section 415 (related to

cost-of-living adjustments) is amended—

(A) by striking ‘‘$90,000’’ in paragraph (1)(A) and inserting ‘‘$160,000’’;

and

(B) in paragraph (3)(A)—

(i) by striking ‘‘$90,000’’ in the heading and inserting ‘‘$160,000’’; and

(ii) by striking ‘‘October 1, 1986’’ and inserting ‘‘July 1, 2000’’.

(5) CONFORMING AMENDMENT.—Section 415(b)(2) is amended by striking subparagraph (F).

(b) DEFINED CONTRIBUTION PLANS.—

(1) DOLLAR LIMIT.—Subparagraph (A) of section 415(c)(1) (relating to limitation for defined contribution plans) is amended by striking ‘‘$30,000’’ and inserting ‘‘$40,000’’.

(2) COST-OF-LIVING ADJUSTMENTS.—Subsection (d) of section 415 (related to

cost-of-living adjustments) is amended—

(A) by striking ‘‘$30,000’’ in paragraph (1)(C) and inserting ‘‘$40,000’’; and

(B) in paragraph (3)(D)—

(i) by striking ‘‘$30,000’’ in the heading and inserting ‘‘$40,000’’; and

(ii) by striking ‘‘October 1, 1993’’ and inserting ‘‘July 1, 2000’’.

(c) QUALIFIED TRUSTS.—

(1) COMPENSATION LIMIT.—Sections 401(a)(17), 404(l), 408(k), and 505(b)(7)

are each amended by striking ‘‘$150,000’’ each place it appears and inserting

‘‘$200,000’’.

(2) BASE PERIOD AND ROUNDING OF COST-OF-LIVING ADJUSTMENT.—Subparagraph (B) of section 401(a)(17) is amended—

(A) by striking ‘‘October 1, 1993’’ and inserting ‘‘July 1, 2000’’; and

(B) by striking ‘‘$10,000’’ both places it appears and inserting ‘‘$5,000’’.

(d) ELECTIVE DEFERRALS.—

(1) IN GENERAL.—Paragraph (1) of section 402(g) (relating to limitation on exclusion for elective deferrals) is amended to read as follows:

‘‘(1) IN GENERAL.—

‘‘(A) LIMITATION.—Notwithstanding subsections (e)(3) and (h)(1)(B), the

elective deferrals of any individual for any taxable year shall be included

in such individual’s gross income to the extent the amount of such deferrals

for the taxable year exceeds the applicable dollar amount.

‘‘(B) APPLICABLE DOLLAR AMOUNT.—For purposes of subparagraph (A), the

applicable dollar amount shall be the amount determined in accordance

with the following table:

‘‘For taxable years The applicable

beginning in dollar amount:

calendar year:

2001 ................................................................................................................................................ $11,000

2002 ................................................................................................................................................ $12,000

2003 ................................................................................................................................................ $13,000

2004 ................................................................................................................................................ $14,000

2005 or thereafter ......................................................................................................................... $15,000.’’.

(2) COST-OF-LIVING ADJUSTMENT.—Paragraph (5) of section 402(g) is amended

to read as follows:

‘‘(5) COST-OF-LIVING ADJUSTMENT.—In the case of taxable years beginning

after December 31, 2005, the Secretary shall adjust the $15,000 amount under

paragraph (1)(B) at the same time and in the same manner as under section

415(d), except that the base period shall be the calendar quarter beginning July

1, 2004, and any increase under this paragraph which is not a multiple of $500

shall be rounded to the next lowest multiple of $500.’’.

(3) CONFORMING AMENDMENTS.—

(A) Section 402(g) (relating to limitation on exclusion for elective deferrals), as amended by paragraphs (1) and (2), is further amended by striking

paragraph (4) and redesignating paragraphs (5), (6), (7), (8), and (9) as

paragraphs (4), (5), (6), (7), and (8), respectively.

(B) Paragraph (2) of section 457(c) is amended by striking

‘‘402(g)(8)(A)(iii)’’ and inserting ‘‘402(g)(7)(A)(iii)’’.

(C) Clause (iii) of section 501(c)(18)(D) is amended by striking ‘‘(other

than paragraph (4) thereof)’’.

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(e) DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND

TAX-EXEMPT ORGANIZATIONS.—

(1) IN GENERAL.—Section 457 (relating to deferred compensation plans of

State and local governments and tax-exempt organizations) is amended—

(A) in subsections (b)(2)(A) and (c)(1) by striking ‘‘$7,500’’ each place it

appears and inserting ‘‘the applicable dollar amount’’; and

(B) in subsection (b)(3)(A) by striking ‘‘$15,000’’ and inserting ‘‘twice the

dollar amount in effect under subsection (b)(2)(A)’’.

(2) APPLICABLE DOLLAR AMOUNT; COST-OF-LIVING ADJUSTMENT.—Paragraph

(15) of section 457(e) is amended to read as follows:

‘‘(15) APPLICABLE DOLLAR AMOUNT.—

‘‘(A) IN GENERAL.—The applicable dollar amount shall be the amount determined in accordance with the following table:

‘‘For taxable years The applicable

beginning in dollar amount:

calendar year:

2001 ................................................................................................................................................ $11,000

2002 ................................................................................................................................................ $12,000

2003 ................................................................................................................................................ $13,000

2004 ................................................................................................................................................ $14,000

2005 or thereafter ......................................................................................................................... $15,000.

‘‘(B) COST-OF-LIVING ADJUSTMENTS.—In the case of taxable years beginning after December 31, 2005, the Secretary shall adjust the $15,000

amount specified in the table in subparagraph (A) at the same time and in

the same manner as under section 415(d), except that the base period shall

be the calendar quarter beginning July 1, 2004, and any increase under this

paragraph which is not a multiple of $500 shall be rounded to the next lowest multiple of $500.’’.

(f) SIMPLE RETIREMENT ACCOUNTS.—

(1) LIMITATION.—Clause (ii) of section 408(p)(2)(A) (relating to general rule for

qualified salary reduction arrangement) is amended by striking ‘‘$6,000’’ and inserting ‘‘the applicable dollar amount’’.

(2) APPLICABLE DOLLAR AMOUNT.—Subparagraph (E) of 408(p)(2) is amended

to read as follows:

‘‘(E) APPLICABLE DOLLAR AMOUNT; COST-OF-LIVING ADJUSTMENT.—

‘‘(i) IN GENERAL.—For purposes of subparagraph (A)(ii), the applicable

dollar amount shall be the amount determined in accordance with the

following table:

‘‘For taxable years The applicable

beginning in dollar amount:

calendar year:

2001 ......................................................................................................................................... $7,000

2002 ......................................................................................................................................... $8,000

2003 ......................................................................................................................................... $9,000

2004 or thereafter .................................................................................................................. $10,000.

‘‘(ii) COST-OF-LIVING ADJUSTMENT.—In the case of a year beginning

after December 31, 2004, the Secretary shall adjust the $10,000

amount under clause (i) at the same time and in the same manner as

under section 415(d), except that the base period taken into account

shall be the calendar quarter beginning July 1, 2003, and any increase

under this subparagraph which is not a multiple of $500 shall be

rounded to the next lower multiple of $500.’’.

(3) CONFORMING AMENDMENTS.—

(A) Clause (I) of section 401(k)(11)(B)(i) is amended by striking ‘‘$6,000’’

and inserting ‘‘the amount in effect under section 408(p)(2)(A)(ii)’’.

(B) Section 401(k)(11) is amended by striking subparagraph (E).

(g) ROUNDING RULE RELATING TO DEFINED BENEFIT PLANS AND DEFINED CONTRIBUTION PLANS.—Paragraph (4) of section 415(d) is amended to read as follows:

‘‘(4) ROUNDING.—

‘‘(A) $160,000 AMOUNT.—Any increase under subparagraph (A) of paragraph (1) which is not a multiple of $5,000 shall be rounded to the next

lowest multiple of $5,000.

‘‘(B) $40,000 AMOUNT.—Any increase under subparagraph (C) of paragraph (1) which is not a multiple of $1,000 shall be rounded to the next

lowest multiple of $1,000.’’.

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

beginning after December 31, 2000.

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SEC. 202. PLAN LOANS FOR SUBCHAPTER S OWNERS, PARTNERS, AND SOLE PROPRIETORS.

(a) IN GENERAL.—Subparagraph (B) of section 4975(f)(6) (relating to exemptions

not to apply to certain transactions) is amended by adding at the end the following

new clause:

‘‘(iii) LOAN EXCEPTION.—For purposes of subparagraph (A)(i), the

term ‘owner-employee’ shall only include a person described in subclause (II) or (III) of clause (i).’’.

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to loans

made after December 31, 2000.

SEC. 203. MODIFICATION OF TOP-HEAVY RULES.

(a) SIMPLIFICATION OF DEFINITION OF KEY EMPLOYEE.—

(1) IN GENERAL.—Section 416(i)(1)(A) (defining key employee) is amended—

(A) by striking ‘‘or any of the 4 preceding plan years’’ in the matter preceding clause (i);

(B) by striking clause (i) and inserting the following:

‘‘(i) an officer of the employer having an annual compensation greater

than $150,000,’’;

(C) by striking clause (ii) and redesignating clauses (iii) and (iv) as

clauses (ii) and (iii), respectively; and

(D) by striking the second sentence in the matter following clause (iii),

as redesignated by subparagraph (C).

(2) CONFORMING AMENDMENT.—Section 416(i)(1)(B)(iii) is amended by striking

‘‘and subparagraph (A)(ii)’’.

(b) MATCHING CONTRIBUTIONS TAKEN INTO ACCOUNT FOR MINIMUM CONTRIBUTION

REQUIREMENTS.—Section 416(c)(2)(A) (relating to defined contribution plans) is

amended by adding at the end the following: ‘‘Employer matching contributions (as

defined in section 401(m)(4)(A)) shall be taken into account for purposes of this subparagraph.’’.

(c) DISTRIBUTIONS DURING LAST YEAR BEFORE DETERMINATION DATE TAKEN INTO

ACCOUNT.—

(1) IN GENERAL.—Paragraph (3) of section 416(g) is amended to read as follows:

‘‘(3) DISTRIBUTIONS DURING LAST YEAR BEFORE DETERMINATION DATE TAKEN

INTO ACCOUNT.—

‘‘(A) IN GENERAL.—For purposes of determining—

‘‘(i) the present value of the cumulative accrued benefit for any employee, or

‘‘(ii) the amount of the account of any employee,

such present value or amount shall be increased by the aggregate distributions made with respect to such employee under the plan during the 1-year

period ending on the determination date. The preceding sentence shall also

apply to distributions under a terminated plan which if it had not been terminated would have been required to be included in an aggregation group.

‘‘(B) 5-YEAR PERIOD IN CASE OF IN-SERVICE DISTRIBUTION.—In the case of

any distribution made for a reason other than separation from service,

death, or disability, subparagraph (A) shall be applied by substituting ‘5-

year period’ for ‘1-year period’.’’.

(2) BENEFITS NOT TAKEN INTO ACCOUNT.—Subparagraph (E) of section

416(g)(4) is amended—

(A) by striking ‘‘LAST 5 YEARS’’ in the heading and inserting ‘‘LAST YEAR

BEFORE DETERMINATION DATE’’; and

(B) by striking ‘‘5-year period’’ and inserting ‘‘1-year period’’.

(d) DEFINITION OF TOP-HEAVY PLANS.—Paragraph (4) of section 416(g) (relating

to other special rules for top-heavy plans) is amended by adding at the end the following new subparagraph:

‘‘(H) CASH OR DEFERRED ARRANGEMENTS USING ALTERNATIVE METHODS OF

MEETING NONDISCRIMINATION REQUIREMENTS.—The term ‘top-heavy plan’

shall not include a plan which consists solely of—

‘‘(i) a cash or deferred arrangement which meets the requirements of

section 401(k)(12), and

‘‘(ii) matching contributions with respect to which the requirements

of section 401(m)(11) are met.

If, but for this subparagraph, a plan would be treated as a top-heavy plan

because it is a member of an aggregation group which is a top-heavy group,

contributions under the plan may be taken into account in determining

whether any other plan in the group meets the requirements of subsection

(c)(2).’’.

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(e) FROZEN PLAN EXEMPT FROM MINIMUM BENEFIT REQUIREMENT.—Subparagraph

(C) of section 416(c)(1) (relating to defined benefit plans) is amended—

(A) by striking ‘‘clause (ii)’’ in clause (i) and inserting ‘‘clause (ii) or (iii)’’;

and

(B) by adding at the end the following:

‘‘(iii) EXCEPTION FOR FROZEN PLAN.—For purposes of determining an

employee’s years of service with the employer, any service with the employer shall be disregarded to the extent that such service occurs during a plan year when the plan benefits (within the meaning of section

410(b)) no employee or former employee.’’.

(f) ELIMINATION OF FAMILY ATTRIBUTION.—Section 416(i)(1)(B) (defining 5-percent

owner) is amended by adding at the end the following new clause:

‘‘(iv) FAMILY ATTRIBUTION DISREGARDED.—Solely for purposes of applying this paragraph (and not for purposes of any provision of this

title which incorporates by reference the definition of a key employee

or 5-percent owner under this paragraph), section 318 shall be applied

without regard to subsection (a)(1) thereof in determining whether any

person is a 5-percent owner.’’.

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

beginning after December 31, 2000.

SEC. 204. ELECTIVE DEFERRALS NOT TAKEN INTO ACCOUNT FOR PURPOSES OF DEDUCTION

LIMITS.

(a) IN GENERAL.—Section 404 (relating to deduction for contributions of an employer to an employees’ trust or annuity plan and compensation under a deferred

payment plan) is amended by adding at the end the following new subsection:

‘‘(n) ELECTIVE DEFERRALS NOT TAKEN INTO ACCOUNT FOR PURPOSES OF DEDUCTION LIMITS.—Elective deferrals (as defined in section 402(g)(3)) shall not be subject

to any limitation contained in paragraph (3), (7), or (9) of subsection (a), and such

elective deferrals shall not be taken into account in applying any such limitation

to any other contributions.’’.

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to years

beginning after December 31, 2000.

SEC. 205. REPEAL OF COORDINATION REQUIREMENTS FOR DEFERRED COMPENSATION

PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS.

(a) IN GENERAL.—Subsection (c) of section 457 (relating to deferred compensation

plans of State and local governments and tax-exempt organizations), as amended by

section 201, is amended to read as follows:

‘‘(c) LIMITATION.—The maximum amount of the compensation of any one individual which may be deferred under subsection (a) during any taxable year shall

not exceed the amount in effect under subsection (b)(2)(A) (as modified by any adjustment provided under subsection (b)(3)).’’.

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to years

beginning after December 31, 2000.

SEC. 206. ELIMINATION OF USER FEE FOR REQUESTS TO IRS REGARDING PENSION PLANS.

(a) ELIMINATION OF CERTAIN USER FEES.—The Secretary of the Treasury or the

Secretary’s delegate shall not require payment of user fees under the program established under section 7527 of the Internal Revenue Code of 1986 for requests to the

Internal Revenue Service for determination letters with respect to the qualified status of a pension benefit plan maintained solely by one or more eligible employers

or any trust which is part of the plan. The preceding sentence shall not apply to

any request—

(1) made after the fifth plan year the pension benefit plan is in existence; or

(2) made by the sponsor of any prototype or similar plan which the sponsor

intends to market to participating employers.

(b) PENSION BENEFIT PLAN.—For purposes of this section, the term ‘‘pension benefit plan’’ means a pension, profit-sharing, stock bonus, annuity, or employee stock

ownership plan.

(c) ELIGIBLE EMPLOYER.—For purposes of this section, the term ‘‘eligible employer’’ has the same meaning given such term in section 408(p)(2)(C)(i)(I) of the Internal Revenue Code of 1986. The determination of whether an employer is an eligible employer under this section shall be made as of the date of the request described

in subsection (a).

(d) EFFECTIVE DATE.—The provisions of this section shall apply with respect to

requests made after December 31, 2000.

SEC. 207. DEDUCTION LIMITS.

(a) IN GENERAL.—

9

(1) STOCK BONUS AND PROFIT SHARING TRUSTS.—Subclause (I) of section

404(a)(3)(A)(i) (relating to stock bonus and profit sharing trusts) is amended by

striking ‘‘15 percent’’ and inserting ‘‘20 percent’’.

(2) COMPENSATION.—Section 404(a) (relating to general rule) is amended by

adding at the end the following:

‘‘(12) DEFINITION OF COMPENSATION.—For purposes of paragraphs (3), (7), (8),

and (9), the term ‘compensation otherwise paid or accrued during the taxable

year’ shall include amounts treated as ‘participant’s compensation’ under subparagraph (C) or (D) of section 415(c)(3).’’.

(b) CONFORMING AMENDMENTS.—

(1) Subparagraph (B) of section 404(a)(3) is amended by striking the last sentence thereof.

(2) Subparagraph (C) of section 404(h)(1) is amended by striking ‘‘15 percent’’

each place it appears and inserting ‘‘20 percent’’.

(3) Clause (i) of section 4972(c)(6)(B) is amended by striking ‘‘(within the

meaning of section 404(a))’’ and inserting ‘‘(within the meaning of section 404(a)

and as adjusted under section 404(a)(12))’’.

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

beginning after December 31, 2000.

SEC. 208. OPTION TO TREAT ELECTIVE DEFERRALS AS AFTER-TAX CONTRIBUTIONS.

(a) IN GENERAL.—Subpart A of part I of subchapter D of chapter 1 (relating to

deferred compensation, etc.) is amended by inserting after section 402 the following

new section:

‘‘SEC. 402A. OPTIONAL TREATMENT OF ELECTIVE DEFERRALS AS PLUS CONTRIBUTIONS.

‘‘(a) GENERAL RULE.—If an applicable retirement plan includes a qualified plus

contribution program—

‘‘(1) any designated plus contribution made by an employee pursuant to the

program shall be treated as an elective deferral for purposes of this chapter, except that such contribution shall not be excludable from gross income, and

‘‘(2) such plan (and any arrangement which is part of such plan) shall not be

treated as failing to meet any requirement of this chapter solely by reason of

including such program.

‘‘(b) QUALIFIED PLUS CONTRIBUTION PROGRAM.—For purposes of this section—

‘‘(1) IN GENERAL.—The term ‘qualified plus contribution program’ means a

program under which an employee may elect to make designated plus contributions in lieu of all or a portion of elective deferrals the employee is otherwise

eligible to make under the applicable retirement plan.

‘‘(2) SEPARATE ACCOUNTING REQUIRED.—A program shall not be treated as a

qualified plus contribution program unless the applicable retirement plan—

‘‘(A) establishes separate accounts (‘designated plus accounts’) for the designated plus contributions of each employee and any earnings properly allocable to the contributions, and

‘‘(B) maintains separate recordkeeping with respect to each account.

‘‘(c) DEFINITIONS AND RULES RELATING TO DESIGNATED PLUS CONTRIBUTIONS.—

For purposes of this section—

‘‘(1) DESIGNATED PLUS CONTRIBUTION.—The term ‘designated plus contribution’ means any elective deferral which—

‘‘(A) is excludable from gross income of an employee without regard to

this section, and

‘‘(B) the employee designates (at such time and in such manner as the

Secretary may prescribe) as not being so excludable.

‘‘(2) DESIGNATION LIMITS.—The amount of elective deferrals which an employee may designate under paragraph (1) shall not exceed the excess (if any)

of—

‘‘(A) the maximum amount of elective deferrals excludable from gross income of the employee for the taxable year (without regard to this section),

over

‘‘(B) the aggregate amount of elective deferrals of the employee for the

taxable year which the employee does not designate under paragraph (1).

‘‘(3) ROLLOVER CONTRIBUTIONS.—

‘‘(A) IN GENERAL.—A rollover contribution of any payment or distribution

from a designated plus account which is otherwise allowable under this

chapter may be made only if the contribution is to—

‘‘(i) another designated plus account of the individual from whose account the payment or distribution was made, or

‘‘(ii) a Roth IRA of such individual.

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‘‘(B) COORDINATION WITH LIMIT.—Any rollover contribution to a designated plus account under subparagraph (A) shall not be taken into account for purposes of paragraph (1).

‘‘(d) DISTRIBUTION RULES.—For purposes of this title—

‘‘(1) EXCLUSION.—Any qualified distribution from a designated plus account

shall not be includible in gross income.

‘‘(2) QUALIFIED DISTRIBUTION.—For purposes of this subsection—

‘‘(A) IN GENERAL.—The term ‘qualified distribution’ has the meaning

given such term by section 408A(d)(2)(A) (without regard to clause (iv)

thereof).

‘‘(B) DISTRIBUTIONS WITHIN NONEXCLUSION PERIOD.—A payment or distribution from a designated plus account shall not be treated as a qualified

distribution if such payment or distribution is made within the 5-taxableyear period beginning with the earlier of—

‘‘(i) the first taxable year for which the individual made a designated

plus contribution to any designated plus account established for such

individual under the same applicable retirement plan, or

‘‘(ii) if a rollover contribution was made to such designated plus account from a designated plus account previously established for such

individual under another applicable retirement plan, the first taxable

year for which the individual made a designated plus contribution to

such previously established account.

‘‘(C) DISTRIBUTIONS OF EXCESS DEFERRALS AND EARNINGS.—The term

‘qualified distribution’ shall not include any distribution of any excess deferral under section 402(g)(2) and any income on the excess deferral.

‘‘(3) AGGREGATION RULES.—Section 72 shall be applied separately with respect

to distributions and payments from a designated plus account and other distributions and payments from the plan.

‘‘(e) OTHER DEFINITIONS.—For purposes of this section—

‘‘(1) APPLICABLE RETIREMENT PLAN.—The term ‘applicable retirement plan’ means—

‘‘(A) an employees’ trust described in section 401(a) which is exempt from

tax under section 501(a), and

‘‘(B) a plan under which amounts are contributed by an individual’s employer for an annuity contract described in section 403(b).

‘‘(2) ELECTIVE DEFERRAL.—The term ‘elective deferral’ means any elective deferral described in subparagraph (A) or (C) of section 402(g)(3).’’.

(b) EXCESS DEFERRALS.—Section 402(g) (relating to limitation on exclusion for

elective deferrals) is amended—

(1) by adding at the end of paragraph (1) the following new sentence: ‘‘The

preceding sentence shall not apply to so much of such excess as does not exceed

the designated plus contributions of the individual for the taxable year.’’; and

(2) by inserting ‘‘(or would be included but for the last sentence thereof)’’ after

‘‘paragraph (1)’’ in paragraph (2)(A).

(c) ROLLOVERS.—Subparagraph (B) of section 402(c)(8) is amended by adding at

the end the following:

‘‘If any portion of an eligible rollover distribution is attributable to payments or distributions from a designated plus account (as defined in section

402A), an eligible retirement plan with respect to such portion shall include

only another designated plus account and a Roth IRA.’’.

(d) REPORTING REQUIREMENTS.—

(1) W–2 INFORMATION.—Section 6051(a)(8) is amended by inserting ‘‘, including the amount of designated plus contributions (as defined in section 402A)’’

before the comma at the end.

(2) INFORMATION.—Section 6047 is amended by redesignating subsection (f) as

subsection (g) and by inserting after subsection (e) the following new subsection:

‘‘(f) DESIGNATED PLUS CONTRIBUTIONS.—The Secretary shall require the plan administrator of each applicable retirement plan (as defined in section 402A) to make

such returns and reports regarding designated plus contributions (as so defined) to

the Secretary, participants and beneficiaries of the plan, and such other persons as

the Secretary may prescribe.’’.

(e) CONFORMING AMENDMENTS.—

(1) Section 408A(e) is amended by adding after the first sentence the following

new sentence: ‘‘Such term includes a rollover contribution described in section

402A(c)(3)(A).’’.

(2) The table of sections for subpart A of part I of subchapter D of chapter

1 is amended by inserting after the item relating to section 402 the following

new item:

‘‘Sec. 402A. Optional treatment of elective deferrals as plus contributions.’’.

11

(f) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2000.

TITLE III—ENHANCING FAIRNESS FOR WOMEN

SEC. 301. CATCH-UP CONTRIBUTIONS FOR INDIVIDUALS AGE 50 OR OVER.

(a) IN GENERAL.—Section 414 (relating to definitions and special rules) is amended by adding at the end the following new subsection:

‘‘(v) CATCH-UP CONTRIBUTIONS FOR INDIVIDUALS AGE 50 OR OVER.—

‘‘(1) IN GENERAL.—An applicable employer plan shall not be treated as failing

to meet any requirement of this title solely because the plan permits an eligible

participant to make additional elective deferrals in any plan year.

‘‘(2) LIMITATION ON AMOUNT OF ADDITIONAL DEFERRALS.—A plan shall not permit additional elective deferrals under paragraph (1) for any year in an amount

greater than the lesser of—

‘‘(A) $5,000, or

‘‘(B) the excess (if any) of—

‘‘(i) the participant’s compensation for the year, over

‘‘(ii) any other elective deferrals of the participant for such year

which are made without regard to this subsection.

‘‘(3) TREATMENT OF CONTRIBUTIONS.—In the case of any contribution to a plan

under paragraph (1), such contribution shall not, with respect to the year in

which the contribution is made—

‘‘(A) be subject to any otherwise applicable limitation contained in section

402(g), 402(h)(2), 404(a), 404(h), 408(p)(2)(A)(ii), 415, or 457, or

‘‘(B) be taken into account in applying such limitations to other contributions or benefits under such plan or any other such plan.

‘‘(4) ELIGIBLE PARTICIPANT.—For purposes of this subsection, the term ‘eligible

participant’ means, with respect to any plan year, a participant in a plan—

‘‘(A) who has attained the age of 50 before the close of the plan year, and

‘‘(B) with respect to whom no other elective deferrals may (without regard

to this subsection) be made to the plan for the plan year by reason of the

application of any limitation or other restriction described in paragraph (3)

or comparable limitation contained in the terms of the plan.

‘‘(5) OTHER DEFINITIONS AND RULES.—For purposes of this subsection—

‘‘(A) APPLICABLE EMPLOYER PLAN.—The term ‘applicable employer plan’

means—

‘‘(i) an employees’ trust described in section 401(a) which is exempt

from tax under section 501(a),

‘‘(ii) a plan under which amounts are contributed by an individual’s

employer for an annuity contract described in section 403(b),

‘‘(iii) an eligible deferred compensation plan under section 457 of an

eligible employer as defined in section 457(e)(1)(A), and

‘‘(iv) an arrangement meeting the requirements of section 408 (k) or

(p).

‘‘(B) ELECTIVE DEFERRAL.—The term ‘elective deferral’ has the meaning

given such term by subsection (u)(2)(C).

‘‘(C) EXCEPTION FOR SECTION 457 PLANS.—This subsection shall not apply

to an applicable employer plan described in subparagraph (A)(iii) for any

year to which section 457(b)(3) applies.

‘‘(D) COST-OF-LIVING ADJUSTMENT.—For years beginning after December

31, 2005, the Secretary shall adjust annually the $5,000 amount in subparagraph (A) for increases in the cost-of-living at the same time and in the

same manner as adjustments under section 415(d); except that the base period shall be the calendar quarter beginning July 1, 2004, and any increase

which is not a multiple of $500 shall be rounded to the next lowest multiple

of $500.’’.

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to contributions in taxable years beginning after December 31, 2000.

SEC. 302. EQUITABLE TREATMENT FOR CONTRIBUTIONS OF EMPLOYEES TO DEFINED CONTRIBUTION PLANS.

(a) EQUITABLE TREATMENT.—

(1) IN GENERAL.—Subparagraph (B) of section 415(c)(1) (relating to limitation

for defined contribution plans) is amended by striking ‘‘25 percent’’ and inserting ‘‘100 percent’’.

(2) APPLICATION TO SECTION 403(b).—Section 403(b) is amended—

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(A) by striking ‘‘the exclusion allowance for such taxable year’’ in paragraph (1) and inserting ‘‘the applicable limit under section 415’’;

(B) by striking paragraph (2); and

(C) by inserting ‘‘or any amount received by a former employee after the

fifth taxable year following the taxable year in which such employee was

terminated’’ before the period at the end of the second sentence of paragraph (3).

(3) CONFORMING AMENDMENTS.— (A) Subsection (f) of section 72 is amended by striking ‘‘section

403(b)(2)(D)(iii))’’ and inserting ‘‘section 403(b)(2)(D)(iii), as in effect before

the enactment of the Comprehensive Retirement Security and Pension Reform Act of 2000)’’.

(B) Section 404(a)(10)(B) is amended by striking ‘‘, the exclusion allowance under section 403(b)(2),’’.

(C) Section 415(a)(2) is amended by striking ‘‘, and the amount of the contribution for such portion shall reduce the exclusion allowance as provided

in section 403(b)(2)’’.

(D) Section 415(c)(3) is amended by adding at the end the following new

subparagraph:

‘‘(E) ANNUITY CONTRACTS.—In the case of an annuity contract described

in section 403(b), the term ‘participant’s compensation’ means the participant’s includible compensation determined under section 403(b)(3).’’.

(E) Section 415(c) is amended by striking paragraph (4).

(F) Section 415(c)(7) is amended to read as follows:

‘‘(7) CERTAIN CONTRIBUTIONS BY CHURCH PLANS NOT TREATED AS EXCEEDING

LIMIT.—

‘‘(A) IN GENERAL.—Notwithstanding any other provision of this subsection, at the election of a participant who is an employee of a church or

a convention or association of churches, including an organization described

in section 414(e)(3)(B)(ii), contributions and other additions for an annuity

contract or retirement income account described in section 403(b) with respect to such participant, when expressed as an annual addition to such

participant’s account, shall be treated as not exceeding the limitation of

paragraph (1) if such annual addition is not in excess of $10,000.

‘‘(B) $40,000 AGGREGATE LIMITATION.—The total amount of additions with

respect to any participant which may be taken into account for purposes of

this subparagraph for all years may not exceed $40,000.

‘‘(C) ANNUAL ADDITION.—For purposes of this paragraph, the term ‘annual addition’ has the meaning given such term by paragraph (2).’’.

(G) Subparagraph (B) of section 402(g)(7) (as redesignated by section 211)

is amended by inserting before the period at the end the following: ‘‘(as in

effect before the enactment of the Comprehensive Retirement Security and

Pension Reform Act of 2000)’’.

(3) EFFECTIVE DATE.—The amendments made by this subsection shall apply

to years beginning after December 31, 2000.

(b) SPECIAL RULES FOR SECTIONS 403(b) AND 408.—

(1) IN GENERAL.—Subsection (k) of section 415 is amended by adding at the

end the following new paragraph:

‘‘(4) SPECIAL RULES FOR SECTIONS 403(b) AND 408.—For purposes of this section, any annuity contract described in section 403(b) for the benefit of a participant shall be treated as a defined contribution plan maintained by each employer with respect to which the participant has the control required under subsection (b) or (c) of section 414 (as modified by subsection (h)). For purposes of

this section, any contribution by an employer to a simplified employee pension

plan for an individual for a taxable year shall be treated as an employer contribution to a defined contribution plan for such individual for such year.’’.

(2) EFFECTIVE DATE.—

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

limitation years beginning after December 31, 1999.

(B) EXCLUSION ALLOWANCE.—Effective for limitation years beginning in

2000, in the case of any annuity contract described in section 403(b) of the

Internal Revenue Code of 1986, the amount of the contribution disqualified

by reason of section 415(g) of such Code shall reduce the exclusion allowance as provided in section 403(b)(2) of such Code.

(3) MODIFICATION OF 403(b) EXCLUSION ALLOWANCE TO CONFORM TO 415 MODIFICATION.—The Secretary of the Treasury shall modify the regulations regarding the exclusion allowance under section 403(b)(2) of the Internal Revenue

Code of 1986 to render void the requirement that contributions to a defined benefit pension plan be treated as previously excluded amounts for purposes of the

13

exclusion allowance. For taxable years beginning after December 31, 1999, such

regulations shall be applied as if such requirement were void.

(c) DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND

TAX-EXEMPT ORGANIZATIONS.—

(1) IN GENERAL.—Subparagraph (B) of section 457(b)(2) (relating to salary

limitation on eligible deferred compensation plans) is amended by striking ‘‘331⁄3

percent’’ and inserting ‘‘100 percent’’.

(2) EFFECTIVE DATE.—The amendment made by this subsection shall apply to

years beginning after December 31, 2000.

SEC. 303. FASTER VESTING OF CERTAIN EMPLOYER MATCHING CONTRIBUTIONS.

(a) IN GENERAL.—Section 411(a) (relating to minimum vesting standards) is

amended—

(1) in paragraph (2), by striking ‘‘A plan’’ and inserting ‘‘Except as provided

in paragraph (12), a plan’’; and

(2) by adding at the end the following:

‘‘(12) FASTER VESTING FOR MATCHING CONTRIBUTIONS.—In the case of matching contributions (as defined in section 401(m)(4)(A)), paragraph (2) shall be

applied—

‘‘(A) by substituting ‘3 years’ for ‘5 years’ in subparagraph (A), and

‘‘(B) by substituting the following table for the table contained in subparagraph (B):

The nonforfeitable

‘‘Years of service: percentage is: 2 ...................................................................................................................................................... 20 3 ...................................................................................................................................................... 40 4 ...................................................................................................................................................... 60 5 ...................................................................................................................................................... 80 6 ...................................................................................................................................................... 100.’’.

(b) EFFECTIVE DATES.—

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

by this section shall apply to contributions for plan years beginning after December 31, 2000.

(2) COLLECTIVE BARGAINING AGREEMENTS.—In the case of a plan maintained

pursuant to one or more collective bargaining agreements between employee

representatives and one or more employers ratified by the date of the enactment

of this Act, the amendments made by this section shall not apply to contributions on behalf of employees covered by any such agreement for plan years beginning before the earlier of—

(A) the later of—

(i) the date on which the last of such collective bargaining agreements terminates (determined without regard to any extension thereof

on or after such date of the enactment); or

(ii) January 1, 2001; or

(B) January 1, 2005.

(3) SERVICE REQUIRED.—With respect to any plan, the amendments made by

this section shall not apply to any employee before the date that such employee

has 1 hour of service under such plan in any plan year to which the amendments made by this section apply.

SEC. 304. SIMPLIFY AND UPDATE THE MINIMUM DISTRIBUTION RULES.

(a) SIMPLIFICATION AND FINALIZATION OF MINIMUM DISTRIBUTION REQUIREMENTS.—

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

(A) simplify and finalize the regulations relating to minimum distribution

requirements under sections 401(a)(9), 408(a)(6) and (b)(3), 403(b)(10), and

457(d)(2) of the Internal Revenue Code of 1986; and

(B) modify such regulations to—

(i) reflect current life expectancy; and

(ii) revise the required distribution methods so that, under reasonable assumptions, the amount of the required minimum distribution

does not decrease over a participant’s life expectancy.

(2) FRESH START.—Notwithstanding subparagraph (D) of section 401(a)(9) of

such Code, during the first year that regulations are in effect under this subsection, required distributions for future years may be redetermined to reflect

changes under such regulations. Such redetermination shall include the opportunity to choose a new designated beneficiary and to elect a new method of calculating life expectancy.

(3) EFFECTIVE DATE FOR REGULATIONS.—Regulations referred to in paragraph

(1) shall be effective for years beginning after December 31, 2000, and shall

14

apply in such years without regard to whether an individual had previously

begun receiving minimum distributions.

(b) REPEAL OF RULE WHERE DISTRIBUTIONS HAD BEGUN BEFORE DEATH OCCURS.—

(1) IN GENERAL.—Subparagraph (B) of section 401(a)(9) is amended by striking clause (i) and redesignating clauses (ii), (iii), and (iv) as clauses (i), (ii), and

(iii), respectively.

(2) CONFORMING CHANGES.—

(A) Clause (i) of section 401(a)(9)(B) (as so redesignated) is amended—

(i) by striking ‘‘FOR OTHER CASES’’ in the heading; and

(ii) by striking ‘‘the distribution of the employee’s interest has begun

in accordance with subparagraph (A)(ii)’’ and inserting ‘‘his entire interest has been distributed to him’’.

(B) Clause (ii) of section 401(a)(9)(B) (as so redesignated) is amended by

striking ‘‘clause (ii)’’ and inserting ‘‘clause (i)’’.

(C) Clause (iii) of section 401(a)(9)(B) (as so redesignated) is amended—

(i) by striking ‘‘clause (iii)(I)’’ and inserting ‘‘clause (ii)(I)’’;

(ii) by striking ‘‘clause (iii)(III)’’ in subclause (I) and inserting ‘‘clause

(ii)(III)’’;

(iii) by striking ‘‘the date on which the employee would have attained

age 701⁄2,’’ in subclause (I) and inserting ‘‘April 1 of the calendar year

following the calendar year in which the spouse attains 701⁄2,’’; and

(iv) by striking ‘‘the distributions to such spouse begin,’’ in subclause

(II) and inserting ‘‘his entire interest has been distributed to him,’’.

(3) EFFECTIVE DATE.—The amendments made by this subsection shall apply

to years beginning after December 31, 2000.

(c) REDUCTION IN EXCISE TAX.—

(1) IN GENERAL.—Subsection (a) of section 4974 is amended by striking ‘‘50

percent’’ and inserting ‘‘10 percent’’.

(2) EFFECTIVE DATE.—The amendment made by this subsection shall apply to

years beginning after December 31, 2000.

SEC. 305. CLARIFICATION OF TAX TREATMENT OF DIVISION OF SECTION 457 PLAN BENEFITS

UPON DIVORCE.

(a) IN GENERAL.—Section 414(p)(11) (relating to application of rules to governmental and church plans) is amended—

(1) by inserting ‘‘or an eligible deferred compensation plan (within the meaning of section 457(b))’’ after ‘‘subsection (e))’’; and

(2) in the heading, by striking ‘‘GOVERNMENTAL AND CHURCH PLANS’’ and inserting ‘‘CERTAIN OTHER PLANS’’.

(b) WAIVER OF CERTAIN DISTRIBUTION REQUIREMENTS.—Paragraph (10) of section

414(p) is amended by striking ‘‘and section 409(d)’’ and inserting ‘‘section 409(d),

and section 457(d)’’.

(c) TAX TREATMENT OF PAYMENTS FROM A SECTION 457 PLAN.—Subsection (p) of

section 414 is amended by redesignating paragraph (12) as paragraph (13) and inserting after paragraph (11) the following new paragraph:

‘‘(12) TAX TREATMENT OF PAYMENTS FROM A SECTION 457 PLAN.—If a distribution or payment from an eligible deferred compensation plan described in section 457(b) is made pursuant to a qualified domestic relations order, rules similar to the rules of section 402(e)(1)(A) shall apply to such distribution or payment.’’.

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to transfers, distributions, and payments made after December 31, 2000.

SEC. 306. MODIFICATION OF SAFE HARBOR RELIEF FOR HARDSHIP WITHDRAWALS FROM

CASH OR DEFERRED ARRANGEMENTS.

(a) IN GENERAL.—The Secretary of the Treasury shall revise the regulations relating to hardship distributions under section 401(k)(2)(B)(i)(IV) of the Internal Revenue Code of 1986 to provide that the period an employee is prohibited from making

elective and employee contributions in order for a distribution to be deemed necessary to satisfy financial need shall be equal to 6 months.

(b) EFFECTIVE DATE.—The revised regulations under subsection (a) shall apply to

years beginning after December 31, 2000.

15

TITLE IV—INCREASING PORTABILITY FOR

PARTICIPANTS

SEC. 401. ROLLOVERS ALLOWED AMONG VARIOUS TYPES OF PLANS.

(a) ROLLOVERS FROM AND TO SECTION 457 PLANS.—

(1) ROLLOVERS FROM SECTION 457 PLANS.—

(A) IN GENERAL.—Section 457(e) (relating to other definitions and special

rules) is amended by adding at the end the following:

‘‘(16) ROLLOVER AMOUNTS.—

‘‘(A) GENERAL RULE.—In the case of an eligible deferred compensation

plan established and maintained by an employer described in subsection

(e)(1)(A), if—

‘‘(i) any portion of the balance to the credit of an employee in such

plan is paid to such employee in an eligible rollover distribution (within

the meaning of section 402(c)(4) without regard to subparagraph (C)

thereof),

‘‘(ii) the employee transfers any portion of the property such employee receives in such distribution to an eligible retirement plan described in section 402(c)(8)(B), and

‘‘(iii) in the case of a distribution of property other than money, the

amount so transferred consists of the property distributed,

then such distribution (to the extent so transferred) shall not be includible

in gross income for the taxable year in which paid.

‘‘(B) CERTAIN RULES MADE APPLICABLE.—The rules of paragraphs (2)

through (7) (other than paragraph (4)(C)) and (9) of section 402(c) and section 402(f) shall apply for purposes of subparagraph (A).

‘‘(C) REPORTING.—Rollovers under this paragraph shall be reported to the

Secretary in the same manner as rollovers from qualified retirement plans

(as defined in section 4974(c)).’’.

(B) DEFERRAL LIMIT DETERMINED WITHOUT REGARD TO ROLLOVER

AMOUNTS.—Section 457(b)(2) (defining eligible deferred compensation plan)

is amended by inserting ‘‘(other than rollover amounts)’’ after ‘‘taxable

year’’.

(C) DIRECT ROLLOVER.—Paragraph (1) of section 457(d) is amended by

striking ‘‘and’’ at the end of subparagraph (A), by striking the period at the

end of subparagraph (B) and inserting ‘‘, and’’, and by inserting after subparagraph (B) the following:

‘‘(C) in the case of a plan maintained by an employer described in subsection (e)(1)(A), the plan meets requirements similar to the requirements

of section 401(a)(31).

Any amount transferred in a direct trustee-to-trustee transfer in accordance

with section 401(a)(31) shall not be includible in gross income for the taxable

year of transfer.’’.

(D) WITHHOLDING.—

(i) Paragraph (12) of section 3401(a) is amended by adding at the end

the following:

‘‘(E) under or to an eligible deferred compensation plan which, at the time

of such payment, is a plan described in section 457(b) maintained by an employer described in section 457(e)(1)(A); or’’.

(ii) Paragraph (3) of section 3405(c) is amended to read as follows:

‘‘(3) ELIGIBLE ROLLOVER DISTRIBUTION.—For purposes of this subsection, the

term ‘eligible rollover distribution’ has the meaning given such term by section

402(f)(2)(A).’’.

(iii) LIABILITY FOR WITHHOLDING.—Subparagraph (B) of section

3405(d)(2) is amended by striking ‘‘or’’ at the end of clause (ii), by striking the period at the end of clause (iii) and inserting ‘‘, or’’, and by adding at the end the following:

‘‘(iv) section 457(b).’’.

(2) ROLLOVERS TO SECTION 457 PLANS.—

(A) IN GENERAL.—Section 402(c)(8)(B) (defining eligible retirement plan)

is amended by striking ‘‘and’’ at the end of clause (iii), by striking the period at the end of clause (iv) and inserting ‘‘, and’’, and by inserting after

clause (iv) the following new clause:

‘‘(v) an eligible deferred compensation plan described in section

457(b) of an employer described in section 457(e)(1)(A).’’.

(B) SEPARATE ACCOUNTING.—Section 402(c) is amended by adding at the

end the following new paragraph:

16

‘‘(11) SEPARATE ACCOUNTING.—Unless a plan described in clause (v) of paragraph (8)(B) agrees to separately account for amounts rolled into such plan from

eligible retirement plans not described in such clause, the plan described in

such clause may not accept transfers or rollovers from such retirement plans.’’.

(C) 10 PERCENT ADDITIONAL TAX.—Subsection (t) of section 72 (relating to

10-percent additional tax on early distributions from qualified retirement

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

‘‘(9) SPECIAL RULE FOR ROLLOVERS TO SECTION 457 PLANS.—For purposes of

this subsection, a distribution from an eligible deferred compensation plan (as

defined in section 457(b)) of an employer described in section 457(e)(1)(A) shall

be treated as a distribution from a qualified retirement plan described in

4974(c)(1) to the extent that such distribution is attributable to an amount

transferred to an eligible deferred compensation plan from a qualified retirement plan (as defined in section 4974(c)).’’.

(b) ALLOWANCE OF ROLLOVERS FROM AND TO 403(b) PLANS.— (1) ROLLOVERS FROM SECTION 403(b) PLANS.—Section 403(b)(8)(A)(ii) (relating

to rollover amounts) is amended by striking ‘‘such distribution’’ and all that follows and inserting ‘‘such distribution to an eligible retirement plan described

in section 402(c)(8)(B), and’’.

(2) ROLLOVERS TO SECTION 403(b) PLANS.—Section 402(c)(8)(B) (defining eligible retirement plan), as amended by subsection (a), is amended by striking

‘‘and’’ at the end of clause (iv), by striking the period at the end of clause (v)

and inserting ‘‘, and’’, and by inserting after clause (v) the following new clause:

‘‘(vi) an annuity contract described in section 403(b).’’.

(c) EXPANDED EXPLANATION TO RECIPIENTS OF ROLLOVER DISTRIBUTIONS.—Paragraph (1) of section 402(f) (relating to written explanation to recipients of distributions eligible for rollover treatment) is amended by striking ‘‘and’’ at the end of subparagraph (C), by striking the period at the end of subparagraph (D) and inserting

‘‘, and’’, and by adding at the end the following new subparagraph:

‘‘(E) of the provisions under which distributions from the eligible retirement plan receiving the distribution may be subject to restrictions and tax

consequences which are different from those applicable to distributions

from the plan making such distribution.’’.

(d) SPOUSAL ROLLOVERS.—Section 402(c)(9) (relating to rollover where spouse receives distribution after death of employee) is amended by striking ‘‘; except that’’

and all that follows up to the end period.

(e) CONFORMING AMENDMENTS.—

(1) Section 72(o)(4) is amended by striking ‘‘and 408(d)(3)’’ and inserting

‘‘403(b)(8), 408(d)(3), and 457(e)(16)’’.

(2) Section 219(d)(2) is amended by striking ‘‘or 408(d)(3)’’ and inserting

‘‘408(d)(3), or 457(e)(16)’’.

(3) Section 401(a)(31)(B) is amended by striking ‘‘and 403(a)(4)’’ and inserting

‘‘, 403(a)(4), 403(b)(8), and 457(e)(16)’’.

(4) Subparagraph (A) of section 402(f)(2) is amended by striking ‘‘or paragraph (4) of section 403(a)’’ and inserting ‘‘, paragraph (4) of section 403(a), subparagraph (A) of section 403(b)(8), or subparagraph (A) of section 457(e)(16)’’.

(5) Paragraph (1) of section 402(f) is amended by striking ‘‘from an eligible

retirement plan’’.

(6) Subparagraphs (A) and (B) of section 402(f)(1) are amended by striking

‘‘another eligible retirement plan’’ and inserting ‘‘an eligible retirement plan’’.

(7) Subparagraph (B) of section 403(b)(8) is amended to read as follows:

‘‘(B) CERTAIN RULES MADE APPLICABLE.—The rules of paragraphs (2)

through (7) and (9) of section 402(c) and section 402(f) shall apply for purposes of subparagraph (A), except that section 402(f) shall be applied to the

payor in lieu of the plan administrator.’’.

(8) Section 408(a)(1) is amended by striking ‘‘or 403(b)(8),’’ and inserting

‘‘403(b)(8), or 457(e)(16)’’.

(9) Subparagraphs (A) and (B) of section 415(b)(2) are each amended by striking ‘‘and 408(d)(3)’’ and inserting ‘‘403(b)(8), 408(d)(3), and 457(e)(16)’’.

(10) Section 415(c)(2) is amended by striking ‘‘and 408(d)(3)’’ and inserting

‘‘408(d)(3), and 457(e)(16)’’.

(11) Section 4973(b)(1)(A) is amended by striking ‘‘or 408(d)(3)’’ and inserting

‘‘408(d)(3), or 457(e)(16)’’.

(f) EFFECTIVE DATE; SPECIAL RULE.—

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

distributions after December 31, 2000.

(2) SPECIAL RULE.—Notwithstanding any other provision of law, subsections

(h)(3) and (h)(5) of section 1122 of the Tax Reform Act of 1986 shall not apply

to any distribution from an eligible retirement plan (as defined in clause (iii)

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or (iv) of section 402(c)(8)(B) of the Internal Revenue Code of 1986) on behalf

of an individual if there was a rollover to such plan on behalf of such individual

which is permitted solely by reason of any amendment made by this section.

SEC. 402. ROLLOVERS OF IRAS INTO WORKPLACE RETIREMENT PLANS.

(a) IN GENERAL.—Subparagraph (A) of section 408(d)(3) (relating to rollover

amounts) is amended by adding ‘‘or’’ at the end of clause (i), by striking clauses (ii)

and (iii), and by adding at the end the following:

‘‘(ii) the entire amount received (including money and any other property) is paid into an eligible retirement plan for the benefit of such individual not later than the 60th day after the date on which the payment

or distribution is received, except that the maximum amount which

may be paid into such plan may not exceed the portion of the amount

received which is includible in gross income (determined without regard

to this paragraph).

For purposes of clause (ii), the term ‘eligible retirement plan’ means an eligible retirement plan described in clause (iii), (iv), (v), or (vi) of section

402(c)(8)(B).’’.

(b) CONFORMING AMENDMENTS.—

(1) Paragraph (1) of section 403(b) is amended by striking ‘‘section

408(d)(3)(A)(iii)’’ and inserting ‘‘section 408(d)(3)(A)(ii)’’.

(2) Clause (i) of section 408(d)(3)(D) is amended by striking ‘‘(i), (ii), or (iii)’’

and inserting ‘‘(i) or (ii)’’.

(3) Subparagraph (G) of section 408(d)(3) is amended to read as follows:

‘‘(G) SIMPLE RETIREMENT ACCOUNTS.—In the case of any payment or distribution out of a simple retirement account (as defined in subsection (p))

to which section 72(t)(6) applies, this paragraph shall not apply unless such

payment or distribution is paid into another simple retirement account.’’.

(c) EFFECTIVE DATE; SPECIAL RULE.—

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

distributions after December 31, 2000.

(2) SPECIAL RULE.—Notwithstanding any other provision of law, subsections

(h)(3) and (h)(5) of section 1122 of the Tax Reform Act of 1986 shall not apply

to any distribution from an eligible retirement plan (as defined in clause (iii)

or (iv) of section 402(c)(8)(B) of the Internal Revenue Code of 1986) on behalf

of an individual if there was a rollover to such plan on behalf of such individual

which is permitted solely by reason of the amendments made by this section.

SEC. 403. ROLLOVERS OF AFTER-TAX CONTRIBUTIONS.

(a) ROLLOVERS FROM EXEMPT TRUSTS.—Paragraph (2) of section 402(c) (relating

to maximum amount which may be rolled over) is amended by adding at the end

the following: ‘‘The preceding sentence shall not apply to such distribution to the

extent—

‘‘(A) such portion is transferred in a direct trustee-to-trustee transfer to

a qualified trust which is part of a plan which is a defined contribution plan

and which agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not

so includible, or

‘‘(B) such portion is transferred to an eligible retirement plan described

in clause (i) or (ii) of paragraph (8)(B).’’.

(b) OPTIONAL DIRECT TRANSFER OF ELIGIBLE ROLLOVER DISTRIBUTIONS.—Subparagraph (B) of section 401(a)(31) (relating to limitation) is amended by adding at the

end the following: ‘‘The preceding sentence shall not apply to such distribution if

the plan to which such distribution is transferred—

‘‘(i) agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is

includible in gross income and the portion of such distribution which

is not so includible, or

‘‘(ii) is an eligible retirement plan described in clause (i) or (ii) of section 402(c)(8)(B).’’.

(c) RULES FOR APPLYING SECTION 72 TO IRAS.—Paragraph (3) of section 408(d)

(relating to special rules for applying section 72) is amended by inserting at the end

the following:

‘‘(H) APPLICATION OF SECTION 72.—

‘‘(i) IN GENERAL.—If—

‘‘(I) a distribution is made from an individual retirement plan,

and

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‘‘(II) a rollover contribution is made to an eligible retirement plan

described in section 402(c)(8)(B)(iii), (iv), (v), or (vi) with respect to

all or part of such distribution,

then, notwithstanding paragraph (2), the rules of clause (ii) shall apply

for purposes of applying section 72.

‘‘(ii) APPLICABLE RULES.—In the case of a distribution described in

clause (i)—

‘‘(I) section 72 shall be applied separately to such distribution,

‘‘(II) notwithstanding the pro rata allocation of income on, and

investment in, the contract to distributions under section 72, the

portion of such distribution rolled over to an eligible retirement

plan described in clause (i) shall be treated as from income on the

contract (to the extent of the aggregate income on the contract from

all individual retirement plans of the distributee), and

‘‘(III) appropriate adjustments shall be made in applying section

72 to other distributions in such taxable year and subsequent taxable years.’’.

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions made after December 31, 2000.

SEC. 404. HARDSHIP EXCEPTION TO 60-DAY RULE.

(a) EXEMPT TRUSTS.—Paragraph (3) of section 402(c) (relating to transfer must be

made within 60 days of receipt) is amended to read as follows:

‘‘(3) TRANSFER MUST BE MADE WITHIN 60 DAYS OF RECEIPT.—

‘‘(A) IN GENERAL.—Except as provided in subparagraph (B), paragraph (1)

shall not apply to any transfer of a distribution made after the 60th day

following the day on which the distributee received the property distributed.

‘‘(B) HARDSHIP EXCEPTION.—The Secretary may waive the 60-day requirement under subparagraph (A) where the failure to waive such requirement

would be against equity or good conscience, including casualty, disaster, or

other events beyond the reasonable control of the individual subject to such

requirement.’’.

(b) IRAS.—Paragraph (3) of section 408(d) (relating to rollover contributions), as

amended by section 403, is amended by adding after subparagraph (H) the following

new subparagraph:

‘‘(I) WAIVER OF 60-DAY REQUIREMENT.—The Secretary may waive the 60-

day requirement under subparagraphs (A) and (D) where the failure to

waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the

individual subject to such requirement.’’.

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions after December 31, 2000.

SEC. 405. TREATMENT OF FORMS OF DISTRIBUTION.

(a) PLAN TRANSFERS.—

(1) IN GENERAL.—Paragraph (6) of section 411(d) (relating to accrued benefit

not to be decreased by amendment) is amended by adding at the end the following:

‘‘(D) PLAN TRANSFERS.—

‘‘(i) IN GENERAL.—A defined contribution plan (in this subparagraph

referred to as the ‘transferee plan’) shall not be treated as failing to

meet the requirements of this subsection merely because the transferee

plan does not provide some or all of the forms of distribution previously

available under another defined contribution plan (in this subparagraph referred to as the ‘transferor plan’) to the extent that—

‘‘(I) the forms of distribution previously available under the

transferor plan applied to the account of a participant or beneficiary under the transferor plan that was transferred from the

transferor plan to the transferee plan pursuant to a direct transfer

rather than pursuant to a distribution from the transferor plan,

‘‘(II) the terms of both the transferor plan and the transferee

plan authorize the transfer described in subclause (I),

‘‘(III) the transfer described in subclause (I) was made pursuant

to a voluntary election by the participant or beneficiary whose account was transferred to the transferee plan,

‘‘(IV) the election described in subclause (III) was made after the

participant or beneficiary received a notice describing the consequences of making the election,

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‘‘(V) if the transferor plan provides for an annuity as the normal

form of distribution under the plan in accordance with section 417,

the transfer is made with the consent of the participant’s spouse

(if any), and such consent meets requirements similar to the requirements imposed by section 417(a)(2), and

‘‘(VI) the transferee plan allows the participant or beneficiary described in subclause (III) to receive any distribution to which the

participant or beneficiary is entitled under the transferee plan in

the form of a single sum distribution.

‘‘(ii) EXCEPTION.—Clause (i) shall apply to plan mergers and other

transactions having the effect of a direct transfer, including consolidations of benefits attributable to different employers within a multiple

employer plan.

‘‘(E) ELIMINATION OF FORM OF DISTRIBUTION.—Except to the extent provided in regulations, a defined contribution plan shall not be treated as failing to meet the requirements of this section merely because of the elimination of a form of distribution previously available thereunder. This subparagraph shall not apply to the elimination of a form of distribution with

respect to any participant unless—

‘‘(i) a single sum payment is available to such participant at the same

time or times as the form of distribution being eliminated, and

‘‘(ii) such single sum payment is based on the same or greater portion

of the participant’s account as the form of distribution being eliminated.’’.

(2) EFFECTIVE DATE.—The amendment made by this subsection shall apply to

years beginning after December 31, 2000.

(b) REGULATIONS.—

(1) IN GENERAL.—The last sentence of paragraph (6)(B) of section 411(d) (relating to accrued benefit not to be decreased by amendment) is amended to read

as follows: ‘‘The Secretary shall by regulations provide that this subparagraph

shall not apply to any plan amendment that does not adversely affect the rights

of participants in a material manner.’’.

(2) SECRETARY DIRECTED.—Not later than December 31, 2001, the Secretary

of the Treasury is directed to issue final regulations under section 411(d)(6) of

the Internal Revenue Code of 1986, including the regulations required by the

amendments made by this subsection. Such regulations shall apply to plan

years beginning after December 31, 2001, or such earlier date as is specified by

the Secretary of the Treasury.

SEC. 406. RATIONALIZATION OF RESTRICTIONS ON DISTRIBUTIONS.

(a) MODIFICATION OF SAME DESK EXCEPTION.—

(1) SECTION 401(k).—

(A) Section 401(k)(2)(B)(i)(I) (relating to qualified cash or deferred arrangements) is amended by striking ‘‘separation from service’’ and inserting

‘‘severance from employment’’.

(B) Subparagraph (A) of section 401(k)(10) (relating to distributions upon

termination of plan or disposition of assets or subsidiary) is amended to

read as follows:

‘‘(A) IN GENERAL.—An event described in this subparagraph is the termination of the plan without establishment or maintenance of another defined

contribution plan (other than an employee stock ownership plan as defined

in section 4975(e)(7)).’’.

(C) Section 401(k)(10) is amended—

(i) in subparagraph (B)—

(I) by striking ‘‘An event’’ in clause (i) and inserting ‘‘A termination’’; and

(II) by striking ‘‘the event’’ in clause (i) and inserting ‘‘the termination’’;

(ii) by striking subparagraph (C); and

(iii) by striking ‘‘OR DISPOSITION OF ASSETS OR SUBSIDIARY’’ in the

heading.

(2) SECTION 403(b).—

(A) Paragraphs (7)(A)(ii) and (11)(A) of section 403(b) are each amended

by striking ‘‘separates from service’’ and inserting ‘‘has a severance from

employment’’.

(B) The heading for paragraph (11) of section 403(b) is amended by striking ‘‘SEPARATION FROM SERVICE’’ and inserting ‘‘SEVERANCE FROM EMPLOYMENT’’.

20

(3) SECTION 457.—Clause (ii) of section 457(d)(1)(A) is amended by striking ‘‘is

separated from service’’ and inserting ‘‘has a severance from employment’’.

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions after December 31, 2000.

SEC. 407. PURCHASE OF SERVICE CREDIT IN GOVERNMENTAL DEFINED BENEFIT PLANS.

(a) 403(b) PLANS.—Subsection (b) of section 403 is amended by adding at the end

the following new paragraph:

‘‘(13) TRUSTEE-TO-TRUSTEE TRANSFERS TO PURCHASE PERMISSIVE SERVICE

CREDIT.—No amount shall be includible in gross income by reason of a direct

trustee-to-trustee transfer to a defined benefit governmental plan (as defined in

section 414(d)) if such transfer is—

‘‘(A) for the purchase of permissive service credit (as defined in section

415(n)(3)(A)) under such plan, or

‘‘(B) a repayment to which section 415 does not apply by reason of subsection (k)(3) thereof.’’.

(b) 457 PLANS.—Subsection (e) of section 457 is amended by adding after paragraph (16) the following new paragraph:

‘‘(17) TRUSTEE-TO-TRUSTEE TRANSFERS TO PURCHASE PERMISSIVE SERVICE

CREDIT.—No amount shall be includible in gross income by reason of a direct

trustee-to-trustee transfer to a defined benefit governmental plan (as defined in

section 414(d)) if such transfer is—

‘‘(A) for the purchase of permissive service credit (as defined in section

415(n)(3)(A)) under such plan, or

‘‘(B) a repayment to which section 415 does not apply by reason of subsection (k)(3) thereof.’’.

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to trustee-to-trustee transfers after December 31, 2000.

SEC. 408. EMPLOYERS MAY DISREGARD ROLLOVERS FOR PURPOSES OF CASH-OUT AMOUNTS.

(a) QUALIFIED PLANS.—Section 411(a)(11) (relating to restrictions on certain mandatory distributions) is amended by adding at the end the following:

‘‘(D) SPECIAL RULE FOR ROLLOVER CONTRIBUTIONS.—A plan shall not fail

to meet the requirements of this paragraph if, under the terms of the plan,

the present value of the nonforfeitable accrued benefit is determined without regard to that portion of such benefit which is attributable to rollover

contributions (and earnings allocable thereto). For purposes of this subparagraph, the term ‘rollover contributions’ means any rollover contribution

under sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16).’’.

(b) ELIGIBLE DEFERRED COMPENSATION PLANS.—Clause (i) of section 457(e)(9)(A)

is amended by striking ‘‘such amount’’ and inserting ‘‘the portion of such amount

which is not attributable to rollover contributions (as defined in section

411(a)(11)(D))’’.

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions after December 31, 2000.

SEC. 409. MINIMUM DISTRIBUTION AND INCLUSION REQUIREMENTS FOR SECTION 457 PLANS.

(a) MINIMUM DISTRIBUTION REQUIREMENTS.—Paragraph (2) of section 457(d) (relating to distribution requirements) is amended to read as follows:

‘‘(2) MINIMUM DISTRIBUTION REQUIREMENTS.—A plan meets the minimum distribution requirements of this paragraph if such plan meets the requirements

of section 401(a)(9).’’.

(b) INCLUSION IN GROSS INCOME.—

(1) YEAR OF INCLUSION.—Subsection (a) of section 457 (relating to year of inclusion in gross income) is amended to read as follows:

‘‘(a) YEAR OF INCLUSION IN GROSS INCOME.—

‘‘(1) IN GENERAL.—Any amount of compensation deferred under an eligible deferred compensation plan, and any income attributable to the amounts so deferred, shall be includible in gross income only for the taxable year in which

such compensation or other income—

‘‘(A) is paid to the participant or other beneficiary, in the case of a plan

of an eligible employer described in subsection (e)(1)(A), and

‘‘(B) is paid or otherwise made available to the participant or other beneficiary, in the case of a plan of an eligible employer described in subsection

(e)(1)(B).

‘‘(2) SPECIAL RULE FOR ROLLOVER AMOUNTS.—To the extent provided in section

72(t)(9), section 72(t) shall apply to any amount includible in gross income

under this subsection.’’.

(2) CONFORMING AMENDMENTS.—

21

(A) So much of paragraph (9) of section 457(e) as precedes subparagraph

(A) is amended to read as follows:

‘‘(9) BENEFITS OF TAX EXEMPT ORGANIZATION PLANS NOT TREATED AS MADE

AVAILABLE BY REASON OF CERTAIN ELECTIONS, ETC.—In the case of an eligible

deferred compensation plan of an employer described in subsection (e)(1)(B)’’.

(B) Section 457(d) is amended by adding at the end the following new

paragraph:

‘‘(3) SPECIAL RULE FOR GOVERNMENT PLAN.—An eligible deferred compensation

plan of an employer described in subsection (e)(1)(A) shall not be treated as failing to meet the requirements of this subsection solely by reason of making a

distribution described in subsection (e)(9)(A).’’.

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions after December 31, 2000.

TITLE V—STRENGTHENING PENSION

SECURITY AND ENFORCEMENT

SEC. 501. REPEAL OF 150 PERCENT OF CURRENT LIABILITY FUNDING LIMIT.

(a) IN GENERAL.—Section 412(c)(7) (relating to full-funding limitation) is

amended—

(1) by striking ‘‘the applicable percentage’’ in subparagraph (A)(i)(I) and inserting ‘‘in the case of plan years beginning before January 1, 2004, the applicable percentage’’; and

(2) by amending subparagraph (F) to read as follows:

‘‘(F) APPLICABLE PERCENTAGE.—For purposes of subparagraph (A)(i)(I),

the applicable percentage shall be determined in accordance with the following table:

‘‘In the case of any plan year The applicable

beginning in— percentage is—

2001 ................................................................................................................................................ 160

2002 ................................................................................................................................................ 165

2003 ................................................................................................................................................ 170.’’.

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

years beginning after December 31, 2000.

SEC. 502. MAXIMUM CONTRIBUTION DEDUCTION RULES MODIFIED AND APPLIED TO ALL DEFINED BENEFIT PLANS.

(a) IN GENERAL.—Subparagraph (D) of section 404(a)(1) (relating to special rule

in case of certain plans) is amended to read as follows:

‘‘(D) SPECIAL RULE IN CASE OF CERTAIN PLANS.—

‘‘(i) IN GENERAL.—In the case of any defined benefit plan, except as

provided in regulations, the maximum amount deductible under the

limitations of this paragraph shall not be less than the unfunded termination liability (determined as if the proposed termination date referred to in section 4041(b)(2)(A)(i)(II) of the Employee Retirement Income Security Act of 1974 were the last day of the plan year).

‘‘(ii) PLANS WITH LESS THAN 100 PARTICIPANTS.—For purposes of this

subparagraph, in the case of a plan which has less than 100 participants for the plan year, termination liability shall not include the liability attributable to benefit increases for highly compensated employees (as defined in section 414(q)) resulting from a plan amendment

which is made or becomes effective, whichever is later, within the last

2 years before the termination date.

‘‘(iii) RULE FOR DETERMINING NUMBER OF PARTICIPANTS.—For purposes of determining whether a plan has more than 100 participants,

all defined benefit plans maintained by the same employer (or any

member of such employer’s controlled group (within the meaning of section 412(l)(8)(C))) shall be treated as one plan, but only employees of

such member or employer shall be taken into account.

‘‘(iv) PLANS ESTABLISHED AND MAINTAINED BY PROFESSIONAL SERVICE

EMPLOYERS.—Clause (i) shall not apply to a plan described in section

4021(b)(13) of the Employee Retirement Income Security Act of 1974.’’.

(b) CONFORMING AMENDMENT.—Paragraph (6) of section 4972(c) is amended to

read as follows:

‘‘(6) EXCEPTIONS.—In determining the amount of nondeductible contributions

for any taxable year, there shall not be taken into account so much of the contributions to one or more defined contribution plans which are not deductible

22

when contributed solely because of section 404(a)(7) as does not exceed the

greater of—

‘‘(A) the amount of contributions not in excess of 6 percent of compensation (within the meaning of section 404(a)) paid or accrued (during the taxable year for which the contributions were made) to beneficiaries under the

plans, or

‘‘(B) the sum of—

‘‘(i) the amount of contributions described in section 401(m)(4)(A),

plus

‘‘(ii) the amount of contributions described in section 402(g)(3)(A).

For purposes of this paragraph, the deductible limits under section 404(a)(7)

shall first be applied to amounts contributed to a defined benefit plan and then

to amounts described in subparagraph (B).’’.

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

years beginning after December 31, 2000.

SEC. 503. EXCISE TAX RELIEF FOR SOUND PENSION FUNDING.

(a) IN GENERAL.—Subsection (c) of section 4972 (relating to nondeductible contributions) is amended by adding at the end the following new paragraph:

‘‘(7) DEFINED BENEFIT PLAN EXCEPTION.—In determining the amount of nondeductible contributions for any taxable year, an employer may elect for such

year not to take into account any contributions to a defined benefit plan except

to the extent that such contributions exceed the full-funding limitation (as defined in section 412(c)(7), determined without regard to subparagraph (A)(i)(I)

thereof). For purposes of this paragraph, the deductible limits under section

404(a)(7) shall first be applied to amounts contributed to defined contribution

plans and then to amounts described in this paragraph. If an employer makes

an election under this paragraph for a taxable year, paragraph (6) shall not

apply to such employer for such taxable year.’’.

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to years

beginning after December 31, 2000.

SEC. 504. EXCISE TAX ON FAILURE TO PROVIDE NOTICE BY DEFINED BENEFIT PLANS SIGNIFICANTLY REDUCING FUTURE BENEFIT ACCRUALS.

(a) IN GENERAL.—Chapter 43 (relating to qualified pension, etc., plans) is amended by adding at the end the following new section:

‘‘SEC. 4980F. FAILURE OF APPLICABLE PLANS REDUCING BENEFIT ACCRUALS TO SATISFY NOTICE REQUIREMENTS.

‘‘(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.—

‘‘(1) IN GENERAL.—The amount of the tax imposed by subsection (a) on any

failure with respect to any applicable individual shall be $100 for each day in

the noncompliance period with respect to such failure.

‘‘(2) NONCOMPLIANCE PERIOD.—For purposes of this section, the term ‘noncompliance period’ means, with respect to any failure, the period beginning on

the date the failure first occurs and ending on the date the failure is corrected.

‘‘(c) LIMITATIONS ON AMOUNT OF TAX.—

‘‘(1) OVERALL LIMITATION FOR UNINTENTIONAL FAILURES.—In the case of failures that are due to reasonable cause and not to willful neglect, 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

one plan. For purposes of this paragraph, if not all persons who are treated as

a single employer for purposes of this section have the same taxable year, the

taxable years taken into account shall be determined under principles similar

to the principles of section 1561.

‘‘(2) 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 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 REQUIREMENTS FOR PLANS SIGNIFICANTLY REDUCING BENEFIT ACCRUALS.—

23

‘‘(1) IN GENERAL.—If an applicable pension plan is amended to provide for a

significant reduction in the rate of future benefit accrual, the plan administrator shall provide written notice to each applicable individual (and to each

employee organization representing applicable individuals).

‘‘(2) NOTICE.—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 regulations prescribed by the Secretary) to allow applicable individuals to understand the effect

of the plan amendment.

‘‘(3) TIMING OF NOTICE.—Except as provided in regulations, the notice required by paragraph (1) shall be provided within a reasonable time before the

effective date of the plan amendment.

‘‘(4) DESIGNEES.—Any notice under paragraph (1) may be provided to a person

designated, in writing, by the person to which it would otherwise be provided.

‘‘(5) NOTICE BEFORE ADOPTION OF AMENDMENT.—A plan shall not be treated

as failing to meet the requirements of paragraph (1) merely because notice is

provided before the adoption of the plan amendment if no material modification

of the amendment occurs before the amendment is adopted.

‘‘(f) APPLICABLE INDIVIDUAL; APPLICABLE PENSION PLAN.—For purposes of this

section—

‘‘(1) APPLICABLE INDIVIDUAL.—The term ‘applicable individual’ means, with respect to any plan amendment—

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

‘‘(B) 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)),

who may reasonably be expected to be affected by such plan amendment.

‘‘(2) APPLICABLE PENSION PLAN.—The term ‘applicable pension plan’ means—

‘‘(A) any defined benefit plan, or

‘‘(B) an individual account plan which is subject to the funding standards

of section 412,

which had 100 or more participants who had accrued a benefit, or with respect

to whom contributions were made, under the plan (whether or not vested) as

of the last day of the plan year preceding the plan year in which the plan

amendment becomes effective. Such term shall not include a governmental plan

(within the meaning of section 414(d)) or a church plan (within the meaning of

section 414(e)) with respect to which the election provided by section 410(d) has

not been made.’’.

(b) CLERICAL AMENDMENT.—The table of sections for chapter 43 is amended by

adding at the end the following new item:

‘‘Sec. 4980F. Failure of applicable plans reducing benefit accruals to satisfy notice requirements.’’.

(c) EFFECTIVE DATES.—

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

amendments taking effect on or after the date of the enactment of this Act.

(2) TRANSITION.—Until such time as the Secretary of the Treasury issues regulations under sections 4980F(e)(2) and (3) of the Internal Revenue Code of

1986 (as added by the amendments made by this section), a plan shall be treated as meeting the requirements of such sections if it makes a good faith effort

to comply with such requirements.

(3) SPECIAL RULE.—The period for providing any notice required by the

amendments made by this section shall not end before the date which is 3

months after the date of the enactment of this Act.

(d) STUDY.—The Secretary of the Treasury shall prepare a report on the effects

of conversions of traditional defined benefit plans to cash balance or hybrid formula

plans. Such study shall examine the effect of such conversions on longer service participants, including the incidence and effects of ‘‘wear away’’ provisions under which

participants earn no additional benefits for a period of time after the conversion. As

soon as practicable, but not later than 60 days after the date of the enactment of

this Act, the Secretary shall submit such report, together with recommendations

thereon, to the Committee on Ways and Means of the House of Representatives and

the Committee on Finance of the Senate.

SEC. 505. TREATMENT OF MULTIEMPLOYER PLANS UNDER SECTION 415.

(a) COMPENSATION LIMIT.—Paragraph (11) of section 415(b) (relating to limitation

for defined benefit plans) is amended to read as follows:

‘‘(11) SPECIAL LIMITATION RULE FOR GOVERNMENTAL AND MULTIEMPLOYER

PLANS.—In the case of a governmental plan (as defined in section 414(d)) or a

24

multiemployer plan (as defined in section 414(f)), subparagraph (B) of paragraph (1) shall not apply.’’.

(b) COMBINING AND AGGREGATION OF PLANS.— (1) COMBINING OF PLANS.—Subsection (f) of section 415 (relating to combining

of plans) is amended by adding at the end the following:

‘‘(3) EXCEPTION FOR MULTIEMPLOYER PLANS.—Notwithstanding paragraph (1)

and subsection (g), a multiemployer plan (as defined in section 414(f)) shall not

be combined or aggregated with any other plan maintained by an employer for

purposes of applying the limitations established in this section, except that such

plan shall be combined or aggregated with another plan which is not such a

multiemployer plan solely for purposes of determining whether such other plan

meets the requirements of subsections (b)(1)(A) and (c).’’.

(2) CONFORMING AMENDMENT FOR AGGREGATION OF PLANS.—Subsection (g) of

section 415 (relating to aggregation of plans) is amended by striking ‘‘The Secretary’’ and inserting ‘‘Except as provided in subsection (f)(3), the Secretary’’.

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

beginning after December 31, 2000.

SEC. 506. PROHIBITED ALLOCATIONS OF STOCK IN S CORPORATION ESOP.

(a) IN GENERAL.—Section 409 (relating to qualifications for tax credit employee

stock ownership plans) is amended by redesignating subsection (p) as subsection (q)

and by inserting after subsection (o) the following new subsection:

‘‘(p) PROHIBITED ALLOCATIONS OF SECURITIES IN AN S CORPORATION.— ‘‘(1) IN GENERAL.—An employee stock ownership plan holding employer securities consisting of stock in an S corporation shall provide that no portion of the

assets of the plan attributable to (or allocable in lieu of) such employer securities may, during a nonallocation year, accrue (or be allocated directly or indirectly under any plan of the employer meeting the requirements of section

401(a)) for the benefit of any disqualified person.

‘‘(2) FAILURE TO MEET REQUIREMENTS.— ‘‘(A) IN GENERAL.—If a plan fails to meet the requirements of paragraph

(1), the plan shall be treated as having distributed to any disqualified person the amount allocated to the account of such person in violation of paragraph (1) at the time of such allocation.

‘‘(B) CROSS REFERENCE.—

‘‘For excise tax relating to violations of paragraph (1) and ownership of synthetic equity,

see section 4979A.

‘‘(3) NONALLOCATION YEAR.—For purposes of this subsection—

‘‘(A) IN GENERAL.—The term ‘nonallocation year’ means any plan year of

an employee stock ownership plan if, at any time during such plan year—

‘‘(i) such plan holds employer securities consisting of stock in an S

corporation, and

‘‘(ii) disqualified persons own at least 50 percent of the number of

shares of stock in the S corporation.

‘‘(B) ATTRIBUTION RULES.—For purposes of subparagraph (A)—

‘‘(i) IN GENERAL.—The rules of section 318(a) shall apply for purposes

of determining ownership, except that—

‘‘(I) in applying paragraph (1) thereof, the members of an individual’s family shall include members of the family described in paragraph (4)(D), and

‘‘(II) paragraph (4) thereof shall not apply.

‘‘(ii) DEEMED-OWNED SHARES.—Notwithstanding the employee trust

exception in section 318(a)(2)(B)(i), individual shall be treated as owning deemed-owned shares of the individual.

Solely for purposes of applying paragraph (5), this subparagraph shall be

applied after the attribution rules of paragraph (5) have been applied.

‘‘(4) DISQUALIFIED PERSON.—For purposes of this subsection—

‘‘(A) IN GENERAL.—The term ‘disqualified person’ means any person if—

‘‘(i) the aggregate number of deemed-owned shares of such person

and the members of such person’s family is at least 20 percent of the

number of deemed-owned shares of stock in the S corporation, or

‘‘(ii) in the case of a person not described in clause (i), the number

of deemed-owned shares of such person is at least 10 percent of the

number of deemed-owned shares of stock in such corporation.

‘‘(B) TREATMENT OF FAMILY MEMBERS.—In the case of a disqualified person described in subparagraph (A)(i), any member of such person’s family

with deemed-owned shares shall be treated as a disqualified person if not

otherwise treated as a disqualified person under subparagraph (A).

‘‘(C) DEEMED-OWNED SHARES.—

25

‘‘(i) IN GENERAL.—The term ‘deemed-owned shares’ means, with respect to any person—

‘‘(I) the stock in the S corporation constituting employer securities of an employee stock ownership plan which is allocated to such

person under the plan, and

‘‘(II) such person’s share of the stock in such corporation which

is held by such plan but which is not allocated under the plan to

participants.

‘‘(ii) PERSON’S SHARE OF UNALLOCATED STOCK.—For purposes of

clause (i)(II), a person’s share of unallocated S corporation stock held

by such plan is the amount of the unallocated stock which would be allocated to such person if the unallocated stock were allocated to all participants in the same proportions as the most recent stock allocation

under the plan.

‘‘(D) MEMBER OF FAMILY.—For purposes of this paragraph, the term

‘member of the family’ means, with respect to any individual—

‘‘(i) the spouse of the individual,

‘‘(ii) an ancestor or lineal descendant of the individual or the individual’s spouse,

‘‘(iii) a brother or sister of the individual or the individual’s spouse

and any lineal descendant of the brother or sister, and

‘‘(iv) the spouse of any individual described in clause (ii) or (iii).

A spouse of an individual who is legally separated from such individual

under a decree of divorce or separate maintenance shall not be treated as

such individual’s spouse for purposes of this subparagraph.

‘‘(5) TREATMENT OF SYNTHETIC EQUITY.—For purposes of paragraphs (3) and

(4), in the case of a person who owns synthetic equity in the S corporation, except to the extent provided in regulations, the shares of stock in such corporation on which such synthetic equity is based shall be treated as outstanding

stock in such corporation and deemed-owned shares of such person if such treatment of synthetic equity of 1 or more such persons results in—

‘‘(A) the treatment of any person as a disqualified person, or

‘‘(B) the treatment of any year as a nonallocation year.

For purposes of this paragraph, synthetic equity shall be treated as owned by

a person in the same manner as stock is treated as owned by a person under

the rules of paragraphs (2) and (3) of section 318(a). If, without regard to this

paragraph, a person is treated as a disqualified person or a year is treated as

a nonallocation year, this paragraph shall not be construed to result in the person or year not being so treated.

‘‘(6) DEFINITIONS.—For purposes of this subsection—

‘‘(A) EMPLOYEE STOCK OWNERSHIP PLAN.—The term ‘employee stock ownership plan’ has the meaning given such term by section 4975(e)(7).

‘‘(B) EMPLOYER SECURITIES.—The term ‘employer security’ has the meaning given such term by section 409(l).

‘‘(C) SYNTHETIC EQUITY.—The term ‘synthetic equity’ means any stock option, warrant, restricted stock, deferred issuance stock right, or similar interest or right that gives the holder the right to acquire or receive stock

of the S corporation in the future. Except to the extent provided in regulations, synthetic equity also includes a stock appreciation right, phantom

stock unit, or similar right to a future cash payment based on the value

of such stock or appreciation in such value.

‘‘(7) REGULATIONS.—The Secretary shall prescribe such regulations as may be

necessary to carry out the purposes of this subsection.’’.

(b) COORDINATION WITH SECTION 4975(e)(7).—The last sentence of section

4975(e)(7) (defining employee stock ownership plan) is amended by inserting ‘‘, section 409(p),’’ after ‘‘409(n)’’.

(c) EXCISE TAX.—

(1) APPLICATION OF TAX.—Subsection (a) of section 4979A (relating to tax on

certain prohibited allocations of employer securities) is amended—

(A) by striking ‘‘or’’ at the end of paragraph (1), and

(B) by striking all that follows paragraph (2) and inserting the following:

‘‘(3) there is any allocation of employer securities which violates the provisions of section 409(p), or a nonallocation year described in subsection (e)(2)(C)

with respect to an employee stock ownership plan, or

‘‘(4) any synthetic equity is owned by a disqualified person in any nonallocation year,

there is hereby imposed a tax on such allocation or ownership equal to 50 percent

of the amount involved.’’.

26

(2) LIABILITY.—Section 4979A(c) (defining liability for tax) is amended to read

as follows:

‘‘(c) LIABILITY FOR TAX.—The tax imposed by this section shall be paid—

‘‘(1) in the case of an allocation referred to in paragraph (1) or (2) of subsection (a), by—

‘‘(A) the employer sponsoring such plan, or

‘‘(B) the eligible worker-owned cooperative,

which made the written statement described in section 664(g)(1)(E) or in section

1042(b)(3)(B) (as the case may be), and

‘‘(2) in the case of an allocation or ownership referred to in paragraph (3) or

(4) of subsection (a), by the S corporation the stock in which was so allocated

or owned.’’.

(3) DEFINITIONS.—Section 4979A(e) (relating to definitions) is amended to

read as follows:

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

‘‘(1) DEFINITIONS.—Except as provided in paragraph (2), terms used in this

section have the same respective meanings as when used in sections 409 and

4978.

‘‘(2) SPECIAL RULES RELATING TO TAX IMPOSED BY REASON OF PARAGRAPH (3)

OR (4) OF SUBSECTION (a).—

‘‘(A) PROHIBITED ALLOCATIONS.—The amount involved with respect to any

tax imposed by reason of subsection (a)(3) is the amount allocated to the

account of any person in violation of section 409(p)(1).

‘‘(B) SYNTHETIC EQUITY.—The amount involved with respect to any tax

imposed by reason of subsection (a)(4) is the value of the shares on which

the synthetic equity is based.

‘‘(C) SPECIAL RULE DURING FIRST NONALLOCATION YEAR.—For purposes of

subparagraph (A), the amount involved for the first nonallocation year of

any employee stock ownership plan shall be determined by taking into account the total value of all the deemed-owned shares of all disqualified persons with respect to such plan.

‘‘(D) STATUTE OF LIMITATIONS.—The statutory period for the assessment

of any tax imposed by this section by reason of paragraph (3) or (4) of subsection (a) shall not expire before the date which is 3 years from the later

of—

‘‘(i) the allocation or ownership referred to in such paragraph giving

rise to such tax, or

‘‘(ii) the date on which the Secretary is notified of such allocation or

ownership.’’.

(d) EFFECTIVE DATES.—

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

years beginning after December 31, 2001.

(2) EXCEPTION FOR CERTAIN PLANS.—In the case of any—

(A) employee stock ownership plan established after July 11, 2000, or

(B) employee stock ownership plan established on or before such date if

employer securities held by the plan consist of stock in a corporation with

respect to which an election under section 1362(a) of the Internal Revenue

Code of 1986 is not in effect on such date,

the amendments made by this section shall apply to plan years ending after

July 11, 2000.

TITLE VI—REDUCING REGULATORY BURDENS

SEC. 601. MODIFICATION OF TIMING OF PLAN VALUATIONS.

(a) IN GENERAL.—Paragraph (9) of section 412(c)(9) (relating to annual valuation)

is amended to read as follows:

‘‘(9) ANNUAL VALUATION.—

‘‘(A) IN GENERAL.—For purposes of this section, a determination of experience gains and losses and a valuation of the plan’s liability shall be made

not less frequently than once every year, except that such determination

shall be made more frequently to the extent required in particular cases

under regulations prescribed by the Secretary.

‘‘(B) VALUATION DATE.—

‘‘(i) CURRENT YEAR.—Except as provided in clause (ii), the valuation

referred to in subparagraph (A) shall be made as of a date within the

plan year to which the valuation refers or within one month prior to

the beginning of such year.

27

‘‘(ii) ELECTION TO USE PRIOR YEAR VALUATION.—The valuation referred to in subparagraph (A) may be made as of a date within the plan

year prior to the year to which the valuation refers if—

‘‘(I) an election is in effect under this clause with respect to the

plan, and

‘‘(II) as of such date, the value of the assets of the plan are not

less than 125 percent of the plan’s current liability (as defined in

paragraph (7)(B)).

‘‘(iii) ADJUSTMENTS.—Information under clause (ii) shall, in accordance with regulations, be actuarially adjusted to reflect significant differences in participants.

‘‘(iv) ELECTION.—An election under clause (ii), once made, shall be irrevocable without the consent of the Secretary.’’.

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

years beginning after December 31, 2000.

SEC. 602. ESOP DIVIDENDS MAY BE REINVESTED WITHOUT LOSS OF DIVIDEND DEDUCTION.

(a) IN GENERAL.—Section 404(k)(2)(A) (defining applicable dividends) is amended

by striking ‘‘or’’ at the end of clause (ii), by redesignating clause (iii) as clause (iv),

and by inserting after clause (ii) the following new clause:

‘‘(iii) is, at the election of such participants or their beneficiaries—

‘‘(I) payable as provided in clause (i) or (ii), or

‘‘(II) paid to the plan and reinvested in qualifying employer securities, or’’.

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2000.

SEC. 603. REPEAL OF TRANSITION RULE RELATING TO CERTAIN HIGHLY COMPENSATED EMPLOYEES.

(a) IN GENERAL.—Paragraph (4) of section 1114(c) of the Tax Reform Act of 1986

is hereby repealed.

(b) EFFECTIVE DATE.—The repeal made by subsection (a) shall apply to plan years

beginning after December 31, 2000.

SEC. 604. EMPLOYEES OF TAX-EXEMPT ENTITIES.

(a) IN GENERAL.—The Secretary of the Treasury shall modify Treasury Regulations section 1.410(b)–6(g) to provide that employees of an organization described in

section 403(b)(1)(A)(i) of the Internal Revenue Code of 1986 who are eligible to make

contributions under section 403(b) of such Code pursuant to a salary reduction

agreement may be treated as excludable with respect to a plan under section 401(k)

or (m) of such Code that is provided under the same general arrangement as a plan

under such section 401(k), if—

(1) no employee of an organization described in section 403(b)(1)(A)(i) of such

Code is eligible to participate in such section 401(k) plan or section 401(m) plan;

and

(2) 95 percent of the employees who are not employees of an organization described in section 403(b)(1)(A)(i) of such Code are eligible to participate in such

plan under such section 401(k) or (m).

(b) EFFECTIVE DATE.—The modification required by subsection (a) shall apply as

of the same date set forth in section 1426(b) of the Small Business Job Protection

Act of 1996.

SEC. 605. CLARIFICATION OF TREATMENT OF EMPLOYER-PROVIDED RETIREMENT ADVICE.

(a) IN GENERAL.—Subsection (a) of section 132 (relating to exclusion from gross

income) is amended by striking ‘‘or’’ at the end of paragraph (5), by striking the period at the end of paragraph (6) and inserting ‘‘, or’’, and by adding at the end the

following new paragraph:

‘‘(7) qualified retirement planning services.’’.

(b) QUALIFIED RETIREMENT PLANNING SERVICES DEFINED.—Section 132 is amended by redesignating subsection (m) as subsection (n) and by inserting after subsection (l) the following:

‘‘(m) QUALIFIED RETIREMENT PLANNING SERVICES.—

‘‘(1) IN GENERAL.—For purposes of this section, the term ‘qualified retirement

planning services’ means any retirement planning service provided to an employee and his spouse by an employer maintaining a qualified employer plan.

‘‘(2) NONDISCRIMINATION RULE.—Subsection (a)(7) shall apply in the case of

highly compensated employees only if such services are available on substantially the same terms to each member of the group of employees normally provided education and information regarding the employer’s qualified employer

plan.

28

‘‘(3) QUALIFIED EMPLOYER PLAN.—For purposes of this subsection, the term

‘qualified employer plan’ means a plan, contract, pension, or account described

in section 219(g)(5).’’.

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

beginning after December 31, 2000.

SEC. 606. REPORTING SIMPLIFICATION.

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

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

(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.

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

EMPLOYEES.—In the case of a retirement plan which covers less than 25 employees

on the first day of the plan year and meets the requirements described in subparagraphs (B), (D), and (E) of subsection (a)(2), the Secretary of the Treasury shall provide for the filing of a simplified annual return that is substantially similar to the

annual return required to be filed by a one-participant retirement plan.

(c) EFFECTIVE DATE.—The provisions of this section shall take effect on January

1, 2001.

SEC. 607. 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 Administrative Policy Regarding Self-Correction for significant compliance failures;

(4) expanding the availability to correct insignificant compliance failures

under the Administrative Policy Regarding Self-Correction 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.

SEC. 608. REPEAL OF THE MULTIPLE USE TEST.

(a) IN GENERAL.—Paragraph (9) of section 401(m) is amended to read as follows:

‘‘(9) REGULATIONS.—The Secretary shall prescribe such regulations as may be

necessary to carry out the purposes of this subsection and subsection (k), including regulations permitting appropriate aggregation of plans and contributions.’’.

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to years

beginning after December 31, 2000.

SEC. 609. 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 cirVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00028 Fmt 6659 Sfmt 6621 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
29

cumstances 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, 2000.

(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) (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.’’.

(2) EFFECTIVE DATES.—

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

years beginning after December 31, 2000.

(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, 2000, 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. 610. 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) and subparagraph (H) of section

401(a)(26) 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) 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) is amended to read

as follows: ‘‘GOVERNMENTAL PLANS’’.

(2) The heading for subparagraph (H) of section 401(a)(26) is amended to read

as follows: ‘‘EXCEPTION FOR GOVERNMENTAL PLANS’’.

(3) Subparagraph (G) of section 401(k)(3) 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, 2000.

SEC. 611. NOTICE AND CONSENT PERIOD REGARDING DISTRIBUTIONS.

(a) EXPANSION OF PERIOD.—

(1) IN GENERAL.—Subparagraph (A) of section 417(a)(6) is amended by striking ‘‘90-day’’ and inserting ‘‘180-day’’.

(2) 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 apVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00029 Fmt 6659 Sfmt 6621 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
30

pears in Treasury Regulations sections 1.402(f)–1, 1.411(a)–11(c), and 1.417(e)–

1(b).

(3) EFFECTIVE DATE.—The amendment made by paragraph (1) and the modifications required by paragraph (2) shall apply to years beginning after December 31, 2000.

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

to years beginning after December 31, 2000.

TITLE VII—PLAN AMENDMENTS

SEC. 701. 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 during the period described in subsection (b)(2)(A); and

(2) 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 Act, or pursuant to any

regulation issued under this Act, and

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

January 1, 2003.

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 ‘‘2005’’

for ‘‘2003’’.

(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.

I. SUMMARY AND BACKGROUND

A. PURPOSE AND SUMMARY

PURPOSE

The revenue provisions of the bill, H.R. 4843 included in the

Committee bill (‘‘Comprehensive Retirement Security and Pension

Reform Act’’) (the ‘‘bill’’) provide for: (1) modifying Individual Retirement Arrangement contributions limits (Title I); (2) expanding

coverage (Title II); (3) enhancing fairness for women (Title III); (4)

increasing portability for participants (Title IV); (5) strengthening

pension security and enforcement (Title V); (6) reducing regulatory

burdens (Title VI); and (7) plan amendments (Title VII).

The bill provides net tax reductions of over $16 billion over fiscal

years 2001–2005. This will provide needed retirement security and

pension reform.

31

SUMMARY

I. Individual Retirement Arrangements (‘‘IRAs’’)

Increase in IRA contribution limit.—The bill increases the annual

dollar IRA contribution limit from $2,000 to $3,000 in 2001, $4,000

in 2002, and $5,000 in 2003, with indexing thereafter.

Catch-up contributions.—The bill accelerates the increase of the

IRA maximum contribution limit for individuals age 50 and older.

The limit for such individuals is $5,000 beginning in 2001, with indexing after 2003.

II. Expanding coverage

Increase in benefit and contribution limits.—Beginning in 2001,

the bill increases the dollar limit on annual elective deferrals under

section 401(k) plans, section 403(b) annuities and salary reduction

SEPs in $1,000 annual increments until the limits reach $15,000

in 2005. Beginning in 2001, the bill increases the maximum annual

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

annual increments until the limit reaches $10,000 in 2004. The

$15,000 and $10,000 dollar limits are indexed in $500 increments,

as under present law. The bill increases the dollar limit on deferrals under a section 457 plan to $11,000 in 2001, $12,000 in 2002,

$13,000 in 2003, $14,000 in 2004, and $15,000 in 2005. After 2005,

the limit is indexed in $500 increments. The limit is twice the otherwise applicable dollar limit in the three years prior to retirement.

Effective in 2001, the bill: increases the $135,000 annual benefit

limit for defined benefit plans to $160,000 (indexed in $5,000 increments) and lowers the early retirement age to 62 and the normal

retirement age to 65 for purposes of applying the limit; increases

the $30,000 annual contribution limit for defined contribution

plans to $40,000 (indexed in $1,000 increments); and increases the

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

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

Plan loans for subchapter S shareholders, partners, and sole proprietors.—The bill generally eliminates the special present-law

rules relating to plan loans made to an owner-employee. Thus, the

general statutory exemption applies to such transactions. Present

law applies with respect to IRAs. The provision is effective with respect to loans made in years beginning after December 31, 2000.

Modification of top-heavy rules.—The bill provides that a safeharbor section 401(k) plan is not a top-heavy plan and that matching contributions may be taken into account in satisfying the minimum contribution requirements. In addition, the bill simplifies the

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

status and repeals the family attribution rule used to determine

whether an individual is a key employee by reason of being a 5-

percent owner of the employer. The provision is effective for years

beginning after December 31, 2000.

Elective deferrals not taken into account for purposes of deduction

limits.—The bill provides that the elective deferral contributions

are not subject to the qualified plan deduction limits, and the application of a deduction limitation to any other employer contribution

to a qualified retirement plan does not take into account elective

deferral contributions. The provision is effective for years beginning

after December 31, 2000.

32

Repeal of coordination requirements for deferred compensation

plans of State and local governments and tax-exempt organizations.—For years beginning after December 31, 2000, the bill repeals the rules coordinating the section 457 dollar limit with contributions under other types of plans.

Eliminate IRS user fees for certain determination letter requests

regarding employer plans.—Under the bill, an employer with no

more than 100 employees is not required to pay a user fee for any

determination letter request made during the first 5 plan years

with respect to the qualified status of a retirement plan that the

employer maintains. The provision is effective for determination

letter requests made after December 31, 2000.

Deduction limits.—The bill provides that for purposes of the

qualified plan deduction limit the compensation otherwise paid or

accrued during the employer’s taxable year to the beneficiaries

under the plan includes elective deferrals under a section 401(k)

plan or a section 403(b) annuity, elective contributions under a section 457 plan, and salary reductions under a section 125 plan. In

addition, the bill increases the limit on deductible contributions

under a profit-sharing or stock bonus plan from 15 percent to 20

percent of the compensation of the employees covered by the plan.

The provision is effective for years beginning after December 31,

2000.

Option to treat elective deferrals as after-tax contributions.—The

bill provides that a section 401(k) plan or a section 403(b) annuity

may permit a participant to elect to have all or a portion of the

participant’s elective deferrals under the plan treated as designated

plus contributions. A qualified distribution from a participant’s designated plus contributions account is not includible in the participant’s gross income. Designated plus contributions are generally

otherwise treated the same as elective deferrals for purposes of the

qualified plan rules. The provision is effective for taxable years beginning after December 31, 2000.

III. Enhancing fairness for women

Additional salary reduction catch-up contributions.—The bill permits individuals who are age 50 or older to make additional contributions to a section 401(k) (or similar plan). The maximum permitted additional contribution is $5,000 (indexed in 2006 and

thereafter). Catch-up contributions to a section 401(k) (or similar)

plan are not subject to any other contribution limits and are not

taken into account in applying other contribution limits. Catch-up

contributions are subject to nondiscrimination rules.

Equitable treatment for contributions of employees to defined contribution plans.—The bill (1) increases the 25 percent of compensation limitation on annual additions under a defined contribution

plan to 100 percent, (2) conforms the limits on contributions to a

tax-sheltered annuity to the limits applicable to tax-qualified plans,

and (3) increases the 331⁄3 percent of compensation limitation on

deferrals under a section 457 plan to 100 percent of compensation.

The provision is effective for years beginning after December 31,

2000.

Faster vesting of employer matching contributions.—Under the

bill, employer matching contributions have to vest at least as rapidly as under 3-year cliff vesting or under 6-year graded vesting

33

that provides for a nonforfeitable right to 20 percent of employer

matching contributions for each year of service beginning with the

participant’s second year of service and ending with 100 percent

after 6 years of service. The provision is effective for plan years beginning after December 31, 2000, with a delayed effective date for

plans maintained pursuant to a collective bargaining agreement.

Simplify and update the minimum distribution rules.—The bill

applies the present-law rules applicable if the participant dies before distribution of minimum benefits has begun to all post-death

distributions. The bill reduces the excise tax on failures to satisfy

the minimum distribution rules to 10 percent of the amount that

was required to be distributed but was not distributed. The Treasury is directed to update, simplify, and finalize the regulations relating to the minimum distribution rules. The bill repeals the special minimum distribution rules applicable to section 457 plans.

The provision is effective for years beginning after December 31,

2000.

Clarification of tax treatment of division of section 457 plan benefits upon divorce.—The bill applies the taxation rules for qualified

plan distributions pursuant to a QDRO to distributions made pursuant to a domestic relations order from a section 457 plan. In addition, a section 457 plan is not treated as violating the restrictions

on distributions from such plans due to payments to an alternate

payee under a QDRO. The provision is effective for transfers, distributions and payments made after December 31, 2000.

Modification of safe harbor relief for hardship withdrawals from

401(k) plans.—The bill directs the Secretary of the Treasury to revise the applicable regulations to reduce from 12 months to 6

months the period during which an employee must be prohibited

from making elective contributions and employee contributions in

order for a distribution to be deemed necessary to satisfy an immediate and heavy financial need. The provision is effective for years

beginning after December 31, 2000.

IV. Increasing portability for participants

Rollovers of retirement plan and IRA distributions.—The bill provides that eligible rollover distributions from qualified retirement

plans, section 403(b) annuities, IRAs and governmental section 457

plans generally can be rolled over to any of such plans or arrangements. The direct rollover and withholding rules are extended to

distributions from a section 457 plan. The bill provides that employee after-tax contributions can be rolled over into another qualified plan or a traditional IRA. In the case of a rollover from a

qualified plan to another qualified plan, the rollover can be accomplished only through a direct rollover. The bill provides that surviving spouses can roll over distributions to a qualified plan, section 403(b) annuity, or governmental section 457 plan in which the

spouse participates. The provision is effective for distributions

made after December 31, 2000.

Waiver of 60-day rule.—The bill provides that the Secretary may

waive the 60-day rollover period if the failure to waive such requirement would be against equity or good conscience, including

cases of casualty, disaster, or other events beyond the reasonable

control of the individual subject to such requirement. The provision

applies to distributions made after December 31, 2000.

34

Treatment of forms of distribution.—Under the bill, if certain requirements are satisfied, a defined contribution plan may eliminate

optional forms of benefit (1) in connection with certain transfers of

benefits, or (2) if a single sum distribution is offered. In addition,

the Secretary is to provide for circumstances under which early retirement benefits, retirement-type subsidies, or an optional form of

benefit may be reduced or eliminated if the rights of participants

are not materially affected. The provision is effective for years beginning after December 31, 2000.

Rationalization of restrictions on distributions.—The bill modifies

the distribution restrictions applicable to section 401(k) plans, section 403(b) annuities, and section 457 plans to provide that distribution may occur upon severance from employment rather than

separation from service. The provision is effective for distributions

after December 31, 2000.

Purchase of service credit under governmental pension plans.— Under the bill a participant in a State or local governmental plan

is not required to include in gross income a direct trustee-to-trustee

transfer to a governmental defined benefit plan from a section

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

used (1) to purchase permissive service credits under the plan, or

(2) to repay certain contributions. The provision is effective for

transfers after December 31, 2000.

Employers may disregard rollovers for purposes of cash-out

rules.—Under the bill a plan is permitted to disregard benefits attributable to rollover contributions for purposes of the cash-out

rules. The provision is effective for distributions after December 31,

2000.

V. Strengthening pension security and enforcement

Phase in repeal of 150 percent of current liability full funding

limit; deduction for contributions to fund termination liability.— Under the bill, the current liability full funding limit is 160 percent

of current liability for plan years beginning in 2001, 165 percent

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

beginning in 2003. The current liability full funding limit is repealed for plan years beginning in 2004 and thereafter. The special

rule allowing a deduction for unfunded current liability generally

is extended to all defined benefit pension plans covered by the

PBGC. The provision is effective for years beginning after December 31, 2000.

Excise tax relief for sound pension funding.—Under the bill if an

employer elects, contributions in excess of the current liability full

funding limit are not subject to the excise tax on nondeductible

contributions. The provision is effective for years beginning after

December 31, 2000.

Notice of significant reduction in plan benefit accruals.—The bill

requires the plan administrator of a defined benefit plan (other

than governmental plans and certain church plans) with more than

100 participants to notify plan participants in advance of an

amendment that significantly reduces the rate of future benefit accruals. The notice must include sufficient information to allow participants to understand the effect of the amendment. An excise tax

applies if the required notice is not provided. The bill also directs

the Secretary of the Treasury to report on the effects of conversions

35

of traditional defined benefit plans to cash balance or hybrid formula plans.

Modifications to section 415 limits for multiemployer plans.—The

bill modifies the section 415 limits for multiemployer plans. The

provision is effective for years beginning after December 31, 2000.

VI. Reducing regulatory burdens

Modification of timing of plan valuations.—The bill permits a defined benefit plan with assets of at least 125 percent of current liability to use a valuation date within the prior plan year. The provision is effective for plan years beginning after December 31,

2000.

ESOP dividends may be reinvested without loss of dividend deduction.—Under the bill, an employer is entitled to deduct dividends that, at the election of plan participants or their beneficiaries, are paid to the plan and reinvested in employer securities.

The provision is effective for taxable years beginning after December 31, 2000.

Repeal transition rule relating to certain highly compensated employees.—The bill repeals the special definition of highly compensated employee under the Tax Reform Act of 1986. The provision is effective for plan years beginning after December 31, 2000.

Employees of tax-exempt entities.—The bill directs the Treasury

Department to revise its regulations under section 410(b) to provide that, if certain requirements are satisfied, employees of a taxexempt charitable organization who are eligible to make salary reduction contributions under a section 403(b) annuity may be treated as excludable employees for purposes of testing a section 401(k)

plan.

Treatment of employer-provided retirement advice.—Under the

bill, qualified retirement planning services provided to an employee

and his or her spouse by an employer maintaining a qualified plan

are generally excludable from income and wages. The provision is

effective with respect to taxable years beginning after December

31, 2000.

Reporting simplification.—The bill directs the Secretary of the

Treasury to provide for an exemption from the annual return requirement for a plan that covers only the sole owner of a business

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

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

if the total value of the plan assets as of the end of the plan year

and all prior plan years does not exceed $250,000 and the plan

meets certain other requirements. In addition, the Secretary of the

Treasury is directed to provide for the filing of a simplified annual

return substantially similar to the Form 5500–EZ by a plan that

meets certain requirements. The provision is effective on the date

of enactment.

Improvement to 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 APRSC for signifiVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00035 Fmt 6659 Sfmt 6602 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
36

cant compliance failures, (4) expanding the availability to correct

insignificant compliance failures under APRSC during audit, and

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

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

The provision is effective on the date of enactment.

Repeal of the multiple use test.—The bill repeals the multiple use

test, effective for years beginning after December 31, 2000.

Flexibility in nondiscrimination, coverage, and line of business

rules.—The bill directs the Secretary of the Treasury to provide by

regulation circumstances under which plans can use the prior-law

facts and circumstances test to satisfy the nondiscrimination, coverage, and line of business rules. used to determine compliance.

The provision is effective on the date of enactment.

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. The provision is effective for plan years beginning after December 31, 2000.

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 six

months 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 six months 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. The provision is effective for years beginning

after December 31, 2000.

VII. Provisions relating to plan amendments

Any amendments to a plan or annuity contract required to be

made by the bill are not required to be made before the last day

of the first plan year beginning on or after January 1, 2003. In the

case of a governmental plan, the date for amendments is extended

to the first plan year beginning on or after January 1, 2004. The

provision is effective on the date of enactment.

B. BACKGROUND AND NEED FOR LEGISLATION

The revenue provisions approved by the Committee reflect the

need for tax relief for retirement security and pension reforms.

C. LEGISLATIVE HISTORY

Committee action

The Committee on Ways and Means marked up the revenue provisions of the bill on July 13, 2000, and approved the provisions,

as amended, on July 13, 2000, by a roll call vote of 27 yeas and

9 nays, with a quorum present.

Committee hearings

The following Committee and Subcommittee hearings related to

provisions in the bill have been held during the 106th Congress.

37

Full Committee hearings

Tax-related hearings were held by the full Committee as follows:

• Outlook for the state of the U.S. economy (January 20, 1999).

• President’s fiscal year 2000 budget (February 4, 1999).

• Revenue provisions in President’s fiscal year 2000 budget

(March 10, 1999).

• Reducing the tax burden: Enhancing retirement and health security (June 16, 1999).

• President’s fiscal year 2001 budget (February 9, 2000).

Subcommittee hearings

The Oversight Subcommittee held tax-related hearings as follows:

• Pension issues (March 23, 1999).

• Impact of complexity in the Tax Code on individual taxpayers

and small businesses (May 25, 1999).

II. EXPLANATION OF THE REVENUE PROVISIONS OF

THE BILL

TITLE I. INDIVIDUAL RETIREMENT ARRANGEMENTS (‘‘IRAs’)

(SEC. 101 OF THE BILL AND SECS. 219, 408, AND 408A OF THE CODE)

PRESENT LAW

In general

There are two general types of individual retirement arrangements (‘‘IRAs’’) under present law: traditional IRAs, to which both

deductible and nondeductible contributions may be made, and Roth

IRAs. The Federal income tax rules regarding each type of IRA

(and IRA contribution) differ.

Traditional IRAs

Under present law, an individual may make deductible contributions to an IRA up to the lesser of $2,000 or the individual’s compensation if neither the individual nor the individual’s spouse is an

active participant in an employer-sponsored retirement plan. In the

case of a married couple, deductible IRA contributions of up to

$2,000 can be made for each spouse (including, for example, a

homemaker who does not work outside the home), if the combined

compensation of both spouses is at least equal to the contributed

amount. If the individual (or the individual’s spouse) is an active

participant in an employer-sponsored retirement plan, the $2,000

deduction limit is phased out for taxpayers with adjusted gross income (‘‘AGI’’) over certain levels for the taxable year.

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

Single taxpayers

Taxable years beginning in Phase-out range

2000 ......................................................................................................... $32,000–42,000

2001 ......................................................................................................... 33,000–43,000

2002 ......................................................................................................... 34,000–44,000

2003 ......................................................................................................... 40,000–50,000

2004 ......................................................................................................... 45,000–55,000

2005 and thereafter ............................................................................... 50,000–60,000

38

Joint returns

2000 ......................................................................................................... 52,000–62,000

2001 ......................................................................................................... 53,000–63,000

2002 ......................................................................................................... 54,000–64,000

2003 ......................................................................................................... 60,000–70,000

2004 ......................................................................................................... 65,000–75,000

2005 ......................................................................................................... 70,000–80,000

2006 ......................................................................................................... 75,000–85,000

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

If the individual is not an active participant in an employer-sponsored retirement plan, but the individual’s spouse is, the $2,000 deduction limit is phased out for taxpayers with AGI between

$150,000 and $160,000.

To the extent an individual cannot or does not make deductible

contributions to an IRA or contributions to a Roth IRA, the individual may make nondeductible contributions to a traditional IRA.

Amounts held in a traditional IRA are includible in income when

withdrawn (except to the extent the withdrawal is a return of nondeductible contributions). Includible amounts withdrawn prior to

attainment of age 591⁄2 are subject to an additional 10-percent

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

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

purchase health insurance of an unemployed individual, is used for

education expenses, or is used for first-time homebuyer expenses of

up to $10,000.

Roth IRAs

Individuals with AGI below certain levels may make nondeductible contributions to a Roth IRA. The maximum annual contribution that may be made to a Roth IRA is the lesser of $2,000 or the

individual’s compensation for the year. The contribution limit is reduced to the extent an individual makes contributions to any other

IRA for the same taxable year. As under the rules relating to IRAs

generally, a contribution of up to $2,000 for each spouse may be

made to a Roth IRA provided the combined compensation of the

spouses is at least equal to the contributed amount. The maximum

annual contribution that can be made to a Roth IRA is phased out

for single individuals with AGI between $95,000 and $110,000 and

for joint filers with AGI between $150,000 and $160,000.

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

convert a traditional IRA into an Roth IRA. The amount converted

is includible in income as if a withdrawal had been made, except

that the 10-percent early withdrawal tax does not apply and, if the

conversion occurred in 1998, the income inclusion may be spread

ratably over 4 years. Married taxpayers who file separate returns

cannot convert a traditional IRA into a Roth IRA.

Amounts held in a Roth IRA that are withdrawn as a qualified

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

is a distribution that (1) is made after the 5-taxable year period beginning with the first taxable year for which the individual made

a contribution to a Roth IRA, and (2) which is made after attainment of age 591⁄2, on account of death or disability, or is made for

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

39

1 Early distribution of converted amounts may also accelerate income inclusion of converted

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

Distributions from a Roth IRA that are not qualified distributions are includible in income to the extent attributable to earnings, and subject to the 10-percent early withdrawal tax (unless an

exception applies).1 The same exceptions to the early withdrawal

tax that apply to IRAs apply to Roth IRAs.

REASONS FOR CHANGE

The Committee is concerned about the low national savings rate,

and that individuals may not be saving adequately for retirement.

The present-law IRA contribution limits have not been increased

since 1981. The Committee believes that the limits should be

raised in order to allow greater savings opportunities.

The Committee understands that, for a variety of reasons, other

individuals may not have been saving sufficiently for retirement.

Thus, the Committee believes it appropriate to accelerate the increase in the IRA contribution limits for such individuals.

EXPLANATION OF PROVISION

Increase in annual contribution limits

The provision increases the maximum annual dollar contribution

limit (before application of the AGI phase-out limits) for IRA contributions from $2,000 to $3,000 in 2001, $4,000 in 2002, and

$5,000 in 2003. The limit is indexed in $500 increments in 2004

and thereafter.

Additional catch-up contributions

The provision accelerates the increase of the IRA maximum contribution limit for individuals who have attained age 50 before the

end of the taxable year. The maximum dollar contribution limit

(before application of the AGI phase-out limits) for such an individual is increased to $5,000 in 2001, 2002, and 2003, and is indexed in $500 increments in 2004 and thereafter, under the general rule.

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2000.

TITLE II. EXPANDING COVERAGE

A. INCREASE IN BENEFIT AND CONTRIBUTION LIMITS (SEC. 201 OF

THE BILL AND SECS. 401(a)(17), 402(g), 408(p), 415 AND 457 OF

THE CODE)

PRESENT LAW

In general

Under present law, limits apply to contributions and benefits

under qualified plans (sec. 415), the amount of compensation that

may be taken into account under a plan for determining benefits

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

individual may make to a salary reduction plan or tax sheltered

40

annuity (sec. 402(g)), and deferrals under an eligible deferred compensation plan of a tax-exempt organization or a State or local government (sec. 457).

Limitations on contributions and benefits

Under present law, the limits on contributions and benefits

under qualified plans are based on the type of plan. Under a defined contribution plan, the qualification rules limit the annual additions to the plan with respect to each plan participant to the lesser of (1) 25 percent of compensation or (2) $30,000 (for 2000). Annual additions are the sum of employer contributions, employee

contributions, and forfeitures with respect to an individual under

all defined contribution plans of the same employer. The $30,000

limit is indexed for cost-of-living adjustments in $5,000 increments.

Under a defined benefit plan, the maximum annual benefit payable at retirement is generally the lesser of (1) 100 percent of average compensation, or (2) $135,000 (for 2000). The dollar limit is adjusted for cost-of-living increases in $5,000 increments.

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

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

begin after social security retirement age.

Compensation limitation

Under present law, the annual compensation of each participant

that may be taken into account for purposes of determining contributions and benefits under a plan, applying the deduction rules,

and for nondiscrimination testing purposes is limited to $170,000

(for 2000). The compensation limit is indexed for cost-of-living adjustments in $10,000 increments.

Elective deferral limitations

Under present law, under certain salary reduction arrangements,

an employee may elect to have the employer make payments as

contributions to a plan on behalf of the employee, or to the employee directly in cash. Contributions made at the election of the

employee are called elective deferrals.

The maximum annual amount of elective deferrals that an individual may make to a qualified cash or deferred arrangement (a

‘‘section 401(k) plan’’), a tax-sheltered annuity (‘‘section 403(b) annuity’’) or a salary reduction simplified employee pension plan

(‘‘SEP’’) is $10,500 (for 2000). The maximum annual amount of

elective deferrals that an individual may make to a SIMPLE plan

is $6,000. These limits are indexed for inflation in $500 increments.

Section 457 plans

The maximum annual deferral under a deferred compensation

plan of a State or local government or a tax-exempt organization

(a ‘‘section 457 plan’’) is the lesser of (1) $8,000 (for 2000) or (2)

331⁄3 percent of compensation. The $8,000 dollar limit is increased

for inflation in $500 increments. Under a special catch-up rule, the

section 457 plan may provide that, for one or more of the participant’s last 3 years before retirement, the otherwise applicable limit

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

41

2The 25 percent of compensation limitation is increased to 100 percent of compensation under

another provision of the bill.

limit applicable in preceding years of participation exceeded the deferrals for that year.

REASONS FOR CHANGE

The tax benefits provided under qualified plans are a departure

from the normally applicable income tax rules. The special tax benefits for qualified plans are generally justified on the ground that

they serve an important social policy objective, i.e., the provision of

retirement benefits to a broad group of employees. The limits on

contributions and benefits, elective deferrals, and compensation

that may be taken into account under a qualified plan all serve to

limit the tax benefits associated with such plans. The level at

which to place such limits involves a balancing of different policy

objectives and a judgment as to what limits are most likely to best

further policy goals.

One of the factors that may influence the decision of an employer, particularly a small employer, to adopt a plan is the extent

to which the owners of the business, the decision-makers, or other

highly compensated employees will benefit under the plan. The

Committee believes that increasing the dollar limits on qualified

plan contributions and benefits will encourage employers to establish qualified plans for their employees.

The Committee understands that, in recent years, section 401(k)

plans have become increasingly more prevalent. The Committee believes it is important to increase the amount of employee elective

deferrals allowed under such plans, and other plans that allow deferrals, to better enable plan participants to save for their retirement.

EXPLANATION OF PROVISION

Limits on contributions and benefits

The provision increases the $30,000 annual addition limit for de- fined contribution plans to $40,000. This amount is indexed in

$1,000 increments.2

The provision increases the $135,000 annual benefit limit under a defined benefit plan to $160,000. The dollar limit is reduced for

benefit commencement before age 62 and increased for benefit commencement after age 65.

Compensation limitation

The provision increases the limit on compensation that may be taken into account under a plan to $200,000. This amount is indexed in $5,000 increments.

Elective deferral limitations

Beginning in 2001, the provision increases the dollar limit on annual elective deferrals under section 401(k) plans, section 403(b)

annuities and salary reduction SEPs in $1,000 annual increments

until the limits reach $15,000 in 2005, with indexing in $500 increments thereafter. Beginning in 2001, the provision increases the

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

42

3 Another provision of the bill increases the 33–1⁄3 percentage of compensation limit to 100 percent. 4Title I of the Employee Retirement Income Security Act of 1974, as amended (‘‘ERISA’’), also

contains prohibited transaction rules. The Code and ERISA provisions are substantially similar,

although not identical. 5 Certain transactions involving a plan and Subchapter S shareholders are permitted.

$10,000 in 2004. Beginning after 2004, the $10,000 dollar limit is

indexed in $500 increments.

Section 457 plans

The provision increases the dollar limit on deferrals under a section 457 plan to conform to the elective deferral limitation. Thus,

the limit is $11,000 in 2001, and is increased in $1,000 annual increments until the limit reaches $15,000 in 2005. The limit is indexed thereafter in $500 increments. The limit is twice the otherwise applicable dollar limit in the three years prior to retirement.3

EFFECTIVE DATE

The provision is effective for years beginning after December 31,

2000.

B. PLAN LOANS FOR SUBCHAPTER S SHAREHOLDERS, PARTNERS, AND

SOLE PROPRIETORS (SEC. 202 OF THE BILL AND SEC. 4975 OF THE

CODE)

PRESENT LAW

The Internal Revenue Code prohibits certain transactions (‘‘prohibited transactions’’) between a qualified plan and a disqualified

person in order to prevent persons with a close relationship to the

qualified plan from using that relationship to the detriment of plan

participants and beneficiaries.4 Certain types of transactions are

exempted from the prohibited transaction rules, including loans

from the plan to plan participants, if certain requirements are satisfied. In addition, the Department of Labor can grant an administrative exemption from the prohibited transaction rules if she finds

the exemption is administratively feasible, in the interest of the

plan and plan participants and beneficiaries, and protective of the

rights of participants and beneficiaries of the plan. Pursuant to this

exemption process, the Secretary of Labor grants exemptions both

with respect to specific transactions and classes of transactions.

The statutory exemptions to the prohibited transaction rules do

not apply to certain transactions in which the plan makes a loan

to an owner-employee.5 Loans to participants other than owner-employees are permitted if loans are available to all participants on

a reasonably equivalent basis, are not made available to highly

compensated employees in an amount greater than made available

to other employees, are made in accordance with specific provisions

in the plan, bear a reasonable rate of interest, and are adequately

secured. In addition, the Code places limits on the amount of loans

and repayment terms.

For purposes of the prohibited transaction rules, an owner-employee means (1) a sole proprietor, (2) a partner who owns more

than 10 percent of either the capital interest or the profits interest

in the partnership, (3) an employee or officer of a Subchapter S corporation who owns more than 5 percent of the outstanding stock

43

of the corporation, and (4) the owner of an individual retirement

arrangement (‘‘IRA’’). The term owner-employee also includes certain family members of an owner-employee and certain corporations owned by an owner-employee.

Under the Internal Revenue Code, a two-tier excise tax is imposed on disqualified persons who engage in a prohibited transaction. The first level tax is equal to 15 percent of the amount involved in the transaction. The second level tax is imposed if the

prohibited transaction is not corrected within a certain period, and

is equal to 100 percent of the amount involved.

REASONS FOR CHANGE

The Committee believes that the present-law prohibited transaction rules regarding loans unfairly discriminate against the owners of unincorporated businesses and subchapter S corporations.

For example, under present law, the sole shareholder of a C corporation may take advantage of the statutory exemption to the prohibited transaction rules for loans, but an individual who does

business as a sole proprietor may not.

EXPLANATION OF PROVISION

The provision generally eliminates the special present-law rules

relating to plan loans made to an owner-employee. Thus, the general statutory exemption applies to such transactions. Present law

continues to apply with respect to IRAs.

EFFECTIVE DATE

The provision is effective with respect to loans made after December 31, 2000.

C. MODIFICATION OF TOP-HEAVY RULES (SEC. 203 OF THE BILL AND

SEC. 416 OF THE CODE)

PRESENT LAW

In general

Under present law, additional qualification requirements apply

to plans that primarily benefit an employer’s key employees (‘‘topheavy plans’’). These additional requirements provide (1) more

rapid vesting for plan participants who are non-key employees and

(2) minimum nonintegrated employer contributions or benefits for

plan participants who are non-key employees.

Definition of top-heavy plan

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

percent of the contributions or benefits are provided to key employees. More precisely, a defined benefit plan is a top-heavy plan if

more than 60 percent of the cumulative accrued benefits under the

plan are for key employees. A defined contribution plan is top

heavy if the sum of the account balances of key employees is more

than 60 percent of the total account balances under the plan. For

each plan year, the determination of top-heavy status generally is

made as of the last day of the preceding plan year (‘‘the determination date’’).

44

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

benefits derived both from employer and employee contributions,

including employee elective contributions, are taken into account.

In addition, the accrued benefit of a participant in a defined benefit

plan and the account balance of a participant in a defined contribution plan includes any amount distributed within the 5-year period

ending on the determination date.

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

into account in determining whether a plan is top-heavy if the individual has not performed services for the employer during the 5-

year period ending on the determination date.

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

aggregated for purposes of determining whether the group of plans

is top-heavy. The following plans must be aggregated: (1) plans

which cover a key employee (including collectively bargained

plans); and (2) any plan upon which a plan covering a key employee depends for purposes of satisfying the Code’s nondiscrimination rules. The employer may be required to include terminated

plans in the required aggregation group. In some circumstances, an

employer may elect to aggregate plans for purposes of determining

whether they are top heavy.

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

Definition of key employee

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

ends on the determination date or any of the 4 preceding plan

years, is (1) an officer earning over one-half of the defined benefit

plan dollar limitation of section 415 ($67,500 for 2000), (2) a 5-percent owner of the employer, (3) a 1-percent owner of the employer

earning over $150,000, or (4) one of the 10 employees earning more

than the defined contribution plan dollar limit ($30,000 for 2000)

with the largest ownership interests in the employer. A family

ownership attribution rule applies to the determination of 1-percent owner status, 5-percent owner status, and largest ownership

interest. Under this attribution rule, an individual is treated as

owning stock owned by the individual’s spouse, children, grandchildren, or parents.

Minimum benefit for non-key employees

A minimum benefit generally must be provided to all non-key

employees in a top-heavy plan. In general, a top-heavy defined benefit plan must provide a minimum benefit equal to the lesser of (1)

2 percent of compensation multiplied by the employee’s years of

service, or (2) 20 percent of compensation. A top-heavy defined contribution plan must provide a minimum annual contribution equal

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

of compensation at which contributions were made for key employees (including employee elective contributions made by key employees and employer matching contributions).

For purposes of the minimum benefit rules, only benefits derived

from employer contributions (other than amounts employees have

elected to defer) to the plan are taken into account, and an employee’s social security benefits are disregarded (i.e., the minimum benefit is nonintegrated). Employer matching contributions may be

used to satisfy the minimum contribution requirement; however, in

45

6Tres. Reg. sec. 1.416–1 Q&A M–19.

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

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

for 20 percent vesting after 3 years and 20 percent more each year thereafter so that a participant is fully vested after 7 years of service.

such a case the contributions are not treated as matching contributions for purposes of applying the special nondiscrimination requirements applicable to employee elective contributions and

matching contributions under sections 401(k) and (m). Thus, such

contributions would have to meet the general nondiscrimination

test of section 401(a)(4).6

Top-heavy vesting

Benefits under a top-heavy plan must vest at least as rapidly as

under one of the following schedules: (1) 3-year cliff vesting, which

provides for 100 percent vesting after 3 years of service; and (2) 2–

6 year graduated vesting, which provides for 20 percent vesting

after 2 years of service, and 20 percent more each year thereafter

so that a participant is fully vested after 6 years of service.7

Qualified cash or deferred arrangements

Under a qualified cash or deferred arrangement (a ‘‘section

401(k) plan’’), an employee may elect to have the employer make

payments as contributions to a qualified plan on behalf of the employee, or to the employee directly in cash. Contributions made at

the election of the employee are called elective deferrals. A special

nondiscrimination test applies to elective deferrals under cash or

deferred arrangements, which compares the elective deferrals of

highly compensated employees with elective deferrals of nonhighly

compensated employees. (This test is called the actual deferral percentage test or the ‘‘ADP’’ test). Employer matching contributions

under qualified defined contribution plans are also subject to a

similar nondiscrimination test. (This test is called the actual contribution percentage test or the ‘‘ACP’’ test.)

Under a design-based safe harbor, a cash or deferred arrangement is deemed to satisfy the ADP test if the plan satisfies one of

two contribution requirements and satisfies a notice requirement.

A plan satisfies the contribution requirement under the safe harbor

rule for qualified cash or deferred arrangements if the employer either (1) satisfies a matching contribution requirement or (2) makes

a nonelective contribution to a defined contribution plan of at least

3 percent of an employee’s compensation on behalf of each nonhighly compensated employee who is eligible to participate in the

arrangement without regard to the permitted disparity rules (sec.

401(1)). A plan satisfies the matching contribution requirement if,

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

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

to 3 percent of compensation and (b) 50 percent of the employee’s

elective deferrals from 3 to 5 percent of compensation; and (2), the

rate of match with respect to any elective contribution for highly

compensated employees is not greater than the rate of match for

nonhighly compensated employees. Matching contributions that

satisfy the design-based safe harbor for cash or deferred arrangeVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00045 Fmt 6659 Sfmt 6602 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
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8This provision is not intended to preclude the use of nonelective contributions that are used

to satisfy the safe harbor rules from being used to satisfy other qualified retirement plan nondiscrimination rules, including those involving cross-testing.

ments are deemed to satisfy the ACP test. Certain additional

matching contributions are also deemed to satisfy the ACP test.

REASONS FOR CHANGE

The top-heavy rules primarily affect the plans of small employers. While the top-heavy rules were intended to provide additional

minimum benefits to rank-and-file employees, the Committee is

concerned that in some cases the top-heavy rules may act as a deterrent to the establishment of a plan by a small employer. The

Committee believes that simplification of the top-heavy rules will

help alleviate the additional administrative burdens the rules place

on small employers. The Committee also believes that, in applying

the top-heavy minimum benefit rules, the employer should receive

credit for all contributions the employer makes, including matching

contributions.

The Committee understands that some employers may have been

discouraged from adopting a safe harbor section 401(k) plan due to

concerns about the top-heavy rules. The Committee believes that

facilitating the adoption of such plans will broaden coverage. Thus,

the Committee believes it appropriate to provide that such plans

are not subject to the top-heavy rules.

EXPLANATION OF PROVISION

Definition of top-heavy plan

The provision provides that a plan consisting of a cash-or-deferred arrangement that satisfies the design-based safe harbor for

such plans and matching contributions that satisfy the safe harbor

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

nonelective contributions provided under such a plan may be taken

into account in satisfying the minimum contribution requirements

applicable to top-heavy plans.8

In determining whether a plan is top-heavy, the provision provides that distributions during the year ending on the date the topheavy determination is being made are taken into account. The

present-law 5-year rule applies with respect to in-service distributions. Similarly, the provision provides that an individual’s accrued

benefit or account balance is not taken into account if the individual has not performed services for the employer during the 1-

year period ending on the date the top-heavy determination is

being made.

Definition of key employee

The provision (1) provides that an employee is not considered a

key employee by reason of officer status unless the employee earns

more than $150,000 in compensation for the year, and (2) repeals

the top-10 owner key employee category.

The provision repeals the 4-year lookback rule for determining

key employee status and provides that an employee is a key employee only if he or she is a key employee during the current plan

year.

47

9Thus, this provision overrides the provision in Treasury regulations that, if matching contributions are used to satisfy the minimum benefit requirement, then they are not treated as

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

The family ownership attribution rule no longer applies in determining whether an individual is a 5-percent owner of the employer

for purposes of the top-heavy rules only.

Minimum benefit for non-key employees

Under the provision, matching contributions are taken into account in determining whether the minimum benefit requirement

has been satisfied.9

The provision provides that, in determining the minimum benefit

required under a defined benefit plan, a year of service does not include any year in which no employee benefits under the plan (as

determined under sec. 410).

EFFECTIVE DATE

The provision is effective for years beginning after December 31,

2000.

D. ELECTIVE DEFERRALS NOT TAKEN INTO ACCOUNT FOR PURPOSES

OF DEDUCTION LIMITS (SEC. 204 OF THE BILL AND SEC. 404 OF

THE CODE)

PRESENT LAW

Employer contributions to one or more qualified retirement plans

are deductible subject to certain limits. In general, the deduction

limit depends on the kind of plan.

In the case of a defined benefit pension plan or a money purchase pension plan, the employer generally may deduct the amount

necessary to satisfy the minimum funding cost of the plan for the

year. If a defined benefit pension plan has more than 100 participants, the maximum amount deductible is at least equal to the

plan’s unfunded current liabilities.

In the case of a profit-sharing or stock bonus plan, the employer

generally may deduct an amount equal to 15 percent of compensation of the employees covered by the plan for the year.

If an employer sponsors both a defined benefit pension plan and

a defined contribution plan that covers some of the same employees

(or a money purchase pension plan and another kind of defined

contribution plan), the total deduction for all plans for a plan year

generally is limited to the greater of (1) 25 percent of compensation

or (2) the contribution necessary to meet the minimum funding requirements of the defined benefit pension plan for the year (or the

amount of the plan’s unfunded current liabilities, in the case of a

plan with more than 100 participants).

For purposes of the deduction limits, employee elective deferral

contributions to a section 401(k) plan are treated as employer contributions and, thus, are subject to the generally applicable deduction limits.

Subject to certain exceptions, nondeductible contributions are

subject to a 10-percent excise tax.

48

REASONS FOR CHANGE

Subjecting elective deferrals to the normally applicable deduction

limits may cause employers to restrict the amount of elective deferrals an employee may make or to restrict employer contributions

to the plan, thereby reducing participants’ ultimate retirement benefits and their ability to save adequately for retirement. The Committee believes that the amount of elective deferrals otherwise allowable should not be further limited through application of the deduction rules.

EXPLANATION OF PROVISION

Under the provision, elective deferral contributions are not subject to the deduction limits, and the application of a deduction limitation to any other employer contribution to a qualified retirement

plan does not take into account elective deferral contributions.

EFFECTIVE DATE

The provision is effective for years beginning after December 31,

2000.

E. REPEAL OF COORDINATION REQUIREMENTS FOR DEFERRED COM- PENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX- EXEMPT ORGANIZATIONS (SEC. 205 OF THE BILL AND SEC. 457 OF

THE CODE)

PRESENT LAW

Compensation deferred under an eligible deferred compensation

plan of a tax-exempt or State and local government employer (a

‘‘section 457 plan’’) is not includible in gross income until paid or

made available. In general, the maximum permitted annual deferral under such a plan is the lesser of (1) $8,000 (in 2000) or (2)

331⁄3 percent of compensation. The $8,000 limit is increased for in- flation in $500 increments. Under a special catch-up rule, a section

457 plan may provide that, for one or more of the participant’s last

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

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

for that year. The $8,000 limit (as modified under the catch-up rule), applies

to all deferrals under all section 457 plans in which the individual

participates. In addition, in applying the $8,000 limit, contributions

under a tax-sheltered annuity (‘‘section 403(b) annuity’’), elective

deferrals under a qualified cash or deferred arrangement (‘‘section

401(k) plan’’), salary reduction contributions under a simplified employee pension plan (‘‘SEP’’), and contributions under a SIMPLE

plan are taken into account. Further, the amount deferred under

a section 457 plan is taken into account in applying a special catchup rule for section 403(b) annuities.

REASONS FOR CHANGE

The Committee believes that individuals participating in a section 457 plan should also be able to fully participate in a section

403(b) annuity or section 401(k) plan of the employer. Eliminating

49

10The limits on deferrals under a section 457 plan are modified under other provisions of the

bill. 11 User fees are statutorily authorized; however, the IRS sets the dollar amount of the fee applicable to any particular type of request.

the coordination rule may also encourage the establishment of section 403(b) or 401(k) plans by tax-exempt and governmental employers (as permitted under present law).

EXPLANATION OF PROVISION

The provision repeals the rules coordinating the section 457 dollar limit with contributions under other types of plans.10

EFFECTIVE DATE

The provision is effective for years beginning after December 31,

2000.

F. ELIMINATE IRS USER FEES FOR CERTAIN DETERMINATION LETTER REQUESTS REGARDING EMPLOYER PLANS (SEC. 206 OF THE

BILL AND SEC. 7527 OF THE CODE)

PRESENT LAW

An employer that maintains a retirement plan for the benefit of

its employees may request from the Internal Revenue Service

(‘‘IRS’’) a determination as to whether the form of the plan satisfies

the requirements applicable to tax-qualified plans (sec. 401(a)). In

order to obtain from the IRS a determination letter on the qualified

status of the plan, the employer must pay a user fee. The user fee

may range from $125 to $1,250, depending upon the scope of the

request and the type and format of the plan.11

REASONS FOR CHANGE

One of the factors affecting the decision of a small employer to

adopt a plan is the level of administrative costs associated with the

plan. The Committee believes that reducing administrative costs,

such as IRS user fees, will help further the establishment of qualified plans by small employers.

EXPLANATION OF PROVISION

A small employer (100 or fewer employees) is not required to pay

a user fee for a determination letter request with respect to the

qualified status of a retirement plan that the employer maintains

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

provision applies only to requests by employers for determination

letters concerning the qualified retirement plans they maintain.

Therefore, a sponsor of a prototype plan is required to pay a user

fee for a request for a notification letter, opinion letter, or similar

ruling. A small employer that adopts a prototype plan, however, is

not required to pay a user fee for a determination letter request

with respect to the employer’s plan.

EFFECTIVE DATE

The provision is effective for determination letter requests made

after December 31, 2000.

50

12 Another provision in the bill provides that elective deferrals are not subject to the deduction

limits. 13 Rev. Rul. 65–295, 1965–2 C.B. 148. 14Treas. Reg. sec. 1.410(b)–3.

G. DEDUCTION LIMITS (SEC. 207 OF THE BILL AND SEC. 404 OF THE

CODE)

PRESENT LAW

Employer contributions to one or more qualified retirement plans

are deductible subject to certain limits. In general, the deduction

limit depends on the kind of plan. Subject to certain exceptions,

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

In the case of a defined benefit pension plan or a money purchase pension plan, the employer generally may deduct the amount

necessary to satisfy the minimum funding cost of the plan for the

year. If a defined benefit pension plan has more than 100 participants, the maximum amount deductible is at least equal to the

plan’s unfunded current liabilities.

In some cases, the amount of deductible contributions is limited

by compensation. In the case of a profit-sharing or stock bonus

plan, the employer generally may deduct an amount equal to 15

percent of compensation of the employees covered by the plan for

the year.

If an employer sponsors both a defined benefit pension plan and

a defined contribution plan that covers some of the same employees

(or a money purchase pension plan and another kind of defined

contribution plan), the total deduction for all plans for a plan year

generally is limited to the greater of (1) 25 percent of compensation

or (2) the contribution necessary to meet the minimum funding requirements of the defined benefit pension plan for the year (or the

amount of the plan’s unfunded current liabilities, in the case of a

plan with more than 100 participants).

In the case of an employee stock ownership plan (‘‘ESOP’’), principal payments on a loan used to acquire qualifying employer securities are deductible up to 25 percent of compensation.

For purposes of the deduction limits, employee elective deferral

contributions to a qualified cash or deferred arrangement (‘‘section

401(k) plan’’) are treated as employer contributions and, thus, are

subject to the generally applicable deduction limits.12

For purposes of the deduction limits, compensation means the

compensation otherwise paid or accrued during the taxable year to

the beneficiaries under the plan, and the beneficiaries under a profit-sharing or stock bonus plan are the employees who benefit under

the plan with respect to the employer’s contribution.13 An employee

who is eligible to make elective deferrals under a section 401(k)

plan is treated as benefitting under the arrangement even if the

employee elects not to defer.14

For purposes of the deduction rules, compensation generally includes only taxable compensation, and thus does not include salary

reduction amounts, such as elective deferrals under a section

401(k) plan or a tax-sheltered annuity (‘‘section 403(b) annuity’’),

elective contributions under a deferred compensation plan of a taxexempt organization or a State or local government (‘‘section 457

plan’’), and salary reduction contributions under a section 125 cafeVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00050 Fmt 6659 Sfmt 6602 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
51

teria plan. For purposes of the contribution limits under section

415, compensation does include such salary reduction amounts.

REASONS FOR CHANGE

The Committee believes that compensation unreduced by employee elective contributions is a more appropriate measure of compensation for plan purposes, including deduction limits, than the

present-law rule. Applying the same definition for deduction purposes as is generally used for other qualified plan purposes will

also simplify application of the qualified plan rules. The Committee

also believes that the 15 percent of compensation limit may restrict

the amount of employer contributions to the plan, thereby reducing

participants’ ultimate retirement benefits and their ability to adequately save for retirement.

EXPLANATION OF PROVISION

Under the provision, the definition of compensation for purposes

of the deduction rules includes salary reduction amounts treated as

compensation under section 415. In addition, the annual limitation

on the amount of deductible contributions to a profit-sharing or

stock bonus plan is increased from 15 percent to 20 percent of compensation of the employees who benefit under the plan for the year.

EFFECTIVE DATE

The provision is effective for years beginning after December 31,

2000.

H. OPTION TO TREAT ELECTIVE DEFERRALS AS AFTER-TAX CONTRIBUTIONS (SEC. 208 OF THE BILL AND NEW SEC. 402a OF THE

CODE)

PRESENT LAW

A qualified cash or deferred arrangement (‘‘section 401(k) plan’’)

or a tax-sheltered annuity (‘‘section 403(b) annuity’’) may permit a

participant to elect to have the employer make payments as contributions to the plan or to the participant directly in cash. Contributions made to the plan at the election of a participant are elective deferrals. Elective deferrals must be nonforfeitable and are

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

restrictions. In addition, elective deferrals under a section 401(k)

plan are subject to special nondiscrimination rules. Elective deferrals (and earnings attributable thereto) are not includible in a participant’s gross income until distributed from the plan.

Individuals with adjusted gross income below certain levels generally may make nondeductible contributions to a Roth IRA and

may convert a deductible or nondeductible IRA into a Roth IRA.

Amounts held in a Roth IRA that are withdrawn as a qualified distribution are not includible in income, nor subject to the additional

10-percent tax on early withdrawals. A qualified distribution is a

distribution that (1) is made after the 5-taxable year period beginning with the first taxable year for which the individual made a

contribution to a Roth IRA, and (2) is made after attainment of age

591⁄2, is made on account of death or disability, or is a qualified

special purpose distribution (i.e., for first-time homebuyer expenses

52

15 Early distributions of converted amounts may also accelerate income inclusion of converted

amounts that are taxable under the 4-year rule applicable to 1998 conversions. 16 A qualified special purpose distribution, as defined under the rules relating to Roth IRAs,

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

of up to $10,000). A distribution from a Roth IRA that is not a

qualified distribution is includible in income to the extent attributable to earnings, and is subject to the 10-percent tax on early

withdrawals (unless an exception applies).15

REASONS FOR CHANGE

The recently-enacted Roth IRA provisions have provided individuals with another form of tax-favored retirement savings. For a variety of reasons, some individuals may prefer to save through a

Roth IRA rather than a traditional deductible IRA. The Committee

believes that similar savings choices should be available to participants in section 401(k) plans and tax-sheltered annuities.

EXPLANATION OF PROVISION

A section 401(k) plan or a section 403(b) annuity is permitted to

include a ‘‘qualified plus contribution program’’ that permits a participant to elect to have all or a portion of the participant’s elective

deferrals under the plan treated as designated plus contributions.

Designated plus contributions are elective deferrals that the participant designates as not excludable from the participant’s gross income.

The annual dollar limitation on a participant’s designated plus

contributions is the section 402(g) annual limitation on elective deferrals, reduced by the participant’s elective deferrals that the participant does not designate as designated plus contributions. Designated plus contributions are treated as any other elective deferral

for purposes of nonforfeitability requirements and distribution restrictions. Under a section 401(k) plan, designated plus contributions also are treated as any other elective deferral for purposes of

the special nondiscrimination requirements.

The plan is required to establish a separate account, and maintain separate recordkeeping, for a participant’s designated plus

contributions (and earnings allocable thereto). A qualified distribution from a participant’s designated plus contributions account is

not includible in the participant’s gross income. A qualified distribution is a distribution that is made after the end of a specified

nonexclusion period and that is (1) made on or after the date on

which the participant attains age 591⁄2, (2) made to a beneficiary

(or to the estate of the participant) on or after the death of the participant, or (3) attributable to the participant’s being disabled.16

The nonexclusion period is the 5-year-taxable period beginning

with the earlier of (1) the first taxable year for which the participant made a designated plus contribution to any designated plus

contribution account established for the participant under the plan,

or (2) if the participant has made a rollover contribution to the designated plus contribution account that is the source of the distribution from a designated plus contribution account established for the

participant under another plan, the first taxable year for which the

participant made a designated plus contribution to the previously

established account.

53

A distribution from a designated plus contributions account that

is a corrective distribution of an elective deferral (and income allocable thereto) that exceeds the section 402(g) annual limit on elective deferrals is not a qualified distribution.

A participant is permitted to roll over a distribution from a designated plus contributions account only to another designated plus

contributions account or a Roth IRA of the participant.

The Secretary of the Treasury is directed to require the plan administrator of each section 401(k) plan or section 403(b) annuity

that permits participants to make designated plus contributions to

make such returns and reports regarding designated plus contributions to the Secretary, plan participants and beneficiaries, and

other persons that the Secretary may designate.

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2000.

TITLE III. ENHANCING FAIRNESS FOR WOMEN

A. ADDITIONAL SALARY REDUCTION CATCH-UP CONTRIBUTIONS (SEC.

301 OF THE BILL AND SEC. 414 OF THE CODE)

PRESENT LAW

Elective deferral limitations

Under present law, under certain salary reduction arrangements,

an employee may elect to have the employer make payments as

contributions to a plan on behalf of the employee, or to the employee directly in cash. Contributions made at the election of the

employee are called elective deferrals.

The maximum annual amount of elective deferrals that an individual may make to a qualified cash or deferred arrangement (a

‘‘401(k) plan’’), a tax-sheltered annuity (‘‘section 403(b) annuity’’) or

a salary reduction simplified employee pension plan (‘‘SEP’’) is

$10,500 (for 2000). The maximum annual amount of elective deferrals that an individual may make to a SIMPLE plan is $6,000.

These limits are indexed for inflation in $500 increments.

Section 457 plans

The maximum annual deferral under a deferred compensation

plan of a State or local government or a tax-exempt organization

(a ‘‘section 457 plan’’) is the lesser of (1) $8,000 (for 2000) or (2)

331⁄3 percent of compensation. The $8,000 dollar limit is increased

for inflation in $500 increments. Under a special catch-up rule, the

section 457 plan may provide that, for one or more of the participant’s last 3 years before retirement, the otherwise applicable limit

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

limit applicable in preceding years of participation exceeded the deferrals for that year.

REASONS FOR CHANGE

Although the Committee believes that individuals should be saving for retirement throughout their working lives, as a practical

54

17 Another provision of the bill increases the dollar limit on elective deferrals under such arrangements. 18 In the case of a section 457 plan, this catch-up rule does not apply during the participant’s

last 3 years before retirement (in those years, the regularly applicable dollar limit is doubled). 19 Another provision of the bill provides that elective contributions are deductible without regard to the otherwise applicable deduction limits.

matter, many individuals simply do not focus on the amount of retirement savings they need until they near retirement. In addition,

many individuals may have difficulty saving more in earlier years,

e.g., because an employee leaves the workplace to care for a family.

Some individuals may have a greater ability to save as they near

retirement.

The Committee believes that the pension laws should assist individuals who are nearing retirement to save more for their retirement.

EXPLANATION OF PROVISION

The provision provides that the otherwise applicable dollar limit

on elective deferrals under a section 401(k) plan, section 403(b) annuity, or SIMPLE, or deferrals under a section 457 plan are increased for individuals who have attained age 50 by the end of the

year.17 Additional contributions are permitted to be made by an individual who has attained age 50 before the end of the plan year

and with respect to whom no other elective deferrals may otherwise

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

limitation of the Code (e.g., the annual limit on elective deferrals)

or of the plan. Under the provision, the additional amount of elective contributions that are permitted to be made by an eligible individual participating in such a plan is the lesser of (1) $5,000, or

(2) the participant’s compensation for the year reduced by any

other elective deferrals of the participant for the year.18 This

$5,000 amount is increased for inflation in $500 increments in 2006

and thereafter.

Catch-up contributions made under the provision are not subject

to any other contribution limits and are not taken into account in

applying other contribution limits. Such contributions are subject

to applicable nondiscrimination rules.19

An employer is permitted to make matching contributions with

respect to catch-up contributions. Any such matching contributions

are subject to the normally applicable rules.

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2000.

B. EQUITABLE TREATMENT FOR CONTRIBUTIONS OF EMPLOYEES TO

DEFINED CONTRIBUTION PLANS (SEC. 302 OF THE BILL AND SECS.

403(b), 415, AND 457 OF THE CODE)

PRESENT LAW

Present law imposes limits on the contributions that may be

made to tax-favored retirement plans.

55

Defined contribution plans

In the case of a tax-qualified defined contribution plan, the limit

on annual additions that can be made to the plan on behalf of an

employee is the lesser of $30,000 (for 2000) or 25 percent of the employee’s compensation (sec. 415(c)). Annual additions include employer contributions, including contributions made at the election of

the employee (i.e., employee elective deferrals), after-tax employee

contributions, and any forfeitures allocated to the employee. For

this purpose, compensation means taxable compensation of the employee, plus elective deferrals, and similar salary reduction contributions. A separate limit applies to benefits under a defined benefit plan.

For years before January 1, 2000, an overall limit applies if an

employee is a participant in both a defined contribution plan and

a defined benefit plan of the same employer.

Tax-sheltered annuities

In the case of a tax-sheltered annuity (a ‘‘section 403(b) annuity’),

the annual contribution generally cannot exceed the lesser of the

exclusion allowance or the section 415(c) defined contribution limit.

The exclusion allowance for a year is equal to 20 percent of the employee’s includible compensation, multiplied by the employee’s

years of service, minus excludable contributions for prior years

under qualified plans, tax-sheltered annuities or section 457 plans

of the employer.

In addition to this general rule, employees of nonprofit educational institutions, hospitals, home health service agencies,

health and welfare service agencies, and churches may elect application of one of several special rules that increase the amount of

the otherwise permitted contributions. The election of a special rule

is irrevocable; an employee may not elect to have more than one

special rule apply.

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

service, the employee may elect to contribute up to the exclusion

allowance, without regard to the 25 percent of compensation limit

under section 415. Under this rule, the exclusion allowance is determined by taking into account no more than 10 years of service.

Under a second special rule, the employee may contribute up to

the lesser of: (1) the exclusion allowance; (2) 25 percent of the participant’s includible compensation; or (3) $15,000.

Under a third special rule, the employee may elect to contribute

up to the section 415(c) limit, without regard to the exclusion allowance. If this option is elected, then contributions to other plans

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

For purposes of determining the contribution limits applicable to

section 403(b) annuities, includible compensation means the

amount of compensation received from the employer for the most

recent period which may be counted as a year of service under the

exclusion allowance. In addition, includible compensation includes

elective deferrals and similar salary reduction amounts.

Treasury regulations include provisions regarding application of

the exclusion allowance in cases where the employee participates

in a section 403(b) annuity and a defined benefit plan. The Taxpayer Relief Act of 1997 directed the Secretary of the Treasury to

revise these regulations, effective for years beginning after DecemVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00055 Fmt 6659 Sfmt 6602 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
56

20 Another provision of the bill increases the defined contribution plan dollar limit.

ber 31, 1999, to reflect the repeal of the overall limit on contributions and benefits.

Section 457 plans

Compensation deferred under an eligible deferred compensation

plan of a tax-exempt or State and local governmental employer (a

‘‘section 457 plan’’) is not includible in gross income until paid or

made available. In general, the maximum permitted annual deferral under such a plan is the lesser of (1) $8,000 (in 2000) or (2)

331⁄3 percent of compensation. The $8,000 limit is increased for inflation in $500 increments.

REASONS FOR CHANGE

The present-law rules that limit contributions to defined contribution plans by a percentage of compensation reduce the amount

that lower- and middle-income workers can save for retirement.

The present-law limits may not allow such workers to accumulate

adequate retirement benefits, particularly if a defined contribution

plan is the only type of retirement plan maintained by the employer.

Conforming the contribution limits for tax-sheltered annuities to

the limits applicable to retirement plans will simplify the administration of the pension laws, and provide more equitable treatment

for participants in similar types of plans.

EXPLANATION OF PROVISION

Increase in defined contribution plan limit

The provision increases the 25 percent of compensation limitation on annual additions under a defined contribution plan to 100

percent.20

Conforming limits on tax-sheltered annuities

The provision repeals the exclusion allowance applicable to contributions to tax-sheltered annuities. Thus, such annuities are subject to the limits applicable to tax-qualified plans.

The provision also directs the Secretary of the Treasury to revise

the regulations relating to the exclusion allowance under section

403(b)(2) to render void the requirement that contributions to a defined benefit plan be treated as previously excluded amounts for

purposes of the exclusion allowance. For taxable years beginning

after December 31, 1999, the regulatory provisions regarding the

exclusion allowance are to be applied as if the requirement that

contributions to a defined benefit plan be treated as previously excluded amounts for purposes of the exclusion allowance were void.

Section 457 plans

The provision increases the 331⁄3 percent of compensation limitation on deferrals under a section 457 plan to 100 percent of compensation.

57

21The minimum vesting requirements are also contained in Title I of the Employee Retirement Income Security Act of 1974, as amended (‘‘ERISA’’).

EFFECTIVE DATE

The provision is generally effective for years beginning after December 31, 2000. The provision regarding the regulations under

section 403(b)(2) is effective on the date of enactment.

C. FASTER VESTING OF EMPLOYER MATCHING CONTRIBUTIONS (SEC.

303 OF THE BILL AND SEC. 411 OF THE CODE)

PRESENT LAW

Under present law, a plan is not a qualified plan unless a participant’s employer-provided benefit vests at least as rapidly as under

one of two alternative minimum vesting schedules. A plan satisfies

the first schedule if a participant acquires a nonforfeitable right to

100 percent of the participant’s accrued benefit derived from employer contributions upon the completion of 5 years of service. A

plan satisfies the second schedule if a participant has a nonforfeitable right to at least 20 percent of the participant’s accrued benefit

derived from employer contributions after 3 years of service, 40

percent after 4 years of service, 60 percent after 5 years of service,

80 percent after 6 years of service, and 100 percent after 7 years

of service.21

REASONS FOR CHANGE

The Committee understands that many employees, particularly

lower- and middle-income employees, do not take full advantage of

the retirement savings opportunities provided by their employer’s

section 401(k) plan. The Committee believes that providing faster

vesting for matching contributions will make section 401(k) plans

more attractive for employees, particularly lower- and middle-income employees, and will encourage employees to save more for

their own retirement. In addition, faster vesting for matching contributions will enable short-service employees to accumulate greater retirement savings.

EXPLANATION OF PROVISION

The provision applies faster vesting schedules to employer

matching contributions. Under the provision, employer matching

contributions have to vest at least as rapidly as under one of the

following two alternative minimum vesting schedules. A plan satisfies the first schedule if a participant acquires a nonforfeitable

right to 100 percent of employer matching contributions upon the

completion of 3 years of service. A plan satisfies the second schedule if a participant has a nonforfeitable right to 20 percent of employer matching contributions for each year of service beginning

with the participant’s second year of service and ending with 100

percent after 6 years of service.

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2000, with a delayed effective date for plans maintained

pursuant to a collective bargaining agreement. The provision does

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22State and local government plans and church plans are not required to actuarially increase

benefits that begin after age 701⁄2.

not apply to any employee until the employee has an hour of service after the effective date. In applying the new vesting schedule,

service before the effective date is taken into account.

D. SIMPLIFY AND UPDATE THE MINIMUM DISTRIBUTION RULES

(SECS. 304 AND 409 OF THE BILL AND SECS. 401(a)(9) AND 457 OF

THE CODE)

PRESENT LAW

In general

Minimum distribution rules apply to all types of tax-favored retirement vehicles, including qualified plans, individual retirement

arrangements (‘‘IRAs’’), tax-sheltered annuities (‘‘section 403(b) annuities’’), and eligible deferred compensation plans of tax-exempt

and State and local government employers (‘‘section 457 plans’’). In

general, under these rules, distribution of minimum benefits must

begin no later than the required beginning date. Minimum distribution rules also apply to benefits payable with respect to a plan

participant who has died. Failure to comply with the minimum distribution rules results in an excise tax imposed on the individual

plan participant equal to 50 percent of the required minimum distribution not distributed for the year. The excise tax can be waived

if the individual establishes to the satisfaction of the Secretary that

the shortfall in the amount distributed was due to reasonable error

and reasonable steps are being taken to remedy the shortfall.

Distributions prior to the death of the individual

In the case of distributions prior to the death of the plan participant, the minimum distribution rules are satisfied if either (1) the

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

is to be distributed (in accordance with regulations), beginning not

later than the required beginning date, over a permissible period.

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

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

expectancy of the participant and a designated beneficiary. In calculating minimum required distributions, life expectancies of the

participant and the participant’s spouse may be recomputed annually.

In the case of qualified plans, tax-sheltered annuities, and section 457 plans, the required beginning date is the April 1 of the

calendar year following the later of (1) the calendar year in which

the employee attains age 701⁄2 or (2) the calendar year in which the

employee retires. However, in the case of a 5-percent owner of the

employer, distributions are required to begin no later than the

April 1 of the calendar year following the year in which the 5-percent owner attains age 701⁄2. If commencement of benefits is delayed beyond age 701⁄2 from a defined benefit plan, then the accrued benefit of the employee must be actuarially increased to take

into account the period after age 701⁄2 in which the employee was

not receiving benefits under the plan.22 In the case of distributions

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from an IRA other than a Roth IRA, the required beginning date

is the April 1 following the calendar year in which the IRA owner

attains age 701⁄2. The pre-death minimum distribution rules do not

apply to Roth IRAs.

In general, under proposed regulations, in order to satisfy the

minimum distribution rules, annuity payments under a defined

benefit plan must be paid in period payments made at intervals not

longer than one year over a permissible period, and must be nonincreasing, or increase only as a result of the following: (1) cost-ofliving adjustments; (2) cash refunds of employee contributions; (3)

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

of the employee’s beneficiary. In the case of a defined contribution

plan, the minimum required distribution is determined by dividing

the employee’s benefit by the applicable life expectancy.

Distributions after the death of the plan participant

The minimum distribution rules also apply to distributions to

beneficiaries of deceased participants. In general, if the participant

dies after minimum distributions have begun, the remaining interest must be distributed at least as rapidly as under the minimum

distribution method being used as of the date of death. If the participant dies before minimum distributions have begun, then the

entire remaining interest must generally be distributed within 5

years of the participant’s death. The 5-year rule does not apply if

distributions begin within 1 year of the participant’s death and are

payable over the life of a designated beneficiary or over the life expectancy of a designated beneficiary. A surviving spouse beneficiary

is not required to begin distribution until the date the deceased

participant would have attained age 701⁄2.

Special rules for section 457 plans

Eligible deferred compensation plans of State and local and taxexempt employers (‘‘section 457 plans’’) are subject to the minimum

distribution rules described above. Such plans are also subject to

additional minimum distribution requirements (sec. 457(d)(2)(b)).

REASONS FOR CHANGE

The Committee believes that the minimum distribution rules are

among the most complex of the rules relating to tax-favored arrangements. While a plan or IRA trustee may assist the individual

in complying with the minimum distribution rules, ultimately the

responsibility for compliance falls on the individual. Many of the

complexities of the present-law rules are contained in Treasury regulations, which have not yet been finalized. The Committee believes that the present-law rules impose undue burdens on individuals and plan administrators.

The sanction for failure to comply with the minimum distribution

rules is severe. The Committee believes this sanction is inappropriate, particularly given the complexity of the rules, and the likelihood of inadvertent mistakes.

60

EXPLANATION OF PROVISION

Modification of post-death distribution rules

The provision applies the present-law rules applicable if the participant dies before distribution of minimum benefits has begun to

all post-death distributions. Thus, in general, if the employee dies

before his or her entire interest has been distributed, distribution

of the remaining interest must be made within 5 years of the date

of death, or begin within one year of the date of death and be paid

over the life or life expectancy of a designated beneficiary. In the

case of a surviving spouse, distributions are not required to begin

until the surviving spouse attains age 701⁄2. Minimum distributions

that have already begun may be recalculated under the new rule.

Reduction in excise tax

The provision reduces the excise tax on failures to satisfy the

minimum distribution rules to 10 percent of the amount that was

required to be distributed but was not distributed.

Treasury regulations

The Treasury is directed to update, simplify and finalize the regulations relating to the minimum distribution rules. The Treasury

is directed to reflect in the regulations current life expectancies and

to revise the required distribution methods so that, under reasonable assumptions, the amount of the required distribution does not

decrease over time. The regulations are to permit recalculation of

distributions for future years to reflect the change in the regulations, and to permit the election of a new designated beneficiary

and method of calculating life expectancy. The regulations are to

be effective for years beginning after December 31, 2000.

Section 457 plans

The provision repeals the special minimum distribution rules applicable to section 457 plans. Thus, such plans are subject to the

same minimum distribution rules applicable to other types of taxfavored arrangements.

EFFECTIVE DATE

In general, the provision is effective for years beginning after December 31, 2000.

E. CLARIFICATION OF TAX TREATMENT OF DIVISION OF SECTION 457

PLAN BENEFITS UPON DIVORCE (SEC. 305 OF THE BILL AND SECS.

414(p) AND 457 OF THE CODE)

PRESENT LAW

Under present law, benefits provided under a qualified retirement plan for a participant may not be assigned or alienated to

creditors of the participant, except in very limited circumstances.

One exception to the prohibition on assignment or alienation rule

is a qualified domestic relations order (‘‘QDRO’’). A QDRO is a domestic relations order that creates or recognizes a right of an alternate payee to any plan benefit payable with respect to a participant, and that meets certain procedural requirements.

61

23Treas. Reg. sec. 1.401(k)–1.

Under present law, a distribution from a governmental plan or

a church plan is treated as made pursuant to a QDRO if it is made

pursuant to a domestic relations order that creates or recognizes a

right of an alternate payee to any plan benefit payable with respect

to a participant. Such distributions are not required to meet the

procedural requirements that apply with respect to distributions

from qualified plans.

Under present law, amounts distributed from a qualified plan

generally are taxable to the participant in the year of distribution.

However, if amounts are distributed to the spouse (or former

spouse) of the participant by reason of a QDRO, the benefits are

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

former spouse) are taxable to the plan participant.

Section 457 of the Internal Revenue Code provides rules for deferral of compensation by an individual participating in an eligible

deferred compensation plan (‘‘section 457 plan’’) of a tax-exempt or

State and local government employer. The QDRO rules do not

apply to section 457 plans.

REASONS FOR CHANGE

The Committee believes that the rules regarding qualified domestic relations orders should apply to all types of employer-sponsored retirement plans.

EXPLANATION OF PROVISION

The provision applies the taxation rules for qualified plan distributions pursuant to a QDRO to distributions made pursuant to

a domestic relations order from a section 457 plan. In addition, a

section 457 plan is not treated as violating the restrictions on distributions from such plans due to payments to an alternate payee

under a QDRO. The special rule applicable to governmental plans

and church plans applies for purposes of determining whether a

distribution is pursuant to a QDRO.

EFFECTIVE DATE

The provision is effective for transfers, distributions and payments made after December 31, 2000.

F. MODIFICATION OF SAFE HARBOR RELIEF FOR HARDSHIP

WITHDRAWALS FROM 401(k) PLANS (SEC. 306 OF THE BILL)

PRESENT LAW

Elective deferrals under a qualified cash or deferred arrangement

(a ‘‘section 401(k) plan’’) may not be distributable prior to the occurrence of one or more specified events. One event upon which

distribution is permitted is the financial hardship of the employee.

Applicable Treasury regulations 23 provide that a distribution is

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

and is necessary to satisfy the heavy need.

The Treasury regulations provide a safe harbor under which a

distribution may be deemed necessary to satisfy an immediate and

62

heavy financial need. One requirement of this safe harbor is that

the employee be prohibited from making elective contributions and

employee contributions to the plan and all other plans maintained

by the employer for at least 12 months after receipt of the hardship

distribution.

REASONS FOR CHANGE

Although the Committee believes that it is appropriate to restrict

the circumstances in which an in-service distribution from a 401(k)

plan is permitted and to encourage participants to take such distributions only when necessary to satisfy an immediate and heavy

financial need, the Committee is concerned about the impact that

a 12-month suspension of contributions may have on the retirement savings of a participant who experiences a hardship. The

Committee believes that the combination of a 6-month contribution

suspension and the other elements of the regulatory safe harbor

will provide an adequate incentive for a participant to seek sources

of funds other than his or her 401(k) plan account balance in order

to satisfy financial hardships.

EXPLANATION OF PROVISION

The Secretary of the Treasury is directed to revise the applicable

regulations to reduce from 12 months to 6 months the period during which an employee must be prohibited from making elective

contributions and employee contributions in order for a distribution

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

EFFECTIVE DATE

The provision is effective for years beginning after December 31,

2000.

TITLE IV. INCREASING PORTABILITY FOR PARTICIPANTS

A. ROLLOVERS OF RETIREMENT PLAN AND IRA DISTRIBUTIONS

(SECS. 401–403 AND 409 OF THE BILL AND SECS. 401, 402, 403(b),

408, 457, AND 3405 OF THE CODE)

PRESENT LAW

In general

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

that apply depend on the type of plan involved. Similarly, the rules

regarding the tax treatment of amounts that are not rolled over depend on the type of plan involved.

Distributions from qualified plans

Under present law, an ‘‘eligible rollover distribution’’ from a taxqualified employer-sponsored retirement plan may be rolled over

tax free to a traditional individual retirement arrangement

63

24 A ‘‘traditional’’ IRA refers to IRAs other than Roth IRAs or SIMPLE IRAs. All references

to IRAs refers only to traditional IRAs. 25 An eligible rollover distribution may either be rolled over by the distributee within 60 days

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

plan.

(‘‘IRA’’) 24 or another qualified plan. 25 An ‘‘eligible rollover distribution’’ means any distribution to an employee of all or any portion

of the balance to the credit of the employee in a qualified plan, except the term does not include (1) any distribution which is one of

a series of substantially equal periodic payments made (a) for the

life (or life expectancy) of the employee or the joint lives (or joint

life expectancies) of the employee and the employee’s designated

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

distribution to the extent such distribution is required under the

minimum distribution rules, and (3) certain hardship distributions.

The maximum amount that can be rolled over is the amount of the

distribution includible in income, i.e., after-tax employee contributions cannot be rolled over. Qualified plans are not required to accept rollovers.

Distributions from tax-sheltered annuities

Eligible rollover distributions from a tax-sheltered annuity (‘‘section 403(b) annuity’’) may be rolled over into an IRA or another

section 403(b) annuity. Distributions from a section 403(b) annuity

cannot be rolled over into a tax-qualified plan. Section 403(b) annuities are not required to accept rollovers.

IRA distributions

Distributions from a traditional IRA, other than minimum required distributions, can be rolled over into another IRA. In general, distributions from an IRA cannot be rolled over into a qualified plan or section 403(b) annuity. An exception to this rule applies in the case of so-called ‘‘conduit IRAs.’’ Under the conduit IRA

rule, amounts can be rolled from a qualified plan into an IRA and

then subsequently rolled back to another qualified plan if the

amounts in the IRA are attributable solely to rollovers from a

qualified plan. Similarly, an amount may be rolled over from a section 403(b) annuity to an IRA and subsequently rolled back into a

section 403(b) annuity if the amounts in the IRA are attributable

solely to rollovers from a section 403(b) annuity.

Distributions from section 457 plans

A ‘‘section 457 plan’’ is an eligible deferred compensation plan of

a State or local government or tax-exempt employer that meets certain requirements. In some cases, different rules apply under section 457 to governmental plans and plans of tax-exempt employers.

For example, governmental section 457 plans are like qualified

plans in that plan assets are required to be held in a trust for the

exclusive benefit of plan participants and beneficiaries. In contrast,

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

employers.

Section 457 benefits can be transferred to another section 457

plan. Distributions from a section 457 plan cannot be rolled over

64

to another section 457 plan, a qualified plan, a section 403(b) annuity, or an IRA.

Rollovers by surviving spouses

A surviving spouse that receives an eligible rollover distribution

may roll over the distribution into an IRA, but not a qualified plan

or section 403(b) annuity.

Direct rollovers and withholding requirements

Qualified plans and section 403(b) annuities are required to provide that a plan participant has the right to elect that an eligible

rollover distribution be directly rolled over to another eligible retirement plan. If the plan participant does not elect the direct rollover option, then withholding is required on the distribution at a

20-percent rate.

Notice of eligible rollover distribution

The plan administrator of a qualified plan or a section 403(b) annuity is required to provide a written explanation of rollover rules

to individuals who receive a distribution eligible for rollover. In

general, the notice is to be provided within a reasonable period of

time before making the distribution and is to include an explanation of (1) the provisions under which the individual may have

the distribution directly rolled over to another eligible retirement

plan, (2) the provision that requires withholding if the distribution

is not directly rolled over, (3) the provision under which the distribution may be rolled over within 60 days of receipt, and (4) if

applicable, certain other rules that may apply to the distribution.

The Treasury Department has provided more specific guidance regarding timing and content of the notice.

Taxation of distributions

As is the case with the rollover rules, different rules regarding

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

403(b) annuity, or IRA are includible in income in the year received. In certain cases, distributions from qualified plans are eligible for capital gains treatment and averaging. These rules do not

apply to distributions from another type of plan. Distributions from

a qualified plan, IRA, and section 403(b) annuity generally are subject to an additional 10-percent early withdrawal tax if made before

age 591⁄2. There are a number of exceptions to the early withdrawal

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

others apply only to certain types of plans. For example, the 10-

percent early withdrawal tax does not apply to IRA distributions

for educational expenses, but does apply to similar distributions

from qualified plans and section 403(b) annuities. Benefits under a

section 457 plan are generally includible in income when paid or

made available. The 10-percent early withdrawal tax does not

apply to section 457 plans.

REASONS FOR CHANGE

Present law encourages individuals who receive distributions

from qualified plans and similar arrangements to save those distributions for retirement by facilitating tax-free rollovers to an IRA

65

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

rollover distributions.

or another qualified plan. The Committee believes that expanding

the rollover options for individuals in employer-sponsored retirement plans and owners of IRAs will provide further incentives for

individuals to continue to accumulate funds for retirement. The

Committee believes it appropriate to extend the same rollover rules

to governmental section 457 plans; like qualified plans, such plans

are required to hold plan assets in trust for employees.

EXPLANATION OF PROVISION

In general

The provision provides that eligible rollover distributions from

qualified retirement plans, section 403(b) annuities, and governmental section 457 plans generally could be rolled over to any of

such plans or arrangements.26 Similarly, distributions from an IRA

generally may be rolled over into a qualified plan, section 403(b)

annuity, or governmental section 457 plan. The direct rollover and

withholding rules are extended to distributions from a governmental section 457 plan, and such plans are required to provide the

written notification regarding eligible rollover distributions. The

rollover notice (with respect to all plans) is required to include a

description of the provisions under which distributions from the

plan to which the distribution is rolled over may be subject to restrictions and tax consequences different than those applicable to

distributions from the distributing plan. Qualified plans, section

403(b) annuities, and section 457 plans are not required to accept

rollovers.

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

qualified plan is not eligible for capital gains or averaging treatment if there was a rollover to the plan that would not have been

permitted under present law. Thus, in order to preserve capital

gains and averaging treatment for a qualified plan distribution

that is rolled over, the rollover has to be made to a ‘‘conduit IRA’’

as under present law, and then rolled back into a qualified plan.

Amounts distributed from a section 457 plan are subject to the

early withdrawal tax to the extent the distribution consists of

amounts attributable to rollovers from another type of plan. Section

457 plans are required to separately account for such amounts.

The provision also provides that benefits in governmental section

457 plans are includible in income when paid.

Rollover of after-tax contributions

The provision provides that employee after-tax contributions may

be rolled over into another qualified plan or a traditional IRA. In

the case of a rollover from a qualified plan to another qualified

plan, the rollover may be accomplished only through a direct rollover. In addition, a qualified plan may not accept rollovers of aftertax contributions unless the plan provides separate accounting for

such contributions (and earnings thereon). After-tax contributions

(including nondeductible contributions to an IRA) may not be rolled

over from an IRA into a qualified plan, tax-sheltered annuity, or

section 457 plan.

66

In the case of a distribution from a traditional IRA that is rolled

over into an eligible rollover plan that is not an IRA, the distribution is attributed first to amounts other than after-tax contributions.

Expansion of spousal rollovers

The provision provides that surviving spouses may roll over eligible rollover distributions to a qualified plan, section 403(b) annuity,

or governmental section 457 plan in which the spouse participates.

Treasury regulations

The Secretary is directed to prescribe rules necessary to carry

out the provisions. Such rules may include, for example, reporting

requirements and mechanisms to address mistakes relating to rollovers. It is anticipated that the IRS will develop forms to assist individuals who roll over after-tax contributions to an IRA in keeping

track of such contributions. Such forms could, for example, expand

Form 8606—Nondeductible IRAs, to include information regarding

after-tax contributions.

EFFECTIVE DATE

The provision is effective for distributions made after December

31, 2000.

B. WAIVER OF 60-DAY RULE (SEC. 404 OF THE BILL AND SECS. 402

AND 408 OF THE CODE)

PRESENT LAW

Under present law, amounts received from an IRA or qualified

plan may be rolled over tax free if the rollover is made within 60

days of the date of the distribution. The Secretary does not have

the authority to waive the 60-day requirement.

REASONS FOR CHANGE

The inability of the Secretary to waive the 60-day rollover period

can result in adverse tax consequences for individuals. The Committee believes such harsh results are inappropriate and that providing for waivers of the rule will help facilitate rollovers.

EXPLANATION OF PROVISION

The provision provides that the Secretary may waive the 60-day

rollover period if the failure to waive such requirement would be

against equity or good conscience, including cases of casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.

EFFECTIVE DATE

The provision applies to distributions made after December 31,

2000.

67

27 A similar provision is contained in Title I of ERISA. 28Treas. Reg. sec. 1.411(d)–4, Q&A–2(a)(3)(i).

C. TREATMENT OF FORMS OF DISTRIBUTION (SEC. 405 OF THE BILL

AND SEC. 411(d)(6) OF THE CODE)

PRESENT LAW

An amendment of a qualified retirement plan may not decrease

the accrued benefit of a plan participant. An amendment is treated

as reducing an accrued benefit if, with respect to benefits accrued

before the amendment is adopted, the amendment has the effect of

either (1) eliminating or reducing an early retirement benefit or a

retirement-type subsidy, or (2) except as provided by Treasury regulations, eliminating an optional form of benefit (sec. 411(d)(6)).27

The prohibition against the elimination of an optional form of

benefit applies to plan mergers, spinoffs, transfers, and transactions amending or having the effect of amending a plan or plans

to transfer plan benefits. For example, if Plan A, a profit-sharing

plan that provides for distribution of benefits in annual installments over ten or twenty years, is merged with Plan B, a profitsharing plan that provides for distribution of benefits in annual installments over life expectancy at the time of retirement, the

merged plan must preserve the ten- or twenty-year installment option with respect to benefits accrued under Plan A as of the date

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

Similarly, for example, if a participant’s benefit under a defined

contribution plan is transferred to another defined contribution

plan maintained by the same or a different employer, the optional

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

benefit under the transferor plan must be preserved.28

REASONS FOR CHANGE

The Committee understands that the application of the prohibition against the elimination of any optional form of benefit frequently results in complexity and confusion, especially in the context of business acquisitions and similar transactions, and makes

it difficult for participants to understand their benefit options and

make choices that are best-suited to their needs. The Committee

believes that it is appropriate to permit the elimination of duplicative benefit options that develop following plan mergers and similar

events while ensuring that meaningful early retirement benefit

payment options and subsidies may not be eliminated. In addition,

the Committee understands that a defined contribution plan participant who is entitled to receive a single sum distribution generally

may roll over such a distribution to an IRA and control the manner

of distribution from the IRA, thus reducing the need to prohibit the

elimination of all optional forms of benefits.

EXPLANATION OF PROVISION

A defined contribution plan to which benefits are transferred is

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

previously available under the transferor plan if (1) the plan receives from another defined contribution plan a direct transfer of

68

the participant’s or beneficiary’s benefit accrued under the transferor plan, or the plan results from a merger or other transaction

that has the effect of a direct transfer (including consolidations of

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

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

is made after the participant or beneficiary received a notice describing the consequences of making the election, (4) if the transferor plan provides for an annuity as the normal form of distribution in accordance with the joint and survivor annuity rules (sec.

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

manner similar to the consent required by section 417, and (5) the

transferee plan allows the participant or beneficiary to receive distribution of his or her benefit under the transferee plan in the form

of a single sum distribution.

In addition, except to the extent provided by the Secretary of the

Treasury in regulations, a defined contribution plan is not treated

as reducing a participant’s accrued benefit if (1) a plan amendment

eliminates a form of distribution previously available under the

plan, (2) a single sum distribution is available to the participant at

the same time or times as the form of distribution eliminated by

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

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

form of distribution eliminated by the amendment.

Furthermore, the provision directs the Secretary of the Treasury

to provide by regulations that the prohibitions against eliminating

or reducing an early retirement benefit, a retirement-type subsidy,

or an optional form of benefit shall not apply to plan amendments

that do not adversely affect the rights of participants in a material

manner but that do eliminate or reduce early retirement benefits,

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

significant burdens and complexities for a plan and its participants.

It is intended that the factors to be considered in determining

whether an amendment has a materially adverse effect on a participant would include (1) all of the participant’s early retirement benefits, retirement-type subsidies, and optional forms of benefits that

are reduced or eliminated by the amendment, (2) the extent to

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

the amendment effective date provide rights that are comparable

to the rights that are reduced or eliminated by the plan amendment, (3) the number of years before the participant attains normal

retirement age under the plan (or early retirement age, as applicable), (4) the size of the participant’s benefit that is affected by the

plan amendment, in relation to the amount of the participant’s

compensation, and (5) the number of years before the plan amendment is effective.

The Secretary is directed to issue, not later than December 31,

2001, final regulations under section 411(d)(6), including regulations required under the provision.

69

29 Rev. Rul. 79-336, 1979-2 C.B. 187.

EFFECTIVE DATE

The provision is effective for years beginning after December 31,

2000, except that the direction to the Secretary is effective on the

date of enactment.

D. RATIONALIZATION OF RESTRICTIONS ON DISTRIBUTIONS (SEC. 406

OF THE BILL AND SECS. 401(k), 403(b), AND 457 OF THE CODE)

PRESENT LAW

Elective deferrals under a qualified cash or deferred arrangement

(‘‘section 401(k) plan’’), tax-sheltered annuity (‘‘section 403(b) annuity’’), or an eligible deferred compensation plan of a tax-exempt organization or State or local government (‘‘section 457 plan’’), may

not be distributable prior to the occurrence of one or more specified

events. These permissible distributable events include ‘‘separation

from service.’’

A separation from service occurs only upon a participant’s death,

retirement, resignation or discharge, and not when the employee

continues on the same job for a different employer as a result of

the liquidation, merger, consolidation or other similar corporate

transaction. A severance from employment occurs when a participant ceases to be employed by the employer that maintains the

plan. Under a so-called ‘‘same desk rule,’’ a participant’s severance

from employment does not necessarily result in a separation from

service. 29

In addition to separation from service and other events, a section

401(k) plan that is maintained by a corporation may permit distributions to certain employees who experience a severance from

employment with the corporation that maintains the plan but does

not experience a separation from service because the employee continues on the same job for a different employer as a result of a corporate transaction. If the corporation disposes of substantially all

of the assets used by the corporation in a trade or business, a distributable event occurs with respect to the accounts of the employees who continue employment with the corporation that acquires

the assets. If the corporation disposes of its interest in a subsidiary, a distributable event occurs with respect to the accounts of

the employees who continue employment with the subsidiary.

REASONS FOR CHANGE

The Committee believes that application of the ‘‘same desk’’ rule

is inappropriate because it hinders portability of retirement benefits, creates confusion for employees, and results in significant administrative burdens for employers that engage in business acquisition transactions.

EXPLANATION OF PROVISION

The provision modifies the distribution restrictions applicable to

section 401(k) plans, section 403(b) annuities, and section 457

plans to provide that distribution may occur upon severance from

employment rather than separation from service. In addition, the

provisions for distribution from a section 401(k) plan based upon a
70

corporation’s disposition of its assets or a subsidiary are repealed;

this special rule is no longer necessary under the provision.

EFFECTIVE DATE

The provision is effective for distributions after December 31,

2000.

E. PURCHASE OF SERVICE CREDIT UNDER GOVERNMENTAL PENSION

PLANS (SEC. 407 OF THE BILL AND SECS. 403(b) AND 457 OF THE

CODE)

PRESENT LAW

A qualified retirement plan maintained by a State or local government employer may provide that a participant may make aftertax employee contributions in order to purchase permissive service

credit, subject to certain limits (sec. 415). Permissive service credit

means credit for a period of service recognized by the governmental

plan only if the employee voluntarily contributes to the plan an

amount (as determined by the plan) that does not exceed the

amount necessary to fund the benefit attributable to the period of

service and that is in addition to the regular employee contributions, if any, under the plan.

In the case of any repayment of contributions and earnings to a

governmental plan with respect to an amount previously refunded

upon a forfeiture of service credit under the plan (or another plan

maintained by a State or local government employer within the

same State), any such repayment is not taken into account for purposes of the section 415 limits on contributions and benefits. Also,

service credit obtained as a result of such a repayment is not considered permissive service credit for purposes of the section 415

limits.

A participant may not use a rollover or direct transfer of benefits

from a tax-sheltered annuity (‘‘section 403(b) annuity’’) or an eligible deferred compensation plan of a tax-exempt organization of a

State or local government (‘‘section 457 plan’’) to purchase permissive service credits or repay contributions and earnings with respect to a forfeiture of service credit.

REASONS FOR CHANGE

The Committee understands that many employees work for multiple State or local government employers during their careers. The

Committee believes that allowing such employees to use their section 403(b) annuity and section 457 plan accounts to purchase permissive service credits or make repayments with respect to forfeitures of service credit will result in more significant retirement benefits for employees who would not otherwise be able to afford such

credits or repayments.

EXPLANATION OF PROVISION

A participant in a State or local governmental plan is not required to include in gross income a direct trustee-to-trustee transfer to a governmental defined benefit plan from a section 403(b) annuity or a section 457 plan if the transferred amount is used (1)

to purchase permissive service credits under the plan, or (2) to

71

30 A similar provision is contained in Title I of ERISA. 31Other provisions of the bill expand the kinds of plans to which benefits may be rolled over.

repay contributions and earnings with respect to an amount previously refunded under a forfeiture of service credit under the plan

(or another plan maintained by a State or local government employer within the same State).

EFFECTIVE DATE

The provision is effective for transfers after December 31, 2000.

F. EMPLOYERS MAY DISREGARD ROLLOVERS FOR PURPOSES OF

CASH-OUT RULES (SEC. 408 OF THE BILL AND SEC. 411(a)(11) OF

THE CODE)

PRESENT LAW

If an qualified retirement plan participant ceases to be employed

by the employer that maintains the plan, the plan may distribute

the participant’s nonforfeitable accrued benefit without the consent

of the participant and, if applicable, the participant’s spouse, if the

present value of the benefit does not exceed $5,000. If such an involuntary distribution occurs and the participant subsequently returns to employment covered by the plan, then service taken into

account in computing benefits payable under the plan after the return need not include service with respect to which a benefit was

involuntarily distributed unless the employee repays the benefit.30

Generally, a participant may roll over an involuntary distribution from a qualified plan to an IRA or to another qualified plan.31

REASONS FOR CHANGE

The present-law cash-out rule reflects a balancing of various policies. On the one hand is the desire to assist individuals to save for

retirement by making it easier to keep retirement funds in tax-favored vehicles. On the other hand is the recognition that keeping

track of small account balances of former employees creates administrative burdens for plans.

The Committee is concerned that, in some cases, the cash-out

rule may discourage plans from accepting rollovers because the

rollover will increase participants’ benefits to above the cash-out

amount, and increase administrative burdens. The Committee believes that disregarding rollovers for purposes of the cash-out rule

will further the intent of the cash-out rule by removing a possible

disincentive for plans to accept rollovers.

EXPLANATION OF PROVISION

A plan is permitted to provide that the present value of a participant’s nonforfeitable accrued benefit is determined without regard

to the portion of such benefit that is attributable to rollover contributions (and any earnings allocable thereto).

EFFECTIVE DATE

The provision is effective for distributions after December 31,

2000.
72

32The minimum funding requirements, including the full funding limit, are also contained in

title I of ERISA. 33 As originally enacted in the Pension Protection Act of 1997, the current liability full funding

limit was 150 percent of current liability. The Taxpayer Relief Act of 1997 increased the current

liability full funding limit to 155 percent in 1999 and 2000, and adopted the scheduled increases

described in the text.

TITLE V. STRENGTHENING PENSION SECURITY AND

ENFORCEMENT

A. PHASE IN REPEAL OF 150 PERCENT OF CURRENT LIABILITY FUNDING LIMIT; DEDUCTION FOR CONTRIBUTIONS TO FUND TERMINATION LIABILITY (SECS. 501 AND 502 OF THE BILL AND SECS.

404(a)(1), 412(c)(7), AND 4972(c) OF THE CODE)

PRESENT LAW

Under present law, defined benefit pension plans are subject to

minimum funding requirements designed to ensure that pension

plans have sufficient assets to pay benefits. A defined benefit pension plan is funded using one of a number of acceptable actuarial

cost methods.

No contribution is required under the minimum funding rules in

excess of the full funding limit. The full funding limit is generally

defined as the excess, if any, of (1) the lesser of (a) the accrued liability under the plan (including normal cost) or (b) 155 percent of

the plan’s current liability, over (2) the value of the plan’s assets

(sec. 412(c)(7)).32 In general, current liability is all liabilities to plan

participants and beneficiaries accrued to date, whereas the accrued

liability full funding limit is based on projected benefits. The current liability full funding limit is scheduled to increase as follows:

160 percent for plan years beginning in 2001 or 2002, 165 percent

for plan years beginning in 2003 and 2004, and 170 percent for

plan years beginning in 2005 and thereafter. 33 In no event is a

plan’s full funding limit less than 90 percent of the plan’s current

liability over the value of the plan’s assets.

An employer sponsoring a defined benefit pension plan generally

may deduct amounts contributed to satisfy the minimum funding

standard for the plan year. Contributions in excess of the full funding limit generally are not deductible. Under a special rule, an employer that sponsors a defined benefit pension plan (other than a

multiemployer plan) which has more than 100 participants for the

plan year may deduct amounts contributed of up to 100 percent of

the plan’s unfunded current liability.

REASONS FOR CHANGE

The Committee is concerned that the current liability full funding limit, which focuses on current but not projected benefits, may

result in inadequate funding of pension plans and thus jeopardize

pension security. The Committee believes that repealing the current liability full funding limit will encourage responsible pension

funding and help ensure that plan participants receive promised

benefits. Also, the Committee believes that the special deduction

rule should be expanded to give more plan sponsors incentives to

adequately fund their plans.

73

34The PBGC termination insurance program does not cover plans of professional service employers that have fewer than 25 participants.

EXPLANATION OF PROVISION

Current liability full funding limit

The provision gradually increases and then repeals the current

liability full funding limit. The current liability full funding limit

is 160 percent of current liability for plan years beginning in 2001,

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

plan years beginning in 2003. The current liability full funding

limit is repealed for plan years beginning in 2004 and thereafter.

Deduction for contributions to fund termination liability

The special rule allowing a deduction for unfunded current liability generally is modified to apply with respect to unfunded termination liability and is extended to all defined benefit pension plans,

i.e., the provision applies to multiemployer plans and plans with

100 or fewer participants. The special rule does not apply to plans

not covered by the PBGC termination insurance program.34

The provision also modifies the rule by providing that the deduction is for up to 100 percent of unfunded termination liability, determined as if the plan terminated at the end of the plan year. In

the case of a plan with less than 100 participants for the plan year,

termination liability does not include the liability attributable to

benefit increases for highly compensated employees resulting from

a plan amendment which was made or became effective, whichever

is later, within the last two years.

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2000.

B. EXCISE TAX RELIEF FOR SOUND PENSION FUNDING (SEC. 503 OF

THE BILL AND SEC. 4972 OF THE CODE)

PRESENT LAW

Under present law, defined benefit pension plans are subject to

minimum funding requirements designed to ensure that pension

plans have sufficient assets to pay benefits. A defined benefit pension plan is funded using one of a number of acceptable actuarial

cost methods.

No contribution is required under the minimum funding rules in

excess of the full funding limit. The full funding limit is generally

defined as the excess, if any, of (1) the lesser of (a) the accrued liability under the plan (including normal cost) or (b) 155 percent of

the plan’s current liability, over (2) the value of the plan’s assets

(sec. 412(c)(7)). In general, current liability is all liabilities to plan

participants and beneficiaries accrued to date, whereas the accrued

liability full funding limit is based on projected benefits. The current liability full funding limit is scheduled to increase as follows:

160 percent for plan years beginning in 2001 or 2002, 165 percent

for plan years beginning in 2003 and 2004, and 170 percent for

74

35 As originally enacted in the Pension Protection Act of 1997, the current liability full funding

limit was 150 percent of current liability. The Taxpayer Relief Act of 1997 increased the current

liability full funding limit to 155 percent in 1999 and 2000, and adopted the scheduled increases

described in the text. Another provision in the bill gradually increases and then repeals the current liability full funding limit. 36Other provisions of the bill repeal the current liability full funding limit for years beginning

in 2004 and thereafter.

plan years beginning in 2005 and thereafter. 35 In no event is a

plan’s full funding limit less than 90 percent of the plan’s current

liability over the value of the plan’s assets.

An employer sponsoring a defined benefit pension plan generally

may deduct amounts contributed to satisfy the minimum funding

standard for the plan year. Contributions in excess of the full funding limit generally are not deductible. Under a special rule, an employer that sponsors a defined benefit pension plan (other than a

multiemployer plan) which has more than 100 participants for the

plan year may deduct amounts contributed of up to 100 percent of

the plan’s unfunded current liability.

Present law also provides that contributions to defined contribution plans are deductible, subject to certain limitations.

Subject to certain exceptions, an employer that makes nondeductible contributions to a plan is subject to an excise tax equal

to 10 percent of the amount of the nondeductible contributions for

the year. The 10-percent excise tax does not apply to contributions

to certain terminating defined benefit plans. The 10-percent excise

tax also does not apply to contributions of up to 6 percent of compensation to a defined contribution plan for employer matching and

employee elective deferrals.

REASONS FOR CHANGE

The Committee believes that employers should be encouraged to

adequately fund their pension plans. Therefore, the Committee

does not believe that an excise tax should be imposed on employer

contributions that do not exceed the accrued liability full funding

limit.

EXPLANATION OF PROVISION

In determining the amount of nondeductible contributions, the

employer may elect not to take into account contributions to a defined benefit pension plan except to the extent they exceed the accrued liability full funding limit. Thus, if an employer elects, contributions in excess of the current liability full funding limit are

not subject to the excise tax on nondeductible contributions.36 An

employer making such an election for a year may not take advantage of the present-law exceptions for certain terminating plans

and certain contributions to defined contribution plans.

EFFECTIVE DATE

The provision is effective for years beginning after December 31,

2000.

75

37Treas. Reg. sec. 1.411(d)–6.

C. NOTICE OF SIGNIFICANT REDUCTION IN PLAN BENEFIT ACCRUALS

(SEC. 504 OF THE BILL AND NEW SEC. 4980f OF THE CODE)

PRESENT LAW

Section 204(h) of Title I of ERISA provides that a defined benefit

pension plan or a money purchase pension plan may not be amended so as to provide for a significant reduction in the rate of future

benefit accrual, unless, after adoption of the plan amendment and

not less than 15 days before the effective date of the plan amendment, the plan administrator provides a written notice (‘‘section

204(h) notice’’), setting forth the plan amendment (or a summary

of the amendment written in a manner calculated to be understood

by the average plan participant) and its effective date. The plan administrator must provide the section 204(h) notice to each plan participant, each alternate payee under an applicable qualified domestic relations order (‘‘QDRO’’), and each employee organization representing participants in the plan. The applicable Treasury regulations 37 provide, however, that a plan administrator need not provide the section 204(h) notice to any participant or alternate payee

whose rate of future benefit accrual is reasonably expected not to

be reduced by the amendment, nor to an employee organization

that does not represent a participant to whom the section 204(h)

notice must be provided. In addition, the regulations provide that

the rate of future benefit accrual is determined without regard to

optional forms of benefit, early retirement benefits, retirement-type

subsidiaries, ancillary benefits, and certain other rights and features.

A covered amendment generally will not become effective with

respect to any participants and alternate payees whose rate of future benefit accrual is reasonably expected to be reduced by the

amendment but who do not receive a section 204(h) notice. An

amendment will become effective with respect to all participants

and alternate payees to whom the section 204(h) notice was required to be provided if the plan administrator (1) has made a good

faith effort to comply with the section 204(h) notice requirements,

(2) has provided a section 204(h) notice to each employee organization that represents any participant to whom a section 204(h) notice was required to be provided, (3) has failed to provide a section

204(h) notice to no more than a de minimis percentage of participants and alternate payees to whom a section 204(h) notice was required to be provided, and (4) promptly upon discovering the oversight, provides a section 204(h) notice to each omitted participant

and alternate payee.

The Internal Revenue Code does not require any notice concerning a plan amendment that provides for a significant reduction

in the rate of future benefit accrual.

REASONS FOR CHANGE

The Committee is aware of recent significant publicity concerning conversions of traditional defined benefit pension plans to

‘‘cash balance’’ plans, with particular focus on the impact such conversions have on affected workers. Several legislative proposals

76

have been introduced to address some of the issues relating to such

conversions.

The Committee believes that employees are entitled to meaningful disclosure concerning plan amendments that may result in reductions of future benefit accruals. The Committee has determined

that present law does not require employers to provide such disclosure, particularly in cases where traditional defined benefit plans

are converted to cash balance plans. The Committee also believes

that any disclosure requirements applicable to plan amendments

should strike a balance between providing meaningful disclosure

and avoiding the imposition of unnecessary administrative burdens

on employers, and that this balance may best be struck through

the regulatory process with an opportunity for input from affected

parties.

The Committee understands that there are other issues in addition to disclosure that have arisen with respect to the conversion

of defined benefit plans to cash balance or other hybrid plans, particularly situations in which plan participants do not earn any additional benefit under the plan for some time after conversion

(called a ‘‘wear away’’). The Committee believes that this issue

should be further studied by the Treasury in order to provide guidance to the Congress.

EXPLANATION OF PROVISION

The provision adds to the Internal Revenue Code a requirement

that the plan administrator of a defined benefit pension plan or a

money purchase pension plan with more than 100 participants furnish a written notice concerning a plan amendment that provides

for a significant reduction in the rate of future benefit accrual. The

plan administrator is required to provide in this notice, in a manner calculated to be understood by the average plan participant,

sufficient information (as defined in Treasury regulations) to allow

participants to understand the effect of the amendment.

The notice requirement does not apply to governmental plans or

church plans with respect to which an election to have the qualified

plan participation, vesting, and funding rules apply has not been

made (sec. 410(d)).

The plan administrator is required to provide this notice to each

affected participant, each affected alternate payee, and each employee organization representing affected participants. For purposes of the provision, an affected participant or alternate payee is

a participant or alternate payee to whom the significant reduction

in the rate of future benefit accrual is reasonably expected to apply.

Except to the extent provided by Treasury regulations, the plan

administrator is required to provide the notice within a reasonable

time before the effective date of the plan amendment.

The provision imposes on a plan administrator that fails to comply with the notice requirement an excise tax equal to $100 per day

per omitted participant and alternate payee. For failures due to

reasonable cause and not to willful neglect, the total excise tax imposed during a taxable year of the employer will not exceed

$500,000. Furthermore, 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 relative to the failure involved.

77

The Committee anticipates that the Secretary will issue the necessary regulations with respect to disclosure within 90 days of enactment. The Committee also anticipates that such guidance may

be relatively detailed because of the need to provide for alternative

disclosures rather than a single disclosure methodology that may

not fit all situations, and the need to consider the complex actuarial calculations and assumptions involved in providing necessary

disclosures.

In addition, the provision directs the Secretary of the Treasury

to prepare a report on the effects of conversions of traditional defined benefit plans to cash balance or hybrid formula plans. Such

study is to examine the effect of such conversions on longer service

participants, including the incidence and effects of ‘‘wear away’’

provisions under which participants earn no additional benefits for

a period of time after the conversion. The Secretary is directed to

submit such report, together with recommendations thereon, to the

Committee on Ways and Means of the House of Representatives

and the Committee on Finance of the Senate as soon as practicable,

but not later than 60 days after the date of enactment. The Committee understands that the Treasury has been studying issues related to conversions to cash balance and other hybrid plans for

some time. Thus, the Committee expects that the Secretary will be

able to provide its study well within the 60-day deadline specified

by the bill.

EFFECTIVE DATE

The provision is effective for plan amendments taking effect on

or after the date of enactment. The period for providing any notice

required under the provision will not end before the last day of the

3-month period following the date of enactment. Prior to the

issuance of Treasury regulations, a plan will be treated as meeting

the requirements of the provision if the plan makes a good faith

effort to comply with such requirements.

D. MODIFICATIONS TO SECTION 415 LIMITS FOR MULTIEMPLOYER

PLANS (SEC. 505 OF THE BILL AND SEC. 415 OF THE CODE)

PRESENT LAW

Under present law, limits apply to contributions and benefits

under qualified plans (sec. 415). The limits on contributions and

benefits under qualified plans are based on the type of plan.

Under a defined benefit plan, the maximum annual benefit payable at retirement is generally the lesser of (1) 100 percent of average compensation for the highest three years, or (2) $135,000 (for

2000). The dollar limit is adjusted for cost-of-living increases in

$5,000 increments. The dollar limit is reduced in the case of retirement before the social security retirement age and increases in the

case of retirement after the social security retirement age.

A special rule applies to governmental defined benefit plans. In

the case of such plans, the defined benefit dollar limit is reduced

in the case of retirement before age 62 and increased in the case

of retirement after age 65. In addition, there is a floor on early retirement benefits. Pursuant to this floor, the minimum benefit payable at age 55 is $75,000.

78

38 Another provision increases this limit to 100 percent of compensation.

In the case of a defined contribution plan, the limit on annual

additions is the lesser of (1) 25 percent of compensation 38 or (2)

$30,000 (for 2000). In applying the limits on contributions and benefits, plans of the same employer are aggregated.

REASONS FOR CHANGE

The Committee understands that, because pension benefits

under multiemployer plans are typically based upon factors other

than compensation, the section 415 benefit limits frequently result

in benefit reductions for employees in industries in which wages

vary annually.

EXPLANATION OF PROVISION

Under the provision, the 100 percent of compensation defined

benefit plan limit does not apply to multiemployer plans. In addition, except in applying the defined benefit plan dollar limitation

and the limitation on annual additions, multiemployer plans are

not aggregated with other plans maintained by an employer contributing to the multiemployer plan.

EFFECTIVE DATE

The provision is effective for years beginning after December 31,

2000.

E. PROHIBITED ALLOCATIONS OF STOCK IN AN S CORPORATION

ESOP (SEC. 506 OF THE BILL AND SECS. 409 AND 4979a OF THE

CODE)

PRESENT LAW

The Small Business Job Protection Act of 1996 allowed qualified

retirement plan trusts described in section 401(a) to own stock in

an S corporation. That Act treated the plan’s share of the S corporation’s income (and gain on the disposition of the stock) as includible in full in the trust’s unrelated business taxable income

(‘‘UBTI’’).

The Tax Relief Act of 1997 repealed the provision treating items

of income or loss of an S corporation as UBTI in the case of an employee stock ownership plan (‘‘ESOP’). Thus, the income of an S

corporation allocable to an ESOP is not subject to current taxation.

Present law provides a deferral of income on the sales of certain

employer securities to an ESOP (sec. 1042). A 50-percent excise tax

is imposed on certain prohibited allocations of securities acquired

by an ESOP in a transaction to which section 1042 applies. In addition, such allocations are currently includible in the gross income

of the individual receiving the prohibited allocation.

REASONS FOR CHANGE

In enacting the 1996 Act provision allowing ESOPs to be shareholders of S corporations, the Congress intended to encourage employee ownership of closely-held businesses, and to facilitate the establishment of ESOPs by S corporations. At the same time, the

Congress provided that all income flowing through to an ESOP (or

79

39 A prohibited allocation does not result in disqualification of the plan. 40 Under the nondiscrimination rules applicable to qualified plans, including ESOPs, such individuals would be highly compensated.

other tax-exempt S shareholder), and gains and losses from the disposition of the stock, was treated as unrelated business taxable income. This treatment was consistent with the premise underlying

the S corporation rules that all income of an S corporation (including all gains of the sale of the stock of the corporation) should be

subject to a shareholder-level tax.

In enacting the present-law rule relating to S corporation ESOPs

in 1997, the Congress was concerned that the 1996 Act rule imposed double taxation on such ESOPs and ESOP participants. The

Congress believed such a result was inappropriate. Since the enactment of the 1997 Act, however, the Committee has become aware

that the present-law rules allow inappropriate deferral and possibly tax avoidance in some cases.

The Committee continues to believe that S corporations should

be able to encourage employee ownership through an ESOP. The

Committee does not believe, however, that ESOPs should be used

by S corporations owners to obtain inappropriate tax deferral or

avoidance. Specifically, the Committee believes that the tax deferral opportunities provided by an S corporation ESOP should be limited to those situations in which there is broad-based employee coverage under the ESOP and the ESOP benefits rank-and-file employees as well as highly compensated employees and historical

owners.

EXPLANATION OF PROVISION

In general

Under the provision, if there is a nonallocation year with respect

to an ESOP maintained by an S corporation: (1) the amount allocated in a prohibited allocation to an individual who is a disqualified person is treated as distributed to such individual (i.e., the

value of the prohibited allocation is includible in the gross income

of the individual receiving the prohibited allocation); (2) an excise

tax is imposed on the S corporation equal to 50 percent of the

amount involved in a prohibited allocation; and (3) an excise tax is

imposed on the S corporation with respect to any synthetic equity

owned by a disqualified person.39

It is expected that the provision will limit the establishment of

ESOPs by S corporations to those that provide broad-based employee coverage and that benefit rank-and-file employees as well as

highly compensated employees and historical owners. For example,

suppose 5 individuals are the sole, equal shareholders and sole employees of an S corporation.40 Under the provision, it is expected

that such individuals would not be able to obtain deferral by establishing an ESOP. In this case, the ESOP would benefit only the 5

highly compensated historical owners of the S corporation and the

ESOP would not result in broad-based employee ownership.

Definition of nonallocation year

A nonallocation year means any plan year of an ESOP holding

shares in an S corporation if, at any time during the plan year, disVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00079 Fmt 6659 Sfmt 6602 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
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41 A family member of a member of a ‘‘deemed 20-percent shareholder group’’ with deemed

owned shares would also be treated as a disqualified person. 42These attribution rules also apply to stock treated as owned by reason of the ownership of

synthetic equity. 43 As under section 318, an individual’s spouse is not treated as a member of the individual’s

family if the spouses are legally separated.

qualified persons own at least 50 percent of the number of outstanding shares of the S corporation.

A person is a disqualified person if the person is either (1) a

member of a ‘‘deemed 20-percent shareholder group’’ or (2) a

‘‘deemed 10-percent shareholder.’’ A person is a member of a

‘‘deemed 20-percent shareholder group’’ if the aggregate number of

deemed-owned shares of the person and his or her family members

is at least 20 percent of the number of deemed-owned shares of

stock in the S corporation.41 A person is a deemed 10-percent

shareholder if the person is not a member of a deemed 20-percent

shareholder group and the number of the person’s deemed-owned

shares is at least 10 percent of the number of deemed-owned

shares of stock of the corporation.

In general, ‘‘deemed-owned shares’’ means: (1) stock allocated to

the account of an individual under the ESOP, and (2) an individual’s share of unallocated stock held by the ESOP. An individual’s

share of unallocated stock held by an ESOP is determined in the

same manner as the most recent allocation of stock under the

terms of the plan.

For purposes of determining whether there is a nonallocation

year, ownership of stock is generally attributed under the rules of

section 318,42 except that: (1) the family attribution rules are modified to include certain other family members, as described below,

(2) option attribution does not apply (but instead special rules relating to synthetic equity described below would apply), and (3)

‘‘deemed-owned shares’’ held by the ESOP are treated as held by

the individual with respect to whom they are deemed owned.

Under the provision, family members of an individual include (1)

the spouse 43 of the individual, (2) an ancestor or lineal descendant

of the individual or his or her spouse, (3) a sibling of the individual

(or the individual’s spouse) and any lineal descendant of the brother or sister, and (4) the spouse of any person described in (2) or

(3).

The provision contains special rules applicable to synthetic equity interests. Except to the extent provided in regulations, the

stock on which a synthetic equity interest is based is treated as

outstanding stock of the S corporation and as deemed-owned shares

of the person holding the synthetic equity interest if such treatment would result in the treatment of any person as a disqualified

person or the treatment of any year as a nonallocation year. Thus,

for example, disqualified persons for a year include those individuals who are disqualified persons under the general rule (i.e., treating only those shares held by the ESOP as deemed-owned shares)

and those individuals who are disqualified individuals if synthetic

equity interests are treated as deemed-owned shares.

‘‘Synthetic equity’’ means any stock option, warrant, restricted

stock, deferred issuance stock right, or similar interest that gives

the holder the right to acquire or receive stock of the S corporation

in the future. Except to the extent provided in regulations, synthetic equity also includes a stock appreciation right, phantom

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44The provisions relating to synthetic equity do not modify the rules relating to S corporations, e.g., the circumstances in which options or similar interests are treated as creating a second class of stock.

stock unit, or similar right to a future cash payment based on the

value of such stock or appreciation in such value.44

Ownership of synthetic equity is attributed in the same manner

as stock would be attributed under the proposal (as described

above). In addition, ownership of synthetic equity is attributed

under the rules of section 318(a)(2) and (3) in the same manner as

stock.

Definition of prohibited allocation

An ESOP of an S corporation is required to provide that no portion of the assets of the plan attributable to (or allocable in lieu of)

S corporation stock may, during a nonallocation year, accrue (or be

allocated directly or indirectly under any qualified plan of the S

corporation) for the benefit of a disqualified person. A ‘‘prohibited

allocation’’ refers to violation of this provision. A prohibited allocation occurs, for example, if income on S corporation stock held by

an ESOP is allocated to the account of an individual who is a disqualified person.

Application of excise tax

In the case of a prohibited allocation, the S corporation is liable

for an excise tax equal to 50 percent of the amount of the allocation. For example, if S corporation stock is allocated in a prohibited

allocation, the excise tax is equal to 50 percent of the fair market

value of such stock.

A special rule applies in the case of the first nonallocation year,

regardless of whether there is a prohibited allocation. In that year,

the excise tax also applies to the fair market value of the deemedowned shares of any disqualified person held by the ESOP, even

though those shares are not allocated to the disqualified person in

that year.

As mentioned above, the S corporation is also liable for an excise

tax with respect to any synthetic equity interest owned by any disqualified person in a nonallocation year. The excise tax would be

50 percent of the value of the shares on which synthetic equity is

based.

Treasury regulations

The Treasury Department is given the authority to prescribe

such regulations as may be necessary to carry out the purposes of

the provision.

EFFECTIVE DATE

The provision generally is effective with respect to plan years beginning after December 31, 2001. In the case of an ESOP established after July 11, 2000, or an ESOP established on or before

such date if the employer maintaining the plan was not an S corporation on such date, the provision is effective with respect to plan

years ending after July 11, 2000.

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TITLE VI. REDUCING REGULATORY BURDENS

A. MODIFICATION OF TIMING OF PLAN VALUATIONS (SEC. 601 OF THE

BILL AND SEC. 412 OF THE CODE)

PRESENT LAW

Under present law, plan valuations are generally required annually for plans subject to the minimum funding rules. Under proposed Treasury regulations, except as provided by the Commissioner, the valuation must be as of a date within the plan year to

which the valuation refers or within the month prior to the beginning of that year

REASONS FOR CHANGE

While plan valuations are necessary to ensure adequate funding

of defined benefit pension plans, they also create administrative

burdens for employers. The Committee believes that permitting

limited elections to use as the valuation date for a plan year any

date within the immediately preceding plan year in the case of

well-funded plans strikes an appropriate balance between funding

concerns and employer concerns about plan administrative burdens.

EXPLANATION OF PROVISION

The provision incorporates into the statute the proposed regulation regarding the date of valuations. The provision also provides,

as an exception to this general rule, that the valuation date with

respect to a plan year may be any date within the immediately preceding plan year if, as of such date, plan assets are not less than

125 percent of the plan’s current liability. Information determined

as of such date is required to be adjusted actuarially, in accordance

with Treasury regulations, to reflect significant differences in plan

participants. An election to use a prior plan year valuation date,

once made, may only be revoked with the consent of the Secretary.

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2000.

B. ESOP DIVIDENDS MAY BE REINVESTED WITHOUT LOSS OF DIVIDEND DEDUCTION (SEC. 602 OF THE BILL AND SEC. 404 OF THE

CODE)

PRESENT LAW

An employer is entitled to deduct certain dividends paid in cash

during the employer’s taxable year with respect to stock of the employer that is held by an employee stock ownership plan (‘‘ESOP’’).

The deduction is allowed with respect to dividends that, in accordance with plan provisions, are (1) paid in cash directly to the plan

participants or their beneficiaries, (2) paid to the plan and subsequently distributed to the participants or beneficiaries in cash no

later than 90 days after the close of the plan year in which the

dividends are paid to the plan, or (3) used to make payments on

loans (including payments of interest as well as principal) that

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45 An employee includes a self-employed individual.

were used to acquire the employer securities (whether or not allocated to participants) with respect to which the dividend is paid.

REASONS FOR CHANGE

The Committee believes that it is appropriate to provide incentives for the accumulation of retirement benefits and expansion of

employee ownership. The Committee has determined that the

present-law rules concerning the deduction of dividends on employer stock held by an ESOP discourage employers from permitting such dividends to be reinvested in employer stock and accumulated for retirement purposes.

EXPLANATION OF PROVISION

In addition to the deductions permitted under present law for

dividends paid with respect to employer securities that are held by

an ESOP, an employer is entitled to deduct dividends that, at the

election of plan participants or their beneficiaries, are (1) payable

in cash directly to plan participants or beneficiaries, (2) paid to the

plan and subsequently distributed to the participants or beneficiaries in cash no later than 90 days after the close of the plan

year in which the dividends are paid to the plan, or (3) paid to the

plan and reinvested in qualifying employer securities.

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2000.

C. REPEAL TRANSITION RULE RELATING TO CERTAIN HIGHLY COMPENSATED EMPLOYEES (SEC. 603 OF THE BILL AND SEC. 1114(c)(4)

OF THE TAX REFORM ACT OF 1986)

PRESENT LAW

Under present law, for purposes of the rules relating to qualified

plans, a highly compensated employee is generally defined as an

employee 45 who (1) was a 5-percent owner of the employer at any

time during the year or the preceding year or (2) either (a) had

compensation for the preceding year in excess of $85,000 (for 2000)

or (b) at the election of the employer, had compensation in excess

of $85,000 for the preceding year and was in the top 20 percent of

employees by compensation for such year.

Under a rule enacted in the Tax Reform Act of 1986, a special

definition of highly compensated employee applies for purposes of

the nondiscrimination rules relating to qualified cash or deferred

arrangements (‘‘section 401(k) plans’’) and matching contributions.

This special definition applies to an employer incorporated on December 15, 1924, that meets certain specific requirements.

REASONS FOR CHANGE

The Committee believes that it is appropriate to repeal the special definition of highly compensated employee in light of the substantial modification of the general definition of highly comVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00083 Fmt 6659 Sfmt 6602 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
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46Treas. Reg. sec. 1.410(b)–6(g).

pensated employee in the Small Business Job Protection Act of

1996.

EXPLANATION OF PROVISION

The provision repeals the special definition of highly compensated employee under the Tax Reform Act of 1986. Thus, the

present-law definition applies.

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2000.

D. EMPLOYEES OF TAX-EXEMPT ENTITIES (SEC. 604 OF THE BILL)

PRESENT LAW

The Tax Reform Act of 1986 provided that nongovernmental taxexempt employers were not permitted to maintain a qualified cash

or deferred arrangement (‘‘section 401(k) plan’’). This prohibition

was repealed, effective for years beginning after December 31,

1996, by the Small Business Job Protection Act of 1996.

Treasury regulations provide that, in applying the nondiscrimination rules to a section 401(k) plan (or a section 401(m)

plan that is provided under the same general arrangement as the

section 401(k) plan), the employer may treat as excludable those

employees of a tax-exempt entity who could not participate in the

arrangement due to the prohibition on maintenance of a section

401(k) plan by such entities. Such employees may be disregarded

only if more than 95 percent of the employees who could participate in the section 401(k) plan benefit under the plan for the plan

year.46

Tax-exempt charitable organizations may maintain a tax-sheltered annuity (a ‘‘section 403(b) annuity’’) that allows employees to

make salary reduction contributions.

REASONS FOR CHANGE

The Committee believes that it is appropriate to modify the special rule regarding the treatment of certain employees of a tax-exempt organization as excludable for section 401(k) plan nondiscrimination testing purposes in light of the provision of the

Small Business Job Protection Act of 1996 that permits such organizations to maintain section 401(k) plans.

EXPLANATION OF PROVISION

The Treasury Department is directed to revise its regulations

under section 410(b) to provide that employees of a tax-exempt

charitable organization who are eligible to make salary reduction

contributions under a section 403(b) annuity may be treated as excludable employees for purposes of testing a section 401(k) plan, or

a section 401(m) plan that is provided under the same general arrangement as the section 401(k) plan of the employer if (1) no employee of such tax-exempt entity is eligible to participate in the section 401(k) or 401(m) plan and (2) at least 95 percent of the emVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00084 Fmt 6659 Sfmt 6602 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
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47The exclusion does not apply with respect to graduate-level courses.

ployees who are not employees of the charitable employer are eligible to participate in such section 401(k) plan or section 401(m)

plan.

The revised regulations will be effective for years beginning after

December 31, 1996.

EFFECTIVE DATE

The provision is effective on the date of enactment.

E. TREATMENT OF EMPLOYER-PROVIDED RETIREMENT ADVICE (SEC. 605 OF THE BILL AND SEC. 132 OF THE CODE)

PRESENT LAW

Under present law, certain employer-provided fringe benefits are

excludable from gross income (sec. 132) and wages for employment

tax purposes. These excludable fringe benefits include working condition fringe benefits and de minimis fringes. In general, a working

condition fringe benefit is any property or services provided by an

employer to an employee to the extent that, if the employee paid

for such property or services, such payment would be allowable as

a deduction as a business expense. A de minimis fringe benefit is

any property or services provided by the employer the value of

which, after taking into account the frequency with which similar

fringes are provided, is so small as to make accounting for it unreasonable or administratively impracticable. In addition, if certain requirements are satisfied, up to $5,250

annually of employer-provided educational assistance is excludable

from gross income (sec. 127) and wages. This exclusion expires with

respect to courses beginning after December 31, 2001.47 Education

not excludable under section 127 may be excludable as a working

condition fringe.

There is no specific exclusion under present law for employerprovided retirement planning services. However, such services may

be excludable as employer-provided educational assistance or a

fringe benefit.

REASONS FOR CHANGE

In order to plan adequately for retirement, individuals must anticipate retirement income needs and understand how their retirement income goals can be achieved. Employer-sponsored plans are

a key part of retirement income planning. The Committee believes

that employers sponsoring retirement plans should be encouraged

to provide retirement planning services for their employees in order

to assist them in preparing for retirement.

EXPLANATION OF PROVISION

Qualified retirement planning services provided to an employee

and his or her spouse by an employer maintaining a qualified plan

are excludable from income and wages. The exclusion does not

apply with respect to highly compensated employees unless the

services are available on substantially the same terms to each

member of the group of employees normally provided education and

information regarding the employer’s qualified plan. The exclusion

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48Treas. Reg. sec. 301.6058–1(a).

is intended to allow employers to provide advice and information

regarding retirement planning. The exclusion is not limited to information regarding the qualified 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 is not intended to apply to services that may be related to retirement planning, such as tax preparation, accounting, legal or brokerage services. The Committee also

intends that the provision is not to be interpreted as narrowing

present law.

EFFECTIVE DATE

The provision is effective with respect to taxable years beginning

after December 31, 2000.

F. REPORTING SIMPLIFICATION (SEC. 606 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.48 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 3 different forms: Form 5500,

Form 5500–C/R, and Form 5500–EZ. Form 5500 is the most comprehensive of the forms and requires the most detailed financial information. Form 5500–C/R requires less information than Form

5500, and Form 5500–EZ, which consists of only 1 page, is the simplest of the forms.

The size of the plan determines which form a plan administrator

must file. If the plan has more than 100 participants at the beginning of the plan year, the plan administrator generally must file

Form 5500. If the plan has fewer than 100 participants at the beginning of the plan year, the plan administrator generally may file

Form 5500–C/R. A plan administrator generally may file Form

5500–EZ if (1) the only participants in the plan are the sole owner

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

or partners in a partnership that maintains the plan (and such

partners’’ spouses), (2) the plan is not aggregated with another

plan in order to satisfy the minimum coverage requirements of section 410(b), (3) the employer is not a member of a related group

87

49 Rev. Proc. 98–22, 1998–12 I.R.B. 11, as modified by Rev. Proc. 99–13, 1999–5, I.R.B. 52.

of employers, and (4) the employer does not receive the services of

leased employees. If the plan satisfies the eligibility requirements

for Form 5500–EZ and the total value of the plan assets as of the

end of the plan year and all prior plan years does not exceed

$100,000, the plan administrator is not required to file a return.

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 is directed to provide for the filing

of a simplified annual return substantially similar to the Form

5500–EZ by a plan that (1) covers less than 25 employees on the

first day of the plan year, (2) is not aggregated with another plan

in order to satisfy the minimum coverage requirements of section

410(b), (3) is maintained by an employer that is not a member of

a related group of employers, and (4) is maintained by an employer

that does not receive the services of leased employees.

In addition, the Secretary is directed to modify the annual return

filing requirements with respect to plans that satisfy the eligibility

requirements for Form 5500–EZ to provide that if the total value

of the plan assets of such a plan as of the end of the plan year and

all prior plan years does not exceed $250,000, the plan administrator is not required to file a return.

EFFECTIVE DATE

The provision is effective on the date of enactment.

G. IMPROVEMENT TO EMPLOYEE PLANS COMPLIANCE RESOLUTION

SYSTEM (SEC. 607 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) and section 403(b), as applicable.49 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

88

identified on audit that are reasonable in light of the nature, extent, and severity of the violation, (4) provide consistent and uniform administration of the correction programs, and (5) permit employers to rely on the availability of EPCRS in taking corrective actions to maintain the tax-favored status of their retirement plans

and annuities.

The basic elements of the programs that comprise EPCRS are

self-correction, voluntary correction with IRS approval, and correction on audit. The Administrative Policy Regarding Self-Correction

(‘‘APRSC’’) permits a plan sponsor that has established compliance

practices to correct certain insignificant failures at any time (including during an audit), and certain significant failures within a

2-year period, without payment of any fee or sanction. The Voluntary Compliance Resolution (‘‘VCR’’) program, the Walk–In Closing Agreement Program (‘‘Walk-In CAP’), and the Tax-Sheltered

Annuity Voluntary Correction (‘‘TVC’’) program permit an employer, at any time before an audit, to pay a limited fee and receive

IRS approval of a correction. For a failure that is discovered on

audit and corrected, the Audit Closing Agreement Program (‘‘Audit

CAP’’) provides for a sanction that bears a reasonable relationship

to the nature, extent, and severity of the failure and that takes into

account the extent to which correction occurred before audit.

The IRS has expressed its intent that EPCRS will be updated

and improved periodically in light of experience and comments

from those who use it.

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 APRSC for significant

compliance failures, (4) expanding the availability to correct insignificant compliance failures under APRSC during audit, and (5) assuring that any tax, penalty, or sanction that is imposed by reason

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

EFFECTIVE DATE

The provision is effective on the date of enactment.

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H. REPEAL OF THE MULTIPLE USE TEST (SEC. 608 OF THE BILL AND

SEC. 401(m) OF THE CODE)

PRESENT LAW

Elective deferrals under a qualified cash or deferred arrangement

(‘‘section 401(k) plan’’) are subject to a special annual nondiscrimination test (‘‘ADP test’’). The ADP test compares the actual

deferral percentages (‘‘ADPs’’) of the highly compensated employee

group and the nonhighly compensated employee group. The ADP

for each group generally is the average of the deferral percentages

separately calculated for the employees in the group who are eligible to make elective deferrals for all or a portion of the relevant

plan year. Each eligible employee’s deferral percentage generally is

the employee’s elective deferrals for the year divided by the employee’s compensation for the year.

The plan generally satisfies the ADP test if the ADP of the highly compensated employee group for the current plan year is either

(1) not more than 125 percent of the ADP of the nonhighly compensated employee group for the prior plan year, or (2) not more

than 200 percent of the ADP of the nonhighly compensated employee group for the prior plan year and not more than 2 percentage points greater than the ADP of the nonhighly compensated employee group for the prior plan year.

Employer matching contributions and after-tax employee contributions under a defined contribution plan also are subject to a

special annual nondiscrimination test (‘‘ACP test’’). The ACP test

compares the actual deferral percentages (‘‘ACPs’’) of the highly

compensated employee group and the nonhighly compensated employee group. The ACP for each group generally is the average of

the contribution percentages separately calculated for the employees in the group who are eligible to make after-tax employee contributions or who are eligible for an allocation of matching contributions for all or a portion of the relevant plan year. Each eligible employee’s contribution percentage generally is the employee’s

aggregate after-tax employee contributions and matching contributions for the year divided by the employee’s compensation for the

year.

The plan generally satisfies the ACP test if the ACP of the highly

compensated employee group for the current plan year is either (1)

not more than 125 percent of the ACP of the nonhighly compensated employee group for the prior plan year, or (2) not more

than 200 percent of the ACP of the nonhighly compensated employee group for the prior plan year and not more than 2 percentage points greater than the ACP of the nonhighly compensated employee group for the prior plan year.

For any year in which (1) at least one highly compensated employee is eligible to participate in an employer’s plan or plans that

are subject to both the ADP test and the ACP test, (2) the plan

subject to the ADP test satisfies the ADP test but the ADP of the

highly compensated employee group exceeds 125 percent of the

ADP of the nonhighly compensated employee group, and (3) the

plan subject to the ACP test satisfies the ACP test but the ACP of

the highly compensated employee group exceeds 125 percent of the

ACP of the nonhighly compensated employee group, an additional

special nondiscrimination test (‘‘multiple use test’’) applies to the

90

elective deferrals, employer matching contributions, and after-tax

employee contributions. The plan or plans generally satisfy the

multiple use test if the sum of the ADP and the ACP of the highly

compensated employee group does not exceed the greater of (1) the

sum of (A) 1.25 times the greater of the ADP or the ACP of the

nonhighly compensated employee group, and (B) 2 percentage

points plus (but not more than 2 times) the lesser of the ADP or

the ACP of the nonhighly compensated employee group, or (2) the

sum of (A) 1.25 times the lesser of the ADP or the ACP of the nonhighly compensated employee group, and (B) 2 percentage points

plus (but not more than 2 times) the greater of the ADP or the

ACP of the nonhighly compensated employee group.

REASONS FOR CHANGE

The Committee believes that the ADP test and the ACP test are

adequate to prevent discrimination in favor of highly compensated

employees under 401(k) plans and has determined that the multiple use test unnecessarily complicates 401(k) plan administration.

EXPLANATION OF PROVISION

The provision repeals the multiple use test.

EFFECTIVE DATE

The provision is effective for years beginning after December 31,

2000.

I. FLEXIBILITY IN NONDISCRIMINATION, COVERAGE, AND LINE OF

BUSINESS RULES (SEC. 609 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.

91

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, 2000, the existing regulations issued under section

414(r) in order to expand (to the extent that the Secretary may determine to be appropriate) the ability of a plan to demonstrate compliance with the line of business requirements based upon the facts

and circumstances surrounding the design and operation of the

plan, even though the plan is unable to satisfy the mechanical tests

currently used to determine compliance.

The Secretary of the Treasury is directed to provide by regulation

applicable to years beginning after December 31, 2000, that a plan

is deemed to satisfy the nondiscrimination requirements of section

401(a)(4) if the plan satisfies the pre-1994 facts and circumstances

test, satisfies the conditions prescribed by the Secretary to appropriately limit the availability of such test, and is submitted to the

Secretary for a determination of whether it satisfies such test (to

the extent provided by the Secretary).

Similarly, a plan complies with the minimum coverage requirement of section 410(b) if the plan satisfies the pre-1989 coverage

rules, is submitted to the Secretary for a determination of whether

it satisfies the pre-1989 coverage rules (to the extent provided by

the Secretary), and satisfies conditions prescribed by the Secretary

by regulation that appropriately limit the availability of the pre1989 coverage rules.

EFFECTIVE DATE

The provision is effective on the date of enactment.

J. EXTENSION TO ALL GOVERNMENTAL PLANS OF MORATORIUM ON

APPLICATION OF CERTAIN NONDISCRIMINATION RULES APPLICABLE

TO STATE AND LOCAL GOVERNMENT PLANS (SEC. 610 OF THE BILL,

SEC. 1505 OF THE TAXPAYER RELIEF ACT OF 1997, AND SECS.

401(a) AND 401(k) OF THE CODE)

PRESENT LAW

All governmental plans are exempt from the minimum coverage

rules (sec. 410(b)). 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 unnecVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00091 Fmt 6659 Sfmt 6602 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
92

50Similar provisions are contained in Title I of ERISA.

essary 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, 2000.

K. NOTICE AND CONSENT PERIOD REGARDING DISTRIBUTIONS (SEC. 611 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.50

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

93

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.

EXPLANATION OF 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.

EFFECTIVE DATE

The provision is effective for years beginning after December 31,

2000.

TITLE VII. PROVISIONS RELATING TO PLAN AMENDMENTS

(SEC. 701 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

Any amendments to a plan or annuity contract required to be

made by the provisions of this Act or pursuant to any regulation

issued under this Act are not required to be made before the last

day of the first plan year beginning on or after January 1, 2003.

In the case of a governmental plan, the date for amendments is extended to the last day of the first plan year beginning on or after

January 1, 2005. The delayed amendment date shall not apply to

any amendment required or permitted by the provisions of this Act

94

or any regulation issued under this Act unless, during the period

beginning on the date the applicable section of the provision takes

effect and ending on the delayed amendment date, (1) the plan or

annuity contract is operated as if such amendment were in effect,

and (2) such amendment applies retroactively for such period.

EFFECTIVE DATE

The 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. 4843.

MOTION TO REPORT THE BILL

The bill, H.R. 4843, as amended, was ordered favorably reported

by a rollcall vote of 27 yeas to 9 nays (with a quorum being

present). The vote was as follows:

Representatives Yea Nay Present Representatives Yea Nay Present

Mr. Archer ............................. X ........... ............. Mr. Rangel ........................... ........... X .............

Mr. Crane .............................. ........... ........... ............. Mr. Stark .............................. ........... X .............

Mr. Thomas ........................... X ........... ............. Mr. Matsui ............................ ........... X .............

Mr. Shaw ............................... X ........... ............. Mr. Coyne ............................. X ........... .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. ........... X .............

Mr. Houghton ........................ X ........... ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. X ........... ............. Mr. McDermott ..................... ........... X .............

Mr. McCrery ........................... X ........... ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... ........... X .............

Mr. Ramstad ......................... X ........... ............. Mr. Neal ............................... ........... X .............

Mr. Nussle ............................. X ........... ............. Mr. McNulty .......................... ........... ........... .............

Mr. Johnson ........................... X ........... ............. Mr. Jefferson ........................ ........... X .............

Ms. Dunn .............................. X ........... ............. Mr. Tanner ............................ X ........... .............

Mr. Collins ............................ X ........... ............. Mr. Becerra .......................... ........... X .............

Mr. Portman .......................... X ........... ............. Mrs. Thurman ....................... X ........... .............

Mr. English ........................... X ........... ............. Mr. Doggett .......................... ........... ........... .............

Mr. Watkins ........................... X ........... .............

Mr. Hayworth ......................... X ........... .............

Mr. Weller .............................. X ........... .............

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

VOTES ON AMENDMENTS

A rollcall vote was conducted on the following amendment to the

Chairman’s amendment in the nature of a substitute.

95

An amendment by Messrs. Jefferson, Rangel, Matsui, Coyne,

Levin, Cardin, McDermott, Lewis of Georgia, Neal, Becerra, and

Thurman, regarding retirement benefits for low- and middle-income workers, tax relief for small employers who establish and

maintain pension plans, relief for multiemployer plans, and a sense

of the Congress regarding cash balance plans, was defeated by a

rollcall vote of 13 yeas to 22 nays. The vote was as follows:

Representatives Yea Nay Present Representatives Yea Nay Present

Mr. Archer ............................. ........... X ............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. ........... ........... ............. Mr. Stark .............................. X ........... .............

Mr. Thomas ........................... ........... X ............. Mr. Matsui ............................ X ........... .............

Mr. Shaw ............................... ........... X ............. Mr. Coyne ............................. X ........... .............

Mrs. Johnson ......................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ ........... X ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. ........... X ............. Mr. McDermott ..................... X ........... .............

Mr. McCrery ........................... ........... X ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. ........... X ............. Mr. Lewis (GA) ..................... ........... ........... .............

Mr. Ramstad ......................... ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Nussle ............................. ........... X ............. Mr. McNulty .......................... ........... ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Jefferson ........................ X ........... .............

Ms. Dunn .............................. ........... X ............. Mr. Tanner ............................ X ........... .............

Mr. Collins ............................ ........... X ............. Mr. Becerra .......................... X ........... .............

Mr. Portman .......................... ........... X ............. Mrs. Thurman ....................... X ........... .............

Mr. English ........................... ........... X ............. Mr. Doggett .......................... ........... ........... .............

Mr. Watkins ........................... ........... X .............

Mr. Hayworth ......................... ........... X .............

Mr. Weller .............................. ........... X .............

Mr. Hulshof ........................... ........... X .............

Mr. McInnis ........................... ........... X .............

Mr. Lewis (KY) ...................... ........... X .............

Mr. Foley ............................... ........... X .............

IV. BUDGET EFFECTS OF THE BILL

A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS

In compliance with clause 3(d)(2) of Rule XIII of the Rules of the

House of Representatives, the following statement is made concerning the affects on the budget of the revenue provisions of the

bill, H.R. 4843, as reported.

96

The bill is estimated to have the following effects on budget receipts for fiscal years 2001–2005:

ESTIMATED BUDGET EFFECTS OF H.R. 4843, THE ‘‘COMPREHENSIVE RETIREMENT SECURITY AND PENSION REFORM ACT,’’ AS REPORTED BY THE COMMITTEE O

AND MEANS

[Fiscal Years 2001–2005 in millions of dollars]

Provision Effective 2001 2002 2003 2004 2005 

Individual Retirement Account Provisions:

1. Modification of IRA Contribution Limits—increase the maximum contribution limit

for traditional and Roth IRAs to $4,000 in 2001, $4,000 in 2002, $5,000 in 2003,and index for inflation thereafter.

tyba 12/31/00 ¥395 ¥1,194 ¥2,013 ¥2,726 ¥3,404 

2. IRA Catch-Up Contributions—increase maximum contribution limits for traditional

and Roth IRAs for individuals age 50 and above to $5,000 in 2001 and 2002.

tyba 12/31/00 ¥201 ¥275 ¥87 ¥27 ¥26 

Total of Individual Retirement Account Provisions ........................................................ ......................................... ¥596 ¥1,469 ¥2,100 ¥2,753 ¥3,430 

Provisions for Expanding Coverage

1. Increase contribution and benefit limits:

a. Increase limitation on exclusion for elective deferrals to $11,000 in 2001,

$12,000 in 2002, $13,000 in 2003, $14,000 in 2004, and $15,000 in 2005;index thereafter 1 2.

yba 12/31/00 ¥130 ¥310 ¥452 ¥557 ¥640 

b. Increase limitation on SIMPLE elective contributions to: $7,000 in 2001,

$8,000 in 2002, $9,000 in 2003, and $10,000 in 2004; index thereafter 1 2.

yba 12/31/00 ¥4 ¥14 ¥21 ¥26 ¥28 

c. Increase defined benefit dollar limit to $160,000 ................................................ yba 12/31/00 ¥18 ¥31 ¥40 ¥45 ¥48 d. Lower early retirement age to 62; lower normal retirement age to 65 ................ yba 12/31/00 ¥3 ¥4 ¥4 ¥4 ¥5 e. Increase annual addition limitation for defined contribution plans to $40,000 1 yba 12/31/00 ¥6 ¥12 ¥14 ¥15 ¥16 

f. Increase qualified plan compensation limit to $200,000 1 ................................... yba 12/31/00 ¥43 ¥74 ¥84 ¥91 ¥99 

g. Increase limits on deferrals under deferred compensation plans of State and

local governments and tax-exempt organizations to: $11,000 in 2001, $12,000in 2002, $13,000 in 2003, $14,000 in 2004, and $15,000 in 2005; indexthereafter 1 2.

yba 12/31/00 ¥52 ¥91 ¥104 ¥114 ¥125 

2. Plan loans for subchapter S owners, partners, and sole proprietors ........................... lma 12/31/00 ¥18 ¥30 ¥33 ¥35 ¥37 

3. Modification of top-heavy rules ...................................................................................... yba 12/31/00 ¥4 ¥9 ¥11 ¥12 ¥14 

4. Elective deferrals not taken into account for purposes of deduction limits ................ yba 12/31/00 ¥40 ¥75 ¥87 ¥94 ¥101 

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

local governments and tax-exempt organizations.

yba 12/31/00 ¥16 ¥22 ¥22 ¥22 ¥22 

6. Elimination of user fee for certain requests regarding small employer pension plans;

waiver applies only for request made during first 5 plan years 3.

rma 12/31/00 ¥9 ¥5 ¥5 .................... .................... 

7. Definition of compensation for purposes of deduction limits 1 ..................................... yba 12/31/00 ¥1 ¥2 ¥3 ¥3 ¥3 

8. Option to treat effective deferrals as after-tax contributions ....................................... tyba 12/31/00 50 100 131 144 89 

ESTIMATED BUDGET EFFECTS OF H.R. 4843, THE ‘‘COMPREHENSIVE RETIREMENT SECURITY AND PENSION REFORM ACT,’’ AS REPORTED BY THE COMMITTEE O

AND MEANS—Continued

[Fiscal Years 2001–2005 in millions of dollars]

Provision Effective 2001 2002 2003 2004 2005 

9. Increase stock bonus and profit sharing plan deduction limit from 15% to 20% ..... tyba 12/31/00 ¥5 ¥9 ¥10 ¥11 ¥12 

Total of Provisions for Expanding coverage ................................................................... ......................................... ¥299 ¥588 ¥759 ¥885 ¥1,061 

Provisions for Enhancing Fairness for Women:

1. Additional catch-up contributions for individuals age 50 and above—increase the

otherwise applicable contribution limit by $5,000 in 2001 through 2005 and indexfor inflation thereafter.

tyba 12/31/00 ¥34 ¥52 ¥55 ¥57 ¥59 

2. Equitable treatment for contributions of employees to defined contribution plans1 .... yba 12/31/00 ¥51 ¥78 ¥84 ¥91 ¥97 

3. Faster vesting of certain employer matching contributions .......................................... pyba 12/31/00 Negligible Revenue Effect4. Simplify and update the minimum distribution rules by modifying post-death distribution rules, reducing (to 10%) the excise tax on failures to make minimum distributions, and directing the Treasury to simplify and finalize regulations relating to

the minimum distribution rules.

yba 12/31/00 ¥118 ¥212 ¥239 ¥268 ¥297 

5. Clarification of tax treatment of division of section 457 plan benefits upon divorce tdapma 12/31/00 Negligible Revenue Effect6. Modification of safe harbor relief for hardship withdrawals from 401(k) plans .......... yba 12/31/00 Negligible Revenue Effect

Total of Provisions for Enhancing Fairness for Women ................................................. ......................................... ¥203 ¥342 ¥378 ¥416 ¥453 

Provisions for Increasing Portability for Participants:

1. Rollovers allowed among governmental section 457 plans, section 403(b) plans, and

qualified plans.

da 12/31/00 26 ¥5 ¥5 ¥5 ¥5 

2. Rollovers of IRAs to workplace retirement plans ........................................................... da 12/31/00 Negligible Revenue Effect3. Rollovers of after-tax retirement plan contributions ..................................................... dma 12/31/00 Negligible Revenue Effect4. Waiver of 60-day rule ..................................................................................................... da 12/31/00 Negligible Revenue Effect5. Treatment of forms of qualified plan distributions ....................................................... yba12/31/00 Negligible Revenue Effect6. Rationalization of restrictions on distributions .............................................................. da 12/31/00 Negligible Revenue Effect7. Purchase of service credit in governmental defined benefit plans .............................. ta 12/31/00 Negligible Revenue Effect8. Employers may disregard rollovers for cash-out amounts ............................................ da 12/31/00 Negligible Revenue Effect9. Minimum distribution and inclusion requirements for section 457 plans .................... da 12/31/00 Considered in Other Provisions

Total of Provisions for Increasing Portability for Participants ...................................... ......................................... 26 ¥5 ¥5 ¥5 ¥5 

99

Provisions for Strengthening Pension Security and Enforcement:

1. Phase-in repeal of 150% of current liability funding limit; extend maximum deduction rule. pyba 12/31/00 ¥3 ¥14 ¥20 ¥36 ¥36 ¥109

2. Excise tax relief for sound pension funding .................................................................. yba ¥2 ¥3 ¥3 ¥3 ¥3 ¥14

3. Notice of significant reduction in plan benefit accruals .............................................. pateo/a DOE Negligible Revenue Effect4. Repeal 100% of compensation limit for multiemployer plans ...................................... yba 12/31/00 ¥2 ¥4 ¥4 ¥4 ¥4 ¥19

5. Modification of section 415 aggregation rules for multi-employer plans ..................... tyba 12/31/00 ¥1 ¥1 ¥1 ¥1 ¥1 ¥5

6. Prohibited allocations of stock in an ESOP of a subchapter S corporation ................. (4) 1 4 5 6 8 24

Total of Provisions for Strengthening Pension Security and Enforcement .................... ......................................... ¥7 ¥18 ¥23 ¥38 ¥36 ¥122

Provisions for Reducing Regulatory Burdens:

1. Modification of timing of plan valuations ................................................................... pyba 12/31/00 Negligible Revenue Effect

2. ESOP dividends may be reinvested without loss of dividend deduction .................... tyba 12/31/00 ¥19 ¥44 ¥56 ¥61 ¥63 ¥243

3. Repeat transition rule relating to certain highly compensated employes .................. pyba 12/31/00 ¥2 ¥3 ¥3 ¥3 ¥3 ¥134. Employees of tax-exempt entities 5 .............................................................................. DOE Negligible Revenue Effect

5. Treatment of employer-provided retirement advice ..................................................... yba 12/31/00 Negligible Revenue Effect

6. Pension plan reporting simplification 5 ....................................................................... 1/1/01 Negligible Revenue Effect

7. Improvement to Employee Plans Compliance Resolution System 5 ............................. DOE Negligible Revenue Effect

8. Repeal of multiple use test .......................................................................................... yba 12/31/00 Considered in Other Provisions9. Flexibility in nondiscrimination, coverage, and line of business rules 5 .................... DOE Negligible Revenue Effect

10. Extension to all governmental plans of moratorium on application of certain nondiscrimination rules applicable to State and local government plans. yba 12/31/00 Negligible Revenue Effect11. Notice and consent period regarding distributions ..................................................... yba 12/31/00 No Revenue Effect

Total of Provisions for Reducing Regulatory Burdens ................................................... ......................................... ¥21 ¥47 ¥59 ¥64 ¥66 ¥256

Provisions Relating to Plan Amendments .................................................................................... DOE No Revenue Effect

Net Total .......................................................................................................................... ......................................... ¥1,100 ¥2,469 ¥3,324 ¥4,161 ¥5,051 ¥16,106

1 Provision includes interaction with other provisions in Provisions for Expanding coverage.2 Provision includes interaction with the Individual Retirement Arrangement Provisions.3 Estimate provided by the Congressional Budget Office.4 Generally effective with respect to years beginning after December 31, 2001. In the case of an ESOP established after July 11, 2000, or an ESOP established on or before such date if the employer maintaining the plan was not an S corporation on such date, the proposal would be effective with respect to plan years ending after July 11, 2000. 5 Directs the Secretary of the Treasury to modify rules through regulations.

Legend for ‘‘Effective’’ column; da = distributions after; dma = distributions made after; DOE = date of enactment; lma = loans made after; pateo/a = plan amendments taking effect on or after; pyba = plan years beginning after; rma

= requests made after; ta = transfer after; tdapma = transfers, distributions, and payments made after; tyba = taxable years beginning after; and yba = years beginning after.

Note.—Details may not add to totals due to rounding.Source: Joint Committee on Taxation.

100

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 no new or increased budget authority.

Tax expenditures

In compliance with clause 2(c)(2) of rule XIII of the Rules of the

House of Representatives, the Committee states that the revenuereducing income tax provisions involve increased tax expenditures,

and the revenue-increasing income tax provisions involve reduced

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 Congressional Budget Office (CBO), the following statement by

CBO provided.

U.S. CONGRESS, CONGRESSIONAL BUDGET OFFICE, Washington, DC, July 17, 2000.

Hon. BILL ARCHER,

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. 4843, the Comprehensive

Retirement Security and Pension Reform Act of 2000.

If you wish further details on this estimate, we will be pleased

to provide them. The CBO staff contacts are Hester Grippando (for

revenues), and John R. Righter (for federal spending).

Sincerely,

BARRY B. ANDERSON

(For Dan L. Crippen, Director).

Enclosure.

H.R. 4843—Comprehensive Retirement Security and Pension Reform Act of 2000

Summary: H.R. 4843 would increase the maximum contribution

limit for Individual Retirement Accounts (IRAs) to $3,000 in 2001,

$4,000 in 2002, and $5,000 in 2003. After 2003, the maximum contribution rate would be indexed for inflation. The bill also would increase the maximum IRA contribution to $5,000 for individuals

aged 50 or older in years 2001 and 2002. In addition, the bill would

make numerous changes to pension laws.

The Joint Committee on Taxation (JCT) estimates that the bill

would reduce revenues by $1 billion in fiscal year 2001, by $16 billion over the 2001–2005 period, and by $52 billion over the 2001–

2010 period. In addition, CBO estimates that the bill would decrease direct spending by between $1 million and $2 million over

101

the 2001–2004 period. Because the bill would affect receipts and direct spending, pay-as-you-go procedures would apply.

H.R. 4843 contains no intergovernmental mandates as defined in

the Unfunded Mandates Reform Act (UMRA) and would impose no

costs on state, local or tribal governments. The bill contains one

new private-sector mandate. JCT has determined the cost of this

mandate would not exceed the threshold established by UMRA for

private-sector mandates ($109 million in fiscal year 2000, adjusted

annually for inflation).

Estimated cost to the Federal Government: The estimated budgetary impact on H.R. 4843 is shown in the following table. The outlay impact of this legislation falls within budget function 800 (general government).

By fiscal year, in millions of dollars—

2000 2001 2002 2003 2004 2005

CHANGES IN REVENUES

Estimated Revenues ............................................. 0 ¥1,100 ¥2,469 ¥3,324 ¥4,161 ¥5,051

CHANGES IN DIRECT SPENDING

Estimated Budget Authority ................................. 0 ¥1 (1) (1) (1) 0

Estimated Outlays ................................................ 0 ¥1 (1) (1) (1) 0

1 Less than $500,000.

Basis of estimate: JCT estimated the impact of the bill on federal

revenues, with the exception of the change in fees charged by the

Internal Revenue Service (IRS). Most of the revenue loss would result from the increase in the limit on IRA contributions. Those provisions would account for $35 billion of the $52 billion reduction in

revenues over the 2001–2010 period.

Beginning on January 1, 2001, the bill would eliminate the fee

the IRS currently charges for determination letters regarding small

business pension plans that are less than five years old. CBO estimates that eliminating these fees would decrease governmental receipts (revenue) by $19 million over the 2001–2003 period, net of

income and payroll tax offsets. Under current law, the authority to

charge such fees will expire at the end of fiscal year 2003. Thus

this provision would have no impact beyond 2003. This estimate is

based on recent fee collections and on information from the IRS.

The IRS has the authority to retain and spend, without further

appropriation action, a small portion of the fees it collects from taxpayers for certain rulings and determinations. By eliminating the

fee paid by small businesses for determination letters, H.R. 4348

would reduce the amounts available for the IRS to spend. CBO estimates that eliminating the fees would decrease direct spending by

nearly $1 million in 2001 and by amounts less than $500,000 in

each of fiscal years 2002–2004.

Pay-as-you-go considerations: The Balanced Budget and Emergency Deficit 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-you-go procedures are shown in the following table. For the purposes of enforcing pay-as-you-go procedures, only the effects in the current year,

the budget year, and the succeeding four years are counted.

102

By fiscal year, in millions of dollars—

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Changes in receipts ...................................................................................................... 0 ¥1,100 ¥2,469 ¥3,324 ¥4,161 ¥5,051 ¥5,858 ¥6,498 ¥7,168 ¥7,906 ¥8,722Changes in outlays ........................................................................................................ 0 ¥1000000000

103

Estimated impact on state, local, and tribal governments: JCT

has determined that H.R. 4843 contains no intergovernmental

mandates as defined in UMRA and would impose no costs on state,

local, or tribal governments.

Estimated impact on the private sector: JCT has determined the

provision that would prohibit allocations of stock in an Employee

Stock Ownership Plan of a subchapter S corporation would be a

new private sector mandate. JCT has estimated that the cost of

this mandate would not exceed the threshold established by UMRA

for private-sector mandates ($109 million in fiscal year 2000, adjusted annually for inflation).

Estimate prepared by: Federal Revenues: Hester Grippando. Federal Spending: John R. Righter.

Estimate approved by: Robert A. Sunshine, Assistant Director for

Budget Analysis. 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 retirement security and pension reforms, that the

Committee concluded that it is appropriate and timely to enact the

revenue provisions included in the bill as reported.

B. SUMMARY OF FINDINGS AND RECOMMENDATIONS OF THE

COMMITTEE ON GOVERNMENT REFORM

With respect to clause 3(c)(4) of rule XII of the Rules of the

House of Representatives, the Committee advises that no oversight

findings or recommendations have been submitted to this Committee by the Committee on Government Reform with respect to

the provisions contained in the bill.

C. CONSTITUTIONAL AUTHORITY STATEMENT

With respect to clause 3(d)(1) of 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 following provision of

the bill contains Federal mandates on the private sector (for

amounts, see tables in Part IV.A., above): prohibited allocation of

stock in an S corporation ESOP.

The costs required to comply with the Federal private sector

mandate generally are no greater than the estimated budget effects

104

of the provision. Benefits from the provision include improved administration of the Federal tax laws and a more accurate measurement of income for Federal income tax purposes.

The bill will not impose a Federal intergovernmental mandate on

State, local, and tribal governments.

E. APPLICABILITY OF HOUSE RULE XXI5(b)

Rule XXI5(b) of the Rules of the House of Representatives provides, in part, that ‘‘No bill or joint resolution, amendment, or conference report carrying a Federal income tax rate increase shall be

considered as passed or agreed to unless determined by a vote of

not less than three-fifths of the Members.’’ 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 increase 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 the 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

* * * * * * *

105

Subchapter A—Determination of Tax Liability

* * * * * * *

PART II—ITEMS SPECIFICALLY INCLUDED IN GROSS

INCOME

* * * * * * *

SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE

INSURANCE CONTRACTS.

(a) * * *

* * * * * * *

(f) SPECIAL RULES FOR COMPUTING EMPLOYEES’ CONTRIBUTIONS.— In computing, for purposes of subsection (c)(1)(A), the aggregate

amount of premiums or other consideration paid for the contract,

and for purposes of subsection (e)(6), the aggregate premiums or

other consideration paid, amounts contributed by the employer

shall be included, but only to the extent that—

(1) * * *

* * * * * * *

Paragraph (2) shall not apply to amounts which were contributed

by the employer after December 31, 1962, and which would not

have been includible in the gross income of the employee by reason

of the application of section 911 if such amounts had been paid directly to the employee at the time of contribution. The preceding

sentence shall not apply to amounts which were contributed by the

employer, as determined under regulations prescribed by the Secretary, to provide pension or annuity credits, to the extent such

credits are attributable to services performed before January 1,

1963, and are provided pursuant to pension or annuity plan provisions in existence on March 12, 1962, and on that date applicable

to such services, or to the extent such credits are attributable to

services performed as a foreign missionary (within the meaning of

øsection 403(b)(2)(D)(iii))¿ section 403(b)(2)(D)(iii), as in effect before

the enactment of the Comprehensive Retirement Security and Pension Reform Act of 2000).

* * * * * * *

(o) SPECIAL RULES FOR DISTRIBUTIONS FROM QUALIFIED PLANS

TO WHICH EMPLOYEE MADE DEDUCTIBLE CONTRIBUTIONS.—

(1) * * *

* * * * * * *

(4) SPECIAL RULE FOR TREATMENT OF ROLLOVER AMOUNTS.—

For purposes of sections 402(c), 403(a)(4), øand 408(d)(3)¿

403(b)(8), 408(d)(3), and 457(e)(16), the Secretary shall prescribe regulations providing for such allocations of amounts attributable to accumulated deductible employee contributions,

and for such other rules, as may be necessary to insure that

such accumulated deductible employee contributions do not become eligible for additional tax benefits (or freed from limitations) through the use of rollovers.

* * * * * * *

(t) 10-PERCENT ADDITIONAL TAX ON EARLY DISTRIBUTIONS FROM

QUALIFIED RETIREMENT PLANS.—

106

(1) * * *

* * * * * * *

(9) SPECIAL RULE FOR ROLLOVERS TO SECTION 457 PLANS.— For purposes of this subsection, a distribution from an eligible

deferred compensation plan (as defined in section 457(b)) of an

employer described in section 457(e)(1)(A) shall be treated as a

distribution from a qualified retirement plan described in

4974(c)(1) to the extent that such distribution is attributable to

an amount transferred to an eligible deferred compensation

plan from a qualified retirement plan (as defined in section

4974(c)).

* * * * * * *

Subchapter B—Computation of Taxable Income

* * * * * * *

PART III—ITEMS SPECIFICALLY EXCLUDED FROM

GROSS INCOME

* * * * * * *

SEC. 132. CERTAIN FRINGE BENEFITS.

(a) EXCLUSION FROM GROSS INCOME.—Gross income shall not include any fringe benefit which qualifies as a—

(1) * * *

* * * * * * *

(5) qualified transportation fringe, øor¿

(6) qualified moving expense reimbursementø.¿, or

(7) qualified retirement planning services.

* * * * * * *

(m) QUALIFIED RETIREMENT PLANNING SERVICES.—

(1) IN GENERAL.—For purposes of this section, the term

‘‘qualified retirement planning services’’ means any retirement

planning service provided to an employee and his spouse by an

employer maintaining a qualified employer plan.

(2) NONDISCRIMINATION RULE.—Subsection (a)(7) shall apply

in the case of highly compensated employees only if such services are available on substantially the same terms to each member of the group of employees normally provided education and

information regarding the employer’s qualified employer plan.

(3) QUALIFIED EMPLOYER PLAN.—For purposes of this subsection, the term ‘‘qualified employer plan’’ means a plan, contract, pension, or account described in section 219(g)(5).

ø(m)¿ (n) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

* * * * * * *

PART VII—ADDITIONAL ITEMIZED DEDUCTIONS FOR

INDIVIDUALS

* * * * * * *

107

SEC. 219. RETIREMENT SAVINGS.

(a) * * *

(b) MAXIMUM AMOUNT OF DEDUCTION.—

(1) IN GENERAL.—The amount allowable as a deduction

under subsection (a) to any individual for any taxable year

shall not exceed the lesser of—

(A) ø$2,000¿ the deductible amount, or

(B) an amount equal to the compensation includible in

the individual’s gross income for such taxable year.

* * * * * * *

(5) DEDUCTIBLE AMOUNT.—For purposes of paragraph

(1)(A)—

(A) IN GENERAL.—The deductible amount shall be determined in accordance with the following table:

For taxable years The deductible

beginning in: amount is:

2001 ................................................................................................ $3,000

2002 ................................................................................................ $4,000

2003 and thereafter ........................................................................ $5,000.

(B) CATCH-UP CONTRIBUTIONS FOR INDIVIDUALS 50 OR

OLDER.—In the case of an individual who has attained the

age of 50 before the close of the taxable year, the deductible

amount for taxable years beginning in 2001 or 2002 shall

be $5,000.

(C) COST-OF-LIVING ADJUSTMENT.—

(i) IN GENERAL.—In the case of any taxable year beginning in a calendar year after 2003, the $5,000

amount under subparagraph (A) shall be increased by

an amount equal to—

(I) such dollar amount, multiplied by

(II) the cost-of-living adjustment determined

under section 1(f )(3) for the calendar year in

which the taxable year begins, determined by substituting ‘‘calendar year 2002’’ for ‘‘calendar year

1992’’ in subparagraph (B) thereof.

(ii) ROUNDING RULES.—If any amount after adjustment under clause (i) is not a multiple of $500, such

amount shall be rounded to the next lower multiple of

$500.

* * * * * * *

(d) OTHER LIMITATIONS AND RESTRICTIONS.—

(1) * * *

(2) RECONTRIBUTED AMOUNTS.—No deduction shall be allowed under this section with respect to a rollover contribution

described in section 402(c), 403(a)(4), 403(b)(8), øor 408(d)(3)¿

408(d)(3), or 457(e)(16).

* * * * * * *

Subchapter D—Deferred Compensation, Etc.

* * * * * * *

108

PART I—PENSION, PROFIT-SHARING, STOCK BONUS

PLANS, ETC.

* * * * * * *

Subpart A—General Rule

Sec. 401. Qualified pension, profit-sharing, and stock bonus plans.

* * * * * * *

Sec. 402A. Optional treatment of elective deferrals as plus contributions.

* * * * * * *

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 political subdivision thereof (or agency or instrumentality

thereof).¿ section 414(d)).

* * * * * * *

(9) REQUIRED DISTRIBUTIONS.—

(A) * * *

(B) REQUIRED DISTRIBUTION WHERE EMPLOYEE DIES BEFORE ENTIRE INTEREST IS DISTRIBUTED.—

ø(i) WHERE DISTRIBUTIONS HAVE BEGUN UNDER SUBPARAGRAPH (A)(ii).—A trust shall not constitute a

qualified trust under this section unless the plan provides that if—

ø(I) the distribution of the employee’s interest

has begun in accordance with subparagraph

(A)(ii), and

ø(II) the employee dies before his entire interest

has been distributed to him, the remaining portion of such interest will be distributed at least as

rapidly as under the method of distributions being

used under subparagraph (A)(ii) as of the date of

his death.¿

ø(ii)¿ (i) 5-YEAR RULE øFOR OTHER CASES¿.—A trust

shall not constitute a qualified trust under this section

unless the plan provides that, if an employee dies before øthe distribution of the employee’s interest has

begun in accordance with subparagraph (A)(ii)¿ his enVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00108 Fmt 6659 Sfmt 6602 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
109

tire interest has been distributed to him, the entire interest of the employee will be distributed within 5

years after the death of such employee.

ø(iii)¿ (ii) EXCEPTION TO 5-YEAR RULE FOR CERTAIN

AMOUNTS PAYABLE OVER LIFE OF BENEFICIARY.—If—

(I) any portion of the employee’s interest is payable to (or for the benefit of) a designated beneficiary,

(II) such portion will be distributed (in accordance with regulations) over the life of such designated beneficiary (or over a period not extending

beyond the life expectancy of such beneficiary),

and

(III) such distributions begin not later than 1

year after the date of the employee’s death or such

later date as the Secretary may by regulations

prescribe,

for purposes of øclause (ii)¿ clause (i), the portion referred to in subclause (I) shall be treated as distributed on the date on which such distributions begin.

ø(iv)¿ (iii) SPECIAL RULE FOR SURVIVING SPOUSE OF

EMPLOYEE.—If the designated beneficiary referred to

in øclause (iii)(I)¿ clause (ii)(I) is the surviving spouse

of the employee—

(I) the date on which the distributions are required to begin under clause ø(iii)(III)¿ clause

(ii)(III) shall not be earlier than øthe date on

which the employee would have attained age

701⁄2,¿ April 1 of the calendar year following the

calendar year in which the spouse attains 701⁄2,

and

(II) if the surviving spouse dies before øthe distributions to such spouse begin,¿ his entire interest has been distributed to him, this subparagraph

shall be applied as if the surviving spouse were

the employee.

* * * * * * *

(17) COMPENSATION LIMIT.—

(A) IN GENERAL.—A trust shall not constitute a qualified

trust under this section unless, under the plan of which

such trust is a part, the annual compensation of each employee taken into account under the plan for any year does

not exceed ø$150,000¿ $200,000.

(B) COST-OF-LIVING ADJUSTMENT.—The Secretary shall

adjust annually the ø$150,000¿ $200,000 amount in subparagraph (A) for increases in the cost-of-living at the

same time and in the same manner as adjustments under

section 415(d); except that the base period shall be the calendar quarter beginning øOctober 1, 1993¿ July 1, 2000,

and any increase which is not a multiple of ø$10,000¿

$5,000 shall be rounded to the next lowest multiple of

ø$10,000¿ $5,000.

* * * * * * *

(26) ADDITIONAL PARTICIPATION REQUIREMENTS.—

110

(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)).

* * * * * * *

(31) OPTIONAL DIRECT TRANSFER OF ELIGIBLE ROLLOVER DISTRIBUTIONS.—

(A) * * *

(B) LIMITATION.—Subparagraph (A) shall apply only to

the extent that the eligible rollover distribution would be

includible in gross income if not transferred as provided in

subparagraph (A) (determined without regard to sections

402(c) øand 403(a)(4)¿, 403(a)(4), 403(b)(8), and 457(e)(16)).

The preceding sentence shall not apply to such distribution

if the plan to which such distribution is transferred—

(i) agrees to separately account for amounts so transferred, including separately accounting for the portion

of such distribution which is includible in gross income

and the portion of such distribution which is not so includible, or

(ii) is an eligible retirement plan described in clause

(i) or (ii) of section 402(c)(8)(B).

* * * * * * *

(k) CASH OR DEFERRED ARRANGEMENTS.—

(1) * * *

(2) QUALIFIED CASH OR DEFERRED ARRANGEMENT.—A qualified cash or deferred arrangement is any arrangement which

is part of a profit-sharing or stock bonus plan, a pre-ERISA

money purchase plan, or a rural cooperative plan which meets

the requirements of subsection (a)—

(A) under which a covered employee may elect to have

the employer make payments as contributions to a trust

under the plan on behalf of the employee, or to the employee directly in cash;

(B) under which amounts held by the trust which are attributable to employer contributions made pursuant to the

employee’s election—

(i) may not be distributable to participants or other

beneficiaries earlier than—

(I) øseparation from service¿ severance from employment, death, or disability,

* * * * * * *

(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

111

or local government or political subdivision thereof (or

agency or instrumentality thereof)¿ shall be treated as

meeting the requirements of this paragraph.

* * * * * * *

(10) DISTRIBUTIONS UPON TERMINATION OF PLAN øOR DISPOSITION OF ASSETS OR SUBSIDIARY¿.—

ø(A) IN GENERAL.—The following events are described in

this paragraph:

ø(i) TERMINATION.—The termination of the plan

without establishment or maintenance of another defined contribution plan (other than an employee stock

ownership plan as defined in section 4975(e)(7)).

ø(ii) DISPOSITION OF ASSETS.—The disposition by a

corporation of substantially all of the assets (within

the meaning of section 409(d)(2)) used by such corporation in a trade or business of such corporation, but

only with respect to an employee who continues employment with the corporation acquiring such assets.

ø(iii) DISPOSITION OF SUBSIDIARY.—The disposition

by a corporation of such corporation’s interest in a

subsidiary (within the meaning of section 409(d)(3)),

but only with respect to an employee who continues

employment with such subsidiary.¿

(A) IN GENERAL.—An event described in this subparagraph is the termination of the plan without establishment

or maintenance of another defined contribution plan (other

than an employee stock ownership plan as defined in section 4975(e)(7)).

(B) DISTRIBUTIONS MUST BE LUMP SUM DISTRIBUTIONS.—

(i) IN GENERAL.—øAn event¿ A termination shall not

be treated as described in subparagraph (A) with respect to any employee unless the employee receives a

lump sum distribution by reason of øthe event¿ the

termination.

* * * * * * *

ø(C) TRANSFEROR CORPORATION MUST MAINTAIN PLAN.—

An event shall not be treated as described in clause (ii) or

(iii) of subparagraph (A) unless the transferor corporation

continues to maintain the plan after the disposition.¿

(11) ADOPTION OF SIMPLE PLAN TO MEET NONDISCRIMINATION

TESTS.—

(A) * * *

(B) CONTRIBUTION REQUIREMENTS.—

(i) IN GENERAL.—The requirements of this subparagraph are met if, under the arrangement—

(I) an employee may elect to have the employer

make elective contributions for the year on behalf

of the employee to a trust under the plan in an

amount which is expressed as a percentage of

compensation of the employee but which in no

event exceeds ø$6,000¿ the amount in effect under

section 408(p)(2)(A)(ii).

* * * * * * *

112

ø(E) COST-OF-LIVING ADJUSTMENT.—The Secretary shall adjust the $6,000 amount under subparagraph (B)(i)(I) at

the same time and in the same manner as under section

408(p)(2)(E).¿

* * * * * * *

(m) NONDISCRIMINATION TEST FOR MATCHING CONTRIBUTIONS

AND EMPLOYEE CONTRIBUTIONS.—

(1) * * *

* * * * * * *

ø(9) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this

subsection and subsection (k) including—

ø(A) such regulations as may be necessary to prevent the

multiple use of the alternative limitation with respect to

any highly compensated employee, and

ø(B) regulations permitting appropriate aggregation of

plans and contributions.

For purposes of the preceding sentence, the term ‘‘alternative

limitation’’ means the limitation of section 401(k)(3)(A)(ii)(II)

and the limitation of paragraph (2)(A)(ii) of this subsection.¿

(9) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection and subsection (k), including regulations permitting appropriate aggregation of plans and contributions.

* * * * * * *

SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES’ TRUST.

(a) * * *

* * * * * * *

(c) RULES APPLICABLE TO ROLLOVERS FROM EXEMPT TRUSTS.— (1) * * *

(2) MAXIMUM AMOUNT WHICH MAY BE ROLLED OVER.—In the

case of any eligible rollover distribution, the maximum amount

transferred to which paragraph (1) applies shall not exceed the

portion of such distribution which is includible in gross income

(determined without regard to paragraph (1)). The preceding

sentence shall not apply to such distribution to the extent—

(A) such portion is transferred in a direct trustee-to-trustee transfer to a qualified trust which is part of a plan

which is a defined contribution plan and which agrees to

separately account for amounts so transferred, including

separately accounting for the portion of such distribution

which is includible in gross income and the portion of such

distribution which is not so includible, or

(B) such portion is transferred to an eligible retirement

plan described in clause (i) or (ii) of paragraph (8)(B).

ø(3) TRANSFER MUST BE MADE WITHIN 60 DAYS OF RECEIPT.—

Paragraph (1) shall not apply to any transfer of a distribution

made after the 60th day following the day on which the distributee received the property distributed.¿

(3) TRANSFER MUST BE MADE WITHIN 60 DAYS OF RECEIPT.—

(A) IN GENERAL.—Except as provided in subparagraph

(B), paragraph (1) shall not apply to any transfer of a disVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00112 Fmt 6659 Sfmt 6603 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
113

tribution made after the 60th day following the day on

which the distributee received the property distributed.

(B) HARDSHIP EXCEPTION.—The Secretary may waive the

60-day requirement under subparagraph (A) where the failure to waive such requirement would be against equity or

good conscience, including casualty, disaster, or other

events beyond the reasonable control of the individual subject to such requirement.

* * * * * * *

(8) DEFINITIONS.—For purposes of this subsection—

(A) * * *

* * * * * * *

(B) ELIGIBLE RETIREMENT PLAN.—The term ‘‘eligible retirement plan’’ means—

(i) an individual retirement account described in section 408(a),

(ii) an individual retirement annuity described in

section 408(b) (other than an endowment contract),

(iii) a qualified trust, øand¿

(iv) an annuity plan described in section 403(a)ø.¿,

(v) an eligible deferred compensation plan described

in section 457(b) of an employer described in section

457(e)(1)(A), and

(vi) an annuity contract described in section 403(b).

If any portion of an eligible rollover distribution is attributable to payments or distributions from a designated plus

account (as defined in section 402A), an eligible retirement

plan with respect to such portion shall include only another

designated plus account and a Roth IRA.

(9) ROLLOVER WHERE SPOUSE RECEIVES DISTRIBUTION AFTER

DEATH OF EMPLOYEE.—If any distribution attributable to an

employee is paid to the spouse of the employee after the employee’s death, the preceding provisions of this subsection shall

apply to such distribution in the same manner as if the spouse

were the employeeø; except that a trust or plan described in

clause (iii) or (iv) of paragraph (8)(B) shall not be treated as

an eligible retirement plan with respect to such distribution¿.

* * * * * * *

(11) SEPARATE ACCOUNTING.—Unless a plan described in

clause (v) of paragraph (8)(B) agrees to separately account for

amounts rolled into such plan from eligible retirement plans

not described in such clause, the plan described in such clause

may not accept transfers or rollovers from such retirement

plans.

* * * * * * *

(f) WRITTEN EXPLANATION TO RECIPIENTS OF DISTRIBUTIONS ELIGIBLE FOR ROLLOVER TREATMENT.—

(1) IN GENERAL.—The plan administrator of any plan shall,

within a reasonable period of time before making an eligible

rollover distribution øfrom an eligible retirement plan¿, provide a written explanation to the recipient—

114

(A) of the provisions under which the recipient may have

the distribution directly transferred to øanother eligible retirement plan¿ an eligible retirement plan, (B) of the provision which requires the withholding of

tax on the distribution if it is not directly transferred to

øanother eligible retirement plan¿ an eligible retirement

plan,

(C) of the provisions under which the distribution will

not be subject to tax if transferred to an eligible retirement

plan within 60 days after the date on which the recipient

received the distribution, øand¿

(D) if applicable, of the provisions of subsections (d) and

(e) of this sectionø.¿, and

(E) of the provisions under which distributions from the

eligible retirement plan receiving the distribution may be

subject to restrictions and tax consequences which are different from those applicable to distributions from the plan

making such distribution.

(2) DEFINITIONS.—For purposes of this subsection—

(A) ELIGIBLE ROLLOVER DISTRIBUTION.—The term ‘‘eligible rollover distribution’’ has the same meaning as when

used in subsection (c) of this section øor paragraph (4) of

section 403(a)¿, paragraph (4) of section 403(a), subparagraph (A) of section 403(b)(8), or subparagraph (A) of section 457(e)(16).

* * * * * * *

(g) LIMITATION ON EXCLUSION FOR ELECTIVE DEFERRALS.—

ø(1) IN GENERAL.—Notwithstanding subsections (e)(3) and

(h)(1)(B), the elective deferrals of any individual for any taxable year shall be included in such individual’s gross income to

the extent the amount of such deferrals for the taxable year exceeds $7,000.¿

(1) IN GENERAL.— (A) LIMITATION.—Notwithstanding subsections (e)(3) and

(h)(1)(B), the elective deferrals of any individual for any

taxable year shall be included in such individual’s gross income to the extent the amount of such deferrals for the taxable year exceeds the applicable dollar amount.

(B) APPLICABLE DOLLAR AMOUNT.—For purposes of subparagraph (A), the applicable dollar amount shall be the

amount determined in accordance with the following table:

For taxable years The applicable

beginning in dollar amount:

calendar year:

2001 ................................................................................................ $11,000

2002 ................................................................................................ $12,000

2003 ................................................................................................ $13,000

2004 ................................................................................................ $14,000

2005 or thereafter ........................................................................... $15,000.

The preceding sentence shall not apply to so much of such excess as does not exceed the designated plus contributions of the

individual for the taxable year.

(2) DISTRIBUTION OF EXCESS DEFERRALS.—

(A) IN GENERAL.—If any amount (hereinafter in this

paragraph referred to as ‘‘excess deferrals’’) is included in

115

the gross income of an individual under paragraph (1) (or

would be included but for the last sentence thereof) for any

taxable year—

(i) * * *

* * * * * * *

ø(4) INCREASE IN LIMIT FOR AMOUNTS CONTRIBUTED UNDER

SECTION 403(b) CONTRACTS.—The limitation under paragraph

(1) shall be increased (but not to an amount in excess of

$9,500) by the amount of any employer contributions for the

taxable year described in paragraph (3)(C).

ø(5) COST-OF-LIVING ADJUSTMENT.—The Secretary shall adjust the $7,000 amount under paragraph (1) at the same time

and in the same manner as under section 415(d); except that

any increase under this paragraph which is not a multiple of

$500 shall be rounded to the next lowest multiple of $500.¿

(4) COST-OF-LIVING ADJUSTMENT.—In the case of taxable

years beginning after December 31, 2005, the Secretary shall

adjust the $15,000 amount under paragraph (1)(B) at the same

time and in the same manner as under section 415(d), except

that the base period shall be the calendar quarter beginning

July 1, 2004, and any increase under this paragraph which is

not a multiple of $500 shall be rounded to the next lowest multiple of $500.

ø(6)¿ (5) DISREGARD OF COMMUNITY PROPERTY LAWS.—This

subsection shall be applied without regard to community property laws.

ø(7)¿ (6) COORDINATION WITH SECTION 72.—For purposes of

applying section 72, any amount includible in gross income for

any taxable year under this subsection but which is not distributed from the plan during such taxable year shall not be treated as investment in the contract.

ø(8)¿ (7) SPECIAL RULE FOR CERTAIN ORGANIZATIONS.—

(A) * * *

* * * * * * *

(B) QUALIFIED ORGANIZATION.—For purposes of this

paragraph, the term ‘‘qualified organization’’ means any

educational organization, hospital, home health service

agency, health and welfare service agency, church, or convention or association of churches. Such term includes any

organization described in section 414(e)(3)(B)(ii). Terms

used in this subparagraph shall have the same meaning as

when used in section 415(c)(4) (as in effect before the enactment of the Comprehensive Retirement Security and Pension Reform Act of 2000).

* * * * * * *

ø(9)¿ (8) MATCHING CONTRIBUTIONS ON BEHALF OF SELF-EMPLOYED INDIVIDUALS NOT TREATED AS ELECTIVE EMPLOYER CONTRIBUTIONS.—Except as provided in section 401(k)(3)(D)(ii), any

matching contribution described in section 401(m)(4)(A) which

is made on behalf of a self-employed individual (as defined in

section 401(c) shall not be treated as an elective employer conVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00115 Fmt 6659 Sfmt 6601 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
116

tribution under a qualified cash or deferred arrangement (as

defined in section 401(k) for purposes of this title.

* * * * * * *

SEC. 402A. OPTIONAL TREATMENT OF ELECTIVE DEFERRALS AS PLUS

CONTRIBUTIONS.

(a) GENERAL RULE.—If an applicable retirement plan includes a

qualified plus contribution program—

(1) any designated plus contribution made by an employee

pursuant to the program shall be treated as an elective deferral

for purposes of this chapter, except that such contribution shall

not be excludable from gross income, and

(2) such plan (and any arrangement which is part of such

plan) shall not be treated as failing to meet any requirement of

this chapter solely by reason of including such program.

(b) QUALIFIED PLUS CONTRIBUTION PROGRAM.—For purposes of

this section—

(1) IN GENERAL.—The term ‘‘qualified plus contribution program’’ means a program under which an employee may elect to

make designated plus contributions in lieu of all or a portion

of elective deferrals the employee is otherwise eligible to make

under the applicable retirement plan.

(2) SEPARATE ACCOUNTING REQUIRED.—A program shall not

be treated as a qualified plus contribution program unless the

applicable retirement plan—

(A) establishes separate accounts (‘‘designated plus accounts’’) for the designated plus contributions of each employee and any earnings properly allocable to the contributions, and

(B) maintains separate recordkeeping with respect to each

account.

(c) DEFINITIONS AND RULES RELATING TO DESIGNATED PLUS CONTRIBUTIONS.—For purposes of this section—

(1) DESIGNATED PLUS CONTRIBUTION.—The term ‘‘designated

plus contribution’’ means any elective deferral which—

(A) is excludable from gross income of an employee without regard to this section, and

(B) the employee designates (at such time and in such

manner as the Secretary may prescribe) as not being so excludable.

(2) DESIGNATION LIMITS.—The amount of elective deferrals

which an employee may designate under paragraph (1) shall

not exceed the excess (if any) of—

(A) the maximum amount of elective deferrals excludable

from gross income of the employee for the taxable year

(without regard to this section), over

(B) the aggregate amount of elective deferrals of the employee for the taxable year which the employee does not designate under paragraph (1).

(3) ROLLOVER CONTRIBUTIONS.—

(A) IN GENERAL.—A rollover contribution of any payment

or distribution from a designated plus account which is

otherwise allowable under this chapter may be made only

if the contribution is to—

117

(i) another designated plus account of the individual

from whose account the payment or distribution was

made, or

(ii) a Roth IRA of such individual.

(B) COORDINATION WITH LIMIT.—Any rollover contribution to a designated plus account under subparagraph (A)

shall not be taken into account for purposes of paragraph

(1).

(d) DISTRIBUTION RULES.—For purposes of this title—

(1) EXCLUSION.—Any qualified distribution from a designated

plus account shall not be includible in gross income.

(2) QUALIFIED DISTRIBUTION.—For purposes of this

subsection—

(A) IN GENERAL.—The term ‘‘qualified distribution’’ has

the meaning given such term by section 408A(d)(2)(A)

(without regard to clause (iv) thereof).

(B) DISTRIBUTIONS WITHIN NONEXCLUSION PERIOD.—A

payment or distribution from a designated plus account

shall not be treated as a qualified distribution if such payment or distribution is made within the 5-taxable-year period beginning with the earlier of—

(i) the first taxable year for which the individual

made a designated plus contribution to any designated

plus account established for such individual under the

same applicable retirement plan, or

(ii) if a rollover contribution was made to such designated plus account from a designated plus account

previously established for such individual under another applicable retirement plan, the first taxable year

for which the individual made a designated plus contribution to such previously established account.

(C) DISTRIBUTIONS OF EXCESS DEFERRALS AND EARNINGS.—The term ‘‘qualified distribution’’ shall not include

any distribution of any excess deferral under section

402(g)(2) and any income on the excess deferral.

(3) AGGREGATION RULES.—Section 72 shall be applied separately with respect to distributions and payments from a designated plus account and other distributions and payments

from the plan.

(e) OTHER DEFINITIONS.—For purposes of this section—

(1) APPLICABLE RETIREMENT PLAN.—The term ‘‘applicable retirement plan’’ means—

(A) an employees’ trust described in section 401(a) which

is exempt from tax under section 501(a), and

(B) a plan under which amounts are contributed by an

individual’s employer for an annuity contract described in

section 403(b).

(2) ELECTIVE DEFERRAL.—The term ‘‘elective deferral’’ means

any elective deferral described in subparagraph (A) or (C) of

section 402(g)(3).

SEC. 403. TAXATION OF EMPLOYEE ANNUITIES.

(a) * * *

* * * * * * *

118

(b) TAXABILITY OF BENEFICIARY UNDER ANNUITY PURCHASED BY

SECTION 501(c)(3) ORGANIZATION OR PUBLIC SCHOOL.— (1) GENERAL RULE.—If—

(A) * * *

* * * * * * *

(E) in the case of a contract purchased under a salary

reduction agreement, the contract meets the requirements

of section 401(a)(30), then amounts contributed by such

employer for such annuity contract on or after such rights

become nonforfeitable shall be excluded from the gross income of the employee for the taxable year to the extent

that the aggregate of such amounts does not exceed øthe

exclusion allowance for such taxable year¿ the applicable

limit under section 415. The amount actually distributed to

any distributee under such contract shall be taxable to the

distributee (in the year in which so distributed) under section 72 (relating to annuities). For purposes of applying

the rules of this subsection to amounts contributed by an

employer for a taxable year, amounts transferred to a contract described in this paragraph by reason of a rollover

contribution described in paragraph (8) of this subsection

or øsection 408(d)(3)(A)(iii)¿ section 408(d)(3)(A)(ii) shall

not be considered contributed by such employer.

ø(2) EXCLUSION ALLOWANCE.— ø(A) IN GENERAL.—For purposes of this subsection, the

exclusion allowance for any employee for the taxable year

is an amount equal to the excess, if any, of—

ø(i) the amount determined by multiplying 20 percent of his includible compensation by the number of

years of service, over

ø(ii) the aggregate of the amounts contributed by

the employer for annuity contracts and excludable

from the gross income of the employee for any prior

taxable year.

ø(B) ELECTION TO HAVE ALLOWANCE DETERMINED UNDER

SECTION 415 RULES.—In the case of an employee who

makes an election under section 415(c)(4)(D) to have the

provisions of section 415(c)(4)(C) (relating to special rule

for section 403(b) contracts purchased by educational institutions, hospitals, home health service agencies, and certain churches, etc.) apply, the exclusion allowance for any

such employee for the taxable year is the amount which

could be contributed (under section 415 without regard to

section 415(c)(8)) by his employer under a plan described

in section 403(a) if the annuity contract for the benefit of

such employee were treated as a defined contribution plan

maintained by the employer.

ø(C) NUMBER OF YEARS OF SERVICE FOR DULY ORDAINED, COMMISSIONED, OR LICENSED MINISTERS OR LAY EMPLOY- EES.—For purposes of this subsection and section

415(c)(4)(A)—

ø(i) all years of service by—

ø(I) a duly ordained, commissioned, or licensed

minister of a church, or

ø(II) a lay person,

119

as an employee of a church, a convention or association of churches, including an organization described

in section 414(e)(3)(B)(ii), shall be considered as years

of service for 1 employer, and

ø(ii) all amounts contributed for annuity contracts

by each such church (or convention or association of

churches) or such organization during such years for

such minister or lay person shall be considered to have

been contributed by 1 employer.

For purposes of the preceding sentence, the terms ‘‘church’’

and ‘‘convention or association of churches’’ have the same

meaning as when used in section 414(e).

ø(D) ALTERNATIVE EXCLUSION ALLOWANCE.—

ø(i) IN GENERAL.—In the case of any individual described in subparagraph (C), the amount determined

under subparagraph (A) shall not be less than the

lesser of—

ø(I) $3,000, or

ø(II) the includible compensation of such individual.

ø(ii) SUBPARAGRAPH NOT TO APPLY TO INDIVIDUALS

WITH ADJUSTED GROSS INCOME OVER $17,000.—This subparagraph shall not apply with respect to any taxable

year to any individual whose adjusted gross income for

such taxable year (determined separately and without

regard to any community property laws) exceeds

$17,000.

ø(iii) SPECIAL RULE FOR FOREIGN MISSIONARIES.—In

the case of an individual described in subparagraph

(C)(i) performing services outside the United States,

there shall be included as includible compensation for

any year under clause (i)(II) any amount contributed

during such year by a church (or convention or association of churches) for an annuity contract with respect to such individual.¿

(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. 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 or 457 or any amount received by a former

employee after the fifth taxable year following the taxable

year in which such employee was terminated.

* * * * * * *

120

(7) CUSTODIAL ACCOUNTS FOR REGULATED INVESTMENT COMPANY STOCK.—

(A) AMOUNTS PAID TREATED AS CONTRIBUTIONS.—For

purposes of this title, amounts paid by an employer described in paragraph (1)(A) to a custodial account which

satisfies the requirements of section 401(f)(2) shall be

treated as amounts contributed by him for an annuity contract for his employee if—

(i) the amounts are to be invested in regulated investment company stock to be held in that custodial

account, and

(ii) under the custodial account no such amounts

may be paid or made available to any distributee before the employee dies, attains age 591⁄2, øseparates

from service¿ has a severance from employment, becomes disabled (within the meaning of section

72(m)(7)), or in the case of contributions made pursuant to a salary reduction agreement (within the meaning of section 3121(a)(1)(D), encounters financial hardship.

* * * * * * *

(8) ROLLOVER AMOUNTS.—

(A) GENERAL RULE.—If—

(i) any portion of the balance to the credit of an employee in an annuity contract described in paragraph

(1) is paid to him in an eligible rollover distribution

(within the meaning of section 402(c)(4),

(ii) the employee transfers any portion of the property he receives in øsuch distribution to an individual

retirement plan or to an annuity contract described in

paragraph (1), and¿ such distribution to an eligible retirement plan described in section 402(c)(8)(B), and

(iii) in the case of a distribution of property other

than money, the property so transferred consists of the

property distributed,

then such distribution (to the extent so transferred) shall

not be includible in gross income for the taxable year in

which paid.

ø(B) CERTAIN RULES MADE APPLICABLE.—Rules similar to

the rules of paragraphs (2) through (7) of section 402(c)

(including paragraph (4)(C) thereof) shall apply for purposes of subparagraph (A).¿

(B) CERTAIN RULES MADE APPLICABLE.—The rules of

paragraphs (2) through (7) and (9) of section 402(c) and

section 402(f) shall apply for purposes of subparagraph (A),

except that section 402(f) shall be applied to the payor in

lieu of the plan administrator.

* * * * * * *

(11) REQUIREMENT THAT DISTRIBUTIONS NOT BEGIN BEFORE

AGE 591⁄2, øSEPARATION FROM SERVICE¿ SEVERANCE FROM EMPLOYMENT, DEATH, OR DISABILITY.—This subsection shall not

apply to any annuity contract unless under such contract distributions attributable to contributions made pursuant to a salVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00120 Fmt 6659 Sfmt 6601 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
121

ary reduction agreement (within the meaning of section

402(g)(3)(C)) may be paid only—

(A) when the employee attains age 591⁄2, øseparates from

service¿ has a severance from employment, dies, or becomes disabled (within the meaning of section 72(m)(7)), or

(B) in the case of hardship.

Such contract may not provide for the distribution of any income attributable to such contributions in the case of hardship.

* * * * * * *

(13) TRUSTEE-TO-TRUSTEE TRANSFERS TO PURCHASE PERMISSIVE SERVICE CREDIT.—No amount shall be includible in gross

income by reason of a direct trustee-to-trustee transfer to a defined benefit governmental plan (as defined in section 414(d)) if

such transfer is—

(A) for the purchase of permissive service credit (as defined in section 415(n)(3)(A)) under such plan, or

(B) a repayment to which section 415 does not apply by

reason of subsection (k)(3) thereof.

* * * * * * *

SEC. 404. DEDUCTION FOR CONTRIBUTIONS OF AN EMPLOYER TO AN

EMPLOYEES’ TRUST OR ANNUITY PLAN AND COMPENSATION UNDER A DEFERRED-PAYMENT PLAN.

(a) GENERAL RULE.—If contributions are paid by an employer to

or under a stock bonus, pension, profit-sharing, or annuity plan, or

if compensation is paid or accrued on account of any employee

under a plan deferring the receipt of such compensation, such contributions or compensation shall not be deductible under this chapter; but, if they would otherwise be deductible, they shall be deductible under this section, subject, however, to the following limitations as to the amounts deductible in any year:

(1) PENSION TRUSTS.— (A) * * *

* * * * * * *

ø(D) SPECIAL RULE IN CASE OF CERTAIN PLANS.—In the

case of any defined benefit plan (other than a multiemployer plan) which has more than 100 participants for the

plan year, except as provided in regulations, the maximum

amount deductible under the limitations of this paragraph

shall not be less than the unfunded current liability determined under section 412(l). For purposes of determining

whether a plan has more than 100 participants, all defined

benefit plans maintained by the same employer (or any

member of such employer’s controlled group (within the

meaning of section 412(l)(8)(C))) shall be treated as 1 plan,

but only employees of such member or employer shall be

taken into account.¿

(D) SPECIAL RULE IN CASE OF CERTAIN PLANS.—

(i) IN GENERAL.—In the case of any defined benefit

plan, except as provided in regulations, the maximum

amount deductible under the limitations of this paragraph shall not be less than the unfunded termination

liability (determined as if the proposed termination

date referred to in section 4041(b)(2)(A)(i)(II) of the

122

Employee Retirement Income Security Act of 1974 were

the last day of the plan year).

(ii) PLANS WITH LESS THAN 100 PARTICIPANTS.—For

purposes of this subparagraph, in the case of a plan

which has less than 100 participants for the plan year,

termination liability shall not include the liability attributable to benefit increases for highly compensated

employees (as defined in section 414(q)) resulting from

a plan amendment which is made or becomes effective,

whichever is later, within the last 2 years before the

termination date.

(iii) RULE FOR DETERMINING NUMBER OF PARTICI- PANTS.—For purposes of determining whether a plan

has more than 100 participants, all defined benefit

plans maintained by the same employer (or any member of such employer’s controlled group (within the

meaning of section 412(l)(8)(C))) shall be treated as one

plan, but only employees of such member or employer

shall be taken into account.

(iv) PLANS ESTABLISHED AND MAINTAIN BY PROFESSIONAL SERVICE EMPLOYERS.—Clause (i) shall not

apply to a plan described in section 4021(b)(13) of the

Employee Retirement Income Security Act of 1974.

* * * * * * *

(3) STOCK BONUS AND PROFIT-SHARING TRUSTS.— (A) LIMITS ON DEDUCTIBLE CONTRIBUTIONS.— (i) IN GENERAL.—In the taxable year when paid, if

the contributions are paid into a stock bonus or profitsharing trust, and if such taxable year ends within or

with a taxable year of the trust with respect to which

the trust is exempt under section 501(a), in an amount

not in excess of the greater of—

(I) ø15¿ 20 percent of the compensation otherwise paid or accrued during the taxable year to

the beneficiaries under the stock bonus or profitsharing plan, or

* * * * * * *

(B) PROFIT-SHARING PLAN OF AFFILIATED GROUP.—In the

case of a profit-sharing plan, or a stock bonus plan in

which contributions are determined with reference to profits, of a group of corporations which is an affiliated group

within the meaning of section 1504, if any member of such

affiliated group is prevented from making a contribution

which it would otherwise have made under the plan, by

reason of having no current or accumulated earnings or

profits or because such earnings or profits are less than

the contributions which it would otherwise have made,

then so much of the contribution which such member was

so prevented from making may be made, for the benefit of

the employees of such member, by the other members of

the group, to the extent of current or accumulated earnings or profits, except that such contribution by each such

other member shall be limited, where the group does not

file a consolidated return, to that proportion of its total

123

current and accumulated earnings or profits remaining

after adjustment for its contribution deductible without regard to this subparagraph which the total prevented contribution bears to the total current and accumulated earnings or profits of all the members of the group remaining

after adjustment for all contributions deductible without

regard to this subparagraph. Contributions made under

the preceding sentence shall be deductible under subparagraph (A) of this paragraph by the employer making such

contribution, and, for the purpose of determining amounts

which may be carried forward and deducted under the second sentence of subparagraph (A) of this paragraph in succeeding taxable years, shall be deemed to have been made

by the employer on behalf of whose employees such contributions were made. øThe term ‘‘compensation otherwise

paid or accrued during the taxable year to all employees’’

shall include any amount with respect to which an election

under section 415(c)(3)(C) is in effect, but only to the extent that any contribution with respect to such amount is

nonforfeitable.¿

* * * * * * *

(10) CONTRIBUTIONS BY CERTAIN MINISTERS TO RETIREMENT

INCOME ACCOUNTS.—In the case of contributions made by a

minister described in section 414(e)(5) to a retirement income

account described in section 403(b)(9) and not by a person

other than such minister, such contributions—

(A) * * *

(B) shall be deductible under this subsection to the extent such contributions do not exceed the limit on elective

deferrals under section 402(g)ø, the exclusion allowance

under section 403(b)(2),¿ or the limit on annual additions

under section 415.

For purposes of this paragraph, all plans in which the minister

is a participant shall be treated as one plan.

* * * * * * *

(12) DEFINITION OF COMPENSATION.—For purposes of paragraphs (3), (7), (8), and (9), the term ‘‘compensation otherwise

paid or accrued during the taxable year’’ shall include amounts

treated as ‘‘participant’s compensation’’ under subparagraph (C)

or (D) of section 415(c)(3).

* * * * * * *

(h) SPECIAL RULES FOR SIMPLIFIED EMPLOYEE PENSIONS.—

(1) IN GENERAL.—Employer contributions to a simplified employee pension shall be treated as if they are made to a plan

subject to the requirements of this section. Employer contributions to a simplified employee pension are subject to the following limitations:

(A) * * *

* * * * * * *

(C) The amount deductible in a taxable year for a simplified employee pension shall not exceed ø15¿ 20 percent

of the compensation paid to the employees during the calendar year ending with or within the taxable year (or durVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00123 Fmt 6659 Sfmt 6601 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
124

ing the taxable year in the case of a taxable year described

in subparagraph (A)(ii)). The excess of the amount contributed over the amount deductible for a taxable year shall

be deductible in the succeeding taxable years in order of

time, subject to the ø15¿ 20 percent limit of the preceding

sentence.

* * * * * * *

(k) DEDUCTION FOR DIVIDENDS PAID ON CERTAIN EMPLOYER SE- CURITIES.— (1) * * *

(2) APPLICABLE DIVIDEND.—For purposes of this subsection—

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

any dividend which, in accordance with the plan

provisions—

(i) is paid in cash to the participants in the plan or

their beneficiaries,

(ii) is paid to the plan and is distributed in cash to

participants in the plan or their beneficiaries not later

than 90 days after the close of the plan year in which

paid, øor¿

(iii) is, at the election of such participants or their

beneficiaries—

(I) payable as provided in clause (i) or (ii), or

(II) paid to the plan and reinvested in qualifying

employer securities, or

ø(iii)¿ (iv) is used to make payments on a loan described in subsection (a)(9) the proceeds of which were

used to acquire the employer securities (whether or

not allocated to participants) with respect to which the

dividend is paid.

* * * * * * *

(l) LIMITATION ON AMOUNT OF ANNUAL COMPENSATION TAKEN

INTO ACCOUNT.—For purposes of applying the limitations of this

section, the amount of annual compensation of each employee

taken into account under the plan for any year shall not exceed

ø$150,000¿ $200,000. The Secretary shall adjust the ø$150,000¿

$200,000 amount at the same time, and by the same amount, as

any adjustment under section 401(a)(17)(B). For purposes of clause

(i), (ii), or (iii) of subsection (a)(1)(A), and in computing the full

funding limitation, any adjustment under the preceding sentence

shall not be taken into account for any year before the year for

which such adjustment first takes effect.

* * * * * * *

(n) ELECTIVE DEFERRALS NOT TAKEN INTO ACCOUNT FOR PUR- POSES OF DEDUCTION LIMITS.—Elective deferrals (as defined in section 402(g)(3)) shall not be subject to any limitation contained in

paragraph (3), (7), or (9) of subsection (a), and such elective deferrals shall not be taken into account in applying any such limitation

to any other contributions.

* * * * * * *

SEC. 408. INDIVIDUAL RETIREMENT ACCOUNTS.

(a) INDIVIDUAL RETIREMENT ACCOUNT.—For purposes of this section, the term ‘‘individual retirement account’’ means a trust creVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00124 Fmt 6659 Sfmt 6601 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
125

ated or organized in the United States for the exclusive benefit of

an individual or his beneficiaries, but only if the written governing

instrument creating the trust meets the following requirements:

(1) Except in the case of a rollover contribution described in

subsection (d)(3) in section 402(c), 403(a)(4), øor 403(b)(8),¿

403(b)(8), or 457(e)(16), no contribution will be accepted unless

it is in cash, and contributions will not be accepted for the taxable year øin excess of $2,000 on behalf of any individual¿ on

behalf of any individual in excess of the amount in effect for

such taxable year under section 219(b)(1)(A).

* * * * * * *

(b) INDIVIDUAL RETIREMENT ANNUITY.—For purposes of this section, the term ‘‘individual retirement annuity’’ means an annuity

contract, or an endowment contract (as determined under regulations prescribed by the Secretary), issued by an insurance company

which meets the following requirements:

(1) * * *

(2) UNDER THE CONTRACT.— (A) the premiums are not fixed,

(B) the annual premium on behalf of any individual will

not exceed ø$2,000¿ the dollar amount in effect under section 219(b)(1)(A), and

* * * * * * *

(4) The entire interest of the owner is nonforfeitable.

Such term does not include such an annuity contract for any taxable year of the owner in which it is disqualified on the application

of subsection (e) or for any subsequent taxable year. For purposes

of this subsection, no contract shall be treated as an endowment

contract if it matures later than the taxable year in which the individual in whose name such contract is purchased attains age 701⁄2;

if it is not for the exclusive benefit of the individual in whose name

it is purchased or his beneficiaries; or if the aggregate annual premiums under all such contracts purchased in the name of such individual for any taxable year exceed ø$2,000¿ the dollar amount in

effect under section 219(b)(1)(A).

* * * * * * *

(d) TAX TREATMENT OF DISTRIBUTIONS

(1) * * *

* * * * * * *

(3) ROLLOVER CONTRIBUTION.—An amount is described in

this paragraph as a rollover contribution if it meets the requirements of subparagraphs (A) and (B).

(A) IN GENERAL.—Paragraph (1) does not apply to any

amount paid or distributed out of an individual retirement

account or individual retirement annuity to the individual

for whose benefit the account or annuity is maintained if—

(i) the entire amount received (including money and

any other property) is paid into an individual retirement account or individual retirement annuity (other

than an endowment contract) for the benefit of such

individual not later than the 60th day after the day on

which he receives the payment or distribution; or

126

ø(ii) no amount in the account and no part of the

value of the annuity is attributable to any source

other than a rollover contribution (as defined in section 402 from an employee’s trust described in section

401(a) which is exempt from tax under section 501(a)

or from an annuity plan described in section 403(a)

(and any earnings on such contribution), and the entire amount received (including property and other

money) is paid (for the benefit of such individual) into

another such trust or annuity plan not later than the

60th day on which the individual receives the payment

or the distribution; or

ø(iii)(I) the entire amount received (including money

and other property) represents the entire interest in

the account or the entire value of the annuity,

ø(II) no amount in the account and no part of

the value of the annuity is attributable to any

source other than a rollover contribution from an

annuity contract described in section 403(b) and

any earnings on such rollover, and

ø(II) the entire amount thereof is paid into another annuity contract described in section 403(b)

(for the benefit of such individual) not later than

the 60th day after he receives the payment or distribution.

ø(III) the entire amount thereof is paid into another annuity contract described in section 403(b)

(for the benefit of such individual) not later than

the 60th day after he receives the payment or distribution.¿

(ii) the entire amount received (including money and

any other property) is paid into an eligible retirement

plan for the benefit of such individual not later than

the 60th day after the date on which the payment or

distribution is received, except that the maximum

amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross income (determined without regard to

this paragraph).

For purposes of clause (ii), the term ‘‘eligible retirement

plan’’ means an eligible retirement plan described in clause

(iii), (iv), (v), or (vi) of section 402(c)(8)(B).

* * * * * * *

(D) PARTIAL ROLLOVERS PERMITTED.—

(i) GENERAL.—If any amount paid or distributed out

of an individual retirement account or individual retirement annuity would meet the requirements of subparagraph (A) but for the fact that the entire amount

was not paid into an eligible plan as required by

clause ø(i), (ii), or (iii)¿ (i) or (ii) of subparagraph (A),

such amount shall be treated as meeting the requirements of subparagraph (A) to the extent it is paid into

127

an eligible plan referred to in such clause not later

than the 60th day referred to in such clause.

* * * * * * *

ø(G) SIMPLE RETIREMENTS ACCOUNTS.—This paragraph

shall not apply to any amount paid or distributed out of

a simple retirement account (as defined in subsection (p))

unless—

ø(i) it is paid into another simple retirement account, or

ø(ii) in the case of any payment or distribution to

which section 72(t)(6) does not apply, it is paid into an

individual retirement plan.¿

(G) SIMPLE RETIREMENT ACCOUNTS.—In the case of any

payment or distribution out of a simple retirement account

(as defined in subsection (p)) to which section 72(t)(6) applies, this paragraph shall not apply unless such payment

or distribution is paid into another simple retirement account.

(H) APPLICATION OF SECTION 72.— (i) IN GENERAL.—If—

(I) a distribution is made from an individual retirement plan, and

(II) a rollover contribution is made to an eligible

retirement plan described in section

402(c)(8)(B)(iii), (iv), (v), or (vi) with respect to all

or part of such distribution,

then, notwithstanding paragraph (2), the rules of

clause (ii) shall apply for purposes of applying section

72.

(ii) APPLICABLE RULES.—In the case of a distribution

described in clause (i)—

(I) section 72 shall be applied separately to such

distribution,

(II) notwithstanding the pro rata allocation of

income on, and investment in, the contract to distributions under section 72, the portion of such distribution rolled over to an eligible retirement plan

described in clause (i) shall be treated as from income on the contract (to the extent of the aggregate

income on the contract from all individual retirement plans of the distributee), and

(III) appropriate adjustments shall be made in

applying section 72 to other distributions in such

taxable year and subsequent taxable years.

(I) WAIVER OF 60-DAY REQUIREMENT.—The Secretary may

waive the 60-day requirement under subparagraphs (A)

and (D) where the failure to waive such requirement would

be against equity or good conscience, including casualty,

disaster, or other events beyond the reasonable control of

the individual subject to such requirement.

* * * * * * *

(j) INCREASE IN MAXIMUM LIMITATIONS FOR SIMPLIFIED EMPLOYEE PENSIONS.—In the case of any simplified employee pension,

subsections (a)(1) and (b)(2) of this section shall be applied by inVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00127 Fmt 6659 Sfmt 6601 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
128

creasing the ø$2,000¿ amounts contained therein by the amount of

the limitation in effect under section 415(c)(1)(A).

(k) SIMPLIFIED EMPLOYEE PENSION DEFINED.— (1) * * *

* * * * * * *

(3) CONTRIBUTIONS MAY NOT DISCRIMINATE IN FAVOR OF THE

HIGHLY COMPENSATED, ETC.— (A) * * *

* * * * * * *

(C) CONTRIBUTIONS MUST BEAR UNIFORM RELATIONSHIP

TO TOTAL COMPENSATION.—For purposes of subparagraph

(A), and except as provided in subparagraph (D), employer

contributions to simplified employee pensions (other than

contributions under an arrangement described in paragraph (6)) shall be considered discriminatory unless contributions thereto bear a uniform relationship to the compensation (not in excess of the first ø$150,000¿ $200,000)

of each employee maintaining a simplified employee pension.

* * * * * * *

(6) EMPLOYEE MAY ELECT SALARY REDUCTION ARRANGEMENT.—

(A) * * *

* * * * * * *

(D) DEFERRAL PERCENTAGE.—For purposes of this paragraph, the deferral percentage for an employee for a year

shall be the ratio of—

(i) the amount of elective employer contributions actually paid over to the simplified employee pension on

behalf of the employee for the year, to

(ii) the employee’s compensation (not in excess of the

first ø$150,000¿ $200,000) for the year.

* * * * * * *

(8) COST-OF-LIVING ADJUSTMENT.—The Secretary shall adjust

the $300 amount in paragraph (2)(C) at the same time and in

the same manner as under section 415(d) and shall adjust the

ø$150,000¿ $200,000 amount in paragraphs (3)(C) and

(6)(D)(ii) at the same time, and by the same amount, as any

adjustment under section 401(a)(17)(B); except that any increase in the $300 amount which is not a multiple of $50 shall

be rounded to the next lowest multiple of $50.

* * * * * * *

(p) SIMPLE RETIREMENT ACCOUNTS.—

(1) * * *

(2) QUALIFIED SALARY REDUCTION ARRANGEMENT.—

(A) IN GENERAL.—For purposes of this subsection, the

term ‘‘qualified salary reduction arrangement’’ means a

written arrangement of an eligible employer under

which—

(i) * * *

(ii) the amount which an employee may elect under

clause (i) for any year is required to be expressed as

129

a percentage of compensation and may not exceed a

total of ø$6,000¿ the applicable dollar amount for any

year,

* * * * * * *

ø(E) COST-OF-LIVING ADJUSTMENT.—The Secretary shall

adjust the $6,000 amount under subparagraph (A)(ii) at

the same time and in the same manner as under section

415(d), except that the base period taken into account shall

be the calendar quarter ending September 30, 1996, and

any increase under this subparagraph which is not a multiple of $500 shall be rounded to the next lower multiple

of $500.¿

(E) APPLICABLE DOLLAR AMOUNT; COST-OF-LIVING ADJUSTMENT.—

(i) IN GENERAL.—For purposes of subparagraph

(A)(ii), the applicable dollar amount shall be the

amount determined in accordance with the following

table:

For taxable years The applicable

beginning in dollar amount:

calendar year:

2001 ......................................................................................... $7,000

2002 ......................................................................................... $8,000

2003 ......................................................................................... $9,000

2004 or thereafter ................................................................... $10,000.

(ii) COST-OF-LIVING ADJUSTMENT.—In the case of a

year beginning after December 31, 2004, the Secretary

shall adjust the $10,000 amount under clause (i) at the

same time and in the same manner as under section

415(d), except that the base period taken into account

shall be the calendar quarter beginning July 1, 2003,

and any increase under this subparagraph which is

not a multiple of $500 shall be rounded to the next

lower multiple of $500.

* * * * * * *

(8) COORDINATION WITH MAXIMUM LIMITATION UNDER SUBSECTION (A).—In the case of any simple retirement account,

subsections (a)(1) and (b)(2) shall be applied by substituting

‘‘the sum of the dollar amount in effect under paragraph

(2)(A)(ii) of this subsection and the employer contribution required under subparagraph (A)(ii) or (B)(i) of paragraph (2) of

this subsection, whichever is applicable’’ for ‘‘ø$2,000¿ the dollar amount in effect under section 219(b)(1)(A)’’.

* * * * * * *

SEC. 408A. ROTH IRA’s.

(a) * * *

* * * * * * *

(e) QUALIFIED ROLLOVER CONTRIBUTION.—For purposes of this

section, the term ‘‘qualified rollover contribution’’ means a rollover

contribution to a Roth IRA from another such account, or from an

individual retirement plan, but only if such rollover contribution

meets the requirements of section 408(d)(3). Such term includes a

rollover contribution described in section 402A(c)(3)(A). For purVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00129 Fmt 6659 Sfmt 6601 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
130

poses of section 408(d)(3)(B), there shall be disregarded any qualified rollover contribution from an individual retirement plan (other

than a Roth IRA) to a Roth IRA.

* * * * * * *

SEC. 409. QUALIFICATIONS FOR TAX CREDIT EMPLOYEE STOCK OWNERSHIP PLANS.

(a) * * *

* * * * * * *

(p) PROHIBITED ALLOCATIONS OF SECURITIES IN AN S CORPORATION.—

(1) IN GENERAL.—An employee stock ownership plan holding

employer securities consisting of stock in an S corporation shall

provide that no portion of the assets of the plan attributable to

(or allocable in lieu of) such employer securities may, during a

nonallocation year, accrue (or be allocated directly or indirectly

under any plan of the employer meeting the requirements of section 401(a)) for the benefit of any disqualified person.

(2) FAILURE TO MEET REQUIREMENTS.—

(A) IN GENERAL.—If a plan fails to meet the requirements

of paragraph (1), the plan shall be treated as having distributed to any disqualified person the amount allocated to

the account of such person in violation of paragraph (1) at

the time of such allocation.

(B) CROSS REFERENCE.—

For excise tax relating to violations of paragraph (1) and ownership of synthetic equity, see section 4979A.

(3) NONALLOCATION YEAR.—For purposes of this subsection—

(A) IN GENERAL.—The term ‘‘nonallocation year’’ means

any plan year of an employee stock ownership plan if, at

any time during such plan year—

(i) such plan holds employer securities consisting of

stock in an S corporation, and

(ii) disqualified persons own at least 50 percent of

the number of shares of stock in the S corporation.

(B) ATTRIBUTION RULES.—For purposes of subparagraph

(A)—

(i) IN GENERAL.—The rules of section 318(a) shall

apply for purposes of determining ownership, except

that—

(I) in applying paragraph (1) thereof, the members of an individual’s family shall include members of the family described in paragraph (4)(D),

and

(II) paragraph (4) thereof shall not apply.

(ii) DEEMED-OWNED SHARES.—Notwithstanding the

employee trust exception in section 318(a)(2)(B)(i), individual shall be treated as owning deemed-owned

shares of the individual.

Solely for purposes of applying paragraph (5), this subparagraph shall be applied after the attribution rules of

paragraph (5) have been applied.

(4) DISQUALIFIED PERSON.—For purposes of this subsection—

131

(A) IN GENERAL.—The term ‘‘disqualified person’’ means

any person if—

(i) the aggregate number of deemed-owned shares of

such person and the members of such person’s family

is at least 20 percent of the number of deemed-owned

shares of stock in the S corporation, or

(ii) in the case of a person not described in clause (i),

the number of deemed-owned shares of such person is

at least 10 percent of the number of deemed-owned

shares of stock in such corporation.

(B) TREATMENT OF FAMILY MEMBERS.—In the case of a

disqualified person described in subparagraph (A)(i), any

member of such person’s family with deemed-owned shares

shall be treated as a disqualified person if not otherwise

treated as a disqualified person under subparagraph (A).

(C) DEEMED-OWNED SHARES.— (i) IN GENERAL.—The term ‘‘deemed-owned shares’’

means, with respect to any person—

(I) the stock in the S corporation constituting

employer securities of an employee stock ownership

plan which is allocated to such person under the

plan, and

(II) such person’s share of the stock in such corporation which is held by such plan but which is

not allocated under the plan to participants.

(ii) PERSON’S SHARE OF UNALLOCATED STOCK.—For

purposes of clause (i)(II), a person’s share of

unallocated S corporation stock held by such plan is

the amount of the unallocated stock which would be allocated to such person if the unallocated stock were allocated to all participants in the same proportions as

the most recent stock allocation under the plan.

(D) MEMBER OF FAMILY.—For purposes of this paragraph, the term ‘‘member of the family’’ means, with respect

to any individual—

(i) the spouse of the individual,

(ii) an ancestor or lineal descendant of the individual

or the individual’s spouse,

(iii) a brother or sister of the individual or the individual’s spouse and any lineal descendant of the brother or sister, and

(iv) the spouse of any individual described in clause

(ii) or (iii).

A spouse of an individual who is legally separated from

such individual under a decree of divorce or separate maintenance shall not be treated as such individual’s spouse for

purposes of this subparagraph.

(5) TREATMENT OF SYNTHETIC EQUITY.—For purposes of paragraphs (3) and (4), in the case of a person who owns synthetic

equity in the S corporation, except to the extent provided in regulations, the shares of stock in such corporation on which such

synthetic equity is based shall be treated as outstanding stock

in such corporation and deemed-owned shares of such person if

such treatment of synthetic equity of 1 or more such persons results in—

132

(A) the treatment of any person as a disqualified person,

or

(B) the treatment of any year as a nonallocation year.

For purposes of this paragraph, synthetic equity shall be treated

as owned by a person in the same manner as stock is treated

as owned by a person under the rules of paragraphs (2) and (3)

of section 318(a). If, without regard to this paragraph, a person

is treated as a disqualified person or a year is treated as a nonallocation year, this paragraph shall not be construed to result

in the person or year not being so treated.

(6) DEFINITIONS.—For purposes of this subsection—

(A) EMPLOYEE STOCK OWNERSHIP PLAN.—The term ‘‘employee stock ownership plan’’ has the meaning given such

term by section 4975(e)(7).

(B) EMPLOYER SECURITIES.—The term ‘‘employer security’’ has the meaning given such term by section 409(l).

(C) SYNTHETIC EQUITY.—The term ‘‘synthetic equity’’

means any stock option, warrant, restricted stock, deferred

issuance stock right, or similar interest or right that gives

the holder the right to acquire or receive stock of the S corporation in the future. Except to the extent provided in regulations, synthetic equity also includes a stock appreciation

right, phantom stock unit, or similar right to a future cash

payment based on the value of such stock or appreciation

in such value.

(7) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection.

ø(p)¿ (q) CROSS REFERENCES.—

(1) For requirements for allowance of employee plan credit, see

section 48(n).

(2) For assessable penalties for failure to meet requirements of

this section, or for failure to make contributions required with respect to the allowance of an employee plan credit or employee

stock ownership credit, see section 6699.

(3) For requirements for allowance of an employee stock ownership credit, see section 41.

Subpart B—Special Rules

* * * * * * *

SEC. 410. MINIMUM PARTICIPATION STANDARDS.

(a) * * *

(b) MINIMUM COVERAGE REQUIREMENTS.—

(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,

133

(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. 411. MINIMUM VESTING STANDARDS.

(a) GENERAL RULE.—A trust shall not constitute a qualified trust

under section 401(a) unless the plan of which such trust is a part

provides that an employee’s right to his normal retirement benefit

is nonforfeitable upon the attainment of normal retirement age (as

defined in paragraph (8)) and in addition satisfies the requirements

of paragraphs (1), (2), and (11) of this subsection and the requirements of subsection (b)(3), and also satisfies, in the case of a defined benefit plan, the requirements of subsection (b)(1) and, in the

case of a defined contribution plan, the requirements of subsection

(b)(2).

(1) * * *

(2) EMPLOYER CONTRIBUTIONS.—øA plan¿ Except as provided

in paragraph (12), a plan satisfies the requirements of this

paragraph if it satisfies the requirements of subparagraph (A)

or (B).

* * * * * * *

(11) RESTRICTIONS ON CERTAIN MANDATORY DISTRIBUTIONS.—

(A) * * *

* * * * * * *

(D) SPECIAL RULE FOR ROLLOVER CONTRIBUTIONS.—A

plan shall not fail to meet the requirements of this paragraph if, under the terms of the plan, the present value of

the nonforfeitable accrued benefit is determined without regard to that portion of such benefit which is attributable to

rollover contributions (and earnings allocable thereto). For

purposes of this subparagraph, the term ‘‘rollover contributions’’ means any rollover contribution under sections

402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and 457(e)(16).

* * * * * * *

(12) FASTER VESTING FOR MATCHING CONTRIBUTIONS.—In the

case of matching contributions (as defined in section

401(m)(4)(A)), paragraph (2) shall be applied—

(A) by substituting ‘‘3 years’’ for ‘‘5 years’’ in subparagraph (A), and

(B) by substituting the following table for the table contained in subparagraph (B):

The nonforfeitable

Years of service: percentage is:

2 ...................................................................................................... 20

3 ...................................................................................................... 40

4 ...................................................................................................... 60

134

5 ...................................................................................................... 80

6 ...................................................................................................... 100.

* * * * * * *

(d) SPECIAL RULES.—

(1) * * *

* * * * * * *

(6) ACCRUED BENEFIT NOT TO BE DECREASED BY AMENDMENT.—

(A) * * *

* * * * * * *

(B) TREATMENT OF CERTAIN PLAN AMENDMENTS.—For

purposes of subparagraph (A), a plan amendment which

has the effect of—

(i) eliminating or reducing an early retirement benefit or a retirement-type subsidy (as defined in regulations), or

(ii) eliminating an optional form of benefit,

with respect to benefits attributable to service before the

amendment shall be treated as reducing accrued benefits.

In the case of a retirement-type subsidy, the preceding

sentence shall apply only with respect to a participant who

satisfies (either before or after the amendment) the

preamendment conditions for the subsidy. øThe Secretary

may by regulations provide that this subparagraph shall

not apply to a plan amendment described in clause (ii)

(other than a plan amendment having an effect described

in clause (i)).¿ The Secretary shall by regulations provide

that this subparagraph shall not apply to any plan amendment that does not adversely affect the rights of participants in a material manner.

* * * * * * *

(D) PLAN TRANSFERS.—

(i) IN GENERAL.—A defined contribution plan (in this

subparagraph referred to as the ‘‘transferee plan’’) shall

not be treated as failing to meet the requirements of

this subsection merely because the transferee plan does

not provide some or all of the forms of distribution previously available under another defined contribution

plan (in this subparagraph referred to as the ‘‘transferor plan’’) to the extent that—

(I) the forms of distribution previously available

under the transferor plan applied to the account of

a participant or beneficiary under the transferor

plan that was transferred from the transferor plan

to the transferee plan pursuant to a direct transfer

rather than pursuant to a distribution from the

transferor plan,

(II) the terms of both the transferor plan and the

transferee plan authorize the transfer described in

subclause (I),

(III) the transfer described in subclause (I) was

made pursuant to a voluntary election by the parVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00134 Fmt 6659 Sfmt 6603 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
135

ticipant or beneficiary whose account was transferred to the transferee plan,

(IV) the election described in subclause (III) was

made after the participant or beneficiary received

a notice describing the consequences of making the

election,

(V) if the transferor plan provides for an annuity

as the normal form of distribution under the plan

in accordance with section 417, the transfer is

made with the consent of the participant’s spouse

(if any), and such consent meets requirements

similar to the requirements imposed by section

417(a)(2), and

(VI) the transferee plan allows the participant or

beneficiary described in subclause (III) to receive

any distribution to which the participant or beneficiary is entitled under the transferee plan in the

form of a single sum distribution.

(ii) EXCEPTION.—Clause (i) shall apply to plan mergers and other transactions having the effect of a direct

transfer, including consolidations of benefits attributable to different employers within a multiple employer plan.

(E) ELIMINATION OF FORM OF DISTRIBUTION.—Except to

the extent provided in regulations, a defined contribution

plan shall not be treated as failing to meet the requirements of this section merely because of the elimination of

a form of distribution previously available thereunder. This

subparagraph shall not apply to the elimination of a form

of distribution with respect to any participant unless—

(i) a single sum payment is available to such participant at the same time or times as the form of distribution being eliminated, and

(ii) such single sum payment is based on the same or

greater portion of the participant’s account as the form

of distribution being eliminated.

SEC. 412. MINIMUM FUNDING STANDARDS.

(a) * * *

* * * * * * *

(c) SPECIAL RULES.—

(1) * * *

* * * * * * *

(7) FULL-FUNDING LIMITATION.—

(A) IN GENERAL.—For purposes of paragraph (6), the

term ‘‘full-funding limitation’’ means the excess (if any)

of—

(i) the lesser of

(I) øthe applicable percentage¿ in the case of

plan years beginning before January 1, 2004, the

applicable percentage of current liability (including the expected increase in current liability due

to benefits accruing during the plan year), or

* * * * * * *

136

ø(F) APPLICABLE PERCENTAGE.—For purposes of subparagraph (A)(i)(I), the applicable percentage shall be determined in accordance with the following table:

øIn the case of any plan year The applicable

beginning in— percentage is—

1999 or 2000 ................................................................................... 155

2001 or 2002 ................................................................................... 160

2003 or 2004 ................................................................................... 165

2005 and succeeding years ............................................................ 170.¿

(F) APPLICABLE PERCENTAGE.—For purposes of subparagraph (A)(i)(I), the applicable percentage shall be determined in accordance with the following table:

In the case of any plan year The applicable

beginning in— percentage is—

2001 ................................................................................................ 160

2002 ................................................................................................ 165

2003 ................................................................................................ 170.

* * * * * * *

ø(9) ANNUAL VALUATION.—For purposes of this section, a determination of experience gains and losses and a valuation of

the plan’s liability shall be made not less frequently than once

every year, except that such determination shall be made more

frequently to the extent required in particular cases under regulations prescribed by the Secretary.¿

(9) ANNUAL VALUATION.—

(A) IN GENERAL.—For purposes of this section, a determination of experience gains and losses and a valuation of

the plan’s liability shall be made not less frequently than

once every year, except that such determination shall be

made more frequently to the extent required in particular

cases under regulations prescribed by the Secretary.

(B) VALUATION DATE.—

(i) CURRENT YEAR.—Except as provided in clause (ii),

the valuation referred to in subparagraph (A) shall be

made as of a date within the plan year to which the

valuation refers or within one month prior to the beginning of such year.

(ii) ELECTION TO USE PRIOR YEAR VALUATION.—The

valuation referred to in subparagraph (A) may be

made as of a date within the plan year prior to the

year to which the valuation refers if—

(I) an election is in effect under this clause with

respect to the plan, and

(II) as of such date, the value of the assets of the

plan are not less than 125 percent of the plan’s

current liability (as defined in paragraph (7)(B)).

(iii) ADJUSTMENTS.—Information under clause (ii)

shall, in accordance with regulations, be actuarially

adjusted to reflect significant differences in participants.

(iv) ELECTION.—An election under clause (ii), once

made, shall be irrevocable without the consent of the

Secretary.

* * * * * * *

137

SEC. 414. DEFINITIONS AND SPECIAL RULES.

(a) * * *

* * * * * * *

(p) QUALIFIED DOMESTIC RELATIONS ORDER DEFINED.—For purposes of this subsection and section 401(a)(13)—

(1) * * *

* * * * * * *

(10) WAIVER OF CERTAIN DISTRIBUTION REQUIREMENTS.—With

respect to the requirements of subsections (a) and (k) of section

401, section 403(b), øand section 409(d)¿ section 409(d), and

section 457(d), a plan shall not be treated as failing to meet

such requirements solely by reason of payments to an alternative payee pursuant to a qualified domestic relations order.

(11) APPLICATION OF RULES TO øGOVERNMENTAL AND CHURCH

PLANS¿ CERTAIN OTHER PLANS.—For purposes of this title, a

distribution or payment from a governmental plan (as defined

in subsection (d)) or a church plan (as described in subsection

(e)) or an eligible deferred compensation plan (within the meaning of section 457(b)) shall be treated as made pursuant to a

qualified domestic relations order if it is made pursuant to a

domestic relations order which meets the requirement of clause

(i) of paragraph (1)(A).

(12) TAX TREATMENT OF PAYMENTS FROM A SECTION 457

PLAN.—If a distribution or payment from an eligible deferred

compensation plan described in section 457(b) is made pursuant to a qualified domestic relations order, rules similar to the

rules of section 402(e)(1)(A) shall apply to such distribution or

payment.

ø(12)¿ (13) CONSULTATION WITH THE SECRETARY.—In prescribing regulations under this subsection and section

401(a)(13), the Secretary of Labor shall consult with the Secretary.

* * * * * * *

(v) CATCH-UP CONTRIBUTIONS FOR INDIVIDUALS AGE 50 OR

OVER.—

(1) IN GENERAL.—An applicable employer plan shall not be

treated as failing to meet any requirement of this title solely because the plan permits an eligible participant to make additional elective deferrals in any plan year.

(2) LIMITATION ON AMOUNT OF ADDITIONAL DEFERRALS.—A

plan shall not permit additional elective deferrals under paragraph (1) for any year in an amount greater than the lesser of—

(A) $5,000, or

(B) the excess (if any) of—

(i) the participant’s compensation for the year, over

(ii) any other elective deferrals of the participant for

such year which are made without regard to this subsection.

(3) TREATMENT OF CONTRIBUTIONS.—In the case of any contribution to a plan under paragraph (1), such contribution shall

not, with respect to the year in which the contribution is

made—

138

(A) be subject to any otherwise applicable limitation contained in section 402(g), 402(h)(2), 404(a), 404(h),

408(p)(2)(A)(ii), 415, or 457, or

(B) be taken into account in applying such limitations to

other contributions or benefits under such plan or any other

such plan.

(4) ELIGIBLE PARTICIPANT.—For purposes of this subsection,

the term ‘‘eligible participant’’ means, with respect to any plan

year, a participant in a plan—

(A) who has attained the age of 50 before the close of the

plan year, and

(B) with respect to whom no other elective deferrals may

(without regard to this subsection) be made to the plan for

the plan year by reason of the application of any limitation

or other restriction described in paragraph (3) or comparable limitation contained in the terms of the plan.

(5) OTHER DEFINITIONS AND RULES.—For purposes of this

subsection—

(A) APPLICABLE EMPLOYER PLAN.—The term ‘‘applicable

employer plan’’ means—

(i) an employees’ trust described in section 401(a)

which is exempt from tax under section 501(a),

(ii) a plan under which amounts are contributed by

an individual’s employer for an annuity contract described in section 403(b),

(iii) an eligible deferred compensation plan under

section 457 of an eligible employer as defined in section

457(e)(1)(A), and

(iv) an arrangement meeting the requirements of section 408 (k) or (p).

(B) ELECTIVE DEFERRAL.—The term ‘‘elective deferral’’

has the meaning given such term by subsection (u)(2)(C).

(C) EXCEPTION FOR SECTION 457 PLANS.—This subsection

shall not apply to an applicable employer plan described in

subparagraph (A)(iii) for any year to which section

457(b)(3) applies.

(D) COST-OF-LIVING ADJUSTMENT.—For years beginning

after December 31, 2005, the Secretary shall adjust annually the $5,000 amount in subparagraph (A) for increases

in the cost-of-living at the same time and in the same manner as adjustments under section 415(d); except that the

base period shall be the calendar quarter beginning July 1,

2004, and any increase which is not a multiple of $500

shall be rounded to the next lowest multiple of $500.

SEC. 415. LIMITATIONS ON BENEFITS AND CONTRIBUTIONS UNDER

QUALIFIED PLANS.

(a) GENERAL RULE.—

(1) * * *

(2) SECTION APPLIES TO CERTAIN ANNUITIES AND ACCOUNTS.—

In the case of—

(A) an employee annuity plan described in section

403(a),

(B) an annuity contract described in section 403(b), or

(C) a simplified employee pension described in section

408(k), such a contract, plan, or pension shall not be conVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00138 Fmt 6659 Sfmt 6601 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
139

sidered to be described in section 403(a), 403(b), or 408(k),

as the case may be, unless it satisfies the requirements of

subparagraph (A) or subparagraph (B) of paragraph (1),

whichever is appropriate, and has not been disqualified

under subsection (g). In the case of an annuity contract described in section 403(b), the preceding sentence shall

apply only to the portion of the annuity contract which exceeds the limitation of subsection (b) or the limitation of

subsection (c), whichever is appropriate, øand the amount

of the contribution for such portion shall reduce the exclusion allowance as provided in section 403(b)(2)¿. (b) LIMITATION FOR DEFINED BENEFIT PLANS.— (1) IN GENERAL.—Benefits with respect to a participant exceed the limitation of this subsection if, when expressed as an

annual benefit (within the meaning of paragraph (2)), such annual benefit is greater than the lesser of—

(A) ø$90,000¿ $160,000, or

(B) 100 percent of the participant’s average compensation for his high 3 years.

(2) ANNUAL BENEFIT.— (A) IN GENERAL.—For purposes of paragraph (1), the

term ‘‘annual benefit’’ means a benefit payable annually in

the form of a straight life annuity (with no ancillary benefits) under a plan to which employees do not contribute

and under which no rollover contributions (as defined in

sections 402(c), 403(a)(4), øand 408(d)(3)¿ 403(b)(8),

408(d)(3), and 457(e)(16)) are made.

(B) ADJUSTMENT FOR CERTAIN OTHER FORMS OF BEN- EFIT.—If the benefit under the plan is payable in any form

other than the form described in subparagraph (A), or if

the employees contribute to the plan or make rollover contributions (as defined in sections 402(c), 403(a)(4), øand

408(d)(3)¿ 403(b)(8), 408(d)(3), and 457(e)(16)), the determinations as to whether the limitation described in paragraph (1) has been satisfied shall be made, in accordance

with regulations prescribed by the Secretary by adjusting

such benefit so that it is equivalent to the benefit described in subparagraph (A). For purposes of this subparagraph, any ancillary benefit which is not directly related to

retirement income benefits shall not be taken into account;

and that portion of any joint and survivor annuity which

constitutes a qualified joint and survivor annuity (as defined in section 417 shall not be taken into account.

(C) ADJUSTMENT TO ø$90,000¿ $160,000 LIMIT WHERE BENEFIT BEGINS BEFORE øTHE SOCIAL SECURITY RETIREMENT

AGE¿ AGE 62.—If the retirement income benefit under the

plan begins before øthe social security retirement age¿ age

62, the determination as to whether the ø$90,000¿

$160,000 limitation set forth in paragraph (1)(A) has been

satisfied shall be made, in accordance with regulations

prescribed by the Secretary, by reducing the limitation of

paragraph (1)(A) so that such limitation (as so reduced)

equals an annual benefit (beginning when such retirement

income benefit begins) which is equivalent to a ø$90,000¿

$160,000 annual benefit beginning at øthe social security

140

retirement age¿ age 62. The reduction under this subparagraph shall be made in such manner as the Secretary may

prescribe which is consistent with the reduction for old-age

insurance benefits commencing before øthe social security

retirement age¿ age 62 under the Social Security Act.

(D) ADJUSTMENT TO ø$90,000¿ $160,000 LIMIT WHERE BEN- EFIT BEGINS AFTER øTHE SOCIAL SECURITY RETIREMENT

AGE¿ AGE 65.—If the retirement income benefit under the

plan begins after øthe social security retirement age¿ age

65, the determination as to whether the ø$90,000¿

$160,000 limitation set forth in paragraph (1)(A) has been

satisfied shall be made, in accordance with regulations

prescribed by the Secretary, by increasing the limitation of

paragraph (1)(A) so that such limitation (as so increased)

equals an annual benefit (beginning when such retirement

income benefit begins) which is equivalent to a ø$90,000¿

$160,000 annual benefit beginning at øthe social security

retirement age¿ age 65.

* * * * * * *

ø(F) PLANS MAINTAINED BY GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS.—In the case of a governmental plan

(within the meaning of section 414(d)), a plan maintained

by an organization (other than a governmental unit) exempt from tax under this subtitle, or a qualified merchant

marine plan—

ø(i) subparagraph (C) shall be applied—

ø(I) by substituting ‘‘age 62’’ for ‘‘social security

retirement age’’ each place it appears, and

ø(II) as if the last sentence thereof read as follows: ‘‘The reduction under this subparagraph

shall not reduce the limitation of paragraph (1)(A)

below (i) $75,000 if the benefit begins at or after

age 55, or

ø(ii) if the benefit begins before age 55, the equivalent of the $75,000 limitation for age 55.’’, and

ø(ii) subparagraph (D) shall be applied by substituting ‘‘age 65’’ for ‘‘social security retirement age’’

each place it appears.

For purposes of this subparagraph, the term ‘‘qualified

merchant marine plan’’ means a plan in existence on January 1, 1986, the participants in which are merchant marine officers holding licenses issued by the Secretary of

Transportation under title 46, United States Code.¿

* * * * * * *

(7) BENEFITS UNDER CERTAIN COLLECTIVELY BARGAINED

PLANS.—For a year, the limitation referred to in paragraph

(1)(B) shall not apply to benefits with respect to a participant

under a defined benefit plan—

(A) * * *

* * * * * * *

This paragraph shall not apply to a participant whose compensation for any 3 years during the 10-year period immediately preceding the year in which he separates from service

141

exceeded the average compensation for such 3 years of all participants in such plan. This paragraph shall not apply to a participant for any period for which he is a participant under another plan to which this section applies which is maintained by

an employer maintaining this plan. For any year for which the

paragraph applies to benefits with respect to a participant,

paragraph (1)(A) and subsection (d)(1)(A) shall be applied with

respect to such participant by substituting øthe greater of $68,212 or one-half the amount otherwise applicable for such

year under paragraph (1)(A) for ‘‘$90,000’’¿ one-half the

amount otherwise applicable for such year under paragraph

(1)(A) for ‘‘$160,000’’.

* * * * * * *

ø(11) SPECIAL LIMITATION RULE FOR GOVERNMENTAL PLANS.—

In the case of a governmental plan (as defined in section

414(d), subparagraph (B) of paragraph (1) shall not apply.¿

(11) SPECIAL LIMITATION RULE FOR GOVERNMENTAL AND MULTIEMPLOYER PLANS.—In the case of a governmental plan (as defined in section 414(d)) or a multiemployer plan (as defined in

section 414(f)), subparagraph (B) of paragraph (1) shall not

apply.

* * * * * * *

(c) LIMITATION FOR DEFINED CONTRIBUTION PLANS.— (1) IN GENERAL.—Contributions and other additions with respect to a participant exceed the limitation of this subsection

if, when expressed as an annual addition (within the meaning

of paragraph (2)) to the participant’s account, such annual addition is greater than the lesser of—

(A) ø$30,000¿ $40,000, or

(B) ø25¿ 100 percent of the participant’s compensation.

(2) ANNUAL ADDITION.—For purposes of paragraph (1), the

term ‘‘annual addition’’ means the sum for any year of—

(A) employer contributions,

(B) the employee contributions, and

(C) forfeitures.

For the purposes of this paragraph, employee contributions

under subparagraph (B) are determined without regard to any

rollover contributions (as defined in sections 402(c), 403(a)(4),

403(b)(8), øand 408(d)(3)¿ 408(d)(3), and 457(e)(16)) without regard to employee contributions to a simplified employee pension which are excludable from gross income under section

408(k)(6). Subparagraph (B) of paragraph (1) shall not apply to

any contribution for medical benefits (within the meaning of

section 419A(f)(2)) after separation from service which is treated as an annual addition.

(3) PARTICIPANT’S COMPENSATION.—For purposes of paragraph (1)—

(A) * * *

* * * * * * *

(E) ANNUITY CONTRACTS.—In the case of an annuity contract described in section 403(b), the term ‘‘participant’s

compensation’’ means the participant’s includible compensation determined under section 403(b)(3).

142

ø(4) SPECIAL ELECTION FOR SECTION 403(b) CONTRACTS PUR- CHASED BY EDUCATIONAL ORGANIZATIONS, HOSPITALS, HOME

HEALTH SERVICE AGENCIES, AND CERTAIN CHURCHES, ETC.— ø(A) In the case of amounts contributed for an annuity

contract described in section 403(b) for the year in which

occurs a participant’s separation from the service with an

educational organization, a hospital, a home health service

agency, a health and welfare service agency, or a church,

convention or association of churches, or an organization

described in section 414(e)(3)(B)(ii), at the election of the

participant there is substituted for the amount specified in

paragraph (1)(B) the amount of the exclusion allowance

which would be determined under section 403(b)(2) (without regard to this section) for the participant’s taxable year

in which such separation occurs if the participant’s years

of service were computed only by taking into account his

service for the employer (as determined for purposes of

section 403(b)(2)) during the period of years (not exceeding

ten) ending on the date of such separation.

ø(B) In the case of amounts contributed for an annuity

contract described in section 403(b) for any year in the

case of a participant who is an employee of an educational

organization, a hospital, a home health service agency, a

health and welfare service agency, or a church, convention

or association of churches, or an organization described in

section 414(e)(3)(B)(ii), at the election of the participant

there is substituted for the amount specified in paragraph

(1)(B) the least of—

ø(i) 25 percent of the participant’s includible com- pensation (as defined in section 403(b)(3)) plus $4,000,

ø(ii) the amount of the exclusion allowance determined for the year under section 403(b)(2), or

ø(iii) $15,000.

ø(C) In the case of amounts contributed for an annuity

contract described in section 403(b) for any year for a participant who is an employee of an educational organization, a hospital, a home health service agency, a health

and welfare service agency, or a church, convention or association of churches, or an organization described in section 414(e)(3)(B)(ii), at the election of the participant the

provisions of section 403(b)(2)(A) shall not apply.

ø(D)(i) The provisions of this paragraph apply only if the

participant elects its application at the time and in the

manner provided under regulations prescribed by the Secretary. Not more than one election may be made under

subparagraph (A) by any participant. A participant who

elects to have the provisions of subparagraph (A), (B), or

(C) of this paragraph apply to him may not elect to have

any other subparagraph of this paragraph apply to him.

Any election made under this paragraph is irrevocable.

ø(ii) For purposes of this paragraph the term ‘‘educational organization’’ means an educational organization described in section 170(b)(1)(A)(ii).

ø(iii) For purposes of this paragraph the term ‘‘home

health service agency’’ means an organization deVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00142 Fmt 6659 Sfmt 6601 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
143

scribed in subsection 501(c)(3) which is exempt from

tax under section 501(a) and which has been determined by the Secretary of Health, Education, and Welfare to be a home health agency (as defined in section

1861(o) of the Social Security Act).

ø(iv) For purposes of this paragraph, the terms

‘‘church’’ and ‘‘convention or association of churches’’

have the same meaning as when used in section

414(e).¿

* * * * * * *

ø(7) CERTAIN CONTRIBUTIONS BY CHURCH PLANS NOT TREATED

AS EXCEEDING LIMITS.— ø(A) ALTERNATIVE EXCLUSION ALLOWANCE.—Any contribution or addition with respect to any participant, when

expressed as an annual addition, which is allocable to the

application of section 403(b)(2)(D) to such participant for

such year, shall be treated as not exceeding the limitations

of paragraph (1).

ø(B) CONTRIBUTIONS NOT IN EXCESS OF $40,000 ($10,000

PER YEAR).— ø(i) IN GENERAL.—Notwithstanding any other provision of this subsection, at the election of a participant

who is an employee of a church, a convention or association of churches, including an organization described in section 414(e)(3)(B)(ii), contributions and

other additions for an annuity contract or retirement

income account described in section 403(b) with respect to such participant, when expressed as an annual addition to such participant’s account, shall be

treated as not exceeding the limitation of paragraph

(1) if such annual addition is not in excess of $10,000.

ø(ii) $40,000 AGGREGATE LIMITATION.—The total

amount of additions with respect to any participant

which may be taken into account for purposes of this

subparagraph for all years may not exceed $40,000.

ø(iii) NO ELECTION IF PARAGRAPH (4)(A) ELECTION

MADE.—No election may be made under this subparagraph for any year if an election is made under paragraph (4)(A) for such year.

ø(C) ANNUAL ADDITION.—For purposes of this paragraph,

the term ‘‘annual addition’’ has the meaning given such

term by paragraph (2).¿

(7) CERTAIN CONTRIBUTIONS BY CHURCH PLANS NOT TREATED

AS EXCEEDING LIMIT.— (A) IN GENERAL.—Notwithstanding any other provision of

this subsection, at the election of a participant who is an

employee of a church or a convention or association of

churches, including an organization described in section

414(e)(3)(B)(ii), contributions and other additions for an

annuity contract or retirement income account described in

section 403(b) with respect to such participant, when expressed as an annual addition to such participant’s account, shall be treated as not exceeding the limitation of

paragraph (1) if such annual addition is not in excess of

$10,000.

144

(B) $40,000 AGGREGATE LIMITATION.—The total amount

of additions with respect to any participant which may be

taken into account for purposes of this subparagraph for all

years may not exceed $40,000.

(C) ANNUAL ADDITION.—For purposes of this paragraph,

the term ‘‘annual addition’’ has the meaning given such

term by paragraph (2).

(d) COST-OF-LIVING ADJUSTMENTS.— (1) IN GENERAL.—The Secretary shall adjust annually—

(A) the ø$90,000¿ $160,000 amount in subsection

(b)(1)(A),

(B) in the case of a participant who separated from service, the amount taken into account under subsection

(b)(1)(B), and

(C) the ø$30,000¿ $40,000 amount in subsection

(c)(1)(A), for increases in the cost-of-living in accordance

with regulations prescribed by the Secretary.

* * * * * * *

(3) BASE PERIOD.—For purposes of paragraph (2)—

(A) ø$90,000¿ $160,000 AMOUNT.—The base period taken

into account for purposes of paragraph (1)(A) is the calendar quarter beginning øOctober 1, 1986¿ July 1, 2000.

* * * * * * *

(D) ø$30,000¿ $40,000 AMOUNT.—The base period taken

into account for purposes of paragraph (1)(C) is the calendar quarter beginning øOctober 1, 1993¿ July 1, 2000.

ø(4) ROUNDING.—Any increase under subparagraph (A) or

(C) of paragraph (1) which is not a multiple of $5,000 shall be

rounded to the next lowest multiple of $5,000.¿

(4) ROUNDING.—

(A) $160,000 AMOUNT.—Any increase under subparagraph (A) of paragraph (1) which is not a multiple of

$5,000 shall be rounded to the next lowest multiple of

$5,000.

(B) $40,000 AMOUNT.—Any increase under subparagraph

(C) of paragraph (1) which is not a multiple of $1,000 shall

be rounded to the next lowest multiple of $1,000.

* * * * * * *

(f) COMBINING OF PLANS.—

(1) * * *

* * * * * * *

(3) EXCEPTION FOR MULTIEMPLOYER PLANS.—Notwithstanding paragraph (1) and subsection (g), a multiemployer

plan (as defined in section 414(f)) shall not be combined or aggregated with any other plan maintained by an employer for

purposes of applying the limitations established in this section,

except that such plan shall be combined or aggregated with another plan which is not such a multiemployer plan solely for

purposes of determining whether such other plan meets the requirements of subsections (b)(1)(A) and (c).

(g) AGGREGATION OF PLANS.—øThe Secretary¿ Except as provided

in subsection (f)(3), the Secretary, in applying the provisions of this

section to benefits or contributions under more than one plan mainVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00144 Fmt 6659 Sfmt 6601 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
145

tained by the same employer, and to any trusts, contracts, accounts, or bonds referred to in subsection (a)(2), with respect to

which the participant has the control required under section 414(b)

or (c), as modified by subsection (h), shall, under regulations prescribed by the Secretary, disqualify one or more trusts, plans, contracts, accounts, or bonds, or any combination thereof until such

benefits or contributions do not exceed the limitations contained in

this section. In addition to taking into account such other factors

as may be necessary to carry out the purposes of subsection (f), the

regulations prescribed under this paragraph shall provide that no

plan which has been terminated shall be disqualified until all other

trusts, plans, contracts, accounts, or bonds have been disqualified.

* * * * * * *

(k) SPECIAL RULES.— (1) * * *

* * * * * * *

(4) SPECIAL RULES FOR SECTIONS 403(b) AND 408.—For purposes of this section, any annuity contract described in section

403(b) for the benefit of a participant shall be treated as a defined contribution plan maintained by each employer with respect to which the participant has the control required under

subsection (b) or (c) of section 414 (as modified by subsection

(h)). For purposes of this section, any contribution by an employer to a simplified employee pension plan for an individual

for a taxable year shall be treated as an employer contribution

to a defined contribution plan for such individual for such year.

* * * * * * *

SEC. 416. SPECIAL RULES FOR TOP-HEAVY PLANS.

(a) * * *

* * * * * * *

(c) PLAN MUST PROVIDE MINIMUM BENEFITS.— (1) DEFINED BENEFIT PLANS.— (A) * * *

* * * * * * *

(C) YEARS OF SERVICE.—For purposes of this

paragraph—

(i) IN GENERAL.—Except as provided in øclause (ii)¿

clause (ii) or (iii), years of service shall be determined

under the rules of paragraphs (4), (5), and (6) of section 411(a).

* * * * * * *

(iii) EXCEPTION FOR FROZEN PLAN.—For purposes of

determining an employee’s years of service with the employer, any service with the employer shall be disregarded to the extent that such service occurs during

a plan year when the plan benefits (within the meaning of section 410(b)) no employee or former employee.

* * * * * * *

(2) DEFINED CONTRIBUTION PLANS.—

(A) IN GENERAL.—A defined contribution plan meets the

requirements of the subsection if the employer contribuVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00145 Fmt 6659 Sfmt 6601 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
146

tion for the year for each participant who is a non-key employee is not less than 3 percent of such participant’s compensation (within the meaning of section 415). Employer

matching contributions (as defined in section 401(m)(4)(A))

shall be taken into account for purposes of this subparagraph.

* * * * * * *

(g) TOP-HEAVY PLAN DEFINED.—For purposes of this section—

(1) * * *

* * * * * * *

ø(3) DISTRIBUTIONS DURING LAST 5 YEARS TAKEN INTO AC- COUNT.—For purposes of determining—

ø(A) the present value of the cumulative accrued benefit

for any employee, or

ø(B) the amount of the account of any employee,such

present value or amount shall be increased by the aggregate distributions made with respect to such employee

under the plan during the 5-year period ending on the determination date. The preceding sentence shall also apply

to distributions under a terminated plan which if it had

not been terminated would have been required to be included in an aggregation group.¿

(3) DISTRIBUTIONS DURING LAST YEAR BEFORE DETERMINA- TION DATE TAKEN INTO ACCOUNT.— (A) IN GENERAL.—For purposes of determining—

(i) the present value of the cumulative accrued benefit for any employee, or

(ii) the amount of the account of any employee,

such present value or amount shall be increased by the aggregate distributions made with respect to such employee

under the plan during the 1-year period ending on the determination date. The preceding sentence shall also apply

to distributions under a terminated plan which if it had

not been terminated would have been required to be included in an aggregation group.

(B) 5-YEAR PERIOD IN CASE OF IN-SERVICE DISTRIBUTION.—In the case of any distribution made for a reason

other than separation from service, death, or disability,

subparagraph (A) shall be applied by substituting ‘‘5-year

period’’ for ‘‘1-year period’’.

(4) OTHER SPECIAL RULES.—For purposes of this subsection—

(A) * * *

* * * * * * *

(E) BENEFITS NOT TAKEN INTO ACCOUNT IF EMPLOYEE

NOT EMPLOYED FOR øLAST 5 YEARS¿ LAST YEAR BEFORE DETERMINATION DATE.—If any individual has not performed

services for the employer maintaining the plan at any time

during the ø5-year period¿ 1-year period ending on the determination date, any accrued benefit for such individual

(and the account of such individual) shall not be taken into

account.

* * * * * * *

147

(H) CASH OR DEFERRED ARRANGEMENTS USING ALTERNATIVE METHODS OF MEETING NONDISCRIMINATION REQUIREMENTS.—The term ‘‘top-heavy plan’’ shall not include

a plan which consists solely of—

(i) a cash or deferred arrangement which meets the

requirements of section 401(k)(12), and

(ii) matching contributions with respect to which the

requirements of section 401(m)(11) are met.

If, but for this subparagraph, a plan would be treated as

a top-heavy plan because it is a member of an aggregation

group which is a top-heavy group, contributions under the

plan may be taken into account in determining whether

any other plan in the group meets the requirements of subsection (c)(2).

* * * * * * *

(i) DEFINITIONS.—For purposes of this section—

(1) KEY EMPLOYEE.—

(A) IN GENERAL.—The term ‘‘key employee’’ means an

employee who, at any time during the plan year øor any

of the 4 preceding plan years¿, is—

ø(i) an officer of the employer having an annual

compensation greater than 50 percent of the amount

in effect under section 415(b)(1)(A) for any such plan

year,

ø(ii) 1 of the 10 employees having annual compensation from the employer of more than the limitation in

effect under section 415(c)(1)(A) and owning (or considered as owning within the meaning of section 318 the

largest interests in the employer,¿

(i) an officer of the employer having an annual compensation greater than $150,000,

ø(iii)¿ (ii) a 5-percent owner of the employer, or

ø(iv)¿ (iii) a 1-percent owner of the employer having

an annual compensation from the employer of more

than $150,000.

For purposes of clause (i), no more than 50 employees (or,

if lesser, the greater of 3 or 10 percent of the employees)

shall be treated as officers. øFor purposes of clause (ii), if

2 employees have the same interest in the employer, the

employee having greater annual compensation from the

employer shall be treated as having a larger interest.¿

Such term shall not include any officer or employee of an

entity referred to in section 414(d) (relating to governmental plans). For purposes of determining the number of

officers taken into account under clause (i), employees described in section 414(q)(5) shall be excluded.

(B) PERCENTAGE OWNERS.—

(i) * * *

* * * * * * *

(iii) CONSTRUCTIVE OWNERSHIP RULES.—For purposes of this subparagraph øand subparagraph

(A)(ii)¿—

148

(I) subparagraph (C) of section 318(a)(2) shall be

applied by substituting ‘‘5 percent’’ for ‘‘50 percent’’, and

(II) in the case of any employer which is not a

corporation, ownership in such employer shall be

determined in accordance with regulations prescribed by the Secretary which shall be based on

principles similar to the principles of section 318

(as modified by subclause (I)).

(iv) FAMILY ATTRIBUTION DISREGARDED.—Solely for

purposes of applying this paragraph (and not for purposes of any provision of this title which incorporates

by reference the definition of a key employee or 5-percent owner under this paragraph), section 318 shall be

applied without regard to subsection (a)(1) thereof in

determining whether any person is a 5-percent owner.

* * * * * * *

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

* * * * * * *

Subchapter E—Accounting periods and methods

of accounting

* * * * * * *

PART II—METHODS OF ACCOUNTING

* * * * * * *

Subpart B—Taxable Year for Which Items of Gross Income

Included

* * * * * * *

SEC. 457. DEFERRED COMPENSATION PLANS OF STATE AND LOCAL

GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS.

ø(a) YEAR OF INCLUSION IN GROSS INCOME.—In the case of a participant in an eligible deferred compensation plan, any amount of

compensation deferred under the plan, and any income attributable

to the amounts so deferred, shall be includible in gross income only

for the taxable year in which such compensation or other income

is paid or otherwise made available to the participant or other beneficiary.¿

(a) YEAR OF INCLUSION IN GROSS INCOME.—

149

(1) IN GENERAL.—Any amount of compensation deferred

under an eligible deferred compensation plan, and any income

attributable to the amounts so deferred, shall be includible in

gross income only for the taxable year in which such compensation or other income—

(A) is paid to the participant or other beneficiary, in the

case of a plan of an eligible employer described in subsection (e)(1)(A), and

(B) is paid or otherwise made available to the participant

or other beneficiary, in the case of a plan of an eligible employer described in subsection (e)(1)(B).

(2) SPECIAL RULE FOR ROLLOVER AMOUNTS.—To the extent

provided in section 72(t)(9), section 72(t) shall apply to any

amount includible in gross income under this subsection.

(b) ELIGIBLE DEFERRED COMPENSATION PLAN DEFINED.—For purposes of this section, the term ‘‘eligible deferred compensation plan’’

means a plan established and maintained by an eligible employer—

(1) in which only individuals who perform service for the employer may be participants,

(2) which provides that (except as provided in paragraph (3))

the maximum amount which may be deferred under the plan

for the taxable year (other than rollover amounts) shall not exceed the lesser of—

(A) ø$7,500¿ the applicable dollar amount, or

(B) ø331⁄3¿ 100 percent of the participant’s includible

compensation,

(3) which may provide that, for 1 or more of the participant’s

last 3 taxable years ending before he attains normal retirement age under the plan, the ceiling set forth in paragraph (2)

shall be the lesser of—

(A) ø$15,000¿ twice the dollar amount in effect under

subsection (b)(2)(A), or

* * * * * * *

(c) INDIVIDUALS WHO ARE PARTICIPANTS IN MORE THAN 1

PLAN.—

(1) IN GENERAL.—The maximum amount of the compensation

of any one individual which may be deferred under subsection

(a) during any taxable year shall not exceed ø$7,500¿ the applicable dollar amount (as modified by any adjustment provided under subsection (b)(3)).

(2) COORDINATION WITH CERTAIN OTHER DEFERRALS.—In applying paragraph (1) of this subsection—

(A) any amount excluded from gross income under section 403(b) for the taxable year, and

(B) any amount—

(i) excluded from gross income under section

402(e)(3) or section 402(h)(1)(B) or (k) for the taxable

year, or

(ii) with respect to which a deduction is allowable by

reason of a contribution to an organization described

in section 501(c)(18) for the taxable year,

shall be treated as an amount deferred under subsection (a).

In applying section ø402(g)(8)(A)(iii)¿ 402(g)(7)(A)(iii) or

403(b)(2)(A)(ii), an amount deferred under subsection (a) for

any year of service shall be taken into account as if described

150

in section 402(g)(3)(C) or 403(b)(2)(A)(ii), respectively. Subparagraph (B) shall not apply in the case of a participant in a rural

cooperative plan (as defined in section 401(k)(7)).

[For years beginning after December 31, 2000, subsection (c) is amended to

read as follows:]

(c) LIMITATION.—The maximum amount of the compensation of

any one individual which may be deferred under subsection (a) during any taxable year shall not exceed the amount in effect under

subsection (b)(2)(A) (as modified by any adjustment provided under

subsection (b)(3)).

(d) DISTRIBUTION REQUIREMENTS.— (1) IN GENERAL.—For purposes of subsection (b)(5), a plan

meets the distribution requirements of this subsection if—

(A) under the plan amounts will not be made available

to participants or beneficiaries earlier than—

(i) the calendar year in which the participant attains

age 701⁄2, (ii) when the participant øis separated from service¿

has a severance from employment with the employer,

or

(iii) when the participant is faced with an unforeseeable emergency (determined in the manner prescribed

by the Secretary in regulations), øand¿

(B) the plan meets the minimum distribution requirements of paragraph (2)ø.¿, and

(C) in the case of a plan maintained by an employer described in subsection (e)(1)(A), the plan meets requirements

similar to the requirements of section 401(a)(31).

Any amount transferred in a direct trustee-to-trustee transfer in

accordance with section 401(a)(31) shall not be includible in

gross income for the taxable year of transfer.

ø(2) MINIMUM DISTRIBUTION REQUIREMENTS.—A plan meets

the minimum distribution requirements of this paragraph if

such plan meets the requirements of subparagraphs (A), (B),

and (C):

ø(A) APPLICATION OF SECTION 401(a)(9).—A plan meets

the requirements of this subparagraph if the plan meets

the requirements of section 401(a)(9).

ø(B) ADDITIONAL DISTRIBUTION REQUIREMENT.—A plan

meets the requirements of this subparagraph if—

ø(i) in the case of a distribution beginning before the

death of the participant, such distribution will be

made in a form under which—

ø(I) the amounts payable with respect to the

participant will be paid at times specified by the

Secretary which are not later than the time determined under section 401(a)(9)(G) (relating to incidental death benefits), and

ø(II) any amount not distributed to the participant during his life will be distributed after the

death of the participant at least as rapidly as

under the method of distributions being used

under subclause (I) as of the date of his death, or

151

ø(ii) in the case of a distribution which does not

begin before the death of the participant, the entire

amount payable with respect to the participant will be

paid during a period not to exceed 15 years (or the life

expectancy of the surviving spouse if such spouse is

the beneficiary).

ø(C) NONINCREASING BENEFITS.—A plan meets the requirements of this subparagraph if any distribution payable over a period of more than 1 year can only be made

in substantially nonincreasing amounts (paid not less frequently than annually).¿

(2) MINIMUM DISTRIBUTION REQUIREMENTS.—A plan meets

the minimum distribution requirements of this paragraph if

such plan meets the requirements of section 401(a)(9).

(3) SPECIAL RULE FOR GOVERNMENT PLAN.—An eligible deferred compensation plan of an employer described in subsection (e)(1)(A) shall not be treated as failing to meet the requirements of this subsection solely by reason of making a distribution described in subsection (e)(9)(A).

* * * * * * *

(e) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of

this section—

(1) * * *

* * * * * * *

ø(9) BENEFITS NOT TREATED AS MADE AVAILABLE BY REASON

OF CERTAIN ELECTIONS, ETC.—¿

(9) BENEFITS OF TAX EXEMPT ORGANIZATION PLANS NOT

TREATED AS MADE AVAILABLE BY REASON OF CERTAIN ELEC- TIONS, ETC.—In the case of an eligible deferred compensation

plan of an employer described in subsection (e)(1)(B)—

(A) TOTAL AMOUNT PAYABLE IS DOLLAR LIMIT OR LESS.— The total amount payable to a participant under the plan

shall not be treated as made available merely because the

participant may elect to receive such amount (or the plan

may distribute such amount without the participant’s consent) if—

(i) øsuch amount¿ the portion of such amount which

is not attributable to rollover contributions (as defined

in section 411(a)(11)(D)) does not exceed the dollar

limit under section 411(a)(11)(A), and

(ii) such amount may be distributed only if—

(I) no amount has been deferred under the plan

with respect to such participant during the 2-year

period ending on the date of the distribution and

(II) there has been no prior distribution under

the plan to such participant to which this subparagraph applied.

A plan shall not be treated as failing to meet the distribution

requirements of subsection (d) by reason of a distribution to

which this subparagraph applies.

* * * * * * *

ø(15) COST-OF-LIVING ADJUSTMENT OF MAXIMUM DEFERRAL

AMOUNT.—The Secretary shall adjust the $7,500 amount speciVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00151 Fmt 6659 Sfmt 6601 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
152

fied in subsections (b)(2) and (c)(1) at the same time and in the

same manner as under section 415(d), except that the base period shall be the calendar quarter ending September 30, 1994,

and any increase under this paragraph which is not a multiple

of $500 shall be rounded to the next lowest multiple of $500.¿

(15) APPLICABLE DOLLAR AMOUNT.— (A) IN GENERAL.—The applicable dollar amount shall be

the amount determined in accordance with the following

table:

For taxable years The applicable

beginning in dollar amount:

calendar year:

2001 ................................................................................................ $11,000

2002 ................................................................................................ $12,000

2003 ................................................................................................ $13,000

2004 ................................................................................................ $14,000

2005 or thereafter ........................................................................... $15,000.

(B) COST-OF-LIVING ADJUSTMENTS.—In the case of taxable years beginning after December 31, 2005, the Secretary

shall adjust the $15,000 amount specified in the table in

subparagraph (A) at the same time and in the same manner as under section 415(d), except that the base period

shall be the calendar quarter beginning July 1, 2004, and

any increase under this paragraph which is not a multiple

of $500 shall be rounded to the next lowest multiple of

$500.

(16) ROLLOVER AMOUNTS.— (A) GENERAL RULE.—In the case of an eligible deferred

compensation plan established and maintained by an employer described in subsection (e)(1)(A), if—

(i) any portion of the balance to the credit of an employee in such plan is paid to such employee in an eligible rollover distribution (within the meaning of section 402(c)(4) without regard to subparagraph (C)

thereof),

(ii) the employee transfers any portion of the property

such employee receives in such distribution to an eligible retirement plan described in section 402(c)(8)(B),

and

(iii) in the case of a distribution of property other

than money, the amount so transferred consists of the

property distributed,

then such distribution (to the extent so transferred) shall

not be includible in gross income for the taxable year in

which paid.

(B) CERTAIN RULES MADE APPLICABLE.—The rules of

paragraphs (2) through (7) (other than paragraph (4)(C))

and (9) of section 402(c) and section 402(f) shall apply for

purposes of subparagraph (A).

(C) REPORTING.—Rollovers under this paragraph shall be

reported to the Secretary in the same manner as rollovers

from qualified retirement plans (as defined in section

4974(c)).

(17) TRUSTEE-TO-TRUSTEE TRANSFERS TO PURCHASE PERMISSIVE SERVICE CREDIT.—No amount shall be includible in gross

income by reason of a direct trustee-to-trustee transfer to a deVerDate 11-MAY-2000 07:36 Jul 19, 2000 Jkt 079006 PO 00000 Frm 00152 Fmt 6659 Sfmt 6603 E:\HR\OC\HR753.XXX pfrm07 PsN: HR753
153

fined benefit governmental plan (as defined in section 414(d)) if

such transfer is—

(A) for the purchase of permissive service credit (as defined in section 415(n)(3)(A)) under such plan, or

(B) a repayment to which section 415 does not apply by

reason of subsection (k)(3) thereof.

* * * * * * *

Subchapter F—Exempt organizations

* * * * * * *

PART I—GENERAL RULE

* * * * * * *

SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN

TRUSTS, ETC.

(a) * * *

* * * * * * *

(c) LIST OF EXEMPT ORGANIZATIONS.—The following organizations

are referred to in subsection (a):

(1) * * *

* * * * * * *

(18) A trust or trusts created before June 25, 1959, forming

part of a plan providing for the payment of benefits under a

pension plan funded only by contributions of employees, if—

(A) * * *

* * * * * * *

(D) in the case of a plan under which an employee may

designate certain contributions as deductible—

(i) * * *

* * * * * * *

(iii) such contributions are treated as elective deferrals for purposes of section 402(g) ø(other than paragraph (4) thereof)¿, and

(iv) the requirements of section 401(a)(30) are met.

* * * * * * *

SEC. 505. ADDITIONAL REQUIREMENTS FOR ORGANIZATIONS DESCRIBED IN PARAGRAPH (9), (17), OR (20) OF SECTION

501(c).

(a) * * *

(b) NONDISCRIMINATION REQUIREMENTS.— (1) * * *

* * * * * * *

(7) COMPENSATION LIMIT.—A plan shall not be treated as

meeting the requirements of this subsection unless under the

plan the annual compensation of each employee taken into account for any year does not exceed ø$150,000¿ $200,000. The

Secretary shall adjust the ø$150,000¿ $200,000 amount at the

same time, and by the same amount, as any adjustment under

154

section 401(a)(17)(B). This paragraph shall not apply in determining whether the requirements of section 79(d) are met.

* * * * * * *

Subtitle C—Employment Taxes

* * * * * * *

CHAPTER 24—COLLECTION OF INCOME TAX

AT SOURCE ON WAGES

* * * * * * *

SEC. 3401. DEFINITIONS.

(a) WAGES.—For purposes of this chapter, the term ‘‘wages’’

means all remuneration (other than fees paid to a public official)

for services performed by an employee for his employer, including

the cash value of all remuneration (including benefits) paid in any

medium other than cash; except that such term shall not include

remuneration paid—

(1) * * *

* * * * * * *

(12) to, or on behalf of, an employee or his beneficiary—

(A) * * *

* * * * * * *

(E) under or to an eligible deferred compensation plan

which, at the time of such payment, is a plan described in

section 457(b) maintained by an employer described in section 457(e)(1)(A); or

* * * * * * *

SEC. 3405. SPECIAL RULES FOR PENSIONS, ANNUITIES, AND CERTAIN

OTHER DEFERRED INCOME.

(a) * * *

* * * * * * *

(c) ELIGIBLE ROLLOVER DISTRIBUTIONS.—

(1) * * *

* * * * * * *

ø(3) ELIGIBLE ROLLOVER DISTRIBUTION.—For purposes of this

subsection, the term ‘‘eligible rollover distribution’’ has the

meaning given such term by section 402(f)(2)(A) (or in the case

of an annuity contract under section 403(b), a distribution from

such contract described in section 402(f)(2)(A)).¿

(3) ELIGIBLE ROLLOVER DISTRIBUTION.—For purposes of this

subsection, the term ‘‘eligible rollover distribution’’ has the

meaning given such term by section 402(f)(2)(A).

* * * * * * *

(d) LIABILITY FOR WITHHOLDING.—

(1) * * *

(2) PLAN ADMINISTRATOR LIABLE IN CERTAIN CASES.—

(A) * * *

155

(B) PLANS TO WHICH PARAGRAPH APPLIES.—This paragraph applies to any plan described in, or which at any

time has been determined to be described in—

(i) section 401(a),

(ii) section 403(a), øor¿

(iii) section 301(d) of the Tax Reduction Act of

1975ø.¿, or

(iv) section 457(b).

* * * * * * *

Subtitle D—Miscellaneous Excise Taxes

* * * * * * *

CHAPTER 43—QUALIFIED PENSION, ETC.,

PLANS

Sec. 4971. Taxes on failure to meet minimum funding standards.

* * * * * * *

Sec. 4980F. Failure of applicable plans reducing benefit accruals to

satisfy notice requirements.

* * * * * * *

SEC. 4972. TAX ON NONDEDUCTIBLE CONTRIBUTIONS TO QUALIFIED

EMPLOYER PLANS.

(a) * * *

* * * * * * *

(c) NONDEDUCTIBLE CONTRIBUTIONS.—For purposes of this

section—

(1) * * *

* * * * * * *

(6) EXCEPTIONS.—In determining the amount of nondeductible contributions for any taxable year, there shall not be taken

into account—

(A) contributions that would be deductible under section

404(a)(1)(D) if the plan had more than 100 participants

if—

(i) the plan is covered under section 4021 of the Employee Retirement Income Security Act of 1974, and

(ii) the plan is terminated under section 4041(b) of

such Act on or before the last day of the taxable year,

and

(B) so much of the contributions to 1 or more defined

contribution plans which are not deductible when contributed solely because of section 404(a)(7) as does not exceed

the greater of—

(i) the amount of contributions not in excess of 6

percent of compensation ø(within the meaning of section 404(a))¿ (within the meaning of section 404(a) and

as adjusted under section 404(a)(12)) paid or accrued

(during the taxable year for which the contributions

were made) to beneficiaries under the plans, or

(ii) the sum of—

156

(I) the amount of contributions described in section 401(m)(4)(A), plus

(II) the amount of contributions described in

section 402(g)(3)(A).

If 1 or more defined benefit plans were taken into account in

determining the amount allowable as a deduction under section 404 for contributions to any defined contribution plan,

subparagraph (B) shall apply only if such defined benefit plans

are described in section 404(a)(1)(D). For purposes of subparagraph (B), the deductible limits under section 404(a)(7) shall

first be applied to amounts contributed to a defined benefit

plan and then to amounts described in subparagraph (B).

øFor years beginning after December 31, 2000, paragraph (6) is amended to

read as follows:¿

(6) EXCEPTIONS.—In determining the amount of nondeductible contributions for any taxable year, there shall not be taken

into account so much of the contributions to one or more defined

contribution plans which are not deductible when contributed

solely because of section 404(a)(7) as does not exceed the greater

of—

(A) the amount of contributions not in excess of 6 percent

of compensation (within the meaning of section 404(a)) paid

or accrued (during the taxable year for which the contributions were made) to beneficiaries under the plans, or

(B) the sum of—

(i) the amount of contributions described in section

401(m)(4)(A), plus

(ii) the amount of contributions described in section

402(g)(3)(A).

For purposes of this paragraph, the deductible limits under section 404(a)(7) shall first be applied to amounts contributed to

a defined benefit plan and then to amounts described in subparagraph (B).

(7) DEFINED BENEFIT PLAN EXCEPTION.—In determining the

amount of nondeductible contributions for any taxable year, an

employer may elect for such year not to take into account any

contributions to a defined benefit plan except to the extent that

such contributions exceed the full-funding limitation (as defined

in section 412(c)(7), determined without regard to subparagraph

(A)(i)(I) thereof). For purposes of this paragraph, the deductible

limits under section 404(a)(7) shall first be applied to amounts

contributed to defined contribution plans and then to amounts

described in this paragraph. If an employer makes an election

under this paragraph for a taxable year, paragraph (6) shall

not apply to such employer for such taxable year.

* * * * * * *

SEC. 4973. TAX ON EXCESS CONTRIBUTIONS TO CERTAIN TAX-FAVORED ACCOUNTS AND ANNUITIES.

(a) * * *

(b) EXCESS CONTRIBUTIONS.—For purposes of this section, in the

case of individual retirement accounts or individual retirement annuities, the term ‘‘excess contributions’’ means the sum of—

(1) the excess (if any) of—

157

(A) the amount contributed for the taxable year to the

accounts or for the annuities (other than a contribution to

a Roth IRA or a rollover contribution described in section

402(c), 403(a)(4), 403(b)(8), øor 408(d)(3)¿ 408(d)(3), or

457(e)(16)), over

* * * * * * *

SEC. 4974. EXCISE TAX ON CERTAIN ACCUMULATIONS IN QUALIFIED

RETIREMENT PLANS.

(a) GENERAL RULE.—If the amount distributed during the taxable year of the payee under any qualified retirement plan or any

eligible deferred compensation plan (as defined in section 457(b)) is

less than the minimum required distribution for such taxable year,

there is hereby imposed a tax equal to ø50¿ 10 percent of the

amount by which such minimum required distribution exceeds the

actual amount distributed during the taxable year. The tax imposed by this section shall be paid by the payee.

* * * * * * *

SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.

(a) * * *

* * * * * * *

(e) DEFINITIONS.—

(1) * * *

* * * * * * *

(7) EMPLOYEE STOCK OWNERSHIP PLAN.—The term ‘‘employee

stock ownership plan’’ means a defined contribution plan—

(A) * * *

* * * * * * *

A plan shall not be treated as an employee stock ownership

plan unless it meets the requirements of section 409(h), section

409(o), and, if applicable, section 409(n), section 409(p), and

section 664(g) and, if the employer has a registration-type class

of securities (as defined in section 409(e)(4)), it meets the requirements of section 409(e).

* * * * * * *

(f) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of

this section—

(1) * * *

* * * * * * *

(6) EXEMPTIONS NOT TO APPLY TO CERTAIN TRANSACTIONS.—

(A) * * *

(B) SPECIAL RULES FOR SHAREHOLDER-EMPLOYEES, ETC.—

(i) * * *

* * * * * * *

(iii) LOAN EXCEPTION.—For purposes of subparagraph (A)(i), the term ‘‘owner-employee’’ shall only include a person described in subclause (II) or (III) of

clause (i).

* * * * * * *

158

SEC. 4979A. TAX ON CERTAIN PROHIBITED ALLOCATIONS OF QUALIFIED SECURITIES.

(a) IMPOSITION OF TAX.—If—

(1) there is a prohibited allocation of qualified securities by

any employee stock ownership plan or eligible worker-owned

cooperative, øor¿

(2) there is an allocation described in section 664(g)(5)(A),

øthere is hereby imposed a tax on such allocation equal to 50 percent of the amount involved.¿

(3) there is any allocation of employer securities which violates the provisions of section 409(p), or a nonallocation year

described in subsection (e)(2)(C) with respect to an employee

stock ownership plan, or

(4) any synthetic equity is owned by a disqualified person in

any nonallocation year,

there is hereby imposed a tax on such allocation or ownership equal

to 50 percent of the amount involved.

* * * * * * *

ø(c) LIABILITY FOR TAX.—The tax imposed by this section shall be

paid by—

ø(1) the employer sponsoring such plan, or

ø(2) the eligible worker-owned cooperative, which made the

written statement described in section 664(g)(1)(E) or in section 1042(b)(3)(B) (as the case may be).¿

(c) LIABILITY FOR TAX.—The tax imposed by this section shall be

paid—

(1) in the case of an allocation referred to in paragraph (1)

or (2) of subsection (a), by—

(A) the employer sponsoring such plan, or

(B) the eligible worker-owned cooperative,

which made the written statement described in section

664(g)(1)(E) or in section 1042(b)(3)(B) (as the case may be),

and

(2) in the case of an allocation or ownership referred to in

paragraph (3) or (4) of subsection (a), by the S corporation the

stock in which was so allocated or owned.

* * * * * * *

ø(e) DEFINITIONS.—Terms used in this section have the same respective meaning as when used in section 4978.¿

(e) DEFINITIONS AND SPECIAL RULES.—For purposes of this

section—

(1) DEFINITIONS.—Except as provided in paragraph (2), terms

used in this section have the same respective meanings as when

used in sections 409 and 4978.

(2) SPECIAL RULES RELATING TO TAX IMPOSED BY REASON OF

PARAGRAPH (3) OR (4) OF SUBSECTION (a).—

(A) PROHIBITED ALLOCATIONS.—The amount involved

with respect to any tax imposed by reason of subsection

(a)(3) is the amount allocated to the account of any person

in violation of section 409(p)(1).

(B) SYNTHETIC EQUITY.—The amount involved with respect to any tax imposed by reason of subsection (a)(4) is

the value of the shares on which the synthetic equity is

based.

159

(C) SPECIAL RULE DURING FIRST NONALLOCATION YEAR.— For purposes of subparagraph (A), the amount involved for

the first nonallocation year of any employee stock ownership plan shall be determined by taking into account the

total value of all the deemed-owned shares of all disqualified persons with respect to such plan.

(D) STATUTE OF LIMITATIONS.—The statutory period for

the assessment of any tax imposed by this section by reason

of paragraph (3) or (4) of subsection (a) shall not expire before the date which is 3 years from the later of—

(i) the allocation or ownership referred to in such

paragraph giving rise to such tax, or

(ii) the date on which the Secretary is notified of

such allocation or ownership.

* * * * * * *

SEC. 4980F. FAILURE OF APPLICABLE PLANS REDUCING BENEFIT ACCRUALS TO SATISFY NOTICE REQUIREMENTS.

(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.— (1) IN GENERAL.—The amount of the tax imposed by subsection (a) on any failure with respect to any applicable individual shall be $100 for each day in the noncompliance period

with respect to such failure.

(2) NONCOMPLIANCE PERIOD.—For purposes of this section,

the term ‘‘noncompliance period’’ means, with respect to any

failure, the period beginning on the date the failure first occurs

and ending on the date the failure is corrected.

(c) LIMITATIONS ON AMOUNT OF TAX.— (1) OVERALL LIMITATION FOR UNINTENTIONAL FAILURES.—In

the case of failures that are due to reasonable cause and not to

willful neglect, 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 one plan. For purposes

of this paragraph, if not all persons who are treated as a single

employer for purposes of this section have the same taxable

year, the taxable years taken into account shall be determined

under principles similar to the principles of section 1561.

(2) 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 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 REQUIREMENTS FOR PLANS SIGNIFICANTLY REDUCING

BENEFIT ACCRUALS.—

160

(1) IN GENERAL.—If an applicable pension plan is amended

to provide for a significant reduction in the rate of future benefit accrual, the plan administrator shall provide written notice

to each applicable individual (and to each employee organization representing applicable individuals).

(2) NOTICE.—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 regulations prescribed by the

Secretary) to allow applicable individuals to understand the effect of the plan amendment.

(3) TIMING OF NOTICE.—Except as provided in regulations,

the notice required by paragraph (1) shall be provided within

a reasonable time before the effective date of the plan amendment.

(4) DESIGNEES.—Any notice under paragraph (1) may be provided to a person designated, in writing, by the person to which

it would otherwise be provided.

(5) NOTICE BEFORE ADOPTION OF AMENDMENT.—A plan shall

not be treated as failing to meet the requirements of paragraph

(1) merely because notice is provided before the adoption of the

plan amendment if no material modification of the amendment

occurs before the amendment is adopted.

(f) APPLICABLE INDIVIDUAL; APPLICABLE PENSION PLAN.—For purposes of this section—

(1) APPLICABLE INDIVIDUAL.—The term ‘‘applicable individual’’ means, with respect to any plan amendment—

(A) any participant in the plan, and

(B) 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)),

who may reasonably be expected to be affected by such plan

amendment.

(2) APPLICABLE PENSION PLAN.—The term ‘‘applicable pension

plan’’ means—

(A) any defined benefit plan, or

(B) an individual account plan which is subject to the

funding standards of section 412,

which had 100 or more participants who had accrued a benefit,

or with respect to whom contributions were made, under the

plan (whether or not vested) as of the last day of the plan year

preceding the plan year in which the plan amendment becomes

effective. Such term shall not include a governmental plan

(within the meaning of section 414(d)) or a church plan (within

the meaning of section 414(e)) with respect to which the election

provided by section 410(d) has not been made.

* * * * * * *

Subtitle F—Procedure and Administration

* * * * * * *

161

CHAPTER 61—INFORMATION AND RETURNS

* * * * * * *

Subchapter A—Returns and Records

* * * * * * *

PART III—INFORMATIONAL RETURNS

* * * * * * *

Subpart B—Information Concerning Transactions With

Other Persons

* * * * * * *

SEC. 6047. INFORMATION RELATING TO CERTAIN TRUSTS AND ANNUITY PLANS.

(a) * * *

* * * * * * *

(f) DESIGNATED PLUS CONTRIBUTIONS.—The Secretary shall require the plan administrator of each applicable retirement plan (as

defined in section 402A) to make such returns and reports regarding

designated plus contributions (as so defined) to the Secretary, participants and beneficiaries of the plan, and such other persons as

the Secretary may prescribe.

ø(f)¿ (g) CROSS REFERENCES

(1) For provisions relating to penalties for failures to file returns

and reports required under this section, see sections 6652(e), 6721,

and 6722.

(2) For criminal penalty for furnishing fraudulent information,

see section 7207.

(3) For provisions relating to penalty for failure to comply with

the provisions of subsection (d), see section 6704.

* * * * * * *

Subpart C—Information Regarding Wages Paid Employees

* * * * * * *

SEC. 6051. RECEIPTS FOR EMPLOYEES.

(a) REQUIREMENT.—Every person required to deduct and withhold from an employee a tax under section 3101 or 3402, or who

would have been required to deduct and withhold a tax under section 3402 (determined without regard to subsection (n)) if the employee had claimed no more than one withholding exemption, or

every employer engaged in a trade or business who pays remuneration for services performed by an employee, including the cash

value of such remuneration paid in any medium other than cash,

shall furnish to each such employee in respect of the remuneration

paid by such person to such employee during the calendar year, on

or before January 31 of the succeeding year, or, if his employment

is terminated before the close of such calendar year, within 30 days

after the date of receipt of a written request from the employee if

such 30-day period ends before January 31, a written statement

showing the following:

162

(1) * * *

* * * * * * *

(8) the total amount of elective deferrals (within the meaning

of section 402(g)(3)) and compensation deferred under section

457, including the amount of designated plus contributions (as

defined in section 402A),

* * * * * * *

SECTION 1114 OF THE TAX REFORM ACT OF 1986

SEC. 1114. DEFINITION OF HIGHLY COMPENSATED EMPLOYEE.

(a) * * *

* * * * * * *

(c) EFFECTIVE DATE.— (1) * * *

* * * * * * *

ø(4) SPECIAL RULE FOR DETERMINING HIGHLY COMPENSATED

EMPLOYEES.—For purposes of sections 401(k) and 401(m) of the

Internal Revenue Code of 1986, in the case of an employer incorporated on December 15, 1924, if more than 50 percent of

its employees in the top-paid group (within the meaning of section 414(q)(4) of such Code) earn less than $25,000 (indexed at

the same time and in the same manner as under section 415(d)

of such Code), then the highly compensated employees shall include employees described in section 414(q)(1)(C) of such Code

determined without regard to the level of compensation of such

employees.¿

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.—

(1) * * *

(2) TREATMENT FOR YEARS BEGINNING BEFORE DATE OF ENACTMENT.—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), and 410 of

such Code for all taxable years beginning before the date of enactment of this Act.

(163)

VII. ADDITIONAL VIEWS

H.R. 4843, the Comprehensive Retirement Security and Pension

Reform Act of 2000, is designed to: (1) increase retirement savings

mainly through tax-preferred employment-based vehicles or Individual Retirement Accounts (IRAs), (2) enhance long-term security

of pension benefits, and (3) reduce certain regulatory burdens relating to establishing and administering employer-sponsored pension

plans.

We strongly support the underlying goal of H.R. 4843, to provide

expanded opportunities for working Americans to save for their retirement. This goal is shared by Members of both parties and is reflected in the level of bipartisan support this legislation has received. Many of the provisions that were included in the original

bill, H.R. 1102, are noncontroversial, while others have been improved since the date of introduction. Consequently, H.R. 4843 is

a more balanced bill than the original bill. However, there are

some provisions we hope will continue to be debated and improved

as this bill moves through the legislative process.

H.R. 4843 provides us with an opportunity to respond to the

pressing need for adequate and secure retirement benefits for all

workers. This bill should provide additional incentives for increased

retirement savings by rank and file workers. Expanding pension

coverage and increasing the rate of participation in employmentbased pension plans is even more important now as we face a declining national savings rate coupled with the imminent retirement

of many baby boomers. In addition, a significant number of workers

will face retirement with either insufficient or no retirement savings other than their Social Security benefit.

Our current retirement system is built on the assumption that

benefits provided under Social Security would be supplemented by

other sources of income such as employment-based pensions and

personal savings. Thus, it is very important that we develop legislation designed to increase and enhance retirement savings for all

working Americans.

H.R. 4843 contains many needed provisions such as those designed to enhance and expand portability of pension benefits by

workers as they move from one employer to another, to enhance

fairness in pensions for women, and to strengthen pension security

and enforcement.

The current level of mobility among workers requires a modified

approach to our retirement system. There is great demand for a

system that incorporates flexibility for employers and portability of

pension benefits for workers. Lack of pension portability in such a

mobile workforce could result in workers being shortchanged in

pension benefits merely because they changed jobs.

H.R. 4843 contains provisions that respond directly to this need.

Under this legislation, workers will have greater flexibility to

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transfer their pension benefits between employer plans or to an

IRA. This flexibility would be available for all forms of employersponsored qualified pension plans and IRAs. We strongly support

these provisions.

In addition, H.R. 4843 contains various proposals designed to enhance the security of pension benefits for women. One such proposal would improve the ability of workers to vest in their accrued

benefits through faster vesting requirements. Under the bill, this

rule would apply to certain employer matching contributions to a

section 401(k) plan. Because all workers should have the opportunity to vest in these employer contributions on an equal basis,

we hope this provision sets the precedent with respect to vesting

in all employer contributions under all pensions plans. There is no

policy reason for workers to vest more slowly in their pension benefits based solely on the type of pension plan offered by their employer.

Several provisions contained in H.R. 4843 are designed to increase benefit and contribution limits for taxpayers who are currently saving the maximum permitted under our current pension

laws. These taxpayers would be allowed to save additional amounts

on a tax-preferred basis through their employer-sponsored plan. We

believe the opportunity either to begin to save or to increase current retirement savings through a tax-preferred vehicle must be extended to all workers, not just those who contribute the maximum

contributions permitted under current law. This has not been accomplished by H.R. 4843 in its present form.

While H.R. 4843 provides significant opportunities for those

workers who can most afford to, and currently do, save the maximum amount allowed, few or no opportunities are available to lowand moderate-income workers under the bill. We must continue to

work together to improve this aspect of the bill. We must ensure

that no segment of our workforce is excluded from the opportunity

to improve their retirement years financially. The pressure to save

adequately for retirement affects all working Americans. We must

respond to these needs in a fair manner.

The Amendment offered by Congressman Jefferson and other

Democrats in Committee but defeated on a party line vote, is essential to make H.R. 4843 a more balanced pension package. The

Amendment would increase savings opportunities for all workers,

not just those workers who can most afford to save, by including

low- and moderate-income workers in this legislation.

The Amendment would have added to H.R. 4843 a Retirement

Savings Account (RSA) proposal as developed by the Administration. We support the goal of the RSA proposal and consider it an

important element to perfect the Comprehensive Retirement Security and Pension Reform Act of 2000.

The RSA proposal would be a good first step in addressing the

balance needed in this legislation. It would provide a refundable

credit to low- and middle-income workers who participate in an employer-sponsored pension plan or an IRA. The maximum credit

would equal 50 percent of the annual contribution limit allowed

under a traditional IRA. The credit would be available to all qualifying taxpayers whose adjusted gross income does not exceed certain specified levels.

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The RSA proposal does not create a separate savings account.

Rather, it works with existing employer-sponsored plans and IRAs.

This feature would provide simplicity and ease of administration

for plan sponsors. The proposal is designed to promote significant

savings among low- and middle-income workers who are not currently participating in a pension plan or who are participating at

a minimal level.

The RSA proposal is intended to provide a strong incentive for

our most vulnerable workers to save for their retirement. Because

many of these workers have not yet begun to save or are saving

at a minimal level, we believe a 50-percent credit would encourage

them to take an important step toward creating increased retirement savings. Many of these workers will begin with a small account balance but will watch it grow over the years to an amount

that could provide a more financially secured retirement. In addition, the satisfaction of seeing a small amount of savings grow

through continuous contributions and compound interest will be an

additional incentive for these individuals to continue the practice

of saving for retirement. Workers who have little or no retirement

savings can be brought into our current retirement system only

through a different form of saving incentive such as the RSA proposal. It is our responsibility to ensure that these workers also benefit from any legislation that expands opportunities to save for retirement.

Statistics confirm that low-income workers are far less likely to

participate in an employment based retirement savings plan than

workers with higher incomes even when a plan is available to

them. Individuals earning between $10,000 and $14,000 annually

participate at a rate of 31 percent even though 51 percent of them

have access to plans at work. However, the participation rate for

workers earning $50,000 or more increases to 83 percent, with 88

percent of such workers having access to employer-sponsored plans.

The refundable aspect of the RSA credit is a key feature in

reaching the workers it is intended to help. This credit allows us

to include in our retirement system workers who simply cannot afford to save without such an incentive. Receiving a matching contribution of up to 50 percent of the annual contribution amount will

motivate many low- and middle-income workers to direct some of

their income or tax refund to retirement savings. The RSA proposal

included in our Amendment would have accomplished all of these

goals.

Another important aspect of our Amendment is the incentive provided to small employers to establish and maintain pension plans

for their workers. These incentives would have been provided

through two credits for small employers.

First, the Amendment would give a 50-percent tax credit to small

employers for their start-up costs associated with establishing and

administering pension plans for their employees. The credit would

be available for the first three years of the life of the plan. This

credit would provide a strong incentive for small businesses to offer

pension plans for their employees. In addition, it could be used as

a marketing tool by financial institutions and pension plan advisors to promote the adoption of plans among small employers.

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Second, the Amendment would provide eligible small employers

with a 50-percent credit for certain employer contributions made to

a pension plan for their non-highly compensated employees. The

credit would encourage small employers to make contributions on

behalf of those workers who have little or no money to contribute

to the plan. The credit would be available for non-elective employer

contributions of up to 1 percent of the employee’s compensation, up

to a total of 3 percent for both non-elective and matching contributions. By encouraging small employers to make contributions on behalf of their non-highly compensated employees, retirement savings

for those workers will increase.

It is critical to improve plan sponsorship among small employers

who lag behind large employers in establishing retirement plans.

Today, small businesses (100 or fewer employees) employ approximately two of every five U.S. workers, yet less than one-third of

these businesses offer any retirement plan to their workers. The

employees of small employers have the same need to save for their

retirement, and we must provide them with the same opportunities

to save in a tax-preferred employment-based vehicle as their counterparts who are employed by larger businesses.

We hope that these proposals, which form the cornerstone of any

inclusive pension reform package, will be given serious consideration as this process moves forward. We remain hopeful that any

pension package signed into law this year will contain these proposals.

Some have concerns that other provisions contained in H.R.

4843, such as the provisions to modify the top-heavy rules and the

nondiscrimination requirements, will be used by employers to reduce coverage to rank and file workers while increasing benefits for

their highly-compensated workers. However, all of us hope that

H.R. 4843 can be improved by the addition of the Administration’s

Retirement Saving Account proposal and the small business tax

credit incentives to expand pension coverage and increase benefits

for rank and file workers. This legislation should be improved to

address the retirement needs of workers at all income levels. We

intend to work in a bipartisan manner to achieve this goal.

XAVIER BECERRA.

RICHARD E. NEAL.

WILLIAM J. COYNE.

SANDER LEVIN.

JOHN LEWIS.

CHARLES B. RANGEL.

ROBERT T. MATSUI.

JIM MCDERMOTT.

WILLIAM J. JEFFERSON.

KAREN L. THURMAN.

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