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Joint Committee on Taxation

February 2, 2004

JCX-8-04

DESCRIPTION OF ADDITIONAL CHAIRMAN’S MODIFICATIONS TO THE

“NATIONAL EMPLOYEE SAVINGS AND TRUST EQUITY

GUARANTEE ACT OF 2003” AS MARKED UP SEPTEMBER 17, 2003,

SCHEDULED FOR MARKUP BY 

THE SENATE COMMITTEE ON FINANCE

ON FEBRUARY 2, 2004

I. MODIFICATIONS TO THE CHAIRMAN'S MODIFICATION RELATING TO

THE TAX TREATMENT OF COMPANY-OWNED LIFE INSURANCE ("COLI")

The proposal adds a provision related to the notice requirement under the COLI provision 

in the Chairman's Modification. The proposal requires that to satisfy the notice requirement, 

employers must include the maximum face amount at the time of issue of the life insurance 

contract that the employer might take out on the life of the employee. 

II. MODIFICATIONS TO THE BILL AS MARKED UP

 RELATING TO PENSIONS

A. Information to Assist Pension Plan Participants

1. Employer-provided qualified retirement planning services 

The proposal permitting employers to offer employees a choice between cash 

compensation and eligible qualified retirement planning services is effective for taxable years 

beginning after December 31, 2004, and before January 1, 2010.

B. Other Provisions Relating to Pensions

1. Updating deduction rules for combination of plans

The proposal providing (1) that the overall limit on employer deductions for contributions 

to combinations of defined benefit and defined contribution plans applies to contributions to one 

or more defined contribution plans only to the extent that such contributions exceed six percent 

of compensation otherwise paid or accrued during the taxable year to the beneficiaries under the 

plans and (2) that for purposes of determining the excise tax on nondeductible contributions, 

matching contributions to a defined contribution plan that are nondeductible solely because of 

the overall deduction limit are disregarded, is effective for contributions for taxable years 

beginning after December 31, 2004.
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2. Rollover of after-tax amounts

The proposal allowing after-tax contributions to be rolled over from a qualified 

retirement plan to another qualified retirement plan (either a defined contribution or a defined 

benefit plan) or tax-sheltered annuity as long as the rollover is a direct rollover, and the plan to 

which the rollover is made separately accounts for after-tax contributions (and earnings thereon) 

is effective for taxable years beginning after December 31, 2004.

3. Rollovers by nonspouse beneficiaries

The proposal providing that benefits of a beneficiary other than a surviving spouse may 

be transferred directly to an IRA is effective for distributions made after December 31, 2004.

4. Faster vesting of employer nonelective contributions

The proposal applying the present-law vesting schedule for matching contributions to all 

employer contributions to defined contribution plans is effective for contributions (including 

allocations of forfeitures) for plan years beginning after December 31, 2004, with a delayed 

effective date for plans maintained pursuant to a collective bargaining agreement. The proposal 

does 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.

5. Direct rollovers from retirement plans to Roth IRAs

The proposal allowing distributions from tax-qualified retirement plans, tax-sheltered 

annuities, and governmental 457 plans to be rolled over directly from such plan into a Roth IRA, 

subject to the present law rules that apply to rollovers from a traditional IRA into a Roth IRA, is 

effective for distributions made after December 31, 2004.

6. SIMPLE plan distribution rules

The proposal eliminating the 25-percent early withdrawal tax on withdrawals of SIMPLE 

IRA contributions during the two-year period beginning on the date the employee first 

participated in the SIMPLE IRA is effective for plan years beginning after December 31, 2004.

7. SIMPLE plan portability

The proposal allowing rollovers from any type of tax-favored retirement plan to a 

SIMPLE IRA and from a SIMPLE IRA to any type of tax-favored retirement plan is effective for 

plan years beginning after December 31, 2004.

8. Extension to all governmental plans of moratorium on application of certain 

nondiscrimination rules applicable to state and local government plans 

The proposal exempting governmental plans from the nondiscrimination and minimum 

participation rules and treating all governmental plans as meeting the participation and 

nondiscrimination requirements applicable to a qualified cash or deferred arrangement is 

effective for plan years beginning after December 31, 2004.
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9. Notice and consent period regarding distributions

The proposal requiring a qualified retirement plan to provide required distribution notices 

no less than 30 days and no more than 180 days before the date distribution commences applies 

to years beginning after December 31, 2004. 

10. Pension plan reporting simplification 

The proposal which directs the Secretary of the Treasury and the Secretary of Labor to 

modify the annual return filing requirements with respect to plans that satisfy the eligibility 

requirements for Form 5500-EZ is effective for plan years beginning on or after January 1, 2004. 

11. Reduced PBGC premiums for small and new plans

The proposal providing for a reduction of the flat-rate Pension Benefit Guaranty 

Corporation (“PBGC”) premium for new plans of small employers and the variable-rate PBGC 

premium for new plans applies to plans first effective after December 31, 2004. The reduction of 

the variable-rate PBGC premium for small plans applies to plan years beginning after December 

31, 2004.

12. Rules for substantial owner benefits in terminated plans 

The proposal providing that a 60-month phase-in for guaranteed PBGC benefits applies 

to a substantial owner with less than 50 percent ownership interest and a 10-year phase-in period 

(depending on the number of years the plan has been in effect) is effective for plan terminations 

with respect to which notices of intent to terminate are provided, or for which proceedings for 

termination are instituted by the PBGC, after December 31, 2004.

13. Multiemployer plan explanation notice

The proposal requiring the administrator of a multiemployer plan to provide participants 

with an annual funding notice and a special solvency notice applies to plan years beginning after 

December 31, 2005.

14. Additional IRA catch-up contributions for certain individuals

The proposal permitting eligible individuals to make additional contributions to an IRA 

up to $1,500 per year in tax years 2004 through 2005, and $3,000 in tax years 2006 through 2008 

is effective for taxable years beginning after December 31, 2003, and before January 1, 2009. 

15. Permit qualified transfers of excess pension assets to retiree health accounts by 

multiemployer plan 

The proposal allowing the qualified transfers of excess defined benefit plan assets to be 

made by a defined benefit plan described in section 404(c) (or a continuation or spin-off thereof 

that primarily covers employees in the building and construction industry) is effective for 

transfers made in taxable years beginning after December 31, 2004.
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C. Provisions Relating to Executives and Stock Options

1. Taxation of nonqualified deferred compensation

The proposal providing that all amounts deferred under a nonqualified deferred 

compensation plan are currently includible in gross income to the extent not subject to a 

substantial risk of forfeiture and not previously included in gross income, unless certain 

requirements are satisfied, is effective for amounts deferred in taxable years beginning after 

December 31, 2004.

2. Denial of deferral of certain stock option and restricted stock gains

The proposal providing that gains attributable to stock options (including exercises of 

stock options), vesting of restricted stock, and other employer security based compensation 

cannot be deferred by electing to receive a future payment in lieu of such amounts is effective 

after December 31, 2004.

D. Women’s Pension Protection Provisions

1. Modifications of joint and survivor annuity requirements

The proposal revising the QJSA requirements to require that, at the election of the 

participant, benefits will be paid in the form of a “qualified joint and 3/4 survivor annuity” (an 

annuity for the life of the participant, with a survivor annuity for the life of the spouse which is 

not less than 75 percent of the amount of the annuity payable during the joint lives of the 

participant and his or her spouse) is generally effective for plan years beginning after 

December 31, 2004, with a delayed effective date for plans maintained pursuant to a collective 

bargaining agreement. 

E. Other Provisions

1. Exclusion for education benefits provided by employers to children of employees

The exclusion for education benefits provided by employers to children of employees is 

modified by providing that it is effective for taxable years beginning after December 31, 2004, 

and does not apply to years beginning after December 31, 2005.

2. Exclusion from gross income for amounts paid under National Health Service Corps 

Loan Repayment Program

The proposal excluding from gross income loan repayments provided under the National 

Health Service Corps Loan Repayment Program is effective with respect to amounts received in 

taxable years beginning after December 31, 2004.

3. Temporary exclusion for group legal services benefits

The proposal restoring the exclusion for employer-provided group legal services, 

providing that the amount of the exclusion is not limited, and providing tax exempt status for 
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organizations which provide qualified group legal services applies to taxable years beginning 

after December 31, 2004, and before January 1, 2006.

III. PROVISIONS DELETED FROM THE BILL AS MARKED UP

The following items are deleted from the bill as marked up:

(1) Consolidation of life and nonlife insurance companies; and

(2) Repeal of reduction of deductions for mutual life insurance companies and of 

policyholder surplus accounts of life insurance companies.

IV. PROVISION ADDED TO THE BILL AS MARKED UP

A. Reporting of Taxable Mergers and Acquisitions

Present Law

Under section 6045 and the regulations thereunder, brokers (defined to include stock 

transfer agents) are required to make information returns and to provide corresponding payee 

statements as to sales made on behalf of their customers, subject to the penalty provisions of 

sections 6721-6724. Under the regulations issued under section 6045, this requirement generally 

does not apply with respect to taxable transactions other than exchanges for cash (e.g., stock 

inversion transactions taxable to shareholders by reason of section 367(a)).

Description of Proposal

Under the proposal, if gain or loss is recognized in whole or in part by shareholders of a 

corporation by reason of a second corporation’s acquisition of the stock or assets of the first 

corporation, then the acquiring corporation (or the acquired corporation, if so prescribed by the 

Treasury Secretary) is required to make a return containing: 

(1) A description of the transaction;

(2) The name and address of each shareholder of the acquired corporation that 

recognizes gain as a result of the transaction (or would recognize gain, if there 

was a built-in gain on the shareholder’s shares);

(3) The amount of money and the value of stock or other consideration paid to each 

shareholder described above; and

(4) Such other information as the Treasury Secretary may prescribe.

Alternatively, a stock transfer agent who records transfers of stock in such transaction 

may make the return described above in lieu of the second corporation.
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In addition, every person required to make a return described above is required to furnish 

to each shareholder (or the shareholder’s nominee1) whose name is required to be set forth in 

such return a written statement showing:

(1) The name, address, and phone number of the information contact of the person 

required to make such return;

(2) The information required to be shown on that return; and

(3) Such other information as the Treasury Secretary may prescribe.

This written statement is required to be furnished to the shareholder on or before January 

31 of the year following the calendar year during which the transaction occurred.

The present-law penalties for failure to comply with information reporting requirements 

are extended to failures to comply with the requirements set forth under the proposal.

Effective Date

The proposal is effective for acquisitions after the date of enactment.

 

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 In the case of a nominee, the nominee must furnish the information to the shareholder 

in the manner prescribed by the Secretary of the Treasury.