```

[Senate Report 106-411]
[From the U.S. Government Publishing Office]

                                                       Calendar No. 802
106th Congress                                                   Report
                                 SENATE
 2d Session                                                     106-411
_______________________________________________________________________

                    RETIREMENT SECURITY AND SAVINGS

                              ACT OF 2000

                              R E P O R T

                                 of the

                          COMMITTEE ON FINANCE

                          UNITED STATES SENATE

                              to accompany

                               H.R. 1102

               September 13, 2000.--Ordered to be printed

                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
79-012                     WASHINGTON : 2000

                            C O N T E N T S

                                                                   Page
 I. Legislative Background............................................1
II. Explanation of the Bill...........................................2
        Title I. Individual Retirement Arrangements (``IRAs'')...     2
        Title II. Expanding Coverage.............................     7
            A. Increase in Benefit and Contribution Limits.......     7
            B. Plan Loans for Subchapter S Shareholders, 
                Partners, and Sole Proprietors...................     9
            C. Modification of Top-Heavy Rules...................    11
            D. Elective Deferrals Not Taken into Account for 
                Purposes of Deduction Limits.....................    15
            E. Repeal of Coordination Requirements for Deferred 
                Compensation Plans of State and Local Governments 
                and Tax-Exempt Organizations.....................    16
            F. Deduction Limits..................................    17
            G. Option to Treat Elective Deferrals as Roth After-
                Tax Contributions................................    18
            H. Credit for Low- and Middle-Income Savers..........    20
            I. Small Business Tax Credit for Qualified Retirement 
                Plan Contributions...............................    22
            J. Small Business Tax Credit for New Retirement Plan 
                Expenses.........................................    24
        Title III. Enhancing Fairness for Women..................    25
            A. Additional Salary Reduction Catch-Up Contributions    25
            B. Equitable Treatment for Contributions of Employees 
                to Defined Contribution Plans....................    27
            C. Faster Vesting of Employer Matching Contributions.    29
            D. Simplify and Update the Minimum Distribution Rules    30
            E. Clarification of Tax Treatment of Division of 
                Section 457 Plan Benefits Upon Divorce...........    33
            F. Modifications Relating to Hardship Withdrawals....    34
            G. Pension Coverage for Domestic and Similar Workers.    35
        Title IV. Increasing Portability for Participants........    36
            A. Rollovers of Retirement Plan and IRA Distributions    36
            B. Waiver of 60-Day Rule.............................    40
            C. Treatment of Forms of Distribution................    40
            D. Rationalization of Restrictions on Distributions..    43
            E. Purchase of Service Credit under Governmental 
                Pension Plans....................................    44
            F. Employers May Disregard Rollovers for Purposes of 
                Cash-Out Rules...................................    45
            G. Time of Inclusion of Benefits Under Section 457 
                Plans............................................    46
        Title V. Strengthening Pension Security and Enforcement..    47
            A. Phase in Repeal of 155 Percent of Current 
                Liability Funding Limit; Deduction For 
                Contributions to Fund Termination Liability......    47
            B. Excise Tax Relief for Sound Pension Funding.......    49
            C. Notice of Significant Reduction in Plan Benefit 
                Accruals.........................................    50
            D. Modifications to Section 415 Limits for 
                Multiemployer Plans..............................    56
            E. Investment of Employee Contributions in 401(k) 
                Plans............................................    57
            F. Periodic Pension Benefit Statements...............    58
            G. Prohibited Allocations of Stock in an S 
                Corporation ESOP.................................    59
        Title VI. Reducing Regulatory Burdens....................    62
            A. Modification of Timing of Plan Valuations.........    62
            B. ESOP Dividends May Be Reinvested Without Loss of 
                Dividend Deduction...............................    63
            C. Repeal Transition Rule Relating to Certain Highly 
                Compensated Employees............................    64
            D. Employees of Tax-Exempt Entities..................    65
            E. Treatment of Employer-Provided Retirement Advice..    66
            F. Reporting Simplification..........................    67
            G. Improvement to Employee Plans Compliance 
                Resolution System................................    68
            H. Repeal of the Multiple Use Test...................    69
            I. Flexibility in Nondiscrimination and Line of 
                Business Rules...................................    71
            J. Extension to All Governmental Plans of Moratorium 
                on Application of Certain Nondiscrimination Rules 
                Applicable to State and Local Government Plans...    72
            K. Notice and Consent Period Regarding Distributions; 
                Disclosure of Optional Forms of Benefit..........    73
            L. Annual Report Dissemination.......................    74
            M. Modifications to SAVER Act........................    75
            N. Studies...........................................    76
        Title VII. Provisions Relating to Plan Amendments........    77
        Title VIII. Compliance With Congressional Budget Act.....    77
III.Budget Effects of the Bill.......................................78

        A. Committee Estimates...................................    78
        B. Budget Authority and Tax Expenditures.................    82
        C. Consultation with the Congressional Budget Office.....    82
IV. Votes of the Committee...........................................82
 V. Regulatory Impact and Other Matters..............................82
        A. Regulatory Impact.....................................    82
        B. Unfunded Mandates Statement...........................    83
        C. Tax Complexity Analysis...............................    83
VI. Changes to Existing Law Made by the Bill as Reported.............83

                                                       Calendar No. 802
106th Congress                                                   Report
                                 SENATE
 2d Session                                                     106-411

======================================================================

 
              RETIREMENT SECURITY AND SAVINGS ACT OF 2000

                                _______
                                

               September 13, 2000.--Ordered to be printed

                                _______
                                

    Mr. Roth, from the Committee on Finance, submitted the following

                              R E P O R T

                        [To accompany H.R. 1102]

    The Committee on Finance reported a substitute to H.R. 1102 
to provide for pension reform, and for other purposes, having 
considered the same, reports favorably thereon and recommends 
that the bill do pass.

                       I. LEGISLATIVE BACKGROUND

Committee markup

    On September 7, 2000, the Senate Committee on Finance 
marked up H.R. 1102 and ordered the bill, as amended, favorably 
reported by a roll call vote of 17 yeas and 0 nays (the vote 
would be 19 yeas and 0 nays if votes by proxy were included in 
the tally of votes for favorably reporting a bill out of 
Committee). The Committee action on the bill was in response to 
the reconciliation instructions contained in section 104 of the 
concurrent resolution on the budget for fiscal year 2001 (H. 
Con. Res. 290) for a net tax reduction of up to $16 billion for 
fiscal year 2001 (adjusted from $11.6 billion by the Chairman 
of the Senate Budget Committee on July 20, 2000) and of up to 
$150 billion for fiscal years 2001-2005.

Committee hearings

    The following related Committee hearings were held during 
the 106th Congress:
     President's fiscal year 2000 budget and tax 
proposals (February 2, 1999);
     Increasing savings for retirement (February 24, 
1999);
     Complexity of the individual income tax (April 15, 
1999); and
     Pension reform proposals (June 30, 1999).

                      II. EXPLANATION OF THE BILL

         TITLE I. INDIVIDUAL RETIREMENT ARRANGEMENTS (``IRAs'')

  (Secs. 101-104 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 
modified 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:                  AGI 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

Taxpayers Filing Joint Returns

        Taxable years beginning in:                      Phase-out range
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

    The AGI phase-out range for married taxpayers filing a 
separate return is $0 to $10,000.
    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 59\1/2\ 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 for 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 taxpayers 
with AGI between $95,000 and $110,000 and for taxpayers filing 
a joint return with AGI between $150,000 and $160,000. For 
married taxpayers filing a separate return, the phase-out range 
is $0 to $10,000.
    Taxpayers with modified AGI of $100,000 or less generally 
may convert a traditional IRA into a 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 neither 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 59\1/
2\, on account of death or disability, or is made for first-
time homebuyer expenses of up to $10,000.
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

Taxation of charitable contributions

    Generally, a taxpayer who itemizes deductions may deduct 
cash contributions to charity, as well as the fair market value 
of contributions of property. The amount of the deduction 
otherwise allowable for the taxable year with respect to a 
charitable contribution may be reduced, depending on the type 
of property contributed, the type of charitable organization to 
which the property is contributed, and the income of the 
taxpayer.
    For donations of cash by individuals, total deductible 
contributions to public charities may not exceed 50 percent of 
a taxpayer's AGI for a taxable year. To the extent a taxpayer 
has not exceeded the 50-percent limitation, contributions of 
cash to private foundations and certain other nonprofit 
organizations and contributions of capital gain property to 
public charities generally may be deducted up to 30 percent of 
the taxpayer's AGI. If a taxpayer makes a contribution in one 
year which exceeds the applicable 50-percent or 30-percent 
limitation, the excess amount of the contribution may be 
carried over and deducted during the next five taxable years.
    In addition to the percentage limitations imposed 
specifically on charitable contributions, present law imposes a 
reduction on most itemized deductions, including charitable 
contribution deductions, for taxpayers with AGI in excess of a 
threshold amount, which is indexed annually for inflation. The 
threshold amount for 1999 is $126,600 ($63,300 for married 
individuals filing separate returns). For those deductions that 
are subject to the reduction, the total amount of itemized 
deductions is reduced by 3 percent of AGI over the threshold 
amount, but not by more than 80 percent of itemized deductions 
subject to the reduction. The effect of this reduction may be 
to limit a taxpayer's ability to deduct charitable 
contributions.

                           Reasons for Change

    The Committee is concerned about the low national savings 
rate and that individuals may not be saving adequately for 
retirement. Present law provides tax incentives for savings, 
including the opportunity to make contributions to traditional 
and Roth IRAs. However, deductible contributions to traditional 
IRAs and Roth IRAs are not available to all Americans. The 
Committee believes that IRAs should be available to more 
individuals.
    The present-law IRA contribution limit has not been 
increased since 1981. The Committee believes that the limit 
should be raised in order to allow greater savings 
opportunities.
    The Committee believes it is appropriate to eliminate the 
marriage penalties with respect to the Roth IRA provisions.
    The Committee believes it appropriate to facilitate the 
making of charitable contributions from IRAs.

                        Explanation of Provision

Increase in annual contribution limits

    The bill increases the maximum annual dollar contribution 
limit 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.

Increase in AGI limits for deductible IRA contributions

    Under the bill, the increases in the AGI phase-out limits 
for active participants in an employer-sponsored plan are 
evened out. In addition, the phase-out range for married 
taxpayers filing separately is conformed to the phase-out range 
for single taxpayers. The AGI phase-out limits under the bill 
are as follows.

Taxpayers Filing Returns Other Than Joint Returns

        Taxable years beginning in:                  AGI Phase-out range
2001....................................................  $36,000-46,000
2002....................................................   40,000-50,000
2003....................................................   44,000-54,000
2004....................................................   48,000-58,000
2005 and thereafter.....................................   50,000-60,000

Taxpayers Filing Joint Returns

        Taxable years beginning in:                  AGI Phase-out range
2001....................................................  $56,000-66,000
2002....................................................   60,000-70,000
2003....................................................   64,000-74,000
2004....................................................   68,000-78,000
2005....................................................   72,000-82,000
2006....................................................   76,000-86,000
2007 and thereafter.....................................  80,000-100,000

    The present-law income phase-out range for an individual 
who is not an active participant in an employer-sponsored plan, 
but whose spouse is, remains at $150,000 to $160,000.

Roth IRAs

    The bill increases the income phase-out range for Roth IRA 
contributions to $190,000 to $220,000 for married couples 
filing a joint return. In addition, the bill applies to married 
taxpayers filing a separate return the same phase-out range 
that applies to single taxpayers.
    Under the bill, the income limit for conversions of 
traditional IRAs to Roth IRAs is $200,000 for married couples 
filing a joint return. For all other taxpayers (including 
married taxpayers filing a separate return), the limit is 
$100,000.

Additional catch-up contributions

    The bill provides that individuals who have attained age 50 
may make additional catch-up IRA contributions. The otherwise 
maximum contribution limit (before application of the AGI 
phase-out limits) for an individual who has attained age 50 
before the end of the taxable year is increased by 50 percent.

Deemed IRAs under employer plans

    The bill provides that, if an eligible retirement plan 
permits employees to make voluntary employee contributions to a 
separate account or annuity that (1) is established under the 
plan, and (2) meets the requirements applicable to either 
traditional IRAs or Roth IRAs, then the separate account or 
annuity is deemed a traditional IRA or a Roth IRA, as 
applicable, for all purposes of the Code. For example, the 
reporting requirements applicable to IRAs apply. The deemed 
IRA, and contributions thereto, are not subject to the Code 
rules pertaining to the eligible retirement plan. In addition, 
the deemed IRA, and contributions thereto, are not taken into 
account in applying such rules to any other contributions under 
the plan. The deemed IRA, and contributions thereto, are 
subject to the exclusive benefit and fiduciary rules of ERISA 
to the extent otherwise applicable to the plan, and are not 
subject to the ERISA reporting and disclosure, participation, 
vesting, funding, and enforcement requirements that apply to 
the eligible retirement plan.2 An eligible 
retirement plan is a qualified plan (sec. 401(a)), tax-
sheltered annuity (sec. 403(b)), or a governmental section 457 
plan.
---------------------------------------------------------------------------
    \2\ The provision does not specify the treatment of deemed IRAs for 
purposes other than the Code and ERISA.
---------------------------------------------------------------------------

Tax-free IRA withdrawals for charitable purposes

    The bill provides an exclusion from gross income for 
qualified charitable distributions from an IRA: (1) to a 
charitable organization to which deductible contributions can 
be made; (2) to a charitable remainder annuity trust or 
charitable remainder unitrust; (3) to a pooled income fund (as 
defined in sec. 642(c)(5)); or (4) for the issuance of a 
charitable gift annuity. The exclusion applies with respect to 
distributions described in (2), (3), or (4) only if no person 
holds an income interest in the trust, fund, or annuity 
attributable to such distributions other than the IRA owner, 
his or her spouse, or a charitable organization.
    In determining the character of distributions from a 
charitable remainder annuity trust or a charitable remainder 
unitrust to which a qualified charitable distribution from an 
IRA is made, the charitable remainder trust is required to 
treat as ordinary income the portion of the distribution from 
the IRA to the trust which would have been includible in income 
but for the provision, and is required to treat any remaining 
portion of the distribution as corpus. Similarly, in 
determining the amount includible in gross income by reason of 
a payment from a charitable gift annuity purchased with a 
qualified charitable distribution from an IRA, the taxpayer is 
not permitted to treat the portion of the distribution from the 
IRA that would have been taxable but for the provision and 
which is used to purchase the annuity as an investment in the 
annuity contract.
    A qualified charitable distribution is any distribution 
from an IRA which (1) is made after age 70\1/2\ of the account 
holder, (2) qualifies as a charitable contribution (within the 
meaning of sec. 170(c)), and (3) is made directly to the 
charitable organization or to a charitable remainder annuity 
trust, charitable remainder unitrust, pooled income fund, or 
charitable gift annuity (as described above).3 A 
taxpayer is not permitted to claim a charitable contribution 
deduction for amounts transferred from his or her IRA to a 
charity or to a trust, fund, or annuity that, because of the 
provision, are excluded from the taxpayer's income. Conversely, 
if the amounts transferred would otherwise be nontaxable, e.g., 
a qualified distribution from a Roth IRA, the regularly 
applicable deduction rules would apply.
---------------------------------------------------------------------------
    \3\ It is intended that, in the case of transfer to a trust, fund, 
or annuity, the full amount distributed from an IRA will meet the 
definition of a qualified charitable distribution if the charitable 
organization's interest in the distribution would qualify as a 
charitable contribution under section 170.
---------------------------------------------------------------------------

                             Effective Date

    The provision is generally effective for taxable years 
beginning after December 31, 2000. The provision relating to 
deemed IRAs under employer plans is effective for plan years 
beginning after December 31, 2001. The provision relating to 
tax-free withdrawals from IRAs for charitable purposes is 
effective for distributions 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 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 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) 33\1/3\ 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

    The tax benefits provided under tax-favored retirement 
plans are a departure from the normally applicable income tax 
rules. The special tax benefits for such 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, 
benefits, and compensation that may be taken into account under 
a plan 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 such 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 benefit limits 
under qualified plans will encourage employers to establish tax-favored 
retirement plans for their employees.
    The Committee understands that, in recent years, section 
401(k) plans have become prevalent. The Committee believes it 
is important to increase the amount of employee elective 
deferrals allowed under such plans, and other plans that allow 
elective deferrals, to better enable plan participants to save 
for their retirement.

                        Explanation of Provision

Limits on contributions and benefits

    The bill provides faster indexing of the $30,000 limit on 
annual additions to a defined contribution plan. Under the 
bill, this limit is indexed in $1,000 increments.\4\
---------------------------------------------------------------------------
    \4\ The 25 percent of compensation limitation is increased to 100 
percent of compensation under another provision of the bill.
---------------------------------------------------------------------------
    The bill 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 bill 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

    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 to $11,000. In 2002 and 
thereafter, these limits increase in $1,000 annual increments 
until the limits reach $15,000 in 2005, with indexing in $500 
increments thereafter. 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. Beginning after 2004, the $10,000 dollar limit 
is indexed in $500 increments.

Section 457 plans

    The bill 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 thereafter 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.\5\
---------------------------------------------------------------------------
    \5\ Another provision of the bill increases the 33\1/3\ percentage 
of compensation limit to 100 percent.
---------------------------------------------------------------------------

                             Effective Date

    The provisions are 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.\6\ 
Certain types of transactions are exempt from the prohibited 
transaction rules, including loans from the plan to plan 
participants, if certain requirements are satisfied. In 
addition, the Secretary 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.
---------------------------------------------------------------------------
    \6\ Title 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.
---------------------------------------------------------------------------
    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.\7\ 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.
---------------------------------------------------------------------------
    \7\ Certain transactions involving a plan and Subchapter S 
shareholders are permitted.
---------------------------------------------------------------------------
    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 an S corporation who owns morethan 5 percent of the 
outstanding stock of the corporation, and (4) the owner of an 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 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 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 continues to apply with respect to IRAs.

                             effective date

    The provision is effective with respect to years beginning 
after December 31, 2000. Thus, a loan that is a prohibited 
transaction solely because of the present-law restriction would 
cease to be a prohibited transaction on January 1, 2000. 
However, the loan would continue to be a prohibited transaction 
prior to January 1, 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 (``top-heavy 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. 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'').
    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 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). 8
---------------------------------------------------------------------------
    \8\  Tres. Reg. sec. 1.416-1 Q&A M-19.
---------------------------------------------------------------------------

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. 9
---------------------------------------------------------------------------
    \9\  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.
---------------------------------------------------------------------------

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 arrangements 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 bill 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 safeharbor 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.10
---------------------------------------------------------------------------
    \10\ This 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.
---------------------------------------------------------------------------
    In determining whether a plan is top-heavy, the bill 
provides that distributions during the year ending on the date 
the top-heavy determination is being made are taken into 
account. The present-law 5-year rule applies with respect to 
in-service distributions. Similarly, the proposal 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 bill (1) provides that an employee is not considered a 
key employee by reason of officer status unless the employee 
earns more than the compensation limit for determining whether 
an employee is highly compensated ($85,000 for 2000) \11\ and 
(2) repeals the top-10 owner key employee category. The 
proposal 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 preceding plan 
year. An employee who was not an employee in the preceding plan 
year, or who was an employee only for part of the year, is 
treated as a key employee if it can be reasonably anticipated 
that the employee will meet the definition of a key employee 
for current plan year.
---------------------------------------------------------------------------
    \11\ The compensation limit would be determined without regard to 
the top-paid group election.
---------------------------------------------------------------------------
    Thus, under the bill, an employee is considered a key 
employee if, during the prior year, the employee was (1) an 
officer with compensation in excess of $85,000 (for 2000), (2) 
a 5-percent owner, or (3) a 1-percent owner with compensation 
in excess of $150,000. The present- law limits on the number of 
officers treated as key employees under (1) continue to apply.
    The family ownership attribution rule no longer applies 
solely in determining whether an individual is a 5-percent 
owner of the employer for purposes of the top-heavy rules. The 
family ownership attribution rule continues to apply to other 
provisions that cross reference the top-heavy rules, such as 
the definition of highly compensated employee and the 
definition of 1-percent owner under the top-heavy rules.

Minimum benefit for non-key employees

    Under the bill, matching contributions are taken into 
account in determining whether the minimum benefit requirement 
has been satisfied.\12\
---------------------------------------------------------------------------
    \12\ Thus, 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 bill 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 key 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.

                           Reasons for Change

    Subjecting elective deferrals to the normally applicable 
deduction limits may cause employers either to restrict the 
amount of elective contributions an employee may make or 
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 bill, 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 Compensation 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) 33\1/3\ percent of compensation. 
The $8,000 limit is increased for inflation 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 catch-up 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 participate fully in a 
section 403(b) annuity or section 401(k) plan of the employer. 
Eliminating 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 bill repeals the rules coordinating the section 457 
dollar limit with contributions under other types of plans.\13\
---------------------------------------------------------------------------
    \13\ The limits on deferrals under a section 457 plan are modified 
under other provisions of the bill.
---------------------------------------------------------------------------

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2000.

  F. Deduction Limits (Sec. 206 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 anotherkind 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.\14\
---------------------------------------------------------------------------
    \14\ Another provision of the bill provides that elective deferrals 
are not subject to the deduction limits.
---------------------------------------------------------------------------
    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.\15\ 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.\16\
---------------------------------------------------------------------------
    \15\ Rev. Rul. 65-295, 1965-2 C.B. 148.
    \16\ Treas. Reg. sec. 1.410(b)-3.
---------------------------------------------------------------------------
    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 tax-exempt organization or a State or 
local government (``section 457 plan''), and salary reduction 
contributions under a section 125 cafeteria 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 of 
compensation 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 bill, the definition of compensation for purposes 
of the deduction rules would include 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 would be increased from 15 
percent to 25 percent of compensation of the employees covered 
by the plan for the year.

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2000.

 G. Option to Treat Elective Deferrals as Roth After-Tax Contributions 
            (Sec. 207 of the Bill and 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 neither 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 59\1/2\, is 
made on account of death or disability, or is a qualified 
special purpose distribution (i.e., for first-time homebuyer 
expenses 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).\17\
---------------------------------------------------------------------------
    \17\ 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.
---------------------------------------------------------------------------

                           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-
ssheltered annuities.

                        Explanation of Provision

    A section 401(k) plan or a section 403(b) annuity is 
permitted to include a ``qualified Roth 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 Roth contributions. Designated Roth contributions 
are elective deferrals that the participant designates (at such 
time and in such manner as the Secretary may prescribe) \18\ as 
not excludable from the participant's gross income.
---------------------------------------------------------------------------
    \18\ It is intended that the Secretary will generally not permit 
retroactive designations of elective deferrals as Roth contributions.
---------------------------------------------------------------------------
    The annual dollar limitation on a participant's designated 
Roth 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 
Roth contributions. Designated Roth contributions are treated 
as any other elective deferral for purposes of 
nonforfeitability requirements and distribution 
restrictions.\19\ Under a section 401(k) plan, designated Roth 
contributions also are treated as any other elective deferral 
for purposes of the special nondiscrimination requirements.\20\
---------------------------------------------------------------------------
    \19\ Similarly, Roth contributions to a section 403(b) annuity are 
treated the same as other salary reduction contributions to the annuity 
(except that Roth contributions are includible in income).
    \20\ It is intended that the Secretary will provide ordering rules 
regarding the return of excess contributions under the special 
nondiscrimination rules (pursuant to sec. 401(k)(8)) in the event a 
participant has made both regular elective deferrals and Roth 
contributions. It is intended that such rules will generally permit a 
plan to allow participants to designate which contributions are 
returned first or to permit the plan to specify which contributions are 
returned first.
---------------------------------------------------------------------------
    The plan would be required to establish a separate account, 
and maintain separate recordkeeping, for a participant's 
designated Roth contributions (and earnings allocable thereto). 
A qualified distribution from a participant's designated Roth 
contributions account would not be 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 59\1/2\, (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.\21\ 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 
Roth contribution to any designated Roth contribution account 
established for the participant under the plan, or (2) if the 
participant has made a rollover contribution to the designated 
Roth contribution account that is the source of the 
distribution from a designated Roth contribution account 
established for the participant under another plan, the first 
taxable year for which the participant made a designated Roth 
contribution to the previously established account.
---------------------------------------------------------------------------
    \21\ 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 Roth contributions account.
---------------------------------------------------------------------------
    A distribution from a designated Roth 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 or a distribution of excess 
contributions (and income allocable thereto) is not is a 
qualified distribution.\22\
---------------------------------------------------------------------------
    \22\ Such distributions are not includible in income to the extent 
they are a return of Roth contributions, because the initial 
contribution is includible in income.
---------------------------------------------------------------------------
    A participant is permitted to roll over a distribution from 
a designated Roth contributions account only to another 
designated Roth 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 
Roth contributions to make such returns and reports regarding 
designated Roth 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.

 H. Credit for Low-and Middle-Income Savers (Sec. 208 of the Bill and 
                       New Sec. 25B of the Code)

                              Present Law

    Present law provides favorable tax treatment for a variety 
of retirement savings vehicles, including employer-sponsored 
retirement plans and individual retirement arrangements 
(``IRAs'').
    Several different types of tax-favored employer-sponsored 
retirement plans exist, such as section 401(a) qualified plans 
(including plans with a section 401(k) qualified cash-or-
deferredarrangement), section 403(a) qualified annuity plans, 
section 403(b) annuities, section 408(k) simplified employee pensions 
(``SEPs''), section 408(p) SIMPLE retirement accounts, and section 
457(b) eligible deferred compensation plans. In general, an employer 
and, in certain cases, employees, contribute to the plan. Taxation of 
the contributions and earnings thereon is generally deferred until 
benefits are distributed from the plan to participants or their 
beneficiaries.23 Contributions and benefits under tax-
favored employer-sponsored retirement plans are subject to specific 
limitations.
---------------------------------------------------------------------------
    \23\ In the case of after-tax employee contributions, only earnings 
are taxed upon withdrawal.
---------------------------------------------------------------------------
    Coverage and nondiscrimination rules also generally apply 
to tax-favored employer-sponsored retirement plans to ensure 
that plans do not disproportionately cover higher-paid 
employees and that benefits provided to moderate- and lower-
paid employees are generally proportional to those provided to 
higher-paid employees.
    IRAs include both traditional IRAs and Roth IRAs. In 
general, an individual makes contributions to an IRA, and 
investment earnings on those contributions accumulate on a tax-
deferred basis. Total annual IRA contributions per individual 
are limited to $2,000 (or the compensation of the individual or 
the individual's spouse, if smaller). Contributions to a 
traditional IRA may be deducted from gross income if an 
individual's adjusted gross income (``AGI'') is below certain 
levels or the individual is not an active participant in 
certain employer-sponsored retirement plans. Contributions to a 
Roth IRA are not deductible from gross income, regardless of 
adjusted gross income. A distribution from a traditional IRA is 
includible in the individual's gross income except to the 
extent of individual contributions made on a nondeductible 
basis. A qualified distribution from a Roth IRA is excludable 
from gross income.
    Taxable distributions made from employer retirement plans 
and IRAs before the employee or individual has reached age 
59\1/2\ are subject to a 10-percent additional tax, unless an 
exception applies.

                           Reasons for Change

    The Committee recognizes that the rate of private savings 
in the United States is low; in particular many low- and 
middle-income individuals have inadequate savings or no savings 
at all. A key reason for these low levels of saving is that 
lower-income families are likely to be more budget constrained 
with competing needs such as food, clothing, shelter, and 
medical care taking a larger portion of their income. The 
Committee believes providing an additional tax incentive for 
low- and middle-income individuals will enhance their ability 
to save adequately for retirement.

                        Explanation of Provision

    The bill provides a temporary nonrefundable tax credit for 
contributions made by eligible taxpayers to a qualified plan. 
The maximum annual contribution eligible for the credit is 
$2,000. The credit rate depends on the adjusted gross income 
(``AGI'') 24 of the taxpayer. Only taxpayers filing 
joint returns with AGI of $50,000 or less, taxpayers filing 
head of household returns of $37,500 or less, and taxpayers 
filing single returns of $25,000 or less are eligible for the 
credit.25 The credit is in addition to any deduction 
or exclusion that would otherwise apply with respect to the 
contribution. The credit offsets minimum tax liability as well 
as regular tax liability. The credit is available to 
individuals age 18 or over, other than individuals who are 
full-time students or claimed as a dependent on another 
taxpayer's return.
---------------------------------------------------------------------------
    \24\ AGI is determined without regard to the exclusion provided by 
sections 911, 931, or 933.
    \25\ The AGI limits applicable to taxpayers filing single returns 
apply to married taxpayers filing separate returns.
---------------------------------------------------------------------------
    The credit is available with respect to (1) elective 
contributions to a section 401(k) plan, tax-sheltered annuity, 
eligible deferred compensation arrangement of a State or local 
government (a ``sec. 457 plan''), SIMPLE, or SEP; (2) 
contributions to a traditional or Roth IRA; and (3) voluntary 
after-tax employee contributions to a qualified retirement 
plan. The present-law rules governing such contributions 
continue to apply. Thus, for example, an individual is not 
entitled to a deduction for contributions to a Roth IRA to 
which the credit applies; distributions of such contributions 
are taxable under the rules applicable to Roth IRAs.
    The amount of any contribution eligible for the credit is 
reduced by taxable distributions received by the taxpayer and 
his or her spouse from any savings arrangement described above 
or any other qualified retirement plan during the taxable year 
for which the credit is claimed, the two taxable years prior to 
the year the credit is claimed, and during the period after the 
end of the taxable year and prior to the due date (including 
extensions) for filing the taxpayer's return for the year. This 
rule applies to any distributions from a Roth IRA which are not 
rolled over.26
---------------------------------------------------------------------------
    \26\ The following distributions are excluded for purposes of the 
rule reducing the credit: (1) loans treated as distributions (sec. 
72(p)); (2) distributions of excess contributions under a 401(k) plan 
(sec. 401(k)(8)); (3) distributions of excess matching or after-tax 
voluntary contributions (sec. 401(m)(6)); (4) distributions of elective 
deferrals that exceed the limits on such deferrals (sec. 402(g)); (5) 
distributions of ESOP dividends (404(k)); (6) returns of certain IRA 
contributions (sec. 408(d)(4)); and (7) distributions from a 
traditional IRA that are converted to a Roth IRA.
---------------------------------------------------------------------------
    The credit rates based on AGI are as shown in the following 
table.

----------------------------------------------------------------------------------------------------------------
                                                                                                    Credit rate
              Joint filers                    Heads of households          All other filers        (in percent)
----------------------------------------------------------------------------------------------------------------
$0-$20,000..............................  $0-$15,000................  $0-$10,000................              50
$20,001-$25,000.........................  $15,001-$18,750...........  $10,001-$12,500...........              30
$25,001-$30,000.........................  $18,751-$22,500...........  $12,501-$15,000...........              25
$30,001-$35,000.........................  $22,501-$26,250...........  $15,001-$17,500...........              20
$35,001-$40,000.........................  $26,250-$30,000...........  $17,501-$20,000...........              15
$40,001-$45,000.........................  $30,001-$33,750...........  $20,001-$22,500...........              10
$45,001-$50,000.........................  $33,751-$37,500...........  $22,501-$25,000...........               5
Over $50,000............................  Over $37,500..............  Over $25,000..............               0
----------------------------------------------------------------------------------------------------------------

    The bill directs the General Accounting Office to report 
annually to the Senate Finance Committee and the House 
Committee on Ways and Means regarding the number of individuals 
who claim the credit.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2000, and before January 1, 2006.

      I. Small Business Tax Credit for Qualified Retirement Plan 
   Contributions (Sec. 209 of the Bill and New Sec. 450 of the Code)

                              Present Law

    The timing of an employer's deduction for compensation paid 
to an employee generally corresponds to the employee's 
recognition of the compensation. However, an employer that 
contributes to a qualified retirement plan is entitled to a 
deduction (within certain limits) for the employer's 
contribution to the plan on behalf of an employee even though 
the employee does not recognize income with respect to the 
contribution until the amount is distributed to the employee.

                           Reasons for Change

    The Committee understands that many small employers are 
reluctant to establish a qualified retirement plan for 
employees that provides nonelective or matching contributions 
to all employees. Plans that offer only salary reduction 
contributions may not provide sufficient incentive for lower- 
and middle-income employees to save. The Committee believes 
that providing a credit for employers who provide nonelective 
and matching contributions for nonhighly compensated employees 
will result in greater retirement saving for such employees.

                        Explanation of Provision

    The bill provides a nonrefundable income tax credit for 
small employers equal to 50 percent of certain qualifying 
employer contributions made to new qualified retirement plans 
on behalf of nonhighly compensated employees.27 For 
purposes of the provision, a small employer means an employer 
with no more than 50 employees who received at least $5,000 of 
earnings in the preceding year. A nonhighly compensated 
employee is defined as an employee who neither (1) was a five-
percent owner of the employer at any time during the current 
year or the preceding year, nor (2) for the preceding year, had 
compensation in excess of $80,000 (indexed for 
inflation).28 The credit is available for the first 
three plan years.
---------------------------------------------------------------------------
    \27\ The credit is not available with respect to contributions to a 
SIMPLE IRA or SEP.
    \28\ The top paid group election, which under present law permits 
an employer to classify an employee as a nonhighly compensated employee 
if the employee had compensation in excess of $80,000 during the 
preceding year but was not among the top 20 percent of employees of the 
employer when ranked on the basis of compensation paid to employees 
during the preceding year, would not be taken into account in 
determining nonhighly compensated employees for purposes of the 
proposal.
---------------------------------------------------------------------------
    A plan is considered a new plan if, during the 3-taxable 
year period immediately preceding the first taxable year for 
which the credit is allowable, neither the employer (or any 
member of the employer's controlled group) established or 
maintained a qualified retirement plan with respect to which 
contributions were made or benefits accrued for substantially 
the same employees covered by the plan with respect to which 
the credit is claimed.
    The bill requires a small employer to make nonelective 
contributions equal to at least one percent of compensation to 
qualify for the credit. The credit applies to both qualifying 
nonelective employer contributions and qualifying employer 
matching contributions, but only up to a total of three percent 
of the nonhighly compensated employee's compensation. The 
credit is available for 50 percent of qualifying benefit 
accruals under a nonintegrated defined benefit plan if the 
benefits are equivalent, as defined in regulations, to a three-
percent nonelective contribution to a defined contribution 
plan. For purposes of applying the limit on contributions with 
respect to which the credit may be claimed, all plans of the 
employer are treated as a single plan.
    To qualify for the credit, the nonelective and matching 
contributions to a defined contribution plan and the benefit 
accruals under a defined benefit plan are required to vest at 
least as rapidly as under either a three-year cliff vesting 
schedule or a graded schedule that provides 20-percent vesting 
per year for five years. In order to qualify for the credit, 
contributions to plansother than pension plans must be subject 
to the same distribution restrictions that apply to qualified 
nonelective employer contributions to a section 401(k) plan, i.e., 
distribution only upon separation from service, death, disability, 
attainment of age 59\1/2\, plan termination without a successor plan, 
or acquisition of a subsidiary or substantially all the assets of a 
trade or business that employs the participant.29 Qualifying 
contributions to pension plans are subject to the distribution 
restrictions applicable to such plans.
---------------------------------------------------------------------------
    \29\ The rules relating to distribution upon separation from 
service are modified under another provision of the bill.
---------------------------------------------------------------------------
    The plan to which the small employer makes the qualifying 
contributions (and any plan aggregated with that plan for 
nondiscrimination testing purposes) are required to allocate 
any nonelective employer contributions proportionally to 
participants' compensation from the employer (or on a flat-
dollar basis) and, accordingly, without the use of permitted 
disparity or cross-testing.
    Forfeited nonvested qualifying contributions or accruals 
for which the credit was claimed generally results in recapture 
of the credit at a rate of 35 percent. However, recapture does 
not apply to the extent that forfeitures of contributions are 
reallocated to nonhighly compensated employees or applied to 
future contributions on behalf of nonhighly compensated 
employees. The Secretary of the Treasury is authorized to issue 
administrative guidance, including de minimis rules, to 
simplify or facilitate claiming and recapturing the credit.
    The credit is a general business credit.30 The 
50 percent of qualifying contributions that are effectively 
offset by the tax credit are not deductible; the other 50 
percent of the qualifying contributions (and other 
contributions) are deductible to the extent otherwise 
permitted.
---------------------------------------------------------------------------
    \30\ The credit could not be carried back to years before the 
effective date.
---------------------------------------------------------------------------

                             Effective Date

    The credit is effective for taxable years beginning after 
December 31, 2000, with respect to plans established after such 
date.

J. Small Business Tax Credit for New Retirement Plan Expenses (Sec. 210 
               of the Bill and New Sec. 45E of the Code)

                              Present Law

    The costs incurred by an employer related to the 
establishment and maintenance of a retirement plan (e.g., 
payroll system changes, investment vehicle set-up fees, 
consulting fees) generally are deductible by the employer as 
ordinary and necessary expenses in carrying on a trade or 
business.

                           Reasons for Change

    One of the reasons some small employers may not adopt a 
tax-favored retirement plan is the administrative costs 
associated with such plans. The Committee believes that 
providing a tax credit for certain administrative costs will 
reduce one of the barriers to retirement plan coverage.

                        Explanation of Provision

    The bill provides a nonrefundable income tax credit for 50 
percent of the administrative and retirement-education expenses 
for any small business that adopts a new qualified defined 
benefit or defined contribution plan (including a section 
401(k) plan), SIMPLE plan, or simplified employee pension 
(``SEP''). The credit applies to 50 percent of the first $1,000 
in administrative and retirement-education expenses for the 
plan for each of the first three years of the plan.
    A plan is considered a new plan if, during the 3-taxable 
year period immediately preceding the first taxable year for 
which the credit is allowable, neither the employer (or any 
member of the employer's controlled group) established or 
maintained a qualified retirement plan with respect to which 
contributions were made or benefits accrued for substantially 
the same employees covered by the plan with respect to which 
the credit is claimed.
    The credit is available to an employer that did not employ, 
in the preceding year, more than 100 employees with 
compensation in excess of $5,000. In order for an employer to 
be eligible for the credit, the plan must cover at least one 
nonhighly compensated employee.
    The credit is a general business credit.31 The 
50 percent of qualifying expenses that are effectively offset 
by the tax credit are not deductible; the other 50 percent of 
the qualifying expenses (and other expenses) are deductible to 
the extent otherwise permitted.
---------------------------------------------------------------------------
    \31\ The credit may not be carried back to years before the 
effective date.
---------------------------------------------------------------------------

                             Effective Date

    The credit is effective for taxable years beginning after 
December 31, 2000, with respect to plans established after such 
date.

                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) 33\1/3\ 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 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 bill provides that individuals who have attained age 50 
may be permitted to make additional catch-up elective 
contributions to employer-sponsored retirement 
plans.32
---------------------------------------------------------------------------
    \32\ Another provision of the bill provides for catch-up 
contributions to IRAs.
---------------------------------------------------------------------------
    In the case of employer-sponsored retirement plans, the 
provision applies to elective deferrals under a section 401(k) 
plan, section 403(b) annuity, SIMPLE, or a section 457 plan. 
Additional contributions may 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.33 Under the bill, the 
additional amount of elective contributions that could be made 
by an eligible individual participating in such a plan is the 
lesser of (1) the applicable percent of the maximum dollar 
amount of elective deferrals otherwise excludable from the 
gross income of the participant for the year (under sec. 
402(g)) or (2) the participant's compensation for the year 
reduced by any other elective deferrals of the participant for 
the year.34 The applicable percent is 10 percent in 
2001, and increases by 10 percentage points until the 
applicable percent is 50 in 2005 and thereafter.
---------------------------------------------------------------------------
    \33\ A plan is not required to permit participants to make catch-up 
contributions.
    \34\ In the case of a section 457 plans, 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).
---------------------------------------------------------------------------
    Catch-up contributions made under the bill are not subject 
to any other contribution limits and are not taken into account 
in applying other contribution limits. In addition, such 
contributions are not subject to otherwise applicable 
nondiscrimination rules.
    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.
    The following examples illustrate the application of the 
provision, assuming the catch-up percentage is 50 percent.
    Example 1: Employee A is a highly compensated employee who 
is over 50 and who participates in a section 401(k) plan 
sponsored by A's employer. The plan provides for catch-up 
contributions up to the maximum permitted by law. The maximum 
annual deferral limit (without regard to the catch-up 
provision) is $15,000. After application ofthe special 
nondiscrimination rules applicable to section 401(k) plans, the maximum 
elective deferral A may make for the year is $10,000. Under the bill, A 
is able to make additional catch-up salary reduction contributions of 
up to $7,500.
    Example 2: Employee B, who is over 50, is a participant in 
a section 401(k) plan. The plan provides for catch-up 
contributions up to the maximum permitted by law. B's 
compensation for the year is $30,000. The maximum annual 
deferral limit (without regard to the provision) is $15,000. 
Under the terms of the plan, the maximum permitted deferral is 
10 percent of compensation or, in B's case, $3,000. Under the 
bill, B can contribute up to $10,500 for the year ($3,000 under 
the normal operation of the plan, and an additional $7,500 
under the provision).

                             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. 413(b), 415, and 452 
                              of the Code)

                              Present Law

    Present law imposes limits on the contributions that may be 
made to tax-favored retirement plans.

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 December 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) 33\1/3\ 
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 non-highly paid 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 bill increases the 25 percent of compensation 
limitation on annual additions under a defined contribution 
plan to 100 percent.\35\
---------------------------------------------------------------------------
    \35\ Another provision of the bill increases the defined 
contribution plan dollar limit.
---------------------------------------------------------------------------

Conforming limits on tax-sheltered annuities

    The bill 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 bill 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 bill increases the 33\1/3\ percent of compensation 
limitation on deferrals under a section 457 plan to 100 percent 
of compensation.

                             Effective Date

    The provision generally is 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. 417 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.\36\
---------------------------------------------------------------------------
    \36\ The minimum vesting requirements are also contained in Title I 
of the Employee Retirement Income Security Act of 1974, as amended 
(``ERISA'').
---------------------------------------------------------------------------

                           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 bill applies faster vesting schedules to employer 
matching contributions. Under the provision, employer matching 
contributions must 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 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 theeffective date must be 
taken into account.

D. Simplify and Update the Minimum Distribution Rules (Sec. 304 of the 
              Bill and Secs. 401(a)19 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 70\1/2\ 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 70\1/2\. If commencement of benefits is delayed beyond age 
70\1/2\ from a defined benefit plan, then the accrued benefit 
of the employee must be actuarially increased to take into 
account the period after age 70\1/2\ in which the employee was 
not receiving benefits under the plan.\37\ In the case of 
distributions 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 70\1/2\. The pre-death minimum 
distribution rules do not apply to Roth IRAs.
---------------------------------------------------------------------------
    \37\ State and local government plans and church plans are not 
required to actuarially increase benefits that begin after age 70\1/2\.
---------------------------------------------------------------------------
    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-of-living 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 70\1/2\.

Special rules for section 457 plans

    Eligible deferred compensation plans of State and local and 
tax-exempt 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 
savings 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.

                        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 is required 
to be made within 5 years of the date of death, or begin within 
one year of the date of death and paid over the life or life 
expectancy of a designated beneficiary. In the case of a 
surviving spouse, distributions would not be required to begin 
until the surviving spouse attains age 70\1/2\. Minimum 
distributions that have already begun would be permitted to be 
recalculated under the new rule.

Reduction in excise tax

    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.

Treasury regulations

    The Secretary of the Treasury is directed to update, 
simplify, and finalize the regulations relating to the minimum 
distribution rules by December 31, 2001. The Secretary 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 apply 
regardless of whether minimum distributions had begun.

Section 457 plans

    The bill 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 tax-favored arrangements.

                             effective date

    In general, the provision is effective for years beginning 
after December 31, 2000. The provision regarding Treasury 
regulations is effective on the date of enactment.

   E. Clarification of Tax Treatment of Division of Section 457 Plan 
 Benefits Upon Divorce (Sec. 305 of the Bill and Sec. 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.
    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 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 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 relating to taxation of distributions is 
effective for transfers, distributions, and payments made after 
December 31, 2000. The other provisions are effective on 
January 1, 2001, except that, in the case of a domestic 
relations order entered into before such date, the plan 
administrator (1) shall treat such order as a QDRO if the 
administrator is paying benefits pursuant to the order and (2) 
may treat any other such order entered into before the 
effective date as a QDRO.

F. Modifications Relating to Hardship Withdrawals (Sec. 306 of the Bill 
                 and Secs. 401(k) and 402 of the Code)

                              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 38 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.
---------------------------------------------------------------------------
    \38\  Treas. Reg. sec. 1.401(k)-1.
---------------------------------------------------------------------------
    The Treasury regulations provide a safe harbor under which 
a distribution may be deemed necessary to satisfy an immediate 
and 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.
    Under present law, hardship withdrawals of elective 
deferrals from a qualified cash or deferred arrangement (or 
403(b) annuity) are not eligible rollover distributions. Other 
types of hardship distributions, e.g., employer matching 
contributions distributed on account of hardship, are eligible 
rollover distributions. Eligible rollover distributions that 
are not directly rolled over are subject to withholding at a 
flat rate of 20-percent.

                           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.
    The present-law rules regarding the ability to rollover 
hardship distributions create administrative burdens for plan 
administrators and confusion on the part of plan participants. 
The Committee believes that providing a uniform rule for all 
hardship distributions will simplify application of the 
rollover rules.

                        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.
    The bill also provides that any hardship distribution made 
pursuant to the terms of a plan is not an eligible rollover 
distribution. The bill does not modify the rules under which 
hardship distributions may be made. For example, as under 
present law, hardship distributions of qualified employer 
matching contributions may only be made under the rules 
applicable to elective deferrals.

                             Effective Date

    The provision relating to safe harbor hardship 
distributions is effective for years beginning after December 
31, 2000.
    The provision providing that hardship distributions are not 
eligible rollover distributions is effective for distributions 
made after December 31, 2000. The Secretary has the authority 
to issue transitional guidance with respect to this provision 
to provide sufficient time for plans to implement the new rule.

 G. Pension Coverage for Domestic and Similar Workers (Sec. 307 of the 
                    Bill and Sec. 4972 of the Code)

                              Present Law

    Under present law, within limits, employers may make 
deductible contributions to qualified retirement plans for 
employees. Subject to certain exception, a 10-percent excise 
tax applies to nondeductible contributions to such plans.
    Employers of household workers may establish a pension plan 
for such workers. Contributions to such plans are not 
deductible.

                           Reasons for Change

    Under present law, individuals who employ domestic and 
similar workers may be discouraged from providing pension plan 
coverage for such employees because of the possible adverse tax 
consequences from making nondeductible contributions. As a 
result, such workers, who are typically lower income, may be 
denied the opportunity for tax-favored retirement savings. The 
Committee believes that such individuals who employ such 
workers should be encouraged to provide pension coverage.

                        Explanation of Provision

    Under the provision, the 10-percent excise tax on 
nondeductible contributions does not apply to contributions to 
a SIMPLE plan or a SIMPLE IRA which are nondeductible solely 
because the contributions are not a trade or business expense 
under section 162. Thus, for example, employers of household 
workers could make contributions to such plans without 
imposition of the excise tax. As under present law, the 
contributions are not deductible. The present-law rules 
applicable to such plans, e.g., contribution limits and 
nondiscrimination rules, continue to apply. The provision does 
not apply with respect to contributions on behalf of the 
individual and members of his or her family.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2000.

           TITLE IV. INCREASING PORTABILITY FOR PARTICIPANTS

A. Rollovers of Retirement Plan and IRA Distributions (Secs. 401-403 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 tax-qualified employer- sponsored retirement plan may be 
rolled over tax free to a traditional individual retirement 
arrangement (``IRA'') 39 or another qualified 
plan.40 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.
---------------------------------------------------------------------------
    \39\ A ``traditional'' IRA refers to IRAs other than Roth IRAs or 
SIMPLE IRAs. All references to IRAs refers only to traditional IRAs.
    \40\ 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.
---------------------------------------------------------------------------

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 requiredto 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 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 
59\1/2\. 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 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 bill provides that eligible rollover distributions from 
qualified retirement plans, section 403(b) annuities, and 
governmental section 457 plans generally may be rolled over to 
any of such plans or arrangements. 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 
must 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.

Rollover of after-tax contributions

    The bill 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 is permitted to 
accept rollovers of after-tax 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.
    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 bill provides that surviving spouses may roll over 
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 expected 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 provisions are effective for distributions made after 
December 31, 2001.

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 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.

                             Effective Date

    The provision applies to distributions made after December 
31, 2000.

 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)).41
---------------------------------------------------------------------------
    \41\ A similar provision is contained in Title I of ERISA.
---------------------------------------------------------------------------
    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 profit-sharing 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.42
---------------------------------------------------------------------------
    \42\ Treas. Reg. sec. 1.411(d)-4, Q&A-2(a)(3)(i).
---------------------------------------------------------------------------
    A plan that is a transferee of a plan that is subject to 
the joint and survivor rules is also subject to those rules.

                           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.

                        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 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, and (4) 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. 
The provision does not modify the rules relating to survivor 
annuities under section 417. Thus, as under present law, if the 
transferor plan is required to provide an annuity as the normal 
form of benefit, the transferee plan must comply with the rules 
of section 417.
    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 do not 
apply to plan amendments that 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, but only if such 
an amendment does not adversely affect the rights of any 
participant in more than a de minimis manner.
    For this purpose, the factors to be considered in 
determining whether an amendment has more than a de minimis 
adverse effect on any participant 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 amount of the 
participant's benefit that is affected by the plan amendment, 
in relation to the amount of the participant's 
compensation,\43\ and (5) the number of years before the plan 
amendment is effective.
---------------------------------------------------------------------------
    \43\ In determining the amount of any subsidy under the provision, 
it is expected that the regulations will value the subsidy by reference 
to the date on which it would be the most valuable with respect to the 
participant.
---------------------------------------------------------------------------
    This provision of the bill does not affect the rules 
relating to involuntary cash outs (sec. 411(a)(11)) \44\ or 
survivor annuity requirements (sec. 417). Accordingly, if a 
participant is entitled to protections of the joint and 
survivor rules, those protections may not be eliminated. The 
intent of the provision authorizing regulations is solely to 
permit the elimination of early retirement benefits, 
retirement-type subsidies, or optional forms of benefit that 
have no more than a de minimis effect on any participant but 
create disproportionate burdens and complexities for a plan and 
its participants.
---------------------------------------------------------------------------
    \44\ Another provision of the bill provides that rollover amounts 
are not taken into account for purposes of the cash-out rules.
---------------------------------------------------------------------------
    For example, assume the following. Employer A acquires 
employer B and merges B's defined benefit plan into A's defined 
benefit plan. The defined benefit plan maintained by B before 
the merger provides an early retirement subsidy for individuals 
age 55 with a specified number of years of service. E1 and E2 
are employees of B and who transfer to A in connection with the 
merger. E1 is 25 years old and has compensation of $40,000. The 
present value of E1's early retirement subsidy under B's plan 
is $75. E2 is 50 years old and also has compensation of 
$40,000. The present value of E2's early retirement subsidy 
under B's plan is $10,000.
    Assume that A's plan has an early retirement subsidy for 
individuals who have attained age 50 with a specified number of 
years of service, but the subsidy is not the same as under B's 
plan. Under A's plan, the present value of E2's early 
retirement subsidy is $9,500. Maintenance of both subsidies 
would create burdens for the plan and complexities for the plan 
and its participants.
    Treasury regulations could permit E1's early retirement 
subsidy under B's plan to be eliminated entirely (i.e., even if 
A's plan did not have an early retirement subsidy). Taking into 
account all relevant factors, including the value of the 
benefit, E1's compensation, and the number of years until E1 
would be eligible to receive the subsidy, the subsidy is de 
minimis. Treasury regulations could permit E2's early 
retirement subsidy under B's plan to be eliminated as to be 
replaced by the subsidy under A's plan, because the difference 
in the subsidies is de minimis. However, A's subsidy could not 
be entirely eliminated.
    The Secretary is directed to issue, not later than December 
31, 2001, regulations under section 411(d)(6), including 
regulations required under the provision.

                             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. 45
---------------------------------------------------------------------------
    \45\  Rev. Rul. 79-336, 1979-2 C.B. 187.
---------------------------------------------------------------------------
    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 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. In 
addition, the provisions for distribution from a section 401(k) 
plan based upon a corporation's disposition of its assets or a 
subsidiary is repealed; this special rule is no longer be 
necessary as a result of the changes made by the provision.

                             Effective Date

    The provision is effective for distributions after December 
31, 2000, regardless of when the severance of employment 
occurred.

 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 
after-tax 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 suchemployees 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.

                        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 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 a 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. 46
---------------------------------------------------------------------------
    \46\  A similar provision is contained in Title I of ERISA.
---------------------------------------------------------------------------
    Generally, a participant may roll over an involuntary 
distribution from a qualified plan to an IRA or to another 
qualified plan. 47
---------------------------------------------------------------------------
    \47\  Other provisions of the bill expand the kinds of plans to 
which benefits may be rolled over.
---------------------------------------------------------------------------

                           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) for purposes of the cash-out rule.

                             Effective Date

    The proposal would be effective for distributions after 
December 31, 2000.

 G. Time of Inclusion of Benefits Under Section 457 Plans (Sec. 409 of 
                   the Bill and Sec. 457 of the Code)

                              Present Law

    A ``section 457 plan'' is an eligible deferred compensation 
plan of a State or local government or tax-exempt employer that 
meets certain requirements. For example, amounts deferred under 
a section 457 plan cannot exceed certain limits. Amounts 
deferred under a section 457 plan are generally includible in 
income when paid or made available. Amounts deferred under a 
plan of deferred compensation of a State or local government or 
tax-exempt employer that does not meet the requirements of 
section 457 are includible in income when the amounts are not 
subject to a substantial risk of forfeiture, regardless of 
whether the amounts have been paid or made available. 
48
---------------------------------------------------------------------------
    \48\  This rule of inclusion does not apply to amounts deferred 
under a tax-qualified retirement plan or similar plans.
---------------------------------------------------------------------------
    The limits on section 457 plans were first applied to plans 
of tax-exempt employers pursuant to the Tax Reform Act of 1986 
(the ``1986 Act''), generally effective for taxable years 
beginning after December 31, 1986. The limitations of section 
457 do not apply to amounts deferred under a plan of a tax-
exempt employer by an individual covered under such a plan on 
August 16, 1986, if the amounts (1) were deferred from taxable 
years beginning before January 1, 1987, or (2) are deferred 
from taxable years beginning after December 31, 1986, pursuant 
to an agreement that was in writing on August 16, 1986, and on 
such date provided for a deferral foreach taxable year covered 
by the agreement of a fixed amount or of an amount determined pursuant 
to a fixed formula. The provision in (2) ceases to apply if there is 
any modification to the agreement or formula.

                           Reasons for Change

    The Committee believes that the rules for timing of 
inclusion of benefits under a governmental section 457 plan 
should be conformed to the rules relating to qualified plans.
    The Committee believes it appropriate to extend the 
grandfather rule for certain section 457 plan benefits to cost-
of-living adjustments.

                        Explanation of Provision

    The bill provides that amounts deferred under a section 457 
plan of a State or local government are includible in income 
when paid.
    In addition, the bill modifies the transition rule adopted 
in the 1986 Act relating to deferred compensation plans of tax-
exempt employers. Under the bill, the transition rule applies 
to agreements providing cost-of-living adjustments to amounts 
that otherwise satisfy the requirements of the transition rule. 
The grandfather does not apply to the extent that the annual 
amount provided under such an agreement exceeds the annual 
grandfathered amount multiplied by the cumulative increase in 
the Consumer Price Index (as published by the Department of 
Labor).

                             Effective Date

    The provision relating to governmental section 457 plans 
would be effective for distributions beginning after December 
31, 2000. The provision relating to plans of tax-exempt 
organizations is effective for taxable years ending after the 
date of enactment for cost-of-living increases after September 
1993.

        TITLE V. STRENGTHENING PENSION SECURITY AND ENFORCEMENT

 A. Phase in Repeal of 155 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)). 
49 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. 50 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.
---------------------------------------------------------------------------
    \49\  The minimum funding requirements, including the full funding 
limit, are also contained in title I of ERISA.
    \50\  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.
---------------------------------------------------------------------------
    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 may result in inadequate funding of pension plans 
and thus jeopardize pension security. Also, the 
Committeebelieves that the special deduction rule should be expanded to 
give more plan sponsors incentives to adequately fund their plans.

                        Explanation of Provision

Current liability full funding limit

    The bill 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. Thus, in 2004 and thereafter, 
the full funding limit will be the excess, if any, of (1) the 
accrued liability under the plan (including normal cost), over 
(2) the value of the plan's assets.

Deduction for contributions to fund termination liability

    The special rule allowing a deduction for unfunded current 
liability generally 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.51
---------------------------------------------------------------------------
    \51\ The PBGC termination insurance program does not cover plans of 
professional service employers that have fewer than 25 participants.
---------------------------------------------------------------------------
    The bill 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 plan years beginning in 2005 and 
thereafter.52 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.
---------------------------------------------------------------------------
    \52\ 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 proposal 
would gradually increase and then repeal the current liability full 
funding limit.
---------------------------------------------------------------------------
    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 is permitted to 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. An employer making 
such an election for a year is not permitted to take advantage 
of the present-law exceptions for certain terminating plans and 
certain contributions to defined contribution plans. The 
provision applies to terminated plans as well as on-going 
plans.

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2000.

 C. Notice of Significant Reduction in Plan Benefit Accruals (Sec. 504 
of the Bill and Secs. 411(d) and 417(e) 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 53 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.
---------------------------------------------------------------------------
    \53\ Treas. Reg. sec. 1.411(d)-6.
---------------------------------------------------------------------------
    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.
    The Internal Revenue Code prohibits the reduction of a 
participant's accrued benefit by plan amendment (sec. 
411(d)(6)), and, for this purpose, except to the extent set 
forth in Treasury regulations, treats the elimination or 
reduction of an early retirement benefit or retirement-type 
subsidy or an optional form of benefit as a reduction of a 
participant's accrued benefit. However, this prohibition does 
not prevent a plan amendment from ceasing or reducing future 
accruals.
    In the case of a pension plan that is subject to the joint 
and survivor annuity rules, the Internal Revenue Code (sec. 
417(e)) restricts distributions before normal retirement age 
without the consent of the participant and the participant's 
spouse unless the value of the distribution does not exceed a 
dollar limit ($5,000 under sec. 411(a)(11)(A)). For this 
purpose, under Treasury regulations, a specific interest rate 
and mortality table are prescribed for purposes of determining 
whether the distribution exceeds the dollar limit and prohibits 
a lump sum distribution of an amount less than the amount 
determined under the applicable interest rate and mortality 
table even if the distribution exceeds the dollar limit.

                           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 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.
    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 theInternal Revenue Code and ERISA 
should contain requirements designed to prevent the use of ``wear 
away'' provisions in these conversions.

                        Explanation of Provision

    The provision adds to the Internal Revenue Code a 
requirement that the plan administrator of a pension plan 
furnish a written notice concerning a plan amendment that 
provides for a significant reduction in the rate of future 
benefit accrual, including any elimination or reduction of an 
early retirement benefit or retirement-type 
subsidy.54 The notice is required to set forth: (1) 
a summary of the amendment and the effective date of the 
amendment; (2) a statement that the amendment is expected to 
significantly reduce the rate of future benefit accrual; (3) a 
description of the classes of employees reasonably expected to 
be affected by the reduction in the rate of future benefit 
accrual; (4) examples illustrating the plan changes for these 
classes of employees; (5) in the event of an amendment that 
results in a conversion of a traditional defined benefit plan 
to a cash balance plan (described below), a notice that the 
plan administrator will provide, generally no later than 15 
days prior to the effective date of the amendment, a ``benefit 
estimation tool kit'' (described below) that will enable 
affected participants who have completed at least 1 year of 
participation to personalize the illustrative examples; and (6) 
notice of each affected participant's right to request, and of 
the procedures for requesting, an annual benefit statement as 
provided under present law. The plan administrator is required 
to provide the notice not less than 45 days before the 
effective date of the plan amendment.
---------------------------------------------------------------------------
    \54\ The provision also modifies the present-law notice requirement 
contained in section 204(h) of Title I of ERISA to provide that an 
applicable pension plan may not be amended to provide for a significant 
reduction in the rate of future benefit accrual in the event of an 
egregious failure by the plan administrator to comply with a notice 
requirement similar to the notice requirement that the provision adds 
to the Internal Revenue Code. In addition, the provision expands the 
current ERISA notice requirement regarding significant reductions in 
normal retirement benefit accrual rates to early retirement benefits 
and retirement-type subsidies.
---------------------------------------------------------------------------
    The notice requirement does not apply to plans to which 
ERISA sec. 204(h) does not apply, including 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 
generalized notice to each affected participant and each 
affected alternate payee. For purposes of the provision, an 
affected participant or alternate payee is a participant or 
alternate payee to whom the reduction in the rate of future 
benefit accrual, including any elimination or significant 
reduction in early retirement benefit or retirement-type 
subsidy, is reasonably expected to apply.
    As noted above, the provision requires the plan 
administrator to provide a benefit estimation tool kit, no 
later than 15 days prior to the amendment effective date, to a 
participant for whom the amendment may reasonably be expected 
to produce a significant reduction in the rate of future 
benefit accrual if the amendment has the effect of converting a 
traditional defined benefit plan to a cash balance plan. The 
plan administrator is not required to provide this benefit 
estimation tool kit to any participant who has less than 1 year 
of participation in the plan. For purposes of the provision, a 
``cash balance plan'' means a defined benefit plan under which 
the accrued benefit is determined as an amount other than an 
annual benefit commencing at normal retirement age, and any 
defined benefit plan, or portion of such a plan, that has an 
effect similar to a defined benefit plan under which the 
accrued benefit is determined as an amount other than an annual 
benefit commencing at normal retirement age (as determined 
under Treasury regulations). If the benefits of 2 or more 
defined benefit plans established or maintained by an employer 
are coordinated in such a manner as to have the effect of a 
conversion to a cash balance plan, the provision treats the 
sponsor of the plan or plans providing for such coordination as 
having adopted such a conversion as of the date such 
coordination begins. If a plan sponsor represents in 
communications to participants and beneficiaries that a plan 
amendment has an effect equivalent to a cash balance 
conversion, such amendment is (to the extent provided in 
Treasury regulations) treated as a cash balance conversion. In 
addition, the provision provides for the Secretary of the 
Treasury to issue regulations to prevent avoidance of the 
requirements of the provision through the use of 2 or more plan 
amendments rather than a single amendment.
    The benefit estimation tool kit is designed to enable 
participants to estimate benefits under the old and new plan 
provisions. The provision permits the tool kit to be in the 
form of software (for use at home, at a workplace kiosk, or on 
a company intranet), worksheets, or calculation instructions, 
or other formats to be determined by the Secretary of the 
Treasury. The tool kit is required to include any necessary 
actuarial assumptions and formulas and to permit the 
participant to estimate both a single life annuity at 
appropriate ages and, when available, a lump sum distribution. 
The tool kit is required to disclose the interest rate used to 
compute a lump sum distribution and whether the value of early 
retirement benefits is included in the lump sum distribution.
    The provision requires the benefit estimation tool kit to 
accommodate employee-provided variables with respect to age, 
years of service, retirement age, covered compensation, and 
interest rate (when variable rates apply). The tool kit is 
required to permit employees to recalculate estimated benefits 
by changing the values of these variables. The provision does 
not require the tool kit to accommodate employee variables with 
respect to qualified domestic relations orders, factors that 
result in unusual patterns of credited service (such as 
extended time away from the job), special benefit formulas for 
unusual situations, offsets from other plans, and forms of 
annuity distributions.
    In the case of a cash balance conversion that occurs in 
connection with a business disposition or acquisition 
transaction and within 1 year following the date of the 
transaction, the provision requires the plan administrator to 
provide the benefit estimation tool kit prior to the end of the 
2-year period following the date of the transaction to the 
affected participants who become participants as a result of 
the transaction.
    The provision permits a plan administrator to provide any 
notice required under the provision to a person designated in 
writing by the individual to whom it would otherwise be 
provided. In addition, the provision authorizes the Secretary 
of the Treasury to allow any notice required under the 
provision to be provided by using new technologies.
    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 is excessive or 
otherwise inequitable relative to the failure involved.
    The provision adds to the Internal Revenue Code and ERISA 
requirements designed to prevent the use of ``wear away'' 
provisions under which participants earn no additional benefits 
for a period of time after a conversion of a traditional 
defined benefit plan to a cash balance plan. These requirements 
are in addition to the other provisions of the Internal Revenue 
Code that prohibit the reduction of a participant's accrued 
benefit by plan amendment (sec. 411(d)(6)). In the event of a 
conversion of a traditional defined benefit plan to a cash 
balance plan, the provision applies a minimum benefit 
requirement. This minimum benefit requirement requires a 
participant's accrued benefit under the cash balance plan to 
equal not less than (1) the benefit accrued for years of 
service prior to the conversion under the traditional defined 
benefit plan formula (not taking into account any early 
retirement benefit or retirement-type subsidy), plus (2) any 
benefit accrued for years of service after the conversion under 
the cash balance plan benefit formula. If the amendment 
provides that the accrued benefit initially credited to a 
participant's accumulation account (or its equivalent) on the 
effective date of the amendment satisfies the present value 
rules described below, the plan will not be treated as failing 
to provide to the participant an accrued benefit that includes 
such pre-conversion accrued benefit at any time after the 
effective date of the amendment merely because of a fluctuation 
in interest rates. The provision does not apply the minimum 
benefit requirement designed to prevent ``wear away'' to a cash 
balance conversion amendment to the extent that the amendment 
permits a participant to continue to accrue benefits in the 
same manner as under the terms of the plan in effect prior to 
the amendment (for example, by providing for the participant to 
receive the greater of the old or new formulas).
    Under the provision, a plan is treated as satisfying the 
minimum benefit requirement designed to prevent ``wear away'' 
if a plan amendment provides that the present value of a 
participant's benefit accrued under a traditional defined 
benefit plan formula prior to a cash balance conversion is not 
less than the greater of (1) the present value determined using 
the applicable mortality table and the applicable interest rate 
in effect under the plan on the effective date of the cash 
balance conversion, or (2) the amount of the lump sum 
distribution that would be payable as of such effective date if 
the participant were eligible to receive a distribution under 
the terms of the plan as in effect immediately before such 
effective date, but not taking into account any early 
retirement benefit or retirement-type subsidy.
    Except as provided in regulations, the provision generally 
requires the present value of the accrued benefit of any 
participant under a cash balance plan to be equal to the 
balance in the participant's accumulation account (or its 
equivalent) as of the time of the present value determination. 
This requirement will not apply to any portion of the 
participant's benefit accrued prior to a cash balance 
conversion except to the extent the plan provides that the 
amount initially credited to a participant's accumulation 
account (or its equivalent) on the effective date of the 
conversion is not less than the benefit accrued for years of 
service prior to the conversion under the traditional defined 
benefit formula (not taking into account any early retirement 
benefit or retirement-type subsidy). This provision is solely 
intended to permit plan sponsors to provide interest credits in 
an amount greater than the amount currently permitted under the 
Internal Revenue Code. Regulations may condition satisfaction 
of this requirement on the plan crediting interest at rates not 
in excess of a maximum and not less than a minimum specified in 
the regulations.
    Failure to comply with the requirements of the provision 
designed to prevent ``wear away'' results in the 
disqualification of the plan.
    The provision directs the Secretary of the Treasury to 
define in regulations, within 12 months after the date of 
enactment, the terms ``early retirement benefit'' and 
``retirement-type subsidy.'' In addition, with respect to a 
participant who is eligible to accrue benefits under the terms 
of a defined benefit plan as in effect either before or after 
an amendment that results in a conversion to a cash balance 
plan, the provision directs the Secretary of the Treasury to 
prescribe regulations under which (1) the plan will be treated 
as meeting the requirements of sec. 411(b)(1)(A), (B), or (C) 
if such requirements are met separately with respect to each of 
the plan's methods of accruing benefits, and (2) the plan will 
not be treated as failing to meet the requirements of sec. 
401(a)(4) merely because only participants as of the effective 
date of the amendment are so eligible, if the plan met the 
requirements of sec. 401(a)(4) under the terms of the plan as 
in effect before the amendment (subject to the terms and 
conditions provided by the regulations).
    Under the provision, no inference is intended with respect 
to the proper treatment of cash balance plans or conversions to 
cash balance plans under the laws in effect prior to the 
effective date of the provision or under laws not affected by 
the provision. In addition, the provision is not intended to 
result in the treatment of a cash balance plan as a defined 
contribution plan, or to affect the rules relating to 
involuntary cash outs (sec. 411(a)(11)) 55 or 
survivor annuity requirements (sec. 417).
---------------------------------------------------------------------------
    \55\ Another provision provides that rollover amounts are not taken 
into account for purposes of the cash-out rules.
---------------------------------------------------------------------------

                             effective date

    The provision is effective for plan amendments taking 
effect on or after the date of enactment, with a delayed 
effective date for plans maintained pursuant to a collective 
bargaining agreement. 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. The 
notice requirements under the provision do not apply to any 
plan amendment taking effect on or after the date of enactment 
if, before September 5, 2000, notice is provided to 
participants and beneficiaries adversely affected by the plan 
amendment (or their representatives) that is reasonably 
expected to notify them of the nature and effective date of the 
plan amendment.

 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.
    In the case of a defined contribution plan, the limit on 
annual is additions if the lesser of (1) 25 percent of 
compensation 56 or (2) $30,000 (for 2000). In 
applying the limits on contributions and benefits, plans of the 
same employer are aggregated.
---------------------------------------------------------------------------
    \56\  Another provision of the bill increases this limit to 100 
percent of compensation.
---------------------------------------------------------------------------

                           reasons for change

    The Committee understands that, because pension benefits 
under multiemployer plans are typically based upon factors 
other than compensation, the 100 percent of compensation limit 
frequently results in benefit reductions for employees in 
industries in which wages vary annually.

                        Explanation of Provision

    Under the bill, the 100 percent of compensation defined 
benefit plan limit does not apply to multiemployer plans. In 
addition, multiemployer plans are not aggregated with single-
employer defined benefit plans maintained by an employer 
contributing to the multiemployer plan for purposes of applying 
the 100 percent of compensation limit to such single-employer 
plan.

                             effective date

    The provision is effective for years beginning after 
December 31, 2000.

 E. Investment of Employee Contributions in 401(k) Plans (Sec. 506 of 
     the Bill and Sec. 1524(b) of the Taxpayer Relief Act of 1997)

                              present law

    The Employee Retirement Income Security Act of 1974, as 
amended (``ERISA'') prohibits certain employee benefit plans 
from acquiring securities or real property of the employer who 
sponsors the plan if, after the acquisition, the fair market 
value of such securities and property exceeds 10 percent of the 
fair market value of plan assets. The 10-percent limitation 
does not apply to any ``eligible individual account plans'' 
that specifically authorize such investments. Generally, 
eligible individual account plans are defined contribution 
plans, including plans containing a cash or deferred 
arrangement (``401(k) plans'').
    The term ``eligible individual account plan'' does not 
include the portion of a plan that consists of elective 
deferrals (and earnings on the elective deferrals) made under 
section 401(k) if elective deferrals equal to more than 1 
percent of any employee's eligible compensation are required to 
be invested in employer securities and employer real property. 
Eligible compensation is compensation that is eligible to be 
deferred under the plan. The portion of the plan that consists 
of elective deferrals (and earnings thereon) is still treated 
as an individual account plan, and the 10-percent limitation 
does not apply, as long as elective deferrals (and earnings 
thereon) are not required to be invested in employer securities 
or employer real property.
    The rule excluding elective deferrals (and earnings 
thereon) from the definition of individual account plan does 
not apply if individual account plans are a small part of the 
employer's retirement plans. In particular, that rule does not 
apply to an individual account plan for a plan year if the 
value of the assets of all individual account plans maintained 
by the employer do not exceed 10 percent of the value of the 
assets of all pension plans maintained by the employer 
(determined as of the last day of the preceding plan year). 
Multiemployer plans are not taken into account in determining 
whether the value of the assets of all individual account plans 
maintained by the employer exceed 10 percent of the value of 
the assets of all pension plans maintained by the employer. The 
rule excluding elective deferrals (and earnings thereon)from 
the definition of individual account plan does not apply to an employee 
stock ownership plan as defined in section 4975(e)(7) of the Internal 
Revenue Code.
    The rule excluding elective deferrals (and earnings 
thereon) from the definition of individual account plan applies 
to elective deferrals for plan years beginning after December 
31, 1998 (and earnings thereon). It does not apply with respect 
to earnings on elective deferrals for plan years beginning 
before January 1, 1999.

                           reasons for change

    The Committee believes that the effective date provided in 
the Taxpayer Relief Act of 1997 with respect to the rule 
excluding elective deferrals (and earnings thereon) from the 
definition of individual account plan has produced unintended 
results.

                        explanation of provision

    The bill modifies the effective date of the rule excluding 
certain elective deferrals (and earnings thereon) from the 
definition of individual account plan by providing that the 
rule does not apply to any elective deferral used to acquire an 
interest in the income or gain from employer securities or 
employer real property acquired (1) before January 1, 1999, or 
(2) after such date pursuant to a written contract which was 
binding on such date and at all times thereafter.

                             effective date

    The provision is effective as if included in the section of 
the Taxpayer Relief Act of 1997 that contained the rule 
excluding certain elective deferrals (and earnings thereon).

 F. Periodic Pension Benefit Statements (Sec. 507 of the Bill and Sec. 
                            105(a) of ERISA)

                              present law

    Title I of ERISA provides that a pension plan administrator 
must furnish a benefit statement to any participant or 
beneficiary who makes a written request for such a statement. 
This statement must indicate, on the basis of the latest 
available information, (1) the participant's or beneficiary's 
total accrued benefit, and (2) the participant's or 
beneficiary's vested accrued benefit or the earliest date on 
which the accrued benefit will become vested. A participant or 
beneficiary is not entitled to receive more than 1 benefit 
statement during any 12-month period. The plan administrator 
must furnish the benefit statement no later than 60 days after 
receipt of the request or, if later, 120 days after the close 
of the immediately preceding plan year.
    In addition, the plan administrator must furnish a benefit 
statement to each participant whose employment terminates or 
who has a 1-year break in service. For purposes of this benefit 
statement requirement, a ``1-year break in service'' is a 
calendar year, plan year, or other 12-month period designated 
by the plan during which the participant does not complete more 
than 500 hours of service for the employer. A participant is 
not entitled to receive more than 1 benefit statement with 
respect to consecutive breaks in service. The plan 
administrator must provide a benefit statement required upon 
termination of employment or a break in service no later than 
180 days after the end of the plan year in which the 
termination of employment or break in service occurs.

                           reasons for change

    The Committee believes that periodic disclosure concerning 
the value of retirement benefits, especially the value of 
benefits accumulating in a defined contribution plan account, 
is necessary to increase employee awareness and appreciation of 
the importance of retirement savings.

                        explanation of provision

    A plan administrator of a defined contribution plan 
generally is required to furnish a benefit statement to each 
participant at least once annually and to a beneficiary upon 
written request.
    In addition to providing a benefit statement to a 
beneficiary upon written request, the plan administrator of a 
defined benefit plan generally is required either (1) to 
furnish a benefit statement at least once every 3 years to each 
participant who has a vested accrued benefit and who is 
employed by the employer at the time the plan administrator 
furnishes the benefit statements to participants, or (2) to 
annually furnish written, electronic, telephonic, or other 
appropriate notice to each participant of the availability of 
and the manner in which the participant may obtain the benefit 
statement.
    The plan administrator of a multiemployer plan or a 
multiple employer plan is required to furnish a benefit 
statement only upon written request of a participant or 
beneficiary.57
---------------------------------------------------------------------------
    \57\ A multiple employer plan is a plan that is maintained by 2 or 
more unrelated employers but that is not maintained pursuant to a 
collective-bargaining agreement (sec. 413(c)).
---------------------------------------------------------------------------
    The plan administrator is required to write the benefit 
statement in a manner calculated to be understood by the 
average plan participant and is permitted to furnish the 
statement in written, electronic, telephonic, or other 
appropriate form.

                             effective date

    The provision is effective for plan years beginning after 
December 31, 2000.

 G. Prohibited Allocations of Stock in an S Corporation ESOP (Sec. 508 
            of the Bill and Sec. 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 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.58
---------------------------------------------------------------------------
    \58\ The plan is not disqualified merely because an excise tax is 
imposed under the provision.
---------------------------------------------------------------------------
    It is intended 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.

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, disqualified 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.59 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.
---------------------------------------------------------------------------
    \59\ A family member of a member of a ``deemed 20-percent 
shareholder group'' with deemed owned shares also is treated as a 
disqualified person.
---------------------------------------------------------------------------
    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 generally is attributed 
under the rules of section 318, 60 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 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.
---------------------------------------------------------------------------
    \60\ These attribution rules also apply to stock treated as owned 
by reason of the ownership of synthetic equity.
---------------------------------------------------------------------------
    Under the provision, family members of an individual 
include (1) the spouse 61 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).
---------------------------------------------------------------------------
    \61\ 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.
---------------------------------------------------------------------------
    The bill 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 stock unit, or similar right to a 
future cash payment based on the value of such stock or 
appreciation in such value. 62
---------------------------------------------------------------------------
    \62\ The 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.
---------------------------------------------------------------------------
    Ownership of synthetic equity is attributed in the same 
manner as stock is attributed under the provision (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 
violations 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 deemed-owned 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 also is liable for an 
excise tax with respect to any synthetic equity interest owned 
by any disqualified person in a nonallocation year. The excise 
tax is 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 proposal is effective with 
respect to plan years ending after July 11, 2000.

                 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 
theCommissioner, 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.63
---------------------------------------------------------------------------
    \63\ Prop. reg. sec. 1.412(c)(9)-1(b)(1).
---------------------------------------------------------------------------

                           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 employers to use prior-year data for valuations 
in certain cases will provide an appropriate balance between 
employer concerns and the desire that plans be adequately 
funded.

                        Explanation of Provision

    The bill incorporates into the statute the proposed 
regulation regarding the date of valuations. The bill 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 were used to acquire the employer securities 
(whether or not allocated to participants) with respect to 
which the dividend is paid.
    The Secretary may disallow the deduction for any ESOP 
dividend if he determines that the dividend constitutes, in 
substance, an evasion of taxation (sec. 404(k)(5)).

                           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.
    As under present law, the Secretary may disallow the 
deduction for any ESOP dividend if he determines that the 
dividend constitutes, in substance, an evasion of taxation 
(sec. 404(k)(5)).

                             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 64 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.
---------------------------------------------------------------------------
    \64\  An employee includes a self-employed individual.
---------------------------------------------------------------------------
    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 specialdefinition 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 compensated 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 
tax-exempt 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. 65
---------------------------------------------------------------------------
    \65\ Treas. Reg. sec. 1.410(b)-6(g).
---------------------------------------------------------------------------
    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 employees 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 are to 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, 2001.66 Education not excludable under 
section 127 may be excludable as a working condition fringe.
---------------------------------------------------------------------------
    \66\ The exclusion does not apply with respect to graduate-level 
courses.
---------------------------------------------------------------------------
    There is no specific exclusion under present law for 
employer-provided 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. Qualified 
retirement planning services are 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 does 
not apply to services that may be related to retirement 
planning, such as tax preparation, accounting, legal, or 
brokerage services.
    The exclusion does not apply with respect to highly 
compensated employees unless the services are available on 
substantially the same terms to each member of the group of 
employees normally provided education and information regarding 
the employer's qualified plan.

                             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, 
profit-sharing 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.67 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 Internal Revenue Service 
(``IRS''), which forwards the form to the Department of Labor 
and the PBGC.
---------------------------------------------------------------------------
    \67\  Treas. Reg. sec. 301.6058-1(a).
---------------------------------------------------------------------------
    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 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 it is appropriate to simplify 
the reporting requirements for plans eligible to file Form 
5500-EZ, because such plans do not cover any employees of the 
business owner.

                        explanation of provision

    The Secretary of the Treasury 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.68 EPCRS permits 
employers to correct compliance failures and continue to 
provide their employees with retirement benefits on a tax-
favored basis.
---------------------------------------------------------------------------
    \68\  Rev. Proc. 98-22, 1998-12 I.R.B. 11, as modified by Rev. 
Proc. 99-13, 1999-5, I.R.B. 52.
---------------------------------------------------------------------------
    The IRS has designed EPCRS to (1) encourage operational and 
formal compliance, (2) promote voluntary and timely correction 
of compliance failures, (3) provide sanctions for compliance 
failures identified on audit that are reasonable in light of 
the nature, extent, and severity of the violation, (4) provide 
consistent and 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.

   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 
morethan 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 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 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.

                           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 provide by 
regulation applicable to years beginning after December 31, 
2001, that a plan is deemed to satisfy the 
nondiscriminationrequirements 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 pre-1989 coverage 
rules.
    The Secretary of the Treasury is directed to modify, on or 
before December 31, 2001, 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.

                             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

    A qualified retirement plan maintained by a State or local 
government is exempt from the rules concerning 
nondiscrimination (sec. 401(a)(4)) and minimum participation 
(sec. 401(a)(26)). All other governmental plans are not exempt 
from the nondiscrimination and minimum participation rules.

                           reasons for change

    The Committee believes that application of the 
nondiscrimination and minimum participation rules to 
governmental plans is unnecessary and inappropriate in light of 
the unique circumstances under which such plans and 
organizations operate. Further, the Committee believes that it 
is appropriate to provide for consistent application of the 
minimum coverage, nondiscrimination, and minimum participation 
rules for governmental plans.

                        explanation of provision

    The provision exempts all governmental plans (as defined in 
sec. 414(d)) from the nondiscrimination and minimum 
participation rules.

                             effective date

    The provision is effective for plan years beginning after 
December 31, 2000.

  K. Notice and Consent Period Regarding Distributions; Disclosure of 
  Optional Forms of Benefit (Sec. 611 of the Bill and Sec. 411 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.69
---------------------------------------------------------------------------
    \69\  Similar provisions are contained in Title I of ERISA.
---------------------------------------------------------------------------
    If the present value of the participant's vested accrued 
benefit exceeds $5,000, the plan may not distribute the 
participant's benefit without the written consent of the 
participant. The participant's consent to a distribution is not 
valid unless the participant has received from the plan a 
notice that contains a written explanation of (1) the material 
features and the relative values of the optional forms of 
benefit available under the plan, (2) the participant's right, 
if any, to have the distribution directly transferred to 
another retirement plan or IRA, and (3) the rules concerning 
the taxation of a distribution. If the joint and survivor 
annuity requirements apply to the participant, this notice also 
must contain a written explanation of (1) the terms and 
conditions of the qualified joint and survivor annuity 
(``QJSA''), (2) the participant's right to make, and the effect 
of, an election to waive the QJSA, (3) the rights of the 
participant's spouse with respect to a participant's waiver of 
the QJSA, and (4) the right to make, and the effect of, a 
revocation of a waiver of the QJSA. The plan generally must 
provide this notice to the participant no less than 30 and no 
more than 90 days before the date distribution commences.
    If the participant's vested accrued benefit does not exceed 
$5,000, the terms of the plan may provide for distribution 
without the participant's consent. The plan generally is 
required, however, to provide to the participant a notice that 
contains a written explanation of (1) the participant's right, 
if any, to have the distribution directly transferred to 
another retirement plan or IRA, and (2) the rules concerning 
the taxation of a distribution. The plan generally mustprovide 
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.
    The provision also requires that plan participants be 
notified of the existence of certain differences between the 
values of optional forms of benefit. If a plan provides 
optional forms of benefits and the present values of such 
optional forms of benefits are not actuarially equivalent as of 
the annuity starting date, then the plan is required to provide 
certain information regarding such benefits in the notice 
required to be provided regarding joint and survivor annuities. 
The information must be sufficient (as determined in accordance 
with Treasury regulations) to allow the participant to 
understand the differences in the present values of the 
optional forms of benefits and the effect the participant's 
election as to the form of benefit will have on the value of 
the benefits provided under the plan. The information must be 
provided in a manner calculated to be reasonably understood by 
the average plan participant.

                             Effective Date

    The provision is effective for years beginning after 
December 31, 2000.

L. Annual Report Dissemination (Sec. 612 of the Bill and Sec. 104(b)(3) 
                               of ERISA)

                              Present Law

    Title I of ERISA generally requires the plan administrator 
of each employee pension benefit plan and each employee welfare 
benefit plan to file an annual report concerning the plan with 
the Secretary of Labor within seven months after the end of the 
plan year. Within nine months after the end of the plan year, 
the plan administrator generally must provide to each 
participant and to each beneficiary receiving benefits under 
the plan a summary of the annual report filed with the 
Secretary of Labor for the plan year.

                           Reasons for Change

    The Committee believes that simplification of the summary 
annual report requirement will reduce the burden and cost of 
plan administration and disclosure, thereby encouraging more 
employers to establish and maintain retirement plans, without 
denying participants the opportunity to obtain information 
concerning plan status and operation.

                        Explanation of Provision

    Within nine months after the end of each plan year, the 
plan administrator is required to make available for 
examination a summary of the annual report filed with the 
Secretary of Labor for the plan year. In addition, the plan 
administrator is required to furnish the summary to a 
participant, or to a beneficiary receiving benefits under the 
plan, upon request.

                             Effective Date

    The provision is effective for reports for years beginning 
after December 31, 1999.

M. Modifications to the SAVER Act (Sec. 613 of the Bill and Sec. 517 of 
                                 ERISA)

                              Present Law

    The Savings Are Vital to Everyone's Retirement (``SAVER'') 
Act 70 initiated a public-private partnership to 
educate American workers about retirement savings and directed 
the Department of Labor to maintain an ongoing program of 
public information and outreach. The Act also convened a 
National Summit on Retirement Savings held June 4-5, 1998, and 
to be held again in 2001 and 2005, co-hosted by the President 
and the bipartisan Congressional leadership. The National 
Summit brings together experts in the fields of employee 
benefits and retirement savings, key leaders of government, and 
interested parties from the private sector and general public. 
The delegates are selected by the Congressional leadership and 
the President. The National Summit is a public-private 
partnership, receiving substantial funding from private sector 
contributions. The goals of the National Summits are to: (1) 
advance the public's knowledge and understanding of retirement 
savings and facilitate the development of a broad-based, public 
education program; (2) identify the barriers which hinder 
workers from setting aside adequate savings for retirement and 
impede employers, especially small employers, from assisting 
their workers in accumulating retirement savings; and (3) 
develop specific recommendations for legislative, executive, 
and private sector actions to promote retirement income savings 
among American workers.
---------------------------------------------------------------------------
    \70\  Pub. L. No. 105-92.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes it appropriate to make modifications 
and clarifications regarding the administration of future 
National Summits on Retirement Savings.

                        Explanation of Provision

    The provision clarifies that future National Summits on 
Retirement Savings are to be held in the month of September in 
2001 and 2005, and would add an additional National Summit in 
2009. To facilitate the administration of future National 
Summits, the Department of Labor is given authority to enter 
into cooperative agreements (pursuant to the Federal Grant and 
Cooperative Agreement Act of 1977) with its 1999 summit 
partner, the American Savings Education Council.
    Six new statutory delegates are added to future National 
Summits: the Chairman and Ranking Member of the House Ways and 
Means Committee, the Senate Finance Committee, and the 
Subcommittee on Employer-Employee Relations of the House 
Committee on Education and the Workforce. Further, the 
President, in consultation with the Congressional leadership, 
may appoint up to three percent of the delegates (not to exceed 
10) from a list of nominees provided by the private sector 
partner in Summit administration. The provision also clarifies 
that new delegates are to be appointed for each future National 
Summit (as was the intent of the original legislation) and sets 
deadlines for their appointment.
    The provision also sets deadlines for the Department of 
Labor to publish the Summit agenda, give the Department of 
Labor limited reception and representation authority, and 
mandates that the Department of Labor consult with the 
Congressional leadership in drafting the post-Summit report.

                             Effective Date

    The provision is effective on the date of enactment.

                   N. Studies (Sec. 614 of the Bill)

                              Present Law

    No provision.

                           Reasons for Change

    The Committee has a continuing interest in retirement 
income security and the national saving rate, and believes 
information regarding such issues, and the effects on such 
issues would be useful in developing and evaluating future 
legislation.

                        Explanation of Provision

Report on pension coverage

    The bill directs the Secretary to report to the Senate 
Committee on Finance and the House Committee on Ways and Means 
regarding the effect of the bill on pension coverage, including 
any expansion of coverage for low- and moderate-income workers, 
levels of pension benefits, quality of coverage, worker's 
access to and participation in plans, and retirement security. 
This report is required to be submitted no later than five 
years after the date of enactment.

Study of preretirement uses of benefits

    The bill directs the Secretary to conduct a study of the 
present-law rules that permit individuals to access their IRA 
or qualified retirement plan benefits prior to retirement, 
including an analysis of the use of the existing rules and the 
extent to which such rules undermine the goal of accumulating 
adequate resources for retirement. In addition, the Secretary 
of the Treasury is directed to conduct a study of the types of 
investment decisions made by IRA owners and participants in 
self-directed qualified retirement plans, including an analysis 
of the existing restrictions on investments and the extent to 
which additional restrictions would facilitate the accumulation 
of adequate income for retirement. The studies are required to 
be submitted to the Senate Committee on Finance and the House 
Committee on Ways and Means no later than January 1, 2002.

                             Effective Date

    The provision is effective on the date of enactment.

           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 made pursuant 
to the provisions of the bill or any regulations issued under 
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 last day of the first plan year beginning on or 
after January 1, 2005. The delayed amendment date does not 
apply to any amendment required or permitted by the bill 
unless, during the period beginning on the date the applicable 
section of the bill 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.

          TITLE VIII. COMPLIANCE WITH CONGRESSIONAL BUDGET ACT

                         (Sec. 801 of the Bill)

                              Present Law

    Reconciliation is a procedure under the Congressional 
Budget Act of 1974 (the ``Budget Act'') by which the Congress 
implements spending and tax policies contained in a budget 
resolution. The Budget Act contains numerous rules enforcing 
the scope of items permitted to be considered under the budget 
reconciliation process. One such rule, the so-called ``Byrd 
rule,'' was incorporated into the Budget Act in 1990. The Byrd 
rule, named after its principal sponsor, Senator Robert C. 
Byrd, is contained in section 313 of the Budget Act. The Byrd 
rule is generally interpreted to permit members to make a 
motion to strike extraneous provisions (those which are 
unrelated to the deficit reduction goals of the reconciliation 
process) from either a budget reconciliation bill or a 
conference report on such bill.
    Under the Byrd rule, a provision is considered to be 
extraneous if it:
          (1) does not produce a change in outlays or revenues;
          (2) produces an outlay increase or revenue decrease 
        when the instructed committee is not in compliance with 
        its instructions;
          (3) is outside of the jurisdiction of the committee 
        that submitted the title or provision for inclusion in 
        the reconciliation measure;
          (4) produces a change in outlays or revenues which is 
        merely incidental to the non-budgetary components of 
        the provision;
          (5) would increase the deficit for a fiscal year 
        beyond those covered by the revenue measure; or
          (6) recommends a change in Social Security.

                           Reasons for Change

    The Committee intends to comply with the Budget Act.

                        Explanation of Provision

    To ensure compliance with the Budget Act, all provisions 
of, and amendments made by, the bill cease to apply for years 
beginning after December 31, 2004.

                             Effective Date

    The provision is effective on the date of enactment.

                    III. BUDGET EFFECTS OF THE BILL

                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate, the following statement is made 
concerning the estimated budget effects of the provisions of 
the bill as reported.
    The bill, as reported, is estimated to have the following 
budget effects for fiscal years 2001-2010.

  ESTIMATED REVENUE EFFECTS OF H.R. 1102, THE ``RETIREMENT SECURITY AND SAVINGS ACT OF 2000,'' INCLUDING CONGRESSIONAL BUDGET ACT SUNSET FOR YEARS AFTER DECEMBER 31, 2004, AS REPORTED BY THE
                                                                                      COMMITTEE ON FINANCE
                                                                        [Fiscal years 2001-2010, in millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
               Provision                           Effective              2001      2002      2003      2004      2005      2006      2007      2008      2009      2010     2001-05    2001-10
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
   Individual Retirement Arrangement
               Provisions

1. Modification of IRA Contribution      tyba 12/31/00................      -395    -1,194    -2,013    -2,726    -2,050    -1,088    -1,113    -1,135    -1,155    -1,173     -8,378    -14,042
 Limits--increase the maximum
 contribution limit for traditional and
 Roth IRAs to: $3,000 in 2001, $4,000
 in 2002, $5,000 in 2003, and index for
 inflation thereafter.
2. Increase AGI limits for deductible    tyba 12/31/00................      -103      -357      -475      -411      -199       -17       -13        -8        -1     (\1\)     -1,544     -1,584
 IRA contributions, including for
 married filing separately.
3. Increase maximum contribution limits  yba 12/31/00.................      -178      -305      -236      -214      -135       -59       -58       -56       -54       -53     -1,068     -1,348
 for IRAs for individuals age 50 and
 above by 50%.
4. Increase income limits for            tyba 12/31/00................        -9       -54      -128      -216      -301      -343      -350      -354      -358      -361       -709     -2,475
 contributions to Roth IRAs for joint
 filers to twice the limits for single
 filers.
5. Deemed IRAs under employer plans....  tyba 12/31/00................                                                  Negligible Revenue Effect
6. Allow tax-free withdrawals from IRAs  tyba 12/31/00................      -168      -340      -347      -416      -259       -37       -38       -38       -39       -40     -1,530     -1,722
 for charitable purposes.
7. Increase the income limit for         tyba 12/31/00................       400     1,046       719       166      -675    -1,185      -954      -553      -128      -135     -1,656     -1,298
 conversions of an IRA to a Roth IRA to
 $200,000 for joint filers.
                                                                       -------------------------------------------------------------------------------------------------------------------------
      Total of Individual Retirement     .............................      -453    -1,204    -2,480    -3,817    -3,619    -2,729    -2,526    -2,144    -1,735    -1,762    -11,573    -22,469
       Arrangement Provisions.
                                                                       =========================================================================================================================
   Provisions for Expanding Coverage

1. Increase contribution and benefit
 limits:
    a. Increase limitation on exclusion  yba 12/31/00.................      -130      -310      -452      -557      -235       -84       -82       -79       -75       -71     -1,684     -2,075
     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
     \2\ \3\.
    b. Increase limitation on SIMPLE     yba 12/31/00.................        -4       -14       -21       -26       -11        -4        -4        -4        -3        -3        -76        -94
     elective contributions to: $7,000
     in 2001, $8,000 in 2002, $9,000 in
     2003, and $10,000 in 2004; index
     thereafter \2\ \3\.
    c. Increase defined benefit dollar   yba 12/31/00.................       -18       -31       -40       -45       -14  ........  ........  ........  ........  ........       -148       -148
     limit to $160,000.
    d. Lower early retirement age to     yba 12/31/00.................        -3        -4        -4        -4        -1  ........  ........  ........  ........  ........        -17        -17
     62; lower normal retirement age to
     65.
    e. Increase indexing on limitation   yba 12/31/00.................  ........        -2        -4        -5        -2        -1        -1        -1        -1        -1        -13        -16
     for defined contribution plans in
     $1,000 increments \2\.
    f. Increase qualified plan           yba 12/31/00.................       -43       -74       -84       -91       -40       -17       -16       -16       -15       -14       -333       -410
     compensation limit to $200,000 \2\.
    g. Increase limits on deferrals      yba 12/31/00.................       -52       -91      -104      -114       -50       -20       -20       -19       -18       -17       -410       -503
     under deferred compensation plans
     of State and local governments and
     tax-exempt organizations to:
     $11,000 in 2001, $12,000 in 2002,
     $13,000 in 2003, $14,000 in 2004,
     and $15,000 in 2005; index
     thereafter \2\,\3\.
2. Plan loans for subchapter S owners,   pa 12/31/00..................       -18       -30       -33       -35       -12        -2        -2        -2        -2        -2       -128       -138
 partners, and sole proprietors.
3. Modification of top-heavy rules.....  yba 12/31/00.................        -4        -9       -11       -12        -5        -2        -2        -2        -2        -2        -41        -50
4. Elective deferrals not taken into     yba 12/31/00.................       -40       -75       -87       -94       -51       -22       -21       -20       -19       -20       -324       -426
 account for purposes of deduction
 limits.
5. Repeal of coordination requirements   yba 12/31/00.................       -16       -22       -22       -22       -10        -4        -4        -4        -4        -3        -92       -110
 for deferred compensation plans of
 State and local governments and tax-
 exempt organizations.
6. Definition of compensation for        yba 12/31/00.................        -1        -2        -3        -3        -2        -1        -1        -1        -1    -(\1\)        -11        -15
 purposes of deduction limits \2\.
7. Increase stock bonus and profit       tyba 12/31/00................        -6       -12       -14       -15        -8        -3        -3        -3        -3        -3        -51        -66
 sharing plan deduction limit from 15%
 to 25%.
8. Option to treat elective deferrals    tyba 12/31/00................        50       100       131       144       -73      -169      -171      -172      -171      -170        352       -500
 as after-tax contributions.
9. Nonrefundable credit to certain       tyba 12/31/00................      -911    -2,052    -1,994    -1,947    -1,111       -72       -65       -64       -64       -62     -8,016     -8,344
 individuals for elective deferrals and
 IRA contributions.
10. Small business (50 or fewer          (\4\)........................       -43      -264      -580      -895      -728      -601      -599      -582      -552      -510     -2,511     -5,355
 employees) tax credit for new
 qualified retirement plan
 contributions--first 3 years of the
 plan.
11. Small business (100 or fewer         (\4\)........................       -22       -31       -33       -32       -28       -19        -9        -2        -1  ........       -146       -177
 employees) tax credit for new
 retirement plan expenses.
                                                                       -------------------------------------------------------------------------------------------------------------------------
      Total of Provisions for Expanding  .............................    -1,261    -2,923    -3,355    -3,753    -2,381    -1,021    -1,000      -971      -931      -878    -13,649    -18,444
       Coverage.
                                                                       =========================================================================================================================
 Provisions for Enhancing Fairness for
                 Women

1. Additional catch-up contributions     yba 12/31/00.................        -8       -23       -39       -57       -24        -7        -7        -6        -6        -5       -151       -181
 for individuals age 50 and above--
 increase maximum contribution limits
 for pension plans by 10% annually
 beginning in 2001, not to exceed 50%.
2. Equitable treatment for               yba 12/31/00.................       -51       -78       -84       -91       -40       -17       -16       -16       -15       -14       -344       -421
 contributions of employees to defined
 contribution plans \2\.
3. Faster vesting of certain employer    pyba 12/31/00................                                                  Negligible Revenue Effect
 matching contributions.
4. Simplify and update the minimum       yba 12/31/00.................      -118      -212      -239      -268      -107       -39       -36       -34       -32       -30       -944     -1,115
 distribution rules--modify post-death
 distribution rules, reduce the excise
 tax on failures to make minimum
 distributions to 10%, and direct the
 Treasury to simplify and finalize
 regulations relating to the minimum
 distribution rules.
5. Clarification of tax treatment of     tdapma 12/31/00..............                                                  Negligible Revenue Effect
 division of section 457 plan benefits
 upon divorce.
6. Modification of safe harbor relief    yba 12/31/00.................                                                  Negligible Revenue Effect
 for hardship withdrawals from 401(k)
 plans; modify definition of hardship
 for rollover purposes.
7. Eliminate the excise tax on           tyba 12/31/00................     (\1\)     (\1\)        -1        -3        -4        -5        -5        -5        -5        -5         -8        -35
 employers who make nondeductible
 contributions to SIMPLE plans on
 behalf of domestic and similar workers.
                                                                       -------------------------------------------------------------------------------------------------------------------------
      Total of Provisions for Enhancing  .............................      -177      -313      -363      -419      -175       -68       -64       -61       -58       -54     -1,447     -1,752
       Fairness for Women.
                                                                       =========================================================================================================================
 Provisions for Increasing Portability
            for Participants

1. Rollovers allowed among governmental  dma 12/31/01.................  ........        27        -5        -5       -35        -2        -2        -1        -1        -1        -18        -25
 section 457 plans, section 403(b)
 plans, and qualified plans.
2. Rollovers of IRAs to workplace        dma 12/31/01.................                                                  Negligible Revenue Effect
 retirement plans.
3. Rollovers of after-tax retirement     dma 12/31/01.................                                                  Negligible Revenue Effect
 plan contributions.
4. Waiver of 60-day rule...............  dma 12/31/01.................                                                  Negligible Revenue Effect
5. Treatment of forms of qualified plan  yba 12/31/00.................                                                  Negligible Revenue Effect
 distributions.
6. Rationalization of restrictions on    da 12/31/00..................                                                  Negligible Revenue Effect
 distributions.
7. Purchase of service credit in         ta 12/31/00..................                                                  Negligible Revenue Effect
 governmental defined benefit plans.
8. Employers may disregard rollovers     da 12/31/00..................                                                  Negligible Revenue Effect
 for cash-out amounts.
9. Minimum distribution and inclusion    da 12/31/00..................                                               Considered in Other Provisions
 requirements for section 457 plans.
                                                                       -------------------------------------------------------------------------------------------------------------------------
      Total of Provisions for            .............................  ........        27        -5        -5       -35        -2        -2        -1        -1        -1        -18        -25
       Increasing Portability for
       Participants.
                                                                       =========================================================================================================================
  Provisions for Strengthening Pension
        Security and Enforcement

1. Phase in repeal of 155% of current    pyba 12/31/00................  ........       -14       -20       -36        -9  ........  ........  ........  ........  ........        -79        -79
 liability funding limit; extend
 maximum deduction rule.
2. Excise tax relief for sound pension   yba 12/31/00.................        -2        -3        -3        -3        -1  ........  ........  ........  ........  ........        -12        -12
 funding.
3. Notice of significant reduction in    pateo/a DOE..................        -1        -4        -7        -9        -2  ........  ........  ........  ........  ........        -23        -23
 plan benefit accruals and wear-away
 prevention.
4. Modification of section 415           yba 12/31/00.................        -1        -1        -1        -1     (\1\)  ........  ........  ........  ........  ........         -4         -4
 aggregation rules for multiemployer
 plans.
5. Repeal 100% of compensation limit     yba 12/31/00.................        -2        -4        -4        -4        -2  ........  ........  ........  ........  ........        -16        -16
 for multiemployer plans.
6. Investment of employee contributions  aiii TRA'97..................                                                  Negligible Revenue Effect
 in 401(k) plans.
7. Periodic pension benefit statements.  pyba 12/31/00................                                                      No Revenue Effect
8. Prohibited allocations of stock in    (\15\).......................         1         4         5         6         2  ........  ........  ........  ........  ........         18         18
 an ESOP of an S corporation.
9. Amendments to the SAVER Act.........  DOE..........................                                                      No Revenue Effect
                                                                       -------------------------------------------------------------------------------------------------------------------------
      Total of Provisions for            .............................        -5       -22       -30       -47       -12     (\6\)     (\6\)     (\6\)     (\6\)     (\6\)       -116       -116
       Strengthening Pension Security
       and Enforcement.
                                                                       =========================================================================================================================
   Provisions for Reducing Regulatory
                Burdens

1. Modification of timing of plan        pyba 12/31/00................                                                  Negligible Revenue Effect
 valuations.
2. ESOP dividends may be reinvested      tyba 12/31/00................       -19       -44       -56       -61       -31  ........  ........  ........  ........  ........       -211       -211
 without loss of dividend deduction.
3. Repeal transition rule relating to    pyba 12/31/00................        -2        -3        -3        -3        -1        -1     (\1\)     (\1\)     (\1\)     (\1\)        -12        -14
 certain highly compensated employees.
4. Employees of tax-exempt entities \7\  DOE..........................                                                  Negligible Revenue Effect
5. Treatment of employer-provided        tyba 12/31/00................                                                  Negligible Revenue Effect
 retirement advice.
6. Pension plan reporting                DOE..........................                                                  Negligible Revenue Effect
 simplification.
7. Improvement to Employee Plans         DOE..........................                                                  Negligible Revenue Effect
 Compliance Resolution System \7\.
8. Repeal of the multiple use test.....  yba 12/31/00.................                                                Considered in Other Provisions
9. Flexibility in nondiscrimination,     DOE..........................                                                  Negligible Revenue Effect
 coverage, and line of business rules
 \7\.
10. Extension to all governmental plans  pyba 12/31/00................                                                  Negligible Revenue Effect
 of moratorium on application of
 certain nondiscrimination rules
 applicable to State and local
 government plans.
11. Notice and consent period regarding  yba 12/31/00.................                                                      No Revenue Effect
 distributions.
12. Annual report dissemination........  yba 12/31/00.................                                                      No Revenue Effect
                                                                       -----------
      Total of Provisions for Reducing   .............................       -21       -47       -59       -64       -32        -1   ((-\1\)    (-\1\)    (-\1\)    (-\1\)       -223       -225
       Regulatory Burdens.
                                                                       ===========
Provisions Relating to Plan Amendments.  DOE..........................                                                      No Revenue Effect
Congressional Budget Act Sunset of the   DOE..........................                                           Considered in Each Individual Provisions
 ``Retirement Security and Savings Act
 of 2000'' for Years Beginning After 12/
 31/04.
                                                                       -------------------------------------------------------------------------------------------------------------------------
      Net Total........................  .............................    -1,917    -4,428    -6,292    -8,105    -6,254    -3,821    -3,592    -3,177    -2,725    -2,695    -27,026    -43,031
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Loss of less than $500,000.
\2\ Provision includes interaction with other provisions in Provisions for Expanding Coverage.
\3\ Provision includes interaction with the Individual Retirement Arrangement provisions.
\4\ Effective for taxable years beginning after 12/31/00, with respect to plans established after such date.
\5\ 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.
\6\ Negligible revenue effect.
\7\ Directs the Secretary of the Treasury to modify rules through regulations.

 Legend for ``Effective'' column: aiii TRA'97 = as if included in the Taxpayer Relief Act of 1997; da = distributions after; dma = distributions made after; DOE = date of enactment; pa =
  periods after; pateo/a = plan amendments taking effect on or after; pyba = plan years beginning after; ta = transfers 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.

                B. Budget Authority and Tax Expenditures

Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that the provisions of the bill as reported 
involve no new or increased budget authority.

Tax expenditures

    In compliance with section 308(a)(2) of the Budget Act, the 
Committee states that the revenue-reducing income tax 
provisions generally involve increased tax expenditures and the 
revenue-raising provision (prohibited allocations of stock in 
an ESOP of an S corporation) involves decreased tax 
expenditures. (See revenue table in Part III.A., above.)

          C. Consultation With the Congressional Budget Office

    In accordance with section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office has not 
submitted a statement on this bill.

                       IV. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of rule XXVI of the 
Standing Rules of the Senate, the following statements are made 
concerning the roll call votes in the Committee's consideration 
of the bill.

Motion to report the bill

    The bill was ordered favorably reported by a roll call vote 
of 17 yeas and 0 nays (19 yeas and 0 nays if proxy votes were 
included in the tally of votes for favorably reporting a bill 
out of Committee) on September 7, 2000. The vote, with a quorum 
present, was as follows:
    Yeas.--Senators Roth, Grassley, Hatch, Murkowski (proxy), 
Nickles, Gramm, Lott (proxy), Jeffords, Mack, Thompson, 
Moynihan, Baucus, Rockefeller, Breaux, Conrad, Graham, Bryan, 
Kerrey, and Robb.
    Nays.--No Senators voted in the negative.

                 V. REGULATORY IMPACT AND OTHER MATTERS

                          A. Regulatory Impact

Impact on individuals and business

    Pursuant to paragraph 11(b) of rule XXVI of the Standing 
Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact that might be 
incurred in carrying out the provisions of the bill as 
reported.
    The bill expands retirement savings tax relief relating to 
individual retirement arrangements, and includes various 
provisions expanding pension coverage, enhancing pension 
fairness for women, increasing pension portability, 
strengthening pension security and enforcement, encouraging 
retirement education, and reducing pension regulatory burdens. 
These provisions generally will reduce the tax burdens on 
individuals, small businesses, and others.

Impact on personal privacy and paperwork

    The bill should not have any adverse impact on personal 
privacy.

                     B. Unfunded Mandates Statement

    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 III.A., above): prohibited 
allocation of stock in ESOP of an S corporation.
    The costs required to comply with the Federal private 
sector mandate generally are no greater than the estimated 
budget effects 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.

                       C. 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 TO EXISTING LAW MADE BY THE BILL, AS REPORTED

    In the opinion of the Committee, it is necessary in order 
to expedite the business of the Senate, to dispense with the 
requirements of paragraph 12 of rule XXVI of the Standing Rules 
of the Senate (relating to the showing of changes in existing 
law made by the bill as reported by the Committee).

                                  

```