49–006 

109TH CONGRESS REPT. 109–232 " ! HOUSE OF REPRESENTATIVES 1st Session Part 2 

PENSION PROTECTION ACT OF 2005 

DECEMBER 6, 2005.—Committed to the Committee of the Whole House on the State 

of the Union and ordered to be printed 

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

submitted the following 

R E P O R T 

together with 

DISSENTING VIEWS 

[To accompany H.R. 2830] 

[Including cost estimate of the Congressional Budget Office] 

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

bill (H.R. 2830) to amend the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 to reform 

the pension funding rules, and for other purposes, having considered the same, report favorably thereon with an amendment and 

recommend that the bill as amended do pass. 

The amendment is as follows: 

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE AND TABLE OF CONTENTS. 

(a) SHORT TITLE.—This Act may be cited as the ‘‘Pension Protection Act of 2005’’. 

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

Sec. 1. Short title and table of contents. 

TITLE I—REFORM OF FUNDING RULES FOR SINGLE-EMPLOYER DEFINED BENEFIT PENSION 

PLANS 

Subtitle A—Amendments to Employee Retirement Income Security Act of 1974 

Sec. 101. Minimum funding standards. 

Sec. 102. Funding rules for single-employer defined benefit pension plans. 

Sec. 103. Benefit limitations under single-employer plans. 

Sec. 104. Technical and conforming amendments. 

Subtitle B—Amendments to Internal Revenue Code of 1986 

Sec. 111. Minimum funding standards. 

Sec. 112. Funding rules for single-employer defined benefit pension plans. 

Sec. 113. Benefit limitations under single-employer plans. 

Sec. 114. Technical and conforming amendments. 

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Subtitle C—Other provisions 

Sec. 121. Modification of transition rule to pension funding requirements. 

Sec. 122. Treatment of nonqualified deferred compensation plans when employer defined benefit plan in at-risk 

status. 

TITLE II—FUNDING RULES FOR MULTIEMPLOYER DEFINED BENEFIT PLANS 

Subtitle A—Amendments to Employee Retirement Income Security Act of 1974 

Sec. 201. Funding rules for multiemployer defined benefit plans. 

Sec. 202. Additional funding rules for multiemployer plans in endangered or critical status. 

Sec. 203. Measures to forestall insolvency of multiemployer plans. 

Sec. 204. Withdrawal liability reforms. 

Sec. 205. Removal of restrictions with respect to procedures applicable to disputes involving withdrawal liability. 

Subtitle B—Amendments to Internal Revenue Code of 1986 

Sec. 211. Funding rules for multiemployer defined benefit plans. 

Sec. 212. Additional funding rules for multiemployer plans in endangered or critical status. 

Sec. 213. Measures to forestall insolvency of multiemployer plans. 

TITLE III—OTHER PROVISIONS 

Sec. 301. Interest rate for 2006 funding requirements. 

Sec. 302. Interest rate assumption for determination of lump sum distributions. 

Sec. 303. Interest rate assumption for applying benefit limitations to lump sum distributions. 

Sec. 304. Distributions during working retirement. 

Sec. 305. Other amendments relating to prohibited transactions. 

Sec. 306. Correction period for certain transactions involving securities and commodities. 

Sec. 307. Government Accountability Office pension funding report. 

TITLE IV—IMPROVEMENTS IN PBGC GUARANTEE PROVISIONS 

Sec. 401. Increases in PBGC premiums. 

TITLE V—DISCLOSURE 

Sec. 501. Defined benefit plan funding notices. 

Sec. 502. Additional disclosure requirements. 

Sec. 503. Section 4010 filings with the PBGC. 

TITLE VI—INVESTMENT ADVICE 

Sec. 601. Amendments to Employee Retirement Income Security Act of 1974 providing prohibited transaction 

exemption for provision of investment advice. 

Sec. 602. Amendments to Internal Revenue Code of 1986 providing prohibited transaction exemption for provision of investment advice. 

TITLE VII—BENEFIT ACCRUAL STANDARDS 

Sec. 701. Improvements in benefit accrual standards. 

TITLE VIII—DEDUCTION LIMITATIONS 

Sec. 801. Increase in deduction limits. 

Sec. 802. Updating deduction rules for combination of plans. 

TITLE IX—ENHANCED RETIREMENTS SAVINGS AND DEFINED CONTRIBUTION PLANS 

Sec. 901. Pensions and individual retirement arrangement provisions of Economic Growth and Tax Relief Reconciliation Act of 2001 made permanent. 

Sec. 902. Saver’s credit. 

Sec. 903. Increasing participation through automatic contribution arrangements. 

Sec. 904. Penalty-free withdrawals from retirement plans for individuals called to active duty for at least 179 

days. 

Sec. 905. Waiver of 10 percent early withdrawal penalty tax on certain distributions of pension plans for public 

safety employees. 

Sec. 906. Combat zone compensation taken into account for purposes of determining limitation and deductibility of contributions to individual retirement plans. 

Sec. 907. Direct payment of tax refunds to individual retirement plans. 

Sec. 908. IRA eligibility for the disabled. 

Sec. 909. Allow rollovers by nonspouse beneficiaries of certain retirement plan distributions. 

TITLE X—PROVISIONS TO ENHANCE HEALTH CARE AFFORDABILITY 

Sec. 1001. Treatment of annuity and life insurance contracts with a long-term care insurance feature. 

Sec. 1002. Disposition of unused health benefits in cafeteria plans and flexible spending arrangements. 

Sec. 1003. Distributions from governmental retirement plans for health and long-term care insurance for public 

safety officers. 

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TITLE I—REFORM OF FUNDING RULES FOR 

SINGLE-EMPLOYER DEFINED BENEFIT PENSION PLANS 

Subtitle A—Amendments to Employee Retirement 

Income Security Act of 1974 

SEC. 101. MINIMUM FUNDING STANDARDS. 

[See section 101 of the bill as reported by the Committee on Education and the 

Workforce.] 

SEC. 102. FUNDING RULES FOR SINGLE-EMPLOYER DEFINED BENEFIT PENSION PLANS. 

[See section 102 of the bill as reported by the Committee on Education and the 

Workforce.] 

SEC. 103. BENEFIT LIMITATIONS UNDER SINGLE-EMPLOYER PLANS. 

[See section 103 of the bill as reported by the Committee on Education and the 

Workforce.] 

SEC. 104. TECHNICAL AND CONFORMING AMENDMENTS. 

[See section 104 of the bill as reported by the Committee on Education and the 

Workforce.] 

Subtitle B—Amendments to Internal Revenue 

Code of 1986 

SEC. 111. MINIMUM FUNDING STANDARDS. 

(a) NEW MINIMUM FUNDING STANDARDS.—Section 412 of the Internal Revenue 

Code of 1986 (relating to minimum funding standards) is amended to read as follows: 

‘‘SEC. 412. MINIMUM FUNDING STANDARDS. 

‘‘(a) REQUIREMENT TO MEET MINIMUM FUNDING STANDARD.—

‘‘(1) IN GENERAL.—A plan to which this section applies shall satisfy the minimum funding standard applicable to the plan for any plan year. 

‘‘(2) MINIMUM FUNDING STANDARD.—For purposes of paragraph (1), a plan 

shall be treated as satisfying the minimum funding standard for a plan year 

if—

‘‘(A) in the case of a defined benefit plan which is not a multiemployer 

plan, the employer makes contributions to or under the plan for the plan 

year which, in the aggregate, are not less than the minimum required contribution determined under section 430 for the plan for the plan year, 

‘‘(B) in the case of a money purchase plan which is not a multiemployer 

plan, the employer makes contributions to or under the plan for the plan 

year which are required under the terms of the plan, and 

‘‘(C) in the case of a multiemployer plan, the employers make contributions to or under the plan for any plan year which, in the aggregate, are 

sufficient to ensure that the plan does not have an accumulated funding deficiency under section 431 as of the end of the plan year. 

‘‘(b) LIABILITY FOR CONTRIBUTIONS.—

‘‘(1) IN GENERAL.—Except as provided in paragraph (2), the amount of any 

contribution required by this section (including any required installments under 

paragraphs (3) and (4) of section 430(j)) shall be paid by the employer responsible for making contributions to or under the plan. 

‘‘(2) JOINT AND SEVERAL LIABILITY WHERE EMPLOYER MEMBER OF CONTROLLED

GROUP.—In the case of a defined benefit plan which is not a multiemployer 

plan, if the employer referred to in paragraph (1) is a member of a controlled 

group, each member of such group shall be jointly and severally liable for payment of such contributions. 

‘‘(c) VARIANCE FROM MINIMUM FUNDING STANDARDS.—

‘‘(1) WAIVER IN CASE OF BUSINESS HARDSHIP.—

‘‘(A) IN GENERAL.—If—

‘‘(i) an employer is (or in the case of a multiemployer plan, 10 percent 

or more of the number of employers contributing to or under the plan 

is) unable to satisfy the minimum funding standard for a plan year 

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without temporary substantial business hardship (substantial business 

hardship in the case of a multiemployer plan), and 

‘‘(ii) application of the standard would be adverse to the interests of 

plan participants in the aggregate, 

the Secretary may, subject to subparagraph (C), waive the requirements of 

subsection (a) for such year with respect to all or any portion of the minimum funding standard. The Secretary shall not waive the minimum funding standard with respect to a plan for more than 3 of any 15 (5 of any 

15 in the case of a multiemployer plan) consecutive plan years. 

‘‘(B) EFFECTS OF WAIVER.—If a waiver is granted under subparagraph (A) 

for any plan year—

‘‘(i) in the case of a defined benefit plan which is not a multiemployer 

plan, the minimum required contribution under section 430 for the plan 

year shall be reduced by the amount of the waived funding deficiency 

and such amount shall be amortized as required under section 430(e), 

and 

‘‘(ii) in the case of a multiemployer plan, the funding standard account shall be credited under section 431(b)(3)(C) with the amount of 

the waived funding deficiency and such amount shall be amortized as 

required under section 431(b)(2)(C). 

‘‘(C) WAIVER OF AMORTIZED PORTION NOT ALLOWED.—The Secretary may 

not waive under subparagraph (A) any portion of the minimum funding 

standard under subsection (a) for a plan year which is attributable to any 

waived funding deficiency for any preceding plan year. 

‘‘(2) DETERMINATION OF BUSINESS HARDSHIP.—For purposes of this subsection, 

the factors taken into account in determining temporary substantial business 

hardship (substantial business hardship in the case of a multiemployer plan) 

shall include (but shall not be limited to) whether or not—

‘‘(A) the employer is operating at an economic loss, 

‘‘(B) there is substantial unemployment or underemployment in the trade 

or business and in the industry concerned, 

‘‘(C) the sales and profits of the industry concerned are depressed or declining, and 

‘‘(D) it is reasonable to expect that the plan will be continued only if the 

waiver is granted. 

‘‘(3) WAIVED FUNDING DEFICIENCY.—For purposes of this section and part III 

of this subchapter, the term ‘waived funding deficiency’ means the portion of the 

minimum funding standard under subsection (a) (determined without regard to 

the waiver) for a plan year waived by the Secretary and not satisfied by employer contributions. 

‘‘(4) SECURITY FOR WAIVERS FOR SINGLE-EMPLOYER PLANS, CONSULTATIONS.—

‘‘(A) SECURITY MAY BE REQUIRED.—

‘‘(i) IN GENERAL.—Except as provided in subparagraph (C), the Secretary may require an employer maintaining a defined benefit plan 

which is not a multiemployer plan to provide security to such plan as 

a condition for granting or modifying a waiver under paragraph (1). 

‘‘(ii) SPECIAL RULES.—Any security provided under clause (i) may be 

perfected and enforced only by the Pension Benefit Guaranty Corporation, or at the direction of the Corporation, by a contributing sponsor 

(within the meaning of section 4001(a)(13) of the Employee Retirement 

Income Security Act of 1974), or a member of such sponsor’s controlled 

group (within the meaning of section 4001(a)(14) of such Act). 

‘‘(B) CONSULTATION WITH THE PENSION BENEFIT GUARANTY CORPORATION.—Except as provided in subparagraph (C), the Secretary shall, before 

granting or modifying a waiver under this subsection with respect to a plan 

described in subparagraph (A)(i)—

‘‘(i) provide the Pension Benefit Guaranty Corporation with—

‘‘(I) notice of the completed application for any waiver or modification, and 

‘‘(II) an opportunity to comment on such application within 30 

days after receipt of such notice, and 

‘‘(ii) consider—

‘‘(I) any comments of the Corporation under clause (i)(II), and 

‘‘(II) any views of any employee organization (within the meaning 

of section 3(4) of the Employee Retirement Income Security Act of 

1974) representing participants in the plan which are submitted in 

writing to the Secretary in connection with such application. 

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Information provided to the Corporation under this subparagraph shall be 

considered tax return information and subject to the safeguarding and reporting requirements of section 6103(p). 

‘‘(C) EXCEPTION FOR CERTAIN WAIVERS.—

‘‘(i) IN GENERAL.—The preceding provisions of this paragraph shall 

not apply to any plan with respect to which the sum of—

‘‘(I) the aggregate unpaid minimum required contribution (within 

the meaning of section 4971(c)(4)) for the plan year and all preceding plan years, and 

‘‘(II) the present value of all waiver amortization installments determined for the plan year and succeeding plan years under section 

430(e)(2), 

is less than $1,000,000. 

‘‘(ii) TREATMENT OF WAIVERS FOR WHICH APPLICATIONS ARE PENDING.—The amount described in clause (i)(I) shall include any increase 

in such amount which would result if all applications for waivers of the 

minimum funding standard under this subsection which are pending 

with respect to such plan were denied. 

‘‘(5) SPECIAL RULES FOR SINGLE-EMPLOYER PLANS.—

‘‘(A) APPLICATION MUST BE SUBMITTED BEFORE DATE 21⁄2 MONTHS AFTER

CLOSE OF YEAR.—In the case of a defined benefit plan which is not a multiemployer plan, no waiver may be granted under this subsection with respect to any plan for any plan year unless an application therefor is submitted to the Secretary not later than the 15th day of the 3rd month beginning after the close of such plan year. 

‘‘(B) SPECIAL RULE IF EMPLOYER IS MEMBER OF CONTROLLED GROUP.—In 

the case of a defined benefit plan which is not a multiemployer plan, if an 

employer is a member of a controlled group, the temporary substantial business hardship requirements of paragraph (1) shall be treated as met only 

if such requirements are met— 

‘‘(i) with respect to such employer, and 

‘‘(ii) with respect to the controlled group of which such employer is 

a member (determined by treating all members of such group as a single employer). 

The Secretary may provide that an analysis of a trade or business or industry of a member need not be conducted if the Secretary determines such 

analysis is not necessary because the taking into account of such member 

would not significantly affect the determination under this paragraph. 

‘‘(6) ADVANCE NOTICE.— 

‘‘(A) IN GENERAL.—The Secretary shall, before granting a waiver under 

this subsection, require each applicant to provide evidence satisfactory to 

the Secretary that the applicant has provided notice of the filing of the application for such waiver to to each affected party (as defined in section 

4001(a)(21) of the Employee Retirement Income Security Act of 1974). Such 

notice shall include a description of the extent to which the plan is funded 

for benefits which are guaranteed under title IV and for benefit liabilities. 

‘‘(B) CONSIDERATION OF RELEVANT INFORMATION.—The Secretary shall 

consider any relevant information provided by a person to whom notice was 

given under subparagraph (A). 

‘‘(7) RESTRICTION ON PLAN AMENDMENTS.— 

‘‘(A) IN GENERAL.—No amendment of a plan which increases the liabilities 

of the plan by reason of any increase in benefits, any change in the accrual 

of benefits, or any change in the rate at which benefits become nonforfeitable under the plan shall be adopted if a waiver under this subsection or 

an extension of time under section 431(d) is in effect with respect to the 

plan, or if a plan amendment described in subsection (d)(2) has been made 

at any time in the preceding 12 months (24 months in the case of a multiemployer plan). If a plan is amended in violation of the preceding sentence, 

any such waiver, or extension of time, shall not apply to any plan year ending on or after the date on which such amendment is adopted. 

‘‘(B) EXCEPTION.—Paragraph (1) shall not apply to any plan amendment 

which— 

‘‘(i) the Secretary determines to be reasonable and which provides for 

only de minimis increases in the liabilities of the plan, 

‘‘(ii) only repeals an amendment described in subsection (d)(2), or 

‘‘(iii) is required as a condition of qualification under part I of subchapter D, of chapter 1. 

‘‘(d) MISCELLANEOUS RULES.— 

6 

‘‘(1) CHANGE IN METHOD OR YEAR.—If the funding method, the valuation date, 

or a plan year for a plan is changed, the change shall take effect only if approved by the Secretary. ‘‘(2) CERTAIN RETROACTIVE PLAN AMENDMENTS.—For purposes of this section, 

any amendment applying to a plan year which— ‘‘(A) is adopted after the close of such plan year but no later than 21⁄2

months after the close of the plan year (or, in the case of a multiemployer 

plan, no later than 2 years after the close of such plan year), ‘‘(B) does not reduce the accrued benefit of any participant determined as 

of the beginning of the first plan year to which the amendment applies, and ‘‘(C) does not reduce the accrued benefit of any participant determined as 

of the time of adoption except to the extent required by the circumstances, 

shall, at the election of the plan administrator, be deemed to have been made 

on the first day of such plan year. No amendment described in this paragraph 

which reduces the accrued benefits of any participant shall take effect unless 

the plan administrator files a notice with the Secretary notifying him of such 

amendment and the Secretary has approved such amendment, or within 90 

days after the date on which such notice was filed, failed to disapprove such 

amendment. No amendment described in this subsection shall be approved by 

the Secretary unless the Secretary determines that such amendment is necessary because of a substantial business hardship (as determined under subsection (c)(2)) and that a waiver under subsection (c) (or, in the case of a multiemployer plan, any extension of the amortization period under section 431(d)) 

is unavailable or inadequate. 

‘‘(3) CONTROLLED GROUP.—For purposes of this section, the term ‘controlled 

group’ means any group treated as a single employer under subsection (b), (c), 

(m), or (o) of section 414. 

‘‘(e) PLANS TO WHICH SECTION APPLIES.—

‘‘(1) IN GENERAL.—Except as provided in paragraph (2), this section applies 

to a plan if, for any plan year beginning after December 31, 2006—

‘‘(A) such plan included a trust which qualified (or was determined by the 

Secretary to have qualified) under section 401(a), or 

‘‘(B) such plan satisfied (or was determined by the Secretary to have satisfied) the requirements of section 403(a). 

‘‘(2) EXCEPTIONS.—This section shall not apply to—

‘‘(A) any profit-sharing or stock bonus plan, 

‘‘(B) any insurance contract plan described in paragraph (3), 

‘‘(C) any governmental plan (within the meaning of section 414(d)), 

‘‘(D) any church plan (within the meaning of section 414(e)) with respect 

to which the election provided by section 410(d) has not been made, 

‘‘(E) any plan which has not, at any time after September 2, 1974, provided for employer contributions, or 

‘‘(F) any plan established and maintained by a society, order, or association described in section 501(c)(8) or (9), if no part of the contributions to 

or under such plan are made by employers of participants in such plan. 

No plan described in subparagraph (C), (D), or (F) shall be treated as a qualified 

plan for purposes of section 401(a) unless such plan meets the requirements of 

section 401(a)(7) as in effect on September 1, 1974. 

‘‘(3) CERTAIN INSURANCE CONTRACT PLANS.—A plan is described in this paragraph if—

‘‘(A) the plan is funded exclusively by the purchase of individual insurance contracts, 

‘‘(B) such contracts provide for level annual premium payments to be paid 

extending not later than the retirement age for each individual participating in the plan, and commencing with the date the individual became 

a participant in the plan (or, in the case of an increase in benefits, commencing at the time such increase becomes effective), 

‘‘(C) benefits provided by the plan are equal to the benefits provided 

under each contract at normal retirement age under the plan and are guaranteed by an insurance carrier (licensed under the laws of a State to do 

business with the plan) to the extent premiums have been paid, 

‘‘(D) premiums payable for the plan year, and all prior plan years, under 

such contracts have been paid before lapse or there is reinstatement of the 

policy, 

‘‘(E) no rights under such contracts have been subject to a security interest at any time during the plan year, and 

‘‘(F) no policy loans are outstanding at any time during the plan year. 

A plan funded exclusively by the purchase of group insurance contracts which 

is determined under regulations prescribed by the Secretary to have the same 

7 

characteristics as contracts described in the preceding sentence shall be treated 

as a plan described in this paragraph.’’. 

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

years beginning after December 31, 2006. 

SEC. 112. FUNDING RULES FOR SINGLE-EMPLOYER DEFINED BENEFIT PENSION PLANS. 

(a) IN GENERAL.—Subchapter D of chapter 1 of the Internal Revenue Code of 1986 

(relating to deferred compensation, etc.) is amended by adding at the end the following new part: 

‘‘PART III—MINIMUM FUNDING STANDARDS FOR 

SINGLE-EMPLOYER DEFINED BENEFIT PENSION PLANS 

‘‘SEC. 430. MINIMUM FUNDING STANDARDS FOR SINGLE-EMPLOYER DEFINED BENEFIT PENSION PLANS. 

‘‘(a) MINIMUM REQUIRED CONTRIBUTION.—For purposes of this section and section 

412(a)(2)(A), except as provided in subsection (f), the term ‘minimum required contribution’ means, with respect to any plan year of a defined benefit plan which is 

not a multiemployer plan—

‘‘(1) in any case in which the value of plan assets of the plan (as reduced 

under subsection (f)(4)(B)) is less than the funding target of the plan for the 

plan year, the sum of—

‘‘(A) the target normal cost of the plan for the plan year, 

‘‘(B) the shortfall amortization charge (if any) for the plan for the plan 

year determined under subsection (c), and 

‘‘(C) the waiver amortization charge (if any) for the plan for the plan year 

as determined under subsection (e); 

‘‘(2) in any case in which the value of plan assets of the plan (as reduced 

under subsection (f)(4)(B)) exceeds the funding target of the plan for the plan 

year, the target normal cost of the plan for the plan year reduced by such excess; or 

‘‘(3) in any other case, the target normal cost of the plan for the plan year. 

‘‘(b) TARGET NORMAL COST.—For purposes of this section, except as provided in 

subsection (i)(2) with respect to plans in at-risk status, the term ‘target normal cost’

means, for any plan year, the present value of all benefits which are expected to 

accrue or to be earned under the plan during the plan year. For purposes of this 

subsection, if any benefit attributable to services performed in a preceding plan year 

is increased by reason of any increase in compensation during the current plan year, 

the increase in such benefit shall be treated as having accrued during the current 

plan year. 

‘‘(c) SHORTFALL AMORTIZATION CHARGE.—

‘‘(1) IN GENERAL.—For purposes of this section, the shortfall amortization 

charge for a plan for any plan year is the aggregate total of the shortfall amortization installments for such plan year with respect to the shortfall amortization 

bases for such plan year and each of the 6 preceding plan years. 

‘‘(2) SHORTFALL AMORTIZATION INSTALLMENT.—The plan sponsor shall determine, with respect to the shortfall amortization base of the plan for any plan 

year, the amounts necessary to amortize such shortfall amortization base, in 

level annual installments over a period of 7 plan years beginning with such 

plan year. For purposes of paragraph (1), the annual installment of such amortization for each plan year in such 7-plan-year period is the shortfall amortization 

installment for such plan year with respect to such shortfall amortization base. 

In determining any shortfall amortization installment under this paragraph, the 

plan sponsor shall use the segment rates determined under subparagraph (C) 

of subsection (h)(2), applied under rules similar to the rules of subparagraph (B) 

of subsection (h)(2). 

‘‘(3) SHORTFALL AMORTIZATION BASE.—For purposes of this section, the shortfall amortization base of a plan for a plan year is the excess (if any) of—

‘‘(A) the funding shortfall of such plan for such plan year, over 

‘‘(B) the sum of—

‘‘(i) the present value (determined using the segment rates determined under subparagraph (C) of subsection (h)(2), applied under rules 

similar to the rules of subparagraph (B) of subsection (h)(2)) of the aggregate total of the shortfall amortization installments, for such plan 

year and the 5 succeeding plan years, which have been determined 

with respect to the shortfall amortization bases of the plan for each of 

the 6 plan years preceding such plan year, and 

8 

‘‘(ii) the present value (as so determined) of the aggregate total of the 

waiver amortization installments for such plan year and the 5 succeeding plan years, which have been determined with respect to the 

waiver amortization bases of the plan for each of the 5 plan years preceding such plan year. 

In any case in which the value of plan assets of the plan (as reduced under 

subsection (f)(4)(A)) is equal to or greater than the funding target of the 

plan for the plan year, the shortfall amortization base of the plan for such 

plan year shall be zero. ‘‘(4) FUNDING SHORTFALL.— ‘‘(A) IN GENERAL.—For purposes of this section, except as provided in subparagraph (B), the funding shortfall of a plan for any plan year is the excess (if any) of— ‘‘(i) the funding target of the plan for the plan year, over 

‘‘(ii) the value of plan assets of the plan (as reduced under subsection 

(f)(4)(B)) for the plan year which are held by the plan on the valuation 

date. ‘‘(B) TRANSITION RULE.— ‘‘(i) IN GENERAL.—For purposes of paragraph (3), in the case of a nondeficit reduction plan, subparagraph (A) shall be applied to plan years 

beginning after 2006 and before 2011 by substituting for the amount 

described in subparagraph (A)(i) the applicable percentage of the funding target of the plan for the plan year determined under the following 

table: 

‘‘In the case of a plan year beginning in calendar year: 

The applicable 

percentage is: 

2007 ........................................................................................................................................................... 92 percent

2008 ........................................................................................................................................................... 94 percent

2009 ........................................................................................................................................................... 96 percent

2010 ........................................................................................................................................................... 98 percent. 

‘‘(ii) NON-DEFICIT REDUCTION PLAN.—For purposes of clause (i), the 

term ‘non-deficit reduction plan’ means any plan— ‘‘(I) to which section 412 (as in effect on the day before the date 

of the enactment of the Pension Protection Act of 2005) applied for 

the plan year beginning in 2006, and ‘‘(II) to which subsection (l) of such section (as so in effect) did 

not apply for such plan year. ‘‘(5) EARLY DEEMED AMORTIZATION UPON ATTAINMENT OF FUNDING TARGET.— In any case in which the funding shortfall of a plan for a plan year is zero, for 

purposes of determining the shortfall amortization charge for such plan year 

and succeeding plan years, the shortfall amortization bases for all preceding 

plan years (and all shortfall amortization installments determined with respect 

to such bases) shall be reduced to zero. ‘‘(d) RULES RELATING TO FUNDING TARGET.—For purposes of this section— ‘‘(1) FUNDING TARGET.—Except as provided in subsection (i)(1) with respect to 

plans in at-risk status, the funding target of a plan for a plan year is the 

present value of all liabilities to participants and their beneficiaries under the 

plan for the plan year. ‘‘(2) FUNDING TARGET ATTAINMENT PERCENTAGE.—The ‘funding target attainment percentage’ of a plan for a plan year is the ratio (expressed as a percentage) which— ‘‘(A) the value of plan assets for the plan year (as reduced under subsection (f)(4)(B)), bears to ‘‘(B) the funding target of the plan for the plan year (determined without 

regard to subsection (i)(1)). 

‘‘(e) WAIVER AMORTIZATION CHARGE.—

‘‘(1) DETERMINATION OF WAIVER AMORTIZATION CHARGE.—The waiver amortization charge (if any) for a plan for any plan year is the aggregate total of the 

waiver amortization installments for such plan year with respect to the waiver 

amortization bases for each of the 5 preceding plan years. 

‘‘(2) WAIVER AMORTIZATION INSTALLMENT.—The plan sponsor shall determine, 

with respect to the waiver amortization base of the plan for any plan year, the 

amounts necessary to amortize such waiver amortization base, in level annual 

installments over a period of 5 plan years beginning with the succeeding plan 

year. For purposes of paragraph (1), the annual installment of such amortizaVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00008 Fmt 6659 Sfmt 6621 E:\HR\OC\HR232P2.XXX HR232P2
9 

tion for each plan year in such 5-plan year period is the waiver amortization 

installment for such plan year with respect to such waiver amortization base. 

‘‘(3) INTEREST RATE.—In determining any waiver amortization installment 

under this subsection, the plan sponsor shall use the segment rates determined 

under subparagraph (C) of subsection (h)(2), applied under rules similar to the 

rules of subparagraph (B) of subsection (h)(2). 

‘‘(4) WAIVER AMORTIZATION BASE.—The waiver amortization base of a plan for 

a plan year is the amount of the waived funding deficiency (if any) for such plan 

year under section 412(c). 

‘‘(5) EARLY DEEMED AMORTIZATION UPON ATTAINMENT OF FUNDING TARGET.—

In any case in which the funding shortfall of a plan for a plan year is zero, for 

purposes of determining the waiver amortization charge for such plan year and 

succeeding plan years, the waiver amortization base for all preceding plan years 

shall be reduced to zero. 

‘‘(f) REDUCTION OF MINIMUM REQUIRED CONTRIBUTION BY PRE-FUNDING BALANCE

AND FUNDING STANDARD CARRYOVER BALANCE.—

‘‘(1) ELECTION TO MAINTAIN BALANCES.—

‘‘(A) PRE-FUNDING BALANCE.—The plan sponsor of a defined benefit plan 

which is not a multiemployer plan may elect to maintain a pre-funding balance. 

‘‘(B) FUNDING STANDARD CARRYOVER BALANCE.—

‘‘(i) IN GENERAL.—In the case of a defined benefit plan (other than 

a multiemployer plan) described in clause (ii), the plan sponsor may 

elect to maintain a funding standard carryover balance, until such balance is reduced to zero. 

‘‘(ii) PLANS MAINTAINING FUNDING STANDARD ACCOUNT IN 2006.—A 

plan is described in this clause if the plan—

‘‘(I) was in effect for a plan year beginning in 2006, and 

‘‘(II) had a positive balance in the funding standard account 

under section 412(b) as in effect for such plan year and determined 

as of the end of such plan year. 

‘‘(2) APPLICATION OF BALANCES.—A pre-funding balance and a funding standard carryover balance maintained pursuant to this paragraph—

‘‘(A) shall be available for crediting against the minimum required contribution, pursuant to an election under paragraph (3), 

‘‘(B) shall be applied as a reduction in the amount treated as the value 

of plan assets for purposes of this section, to the extent provided in paragraph (4), and 

‘‘(C) may be reduced at any time, pursuant to an election under paragraph (5). 

‘‘(3) ELECTION TO APPLY BALANCES AGAINST MINIMUM REQUIRED CONTRIBUTION.—

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

the case of any plan year in which the plan sponsor elects to credit against 

the minimum required contribution for the current plan year all or a portion of the pre-funding balance or the funding standard carryover balance 

for the current plan year (not in excess of such minimum required contribution), the minimum required contribution for the plan year shall be reduced 

by the amount so credited by the plan sponsor. For purposes of the preceding sentence, the minimum required contribution shall be determined 

after taking into account any waiver under section 412(c). 

‘‘(B) COORDINATION WITH FUNDING STANDARD CARRYOVER BALANCE.—To 

the extent that any plan has a funding standard carryover balance greater 

than zero, no amount of the pre-funding balance of such plan may be credited under this paragraph in reducing the minimum required contribution. 

‘‘(C) LIMITATION FOR UNDERFUNDED PLANS.—The preceding provisions of 

this paragraph shall not apply for any plan year if the ratio (expressed as 

a percentage) which—

‘‘(i) the value of plan assets for the preceding plan year (as reduced 

under paragraph (4)(C)), bears to 

‘‘(ii) the funding target of the plan for the preceding plan year (determined without regard to subsection (i)(1)), 

is less than 80 percent. 

‘‘(4) EFFECT OF BALANCES ON AMOUNTS TREATED AS VALUE OF PLAN ASSETS.—

In the case of any plan maintaining a pre-funding balance or a funding standard carryover balance pursuant to this subsection, the amount treated as the 

value of plan assets shall be deemed to be such amount, reduced as provided 

in the following subparagraphs: 

10 

‘‘(A) APPLICABILITY OF SHORTFALL AMORTIZATION BASE.—For purposes of 

subsection (c)(3), the value of plan assets is deemed to be such amount, reduced by the amount of the pre-funding balance, but only if an election 

under paragraph (2) applying any portion of the pre-funding balance in reducing the minimum required contribution is in effect for the plan year. ‘‘(B) DETERMINATION OF EXCESS ASSETS, FUNDING SHORTFALL, AND FUND- ING TARGET ATTAINMENT PERCENTAGE.—For purposes of subsections (a), 

(c)(4)(A)(ii), and (d)(2)(A), the value of plan assets is deemed to be such 

amount, reduced by the amount of the pre-funding balance and the funding 

standard carryover balance. ‘‘(C) AVAILABILITY OF BALANCES IN PLAN YEAR FOR CREDITING AGAINST

MINIMUM REQUIRED CONTRIBUTION.—For purposes of paragraph (3)(C)(i) of 

this subsection, the value of plan assets is deemed to be such amount, reduced by the amount of the pre-funding balance. ‘‘(5) ELECTION TO REDUCE BALANCE PRIOR TO DETERMINATIONS OF VALUE OF

PLAN ASSETS AND CREDITING AGAINST MINIMUM REQUIRED CONTRIBUTION.— ‘‘(A) IN GENERAL.—The plan sponsor may elect to reduce by any amount 

the balance of the pre-funding balance and the funding standard carryover 

balance for any plan year (but not below zero). Such reduction shall be effective prior to any determination of the value of plan assets for such plan 

year under this section and application of the balance in reducing the minimum required contribution for such plan for such plan year pursuant to 

an election under paragraph (2). 

‘‘(B) COORDINATION BETWEEN PRE-FUNDING BALANCE AND FUNDING STAND- ARD CARRYOVER BALANCE.—To the extent that any plan has a funding 

standard carryover balance greater than zero, no election may be made 

under subparagraph (A) with respect to the pre-funding balance. 

‘‘(6) PRE-FUNDING BALANCE.—

‘‘(A) IN GENERAL.—A pre-funding balance maintained by a plan shall consist of a beginning balance of zero, increased and decreased to the extent 

provided in subparagraphs (B) and (C), and adjusted further as provided in 

paragraph (8). 

‘‘(B) INCREASES.—As of the valuation date for each plan year beginning 

after 2007, the pre-funding balance of a plan shall be increased by the 

amount elected by the plan sponsor for the plan year. Such amount shall 

not exceed the excess (if any) of—

‘‘(i) the aggregate total of employer contributions to the plan for the 

preceding plan year, over 

‘‘(ii) the minimum required contribution for such preceding plan year 

(increased by interest on any portion of such minimum required contribution remaining unpaid as of the valuation date for the current 

plan year, at the effective interest rate for the plan for the preceding 

plan year, for the period beginning with the first day of such preceding 

plan year and ending on the date that payment of such portion is 

made). 

‘‘(C) DECREASES.—As of the valuation date for each plan year after 2007, 

the pre-funding balance of a plan shall be decreased (but not below zero) 

by the sum of—

‘‘(i) the amount of such balance credited under paragraph (2) (if any) 

in reducing the minimum required contribution of the plan for the preceding plan year, and 

‘‘(ii) any reduction in such balance elected under paragraph (5). 

‘‘(7) FUNDING STANDARD CARRYOVER BALANCE.—

‘‘(A) IN GENERAL.—A funding standard carryover balance maintained by 

a plan shall consist of a beginning balance determined under subparagraph 

(B), decreased to the extent provided in subparagraph (C), and adjusted further as provided in paragraph (8). 

‘‘(B) BEGINNING BALANCE.—The beginning balance of the funding standard carryover balance shall be the positive balance described in paragraph 

(1)(B)(ii)(II). 

‘‘(C) DECREASES.—As of the valuation date for each plan year after 2007, 

the funding standard carryover balance of a plan shall be decreased (but 

not below zero) by the sum of—

‘‘(i) the amount of such balance credited under paragraph (2) (if any) 

in reducing the minimum required contribution of the plan for the preceding plan year, and 

‘‘(ii) any reduction in such balance elected under paragraph (5). 

‘‘(8) ADJUSTMENTS TO BALANCES.—In determining the pre-funding balance or 

the funding standard carryover balance of a plan as of the valuation date (beVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00010 Fmt 6659 Sfmt 6621 E:\HR\OC\HR232P2.XXX HR232P2
11 

fore applying any increase or decrease under paragraph (6) or (7)), the plan 

sponsor shall, in accordance with regulations which shall be prescribed by the 

Secretary, adjust such balance so as to reflect the rate of net gain or loss (determined, notwithstanding subsection (g)(3), on the basis of fair market value) experienced by all plan assets for the period beginning with the valuation date 

for the preceding plan year and ending with the date preceding the valuation 

date for the current plan year, properly taking into account, in accordance with 

such regulations, all contributions, distributions, and other plan payments made 

during such period. ‘‘(9) ELECTIONS.—Elections under this subsection shall be made at such times, 

and in such form and manner, as shall be prescribed in regulations of the Secretary. ‘‘(g) VALUATION OF PLAN ASSETS AND LIABILITIES.— ‘‘(1) TIMING OF DETERMINATIONS.—Except as otherwise provided under this 

subsection, all determinations under this section for a plan year shall be made 

as of the valuation date of the plan for such plan year. ‘‘(2) VALUATION DATE.—For purposes of this section— ‘‘(A) IN GENERAL.—Except as provided in subparagraph (B), the valuation 

date of a plan for any plan year shall be the first day of the plan year. ‘‘(B) EXCEPTION FOR SMALL PLANS.—If, on each day during the preceding 

plan year, a plan had 500 or fewer participants, the plan may designate 

any day during the plan year as its valuation date for such plan year and 

succeeding plan years. For purposes of this subparagraph, all defined benefit plans (other than multiemployer plans) maintained by the same employer (or any member of such employer’s controlled group) shall be treated 

as 1 plan, but only participants with respect to such employer or member 

shall be taken into account. 

‘‘(C) APPLICATION OF CERTAIN RULES IN DETERMINATION OF PLAN SIZE.—

For purposes of this paragraph—

‘‘(i) PLANS NOT IN EXISTENCE IN PRECEDING YEAR.—In the case of the 

first plan year of any plan, subparagraph (B) shall apply to such plan 

by taking into account the number of participants that the plan is reasonably expected to have on days during such first plan year. 

‘‘(ii) PREDECESSORS.—Any reference in subparagraph (B) to an employer shall include a reference to any predecessor of such employer. 

‘‘(3) AUTHORIZATION OF USE OF ACTUARIAL VALUE.—For purposes of this section, the value of plan assets shall be determined on the basis of any reasonable 

actuarial method of valuation which takes into account fair market value and 

which is permitted under regulations prescribed by the Secretary, except that—

‘‘(A) any such method providing for averaging of fair market values may 

not provide for averaging of such values over more than the 3 most recent 

plan years (including the current plan year), and 

‘‘(B) any such method may not result in a determination of the value of 

plan assets which, at any time, is lower than 90 percent or greater than 

110 percent of the fair market value of such assets at such time. 

‘‘(4) ACCOUNTING FOR CONTRIBUTION RECEIPTS.—For purposes of this section—

‘‘(A) CONTRIBUTIONS FOR PRIOR PLAN YEARS TAKEN INTO ACCOUNT.—For 

purposes of determining the value of plan assets for any current plan year, 

in any case in which a contribution properly allocable to amounts owed for 

a preceding plan year is made on or after the valuation date of the plan 

for such current plan year, such contribution shall be taken into account, 

except that any such contribution made during any such current plan year 

beginning after 2007 shall be taken into account only in an amount equal 

to its present value (determined using the effective rate of interest for the 

plan for the preceding plan year) as of the valuation date of the plan for 

such current plan year. 

‘‘(B) CONTRIBUTIONS FOR CURRENT PLAN YEAR DISREGARDED.—For purposes of determining the value of plan assets for any current plan year, contributions which are properly allocable to amounts owed for such plan year 

shall not be taken into account, and, in the case of any such contribution 

made before the valuation date of the plan for such plan year, such value 

of plan assets shall be reduced for interest on such amount determined 

using the effective rate of interest of the plan for the current plan year for 

the period beginning when such payment was made and ending on the 

valuation date of the plan. 

‘‘(5) ACCOUNTING FOR PLAN LIABILITIES.—For purposes of this section—

‘‘(A) LIABILITIES TAKEN INTO ACCOUNT FOR CURRENT PLAN YEAR.—In determining the value of liabilities under a plan for a plan year, liabilities 

shall be taken into account to the extent attributable to benefits (including 

12 

any early retirement or similar benefit) accrued or earned as of the beginning of the plan year. ‘‘(B) ACCRUALS DURING CURRENT PLAN YEAR DISREGARDED.—For purposes 

of subparagraph (A), benefits accrued or earned during such plan year shall 

not be taken into account, irrespective of whether the valuation date of the 

plan for such plan year is later than the first day of such plan year. ‘‘(h) ACTUARIAL ASSUMPTIONS AND METHODS.— ‘‘(1) IN GENERAL.—Subject to this subsection, the determination of any present 

value or other computation under this section shall be made on the basis of actuarial assumptions and methods— ‘‘(A) each of which is reasonable (taking into account the experience of the 

plan and reasonable expectations), and ‘‘(B) which, in combination, offer the actuary’s best estimate of anticipated experience under the plan. ‘‘(2) INTEREST RATES.— ‘‘(A) EFFECTIVE INTEREST RATE.—For purposes of this section, the term ‘effective interest rate’ means, with respect to any plan for any plan year, 

the single rate of interest which, if used to determine the present value of 

the plan’s liabilities referred to in subsection (d)(1), would result in an 

amount equal to the funding target of the plan for such plan year. ‘‘(B) INTEREST RATES FOR DETERMINING FUNDING TARGET.—For purposes 

of determining the funding target of a plan for any plan year, the interest 

rate used in determining the present value of the liabilities of the plan 

shall be—

‘‘(i) in the case of liabilities reasonably determined to be payable during the 5-year period beginning on the first day of the plan year, the 

first segment rate with respect to the applicable month, 

‘‘(ii) in the case of liabilities reasonably determined to be payable during the 15-year period beginning at the end of the period described in 

clause (i), the second segment rate with respect to the applicable 

month, and 

‘‘(iii) in the case of liabilities reasonably determined to be payable 

after the period described in clause (ii), the third segment rate with respect to the applicable month. 

‘‘(C) SEGMENT RATES.—For purposes of this paragraph—

‘‘(i) FIRST SEGMENT RATE.—The term ‘first segment rate’ means, with 

respect to any month, the single rate of interest which shall be determined by the Secretary for such month on the basis of the corporate 

bond yield curve for such month, taking into account only that portion 

of such yield curve which is based on bonds maturing during the 5-year 

period commencing with such month. 

‘‘(ii) SECOND SEGMENT RATE.—The term ‘second segment rate’ means, 

with respect to any month, the single rate of interest which shall be 

determined by the Secretary for such month on the basis of the corporate bond yield curve for such month, taking into account only that 

portion of such yield curve which is based on bonds maturing during 

the 15-year period beginning at the end of the period described in 

clause (i). 

‘‘(iii) THIRD SEGMENT RATE.—The term ‘third segment rate’ means, 

with respect to any month, the single rate of interest which shall be 

determined by the Secretary for such month on the basis of the corporate bond yield curve for such month, taking into account only that 

portion of such yield curve which is based on bonds maturing during 

periods beginning after the period described in clause (ii). 

‘‘(D) CORPORATE BOND YIELD CURVE.—For purposes of this paragraph—

‘‘(i) IN GENERAL.—The term ‘corporate bond yield curve’ means, with 

respect to any month, a yield curve which is prescribed by the Secretary for such month and which reflects a 3-year weighted average of 

yields on investment grade corporate bonds with varying maturities. 

‘‘(ii) 3-YEAR WEIGHTED AVERAGE.—The term ‘3-year weighted average’

means an average determined by using a methodology under which the 

most recent year is weighted 50 percent, the year preceding such year 

is weighted 35 percent, and the second year preceding such year is 

weighted 15 percent. 

‘‘(E) APPLICABLE MONTH.—For purposes of this paragraph, the term ‘applicable month’ means, with respect to any plan for any plan year, the 

month which includes the valuation date of such plan for such plan year 

or, at the election of the plan sponsor, any of the 4 months which precede 

such month. Any election made under this subparagraph shall apply to the 

13 

plan year for which the election is made and all succeeding plan years, unless the election is revoked with the consent of the Secretary. ‘‘(F) PUBLICATION REQUIREMENTS.—The Secretary shall publish for each 

month the corporate bond yield curve (and the corporate bond yield curve 

reflecting the modification described in section 417(e)(3)(A)(iv)(I)) for such 

month and each of the rates determined under subparagraph (B) for such 

month. The Secretary shall also publish a description of the methodology 

used to determine such yield curve and such rates which is sufficiently detailed to enable plans to make reasonable projections regarding the yield 

curve and such rates for future months based on the plan’s projection of future interest rates. ‘‘(G) TRANSITION RULE.— ‘‘(i) IN GENERAL.—Notwithstanding the preceding provisions of this 

paragraph, for plan years beginning in 2007 or 2008, the first, second, 

or third segment rate for a plan with respect to any month shall be 

equal to the sum of— ‘‘(I) the product of such rate for such month determined without 

regard to this subparagraph, multiplied by the applicable percentage, and ‘‘(II) the product of the rate determined under the rules of section 

412(b)(5)(B)(ii)(II) (as in effect for plan years beginning in 2006), 

multiplied by a percentage equal to 100 percent minus the applicable percentage. 

‘‘(ii) APPLICABLE PERCENTAGE.—For purposes of clause (i), the applicable percentage is 331⁄3 percent for plan years beginning in 2007 and 

662⁄3 percent for plan years beginning in 2008. 

‘‘(iii) NEW PLANS INELIGIBLE.—Clause (i) shall not apply to any plan 

if the first plan year of the plan begins after December 31, 2006. 

‘‘(3) MORTALITY TABLE.—

‘‘(A) IN GENERAL.—Except as provided in subparagraph (C), the mortality 

table used in determining any present value or making any computation 

under this section shall be the RP–2000 Combined Mortality Table, using 

Scale AA, as published by the Society of Actuaries, as in effect on the date 

of the enactment of the Pension Protection Act of 2005 and as revised from 

time to time under subparagraph (B). 

‘‘(B) PERIODIC REVISION.—The Secretary shall (at least every 10 years) 

make revisions in any table in effect under subparagraph (A) to reflect the 

actual experience of pension plans and projected trends in such experience. 

‘‘(C) SUBSTITUTE MORTALITY TABLE.—

‘‘(i) IN GENERAL.—Upon request by the plan sponsor and approval by 

the Secretary for a period not to exceed 10 years, a mortality table 

which meets the requirements of clause (ii) shall be used in determining any present value or making any computation under this section. A mortality table described in this clause shall cease to be in effect if the plan actuary determines at any time that such table does not 

meet the requirements of subclauses (I) and (II) of clause (ii). 

‘‘(ii) REQUIREMENTS.—A mortality table meets the requirements of 

this clause if the Secretary determines that—

‘‘(I) such table reflects the actual experience of the pension plan 

and projected trends in such experience, and 

‘‘(II) such table is significantly different from the table described 

in subparagraph (A). 

‘‘(iii) DEADLINE FOR DISPOSITION OF APPLICATION.—Any mortality 

table submitted to the Secretary for approval under this subparagraph 

shall be treated as in effect for the succeeding plan year unless the Secretary, during the 180-day period beginning on the date of such submission, disapproves of such table and provides the reasons that such table 

fails to meet the requirements of clause (ii). 

‘‘(D) TRANSITION RULE.—Under regulations of the Secretary, any difference in assumptions as set forth in the mortality table specified in subparagraph (A) and assumptions as set forth in the mortality table described 

in section 412(l)(7)(C)(ii) (as in effect for plan years beginning in 2006) shall 

be phased in ratably over the first period of 5 plan years beginning in or 

after 2007 so as to be fully effective for the fifth plan year. The preceding 

sentence shall not apply to any plan if the first plan year of the plan begins 

after December 31, 2006. 

‘‘(4) PROBABILITY OF BENEFIT PAYMENTS IN THE FORM OF LUMP SUMS OR OTHER

OPTIONAL FORMS.—For purposes of determining any present value or making 

any computation under this section, there shall be taken into account—

14 

‘‘(A) the probability that future benefit payments under the plan will be 

made in the form of optional forms of benefits provided under the plan (including lump sum distributions, determined on the basis of the plan’s experience and other related assumptions), and ‘‘(B) any difference in the present value of such future benefit payments 

resulting from the use of actuarial assumptions, in determining benefit payments in any such optional form of benefits, which are different from those 

specified in this subsection. ‘‘(5) APPROVAL OF LARGE CHANGES IN ACTUARIAL ASSUMPTIONS.— ‘‘(A) IN GENERAL.—No actuarial assumption used to determine the funding target for a plan to which this paragraph applies may be changed without the approval of the Secretary. ‘‘(B) PLANS TO WHICH PARAGRAPH APPLIES.—This paragraph shall apply to 

a plan only if— ‘‘(i) the plan is a defined benefit plan (other than a multiemployer 

plan) to which title IV of the Employee Retirement Income Security Act 

of 1974 applies, ‘‘(ii) the aggregate unfunded vested benefits as of the close of the preceding plan year (as determined under section 4006(a)(3)(E)(iii) of the 

Employee Retirement Income Security Act of 1974) of such plan and all 

other plans maintained by the contributing sponsors (as defined in section 4001(a)(13) of such Act) and members of such sponsors’ controlled 

groups (as defined in section 4001(a)(14) of such Act) which are covered 

by title IV (disregarding plans with no unfunded vested benefits) exceed $50,000,000, and 

‘‘(iii) the change in assumptions (determined after taking into account 

any changes in interest rate and mortality table) results in a decrease 

in the funding shortfall of the plan for the current plan year that exceeds $50,000,000, or that exceeds $5,000,000 and that is 5 percent or 

more of the funding target of the plan before such change. 

‘‘(i) SPECIAL RULES FOR AT-RISK PLANS.—

‘‘(1) FUNDING TARGET FOR PLANS IN AT-RISK STATUS.—

‘‘(A) IN GENERAL.—In any case in which a plan is in at-risk status for a 

plan year, the funding target of the plan for the plan year is the sum of—

‘‘(i) the present value of all liabilities to participants and their beneficiaries under the plan for the plan year, as determined by using, in 

addition to the actuarial assumptions described in subsection (g), the 

supplemental actuarial assumptions described in subparagraph (B), 

plus 

‘‘(ii) a loading factor determined under subparagraph (C). 

‘‘(B) SUPPLEMENTAL ACTUARIAL ASSUMPTIONS.—The actuarial assumptions 

used in determining the valuation of the funding target shall include, in addition to the actuarial assumptions described in subsection (h), an assumption that all participants will elect benefits at such times and in such forms 

as will result in the highest present value of liabilities under subparagraph 

(A)(i). 

‘‘(C) LOADING FACTOR.—The loading factor applied with respect to a plan 

under this paragraph for any plan year is the sum of—

‘‘(i) $700, times the number of participants in the plan, plus 

‘‘(ii) 4 percent of the funding target (determined without regard to 

this paragraph) of the plan for the plan year. 

‘‘(2) TARGET NORMAL COST OF AT-RISK PLANS.—In any case in which a plan 

is in at-risk status for a plan year, the target normal cost of the plan for such 

plan year shall be the sum of—

‘‘(A) the present value of all benefits which are expected to accrue or be 

earned under the plan during the plan year, determined under the actuarial assumptions used under paragraph (1), plus 

‘‘(B) the loading factor under paragraph (1)(C), excluding the portion of 

the loading factor described in paragraph (1)(C)(i). 

‘‘(3) DETERMINATION OF AT-RISK STATUS.—For purposes of this subsection, a 

plan is in ‘at-risk status’ for a plan year if the funding target attainment percentage of the plan for the preceding plan year was less than 60 percent. 

‘‘(4) TRANSITION BETWEEN APPLICABLE FUNDING TARGETS AND BETWEEN APPLICABLE TARGET NORMAL COSTS.—

‘‘(A) IN GENERAL.—In any case in which a plan which is in at-risk status 

for a plan year has been in such status for a consecutive period of fewer 

than 5 plan years, the applicable amount of the funding target and of the 

target normal cost shall be, in lieu of the amount determined without regard to this paragraph, the sum of—

15 

‘‘(i) the amount determined under this section without regard to this 

subsection, plus ‘‘(ii) the transition percentage for such plan year of the excess of the 

amount determined under this subsection (without regard to this paragraph) over the amount determined under this section without regard 

to this subsection. ‘‘(B) TRANSITION PERCENTAGE.—For purposes of this paragraph, the ‘transition percentage’ for a plan year is the product derived by multiplying— ‘‘(i) 20 percent, by 

‘‘(ii) the number of plan years during the period described in subparagraph (A). ‘‘(j) PAYMENT OF MINIMUM REQUIRED CONTRIBUTIONS.— ‘‘(1) IN GENERAL.—For purposes of this section, the due date for any payment 

of any minimum required contribution for any plan year shall be 81⁄2 months 

after the close of the plan year. ‘‘(2) INTEREST.—Any payment required under paragraph (1) for a plan year 

that is made on a date other than the valuation date for such plan year shall 

be adjusted for interest accruing for the period between the valuation date and 

the payment date, at the effective rate of interest for the plan for such plan 

year. ‘‘(3) ACCELERATED QUARTERLY CONTRIBUTION SCHEDULE FOR UNDERFUNDED

PLANS.—

‘‘(A) INTEREST PENALTY FOR FAILURE TO MEET ACCELERATED QUARTERLY

PAYMENT SCHEDULE.—In any case in which the plan has a funding shortfall 

for the preceding plan year, if the required installment is not paid in full, 

then the minimum required contribution for the plan year (as increased 

under paragraph (2)) shall be further increased by an amount equal to the 

interest on the amount of the underpayment for the period of the underpayment, using an interest rate equal to the excess of— ‘‘(i) 175 percent of the Federal mid-term rate (as in effect under section 1274 for the 1st month of such plan year), over ‘‘(ii) the effective rate of interest for the plan for the plan year. ‘‘(B) AMOUNT OF UNDERPAYMENT, PERIOD OF UNDERPAYMENT.—For purposes of subparagraph (A)— ‘‘(i) AMOUNT.—The amount of the underpayment shall be the excess 

of— ‘‘(I) the required installment, over 

‘‘(II) the amount (if any) of the installment contributed to or 

under the plan on or before the due date for the installment. 

‘‘(ii) PERIOD OF UNDERPAYMENT.—The period for which any interest 

is charged under this paragraph with respect to any portion of the underpayment shall run from the due date for the installment to the date 

on which such portion is contributed to or under the plan. 

‘‘(iii) ORDER OF CREDITING CONTRIBUTIONS.—For purposes of clause 

(i)(II), contributions shall be credited against unpaid required installments in the order in which such installments are required to be paid. 

‘‘(C) NUMBER OF REQUIRED INSTALLMENTS; DUE DATES.—For purposes of 

this paragraph—

‘‘(i) PAYABLE IN 4 INSTALLMENTS.—There shall be 4 required installments for each plan year. 

‘‘(ii) TIME FOR PAYMENT OF INSTALLMENTS.—The due dates for required installments are set forth in the following table: 

‘‘In the case of the following required installment: The due date is: 

1st .................................................................................................................... April 15

2nd ................................................................................................................... July 15 

3rd ................................................................................................................... October 15 

4th ................................................................................................................... January 15 of the following year 

‘‘(D) AMOUNT OF REQUIRED INSTALLMENT.—For purposes of this paragraph—

‘‘(i) IN GENERAL.—The amount of any required installment shall be 

25 percent of the required annual payment. 

‘‘(ii) REQUIRED ANNUAL PAYMENT.—For purposes of clause (i), the 

term ‘required annual payment’ means the lesser of—

‘‘(I) 90 percent of the minimum required contribution (without regard to any waiver under section 412(c)) to the plan for the plan 

year under this section, or 

16 

‘‘(II) in the case of a plan year beginning after 2007, 100 percent 

of the minimum required contribution (without regard to any waiver under section 412(c)) to the plan for the preceding plan year. 

Subclause (II) shall not apply if the preceding plan year referred to in 

such clause was not a year of 12 months. 

‘‘(E) FISCAL YEARS AND SHORT YEARS.—

‘‘(i) FISCAL YEARS.—In applying this paragraph to a plan year beginning on any date other than January 1, there shall be substituted for 

the months specified in this paragraph, the months which correspond 

thereto. 

‘‘(ii) SHORT PLAN YEAR.—This subparagraph shall be applied to plan 

years of less than 12 months in accordance with regulations prescribed 

by the Secretary. 

‘‘(4) LIQUIDITY REQUIREMENT IN CONNECTION WITH QUARTERLY CONTRIBUTIONS.—

‘‘(A) IN GENERAL.—A plan to which this paragraph applies shall be treated as failing to pay the full amount of any required installment under paragraph (3) to the extent that the value of the liquid assets paid in such installment is less than the liquidity shortfall (whether or not such liquidity 

shortfall exceeds the amount of such installment required to be paid but for 

this paragraph). 

‘‘(B) PLANS TO WHICH PARAGRAPH APPLIES.—This paragraph shall apply to 

a plan (other than a plan that would be described in subsection (f)(2)(B) if 

‘100’ were substituted for ‘500’ therein) which—

‘‘(i) is required to pay installments under paragraph (3) for a plan 

year, and 

‘‘(ii) has a liquidity shortfall for any quarter during such plan year. 

‘‘(C) PERIOD OF UNDERPAYMENT.—For purposes of paragraph (3)(A), any 

portion of an installment that is treated as not paid under subparagraph 

(A) shall continue to be treated as unpaid until the close of the quarter in 

which the due date for such installment occurs. 

‘‘(D) LIMITATION ON INCREASE.—If the amount of any required installment 

is increased by reason of subparagraph (A), in no event shall such increase 

exceed the amount which, when added to prior installments for the plan 

year, is necessary to increase the funding target attainment percentage of 

the plan for the plan year (taking into account the expected increase in 

funding target due to benefits accruing or earned during the plan year) to 

100 percent. 

‘‘(E) DEFINITIONS.—For purposes of this subparagraph: 

‘‘(i) LIQUIDITY SHORTFALL.—The term ‘liquidity shortfall’ means, with 

respect to any required installment, an amount equal to the excess (as 

of the last day of the quarter for which such installment is made) of—

‘‘(I) the base amount with respect to such quarter, over 

‘‘(II) the value (as of such last day) of the plan’s liquid assets. 

‘‘(ii) BASE AMOUNT.—

‘‘(I) IN GENERAL.—The term ‘base amount’ means, with respect to 

any quarter, an amount equal to 3 times the sum of the adjusted 

disbursements from the plan for the 12 months ending on the last 

day of such quarter. 

‘‘(II) SPECIAL RULE.—If the amount determined under subclause 

(I) exceeds an amount equal to 2 times the sum of the adjusted disbursements from the plan for the 36 months ending on the last day 

of the quarter and an enrolled actuary certifies to the satisfaction 

of the Secretary that such excess is the result of nonrecurring circumstances, the base amount with respect to such quarter shall be 

determined without regard to amounts related to those nonrecurring circumstances. 

‘‘(iii) DISBURSEMENTS FROM THE PLAN.—The term ‘disbursements 

from the plan’ means all disbursements from the trust, including purchases of annuities, payments of single sums and other benefits, and 

administrative expenses. 

‘‘(iv) ADJUSTED DISBURSEMENTS.—The term ‘adjusted disbursements’

means disbursements from the plan reduced by the product of—

‘‘(I) the plan’s funding target attainment percentage for the plan 

year, and 

‘‘(II) the sum of the purchases of annuities, payments of single 

sums, and such other disbursements as the Secretary shall provide 

in regulations. 

17 

‘‘(v) LIQUID ASSETS.—The term ‘liquid assets’ means cash, marketable 

securities, and such other assets as specified by the Secretary in regulations. 

‘‘(vi) QUARTER.—The term ‘quarter’ means, with respect to any required installment, the 3-month period preceding the month in which 

the due date for such installment occurs. 

‘‘(F) REGULATIONS.—The Secretary may prescribe such regulations as are 

necessary to carry out this paragraph. 

‘‘(k) IMPOSITION OF LIEN WHERE FAILURE TO MAKE REQUIRED CONTRIBUTIONS.—

‘‘(1) IN GENERAL.—In the case of a plan to which this subsection applies, if—

‘‘(A) any person fails to make a contribution payment required by section 

412 and this section before the due date for such payment, and 

‘‘(B) the unpaid balance of such payment (including interest), when added 

to the aggregate unpaid balance of all preceding such payments for which 

payment was not made before the due date (including interest), exceeds 

$1,000,000, 

then there shall be a lien in favor of the plan in the amount determined under 

paragraph (3) upon all property and rights to property, whether real or personal, belonging to such person and any other person who is a member of the 

same controlled group of which such person is a member. 

‘‘(2) PLANS TO WHICH SUBSECTION APPLIES.—This subsection shall apply to a 

defined benefit plan (other than a multiemployer plan) for any plan year for 

which the funding target attainment percentage (as defined in subsection (d)(2)) 

of such plan is less than 100 percent. This subsection shall not apply to any 

plan to which section 4021 of the Employee Retirement Income Security Act of 

1974 does not apply (as such section is in effect on the date of the enactment 

of the Pension Protection Act of 2005). 

‘‘(3) AMOUNT OF LIEN.—For purposes of paragraph (1), the amount of the lien 

shall be equal to the aggregate unpaid balance of contribution payments required under this section and section 412 for which payment has not been made 

before the due date. 

‘‘(4) NOTICE OF FAILURE; LIEN.—

‘‘(A) NOTICE OF FAILURE.—A person committing a failure described in 

paragraph (1) shall notify the Pension Benefit Guaranty Corporation of 

such failure within 10 days of the due date for the required contribution 

payment. 

‘‘(B) PERIOD OF LIEN.—The lien imposed by paragraph (1) shall arise on 

the due date for the required contribution payment and shall continue until 

the last day of the first plan year in which the plan ceases to be described 

in paragraph (1)(B). Such lien shall continue to run without regard to 

whether such plan continues to be described in paragraph (2) during the 

period referred to in the preceding sentence. 

‘‘(C) CERTAIN RULES TO APPLY.—Any amount with respect to which a lien 

is imposed under paragraph (1) shall be treated as taxes due and owing the 

United States and rules similar to the rules of subsections (c), (d), and (e) 

of section 4068 of the Employee Retirement Income Security Act of 1974 

shall apply with respect to a lien imposed by subsection (a) and the amount 

with respect to such lien. 

‘‘(5) ENFORCEMENT.—Any lien created under paragraph (1) may be perfected 

and enforced only by the Pension Benefit Guaranty Corporation, or at the direction of the Pension Benefit Guaranty Corporation, by the contributing sponsor 

(or any member of the controlled group of the contributing sponsor). 

‘‘(6) DEFINITIONS.—For purposes of this subsection—

‘‘(A) CONTRIBUTION PAYMENT.—The term ‘contribution payment’ means, in 

connection with a plan, a contribution payment required to be made to the 

plan, including any required installment under paragraphs (3) and (4) of 

subsection (i). 

‘‘(B) DUE DATE; REQUIRED INSTALLMENT.—The terms ‘due date’ and ‘required installment’ have the meanings given such terms by subsection (j), 

except that in the case of a payment other than a required installment, the 

due date shall be the date such payment is required to be made under section 430. 

‘‘(C) CONTROLLED GROUP.—The term ‘controlled group’ means any group 

treated as a single employer under subsections (b), (c), (m), and (o) of section 414. 

‘‘(l) QUALIFIED TRANSFERS TO HEALTH BENEFIT ACCOUNTS.—In the case of a qualified transfer (as defined in section 420), any assets so transferred shall not, for purposes of this section, be treated as assets in the plan.’’. 

18 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply with respect to plan years beginning after December 31, 2006. 

SEC. 113. BENEFIT LIMITATIONS UNDER SINGLE-EMPLOYER PLANS. 

(a) PROHIBITION OF SHUTDOWN BENEFITS AND OTHER UNPREDICTABLE CONTINGENT EVENT BENEFITS UNDER SINGLE-EMPLOYER PLANS.—

(1) IN GENERAL.—Part III of subchapter D of chapter 1 of the Internal Revenue Code of 1986 (relating to deferred compensation, etc.) is amended—

(A) by striking the heading and inserting the following: 

‘‘PART III—RULES RELATING TO MINIMUM FUNDING 

STANDARDS AND BENEFIT LIMITATIONS 

‘‘Subpart A. Minimum funding standards for pension plans. 

‘‘Subpart B. Benefit limitations under single-employer plans. 

‘‘Subpart A—Minimum Funding Standards for Pension 

Plans 

‘‘Sec. 430. Minimum funding standards for single-employer defined benefit pension plans.’’, and 

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

‘‘Subpart B—Benefit Limitations Under Single-employer 

Plans 

‘‘Sec. 436. Prohibition of shutdown benefits and other unpredictable contingent event benefits under single-employer plans. 

‘‘SEC. 436. PROHIBITION OF SHUTDOWN BENEFITS AND OTHER UNPREDICTABLE CONTINGENT EVENT BENEFITS UNDER SINGLE-EMPLOYER PLANS. 

‘‘(a) IN GENERAL.—No pension plan which is defined benefit plan (other than a 

multiemployer plan) may provide benefits to which participants are entitled solely 

by reason of the occurrence of—

‘‘(1) a plant shutdown, or 

‘‘(2) any other unpredictable contingent event. 

‘‘(b) UNPREDICTABLE CONTINGENT EVENT.—For purposes of this subsection, the 

term ‘unpredictable contingent event’ means an event other than—

‘‘(1) attainment of any age, performance of any service, receipt or derivation 

of any compensation, or the occurrence of death or disability, or 

‘‘(2) an event which is reasonably and reliably predictable (as determined by 

the Secretary).’’. 

(2) CLERICAL AMENDMENT.—The table of parts for suchapter D of chapter 1 

of the Internal Revenue Code of 1986 is amended by adding at the end the following new item: 

‘‘PART IIIlRULES RELATING TO MINIMUM FUNDING STANDARDS AND BENEFIT LIMITATIONS’’. 

(b) OTHER LIMITS ON BENEFITS AND BENEFIT ACCRUALS.—

(1) IN GENERAL.—Subpart B of part III of subchapter D of chapter 1 of such 

Code is amended by adding at the end the following: 

‘‘SEC. 437. FUNDING-BASED LIMITS ON BENEFITS AND BENEFIT ACCRUALS UNDER SINGLEEMPLOYER PLANS. 

‘‘(a) LIMITATIONS ON PLAN AMENDMENTS INCREASING LIABILITY FOR BENEFITS.—

‘‘(1) IN GENERAL.—No amendment to a defined benefit plan (other than a multiemployer plan) which has the effect of increasing liabilities of the plan by reason of increases in benefits, establishment of new benefits, changing the rate 

of benefit accrual, or changing the rate at which benefits become nonforfeitable 

to the plan may take effect during any plan year if the funding target attainment percentage as of the valuation date of the plan for such plan year is—

‘‘(A) less than 80 percent, or 

‘‘(B) would be less than 80 percent taking into account such amendment. 

For purposes of this subparagraph, any increase in benefits under the plan by 

reason of an increase in the benefit rate provided under the plan or on the basis 

of an increase in compensation shall be treated as effected by plan amendment. 

19 

‘‘(2) EXEMPTION.—Paragraph (1) shall cease to apply with respect to any plan 

year, effective as of the first date of the plan year (or if later, the effective date 

of the amendment), upon payment by the plan sponsor of a contribution (in addition to any minimum required contribution under section 430) equal to— ‘‘(A) in the case of paragraph (1)(A), the amount of the increase in the 

funding target of the plan (under section 430) for the plan year attributable 

to the amendment, and ‘‘(B) in the case of paragraph (1)(B), the amount sufficient to result in a 

funding target attainment percentage of 80 percent. ‘‘(b) FUNDING-BASED LIMITATION ON CERTAIN FORMS OF DISTRIBUTION.— ‘‘(1) IN GENERAL.—A defined benefit plan (other than a multiemployer plan) 

shall provide that, in any case in which the plan’s funding target attainment 

percentage as of the valuation date of the plan for a plan year is less than 80 

percent, the plan may not after such date pay any payment described in section 

401(a)(32)(B). ‘‘(2) EXCEPTION.—Paragraph (1) shall not apply to any plan for any plan year 

if the terms of such plan (as in effect for the period beginning on June 29, 2005, 

and ending with such plan year) provide for no benefit accruals with respect to 

any participant during such period. ‘‘(c) LIMITATIONS ON BENEFIT ACCRUALS FOR PLANS WITH SEVERE FUNDING

SHORTFALLS.—A defined benefit plan (other than a multiemployer plan) shall provide that, in any case in which the plan’s funding target attainment percentage as 

of the valuation date of the plan for a plan year is less than 60 percent, all future 

benefit accruals under the plan shall cease as of such date. 

‘‘(d) NEW PLANS.—Subsections (a) and (c) shall not apply to a plan for the first 

5 plan years of the plan. For purposes of this subsection, the reference in this subsection to a plan shall include a reference to any predecessor plan. 

‘‘(e) PRESUMED UNDERFUNDING FOR PURPOSES OF BENEFIT LIMITATIONS BASED ON

PRIOR YEAR’S FUNDING STATUS.—

‘‘(1) PRESUMPTION OF CONTINUED UNDERFUNDING.—In any case in which a 

benefit limitation under subsection (a), (b), or (c) has been applied to a plan 

with respect to the plan year preceding the current plan year, the funding target attainment percentage of the plan as of the valuation date of the plan for 

the current plan year shall be presumed to be equal to the funding target attainment percentage of the plan as of the valuation date of the plan for the preceding plan year until the enrolled actuary of the plan certifies the actual funding target attainment percentage of the plan as of the valuation date of the plan 

for the current plan year. 

‘‘(2) PRESUMPTION OF UNDERFUNDING AFTER 10TH MONTH.—In any case in 

which no such certification is made with respect to the plan before the first day 

of the 10th month of the current plan year, for purposes of subsections (a), (b), 

and (c), the plan’s funding target attainment percentage shall be conclusively 

presumed to be less than 60 percent as of the first day of such 10th month, and 

such day shall be deemed, for purposes of such subsections, to be the valuation 

date of the plan for the current plan year. 

‘‘(3) PRESUMPTION OF UNDERFUNDING AFTER 4TH MONTH FOR NEARLY UNDERFUNDED PLANS.—In any case in which—

‘‘(A) a benefit limitation under subsection (a), (b), or (c) did not apply to 

a plan with respect to the plan year preceding the current plan year, but 

the funding target attainment percentage of the plan for such preceding 

plan year was not more than 10 percentage points greater than the percentage which would have caused such subsection to apply to the plan with respect to such preceding plan year, and 

‘‘(B) as of the first day of the 4th month of the current plan year, the enrolled actuary of the plan has not certified the actual funding target attainment percentage of the plan as of the valuation date of the plan for the current plan year, 

until the enrolled actuary so certifies, such first day shall be deemed, for purposes of such subsection, to be the valuation date of the plan for the current 

plan year and the funding target attainment percentage of the plan as of such 

first day shall, for purposes of such subsection, be presumed to be equal to 10 

percentage points less than the funding target attainment percentage of the 

plan as of the valuation date of the plan for such preceding plan year. 

‘‘(f) RESTORATION BY PLAN AMENDMENT OF BENEFITS OR BENEFIT ACCRUAL.—In 

any case in which a prohibition under subsection (b) of the payment of lump sum 

distributions or benefits in any other accelerated form or a cessation of benefit accruals under subsection (c) is applied to a plan with respect to any plan year and 

such prohibition or cessation, as the case may be, ceases to apply to any subsequent 

plan year, the plan may provide for the resumption of such benefit payment or such 

20 

benefit accrual only by means of the adoption of a plan amendment after the valuation date of the plan for such subsequent plan year. The preceding sentence shall 

not apply to a prohibition or cessation required by reason of subsection (e). ‘‘(g) FUNDING TARGET ATTAINMENT PERCENTAGE.— ‘‘(1) IN GENERAL.—For purposes of this section, the term ‘funding target attainment percentage’ means, with respect to any plan for any plan year, the 

ratio (expressed as a percentage) which— ‘‘(A) the value of plan assets for the plan year (as determined under section 430(g)) reduced by the pre-funding balance and the funding standard 

carryover balance (within the meaning of section 430(f)), bears to ‘‘(B) the funding target of the plan for the plan year (as determined under 

section 430(d)(1), but without regard to section 430(i)(1)). ‘‘(2) APPLICATION TO PLANS WHICH ARE FULLY FUNDED WITHOUT REGARD TO RE- DUCTIONS FOR FUNDING BALANCES.—In the case of a plan for any plan year, if 

the funding target attainment percentage is 100 percent or more (determined 

without regard to this paragraph and without regard to the reduction under 

paragraph (1)(A) for the pre-funding balance and the funding standard carryover balance), paragraph (1) shall be applied without regard to such reduction.’’. (2) CLERICAL AMENDMENT.—The table of sections for such subpart is amended 

by adding at the end the following new item: 

‘‘Sec. 437. Funding-based limits on benefits and benefit accruals under single-employer plans.’’. 

(c) SPECIAL RULE FOR PLAN AMENDMENTS.—A plan shall not fail to meet the requirements of section 411(d)(6) of the Internal Revenue Code of 1986 or section 

204(g) of the Employee Retirement Income Security Act of 1974 solely by reason of 

the adoption by the plan of an amendment necessary to meet the requirements of 

the amendments made by this section. 

(d) EFFECTIVE DATE.— (1) SHUTDOWN BENEFITS.—Except as provided in paragraph (3), the amendments made by subsection (a) shall apply with respect to plant shutdowns, or 

other unpredictable contingent events, occurring after December 31, 2006. 

(2) OTHER BENEFITS.—Except as provided in paragraph (3), the amendments 

made by subsection (b) shall apply with respect to plan years beginning after 

December 31, 2006. 

(3) COLLECTIVE BARGAINING EXCEPTION.—In the case of a plan maintained 

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

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

years beginning before the earlier of— (A) the later of— (i) the date on which the last collective bargaining agreement relating to the plan terminates (determined without regard to any extension 

thereof agreed to after the date of the enactment of this Act), or 

(ii) the first day of the first plan year to which the amendments made 

by this subsection would (but for this subparagraph) apply, or 

(B) January 1, 2009. 

For purposes of clause (i), any plan amendment made pursuant to a collective 

bargaining agreement relating to the plan which amends the plan solely to conform to any requirement added by this subsection shall not be treated as a termination of such collective bargaining agreement. 

(e) SPECIAL RULE FOR 2007.—For purposes of applying subsection (e) of section 

437 of such Code (as added by this section) to current plan years (within the meaning of such subsection) beginning in 2007, the modified funded current liability percentage of the plan for the preceding year shall be substituted for the funding target 

attainment percentage of the plan for the preceding year. For purposes of the preceding sentence, the term ‘‘modified funded current liability percentage’’ means the 

funded current liability percentage (as defined in section 412(l)(8) of such Code), reduced as described in subparagraph (E) thereof in the case of a plan with a funded 

current liability percentage (as so defined and before such reduction) which is less 

than 100 percent. 

SEC. 114. TECHNICAL AND CONFORMING AMENDMENTS. 

(a) AMENDMENTS RELATED TO QUALIFICATION REQUIREMENTS.—

(1) Section 401(a)(29) of the Internal Revenue Code of 1986 is amended to 

read as follows: 

‘‘(29) BENEFIT LIMITATIONS ON PLANS IN AT-RISK STATUS.—In the case of a defined benefit plan (other than a multiemployer plan) to which the requirements 

of section 412 apply, the trust of which the plan is a part shall not constitute 

a qualified trust under this subsection unless the plan meets the requirements 

of sections 436 and 437.’’. 

21 

(2) Section 401(a)(32) of such Code is amended—

(A) in subparagraph (A), by striking ‘‘412(m)(5)’’ each place it appears and 

inserting ‘‘430(j)(4)’’, and 

(B) in subparagraph (C), by striking ‘‘section 412(m) by reason of paragraph (5)(A) thereof’’ and inserting ‘‘section 430(j)(3) by reason of section 

430(j)(4)(A)’’. 

(3) Section 401(a)(33) of such Code is amended—

(A) in subparagraph (B)(i), by striking ‘‘funded current liability percentage (as defined in section 412(l)(8))’’ and inserting ‘‘funding target attainment percentage (as defined in section 430(d)(2))’’, 

(B) in subparagraph (B)(iii), by striking ‘‘subsection 412(c)(8)’’ and inserting ‘‘section 412(d)(2)’’, and 

(C) in subparagraph (D), by striking ‘‘section 412(c)(11) (without regard 

to subparagraph (B) thereof)’’ and inserting ‘‘section 412(b) (without regard 

to paragraph (2) thereof)’’. 

(b) VESTING RULES.—Section 411 of such Code is amended—

(1) by striking ‘‘section 412(c)(8)’’ in subsection (a)(3)(C) and inserting ‘‘section 

412(d)(2)’’, 

(2) in subsection (b)(1)(F)—

(A) by striking ‘‘paragraphs (2) and (3) of section 412(i)’’ in clause (ii) and 

inserting ‘‘subparagraphs (B) and (C) of section 412(e)(3)’’, and 

(B) by striking ‘‘paragraphs (4), (5), and (6) of section 412(i)’’ and inserting ‘‘subparagraphs (D), (E), and (F) of section 412(e)(3)’’, and 

(3) by striking ‘‘section 412(c)(8)’’ in subsection (d)(6)(A) and inserting ‘‘section 

412(d)(2)’’. 

(c) MERGERS AND CONSOLIDATIONS OF PLANS.—Subclause (I) of section 

414(l)(2)(B)(i) of such Code is amended to read as follows: 

‘‘(I) the amount determined under section 431(c)(6)(A)(i) in the 

case of a multiemployer plan (and the sum of the target liability 

amount and target normal cost determined under section 430 in 

the case of any other plan), over’’. 

(d) TRANSFER OF EXCESS PENSION ASSETS TO RETIREE HEALTH ACCOUNTS.—

(1) Section 420(e)(2) of such Code is amended to read as follows: 

‘‘(2) EXCESS PENSION ASSETS.—The term ‘excess pension assets’ means the excess (if any) of—

‘‘(A) the lesser of—

‘‘(i) the fair market value of the plan’s assets (reduced by the prefunding balance and the funding standard carryover balance, as determined under section 430(f)), or 

‘‘(ii) the value of plan assets as determined under section 430(g)(3) 

(reduced by the pre-funding balance and the funding standard carryover balance, as determined under section 430(f)), over 

‘‘(B) 125 percent of the sum of the target liability amount and the target 

normal cost determined under section 430 for such plan year.’’. 

(2) Section 420(e)(4) of such Code is amended to read as follows: 

‘‘(4) COORDINATION WITH SECTION 430.—In the case of a qualified transfer, any 

assets so transferred shall not, for purposes of this section, be treated as assets 

in the plan.’’. 

(e) EXCISE TAXES.—

(1) IN GENERAL.—Subsections (a) and (b) of section 4971 of such Code are 

amended to read as follows: 

‘‘(a) INITIAL TAX.—If at any time during any taxable year an employer maintains 

a plan to which section 412 applies, there is hereby imposed for the taxable year 

a tax equal to—

‘‘(1) in the case of a defined benefit plan which is not a multiemployer plan, 

10 percent of the aggregate unpaid minimum required contributions for all plan 

years remaining unpaid as of the end of any plan year ending with or within 

the taxable year, and 

‘‘(2) in the case of a multiemployer plan, 5 percent of the accumulated funding 

deficiency determined under section 431 as of the end of any plan year ending 

with or within the taxable year. 

‘‘(b) ADDITIONAL TAX.—If—

‘‘(1) a tax is imposed under subsection (a)(1) on any unpaid required minimum contribution and such amount remains unpaid as of the close of the taxable period, or 

‘‘(2) a tax is imposed under subsection (a)(2) on any accumulated funding deficiency and the accumulated funding deficiency is not corrected within the taxable period, 

22 

there is hereby imposed a tax equal to 100 percent of the unpaid minimum required 

contribution or accumulated funding deficiency, whichever is applicable, to the extent not so paid or corrected.’’. 

(2) Section 4971(c) of such Code is amended—

(A) by striking ‘‘the last two sentences of section 412(a)’’ in paragraph (1) 

and inserting ‘‘section 431’’, and 

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

‘‘(4) UNPAID MINIMUM REQUIRED CONTRIBUTION.—

‘‘(A) IN GENERAL.—The term ‘unpaid minimum required contribution’

means, with respect to any plan year, any minimum required contribution 

under section 430 for the plan year which is not paid on or before the due 

date (as determined under section 430(j)(1)) for the plan year. 

‘‘(B) ORDERING RULE.—Any payment to or under a plan for any plan year 

shall be allocated first to unpaid minimum required contributions for all 

preceding plan years in the order in which such contributions became due 

and then to the minimum required contribution under section 430 for the 

plan year.’’. 

(3) Section 4971(e)(1) of such Code is amended by striking ‘‘section 

412(b)(3)(A)’’ and inserting ‘‘section 412(a)(2)’’. 

(4) Section 4971(f)(1) of such Code is amended—

(A) by striking ‘‘section 412(m)(5)’’ and inserting ‘‘section 430(j)(4)’’, and 

(B) by striking ‘‘section 412(m)’’ and inserting ‘‘section 430(j)(3)’’. 

(5) Section 4972(c)(7) of such Code is amended by striking ‘‘except to the extent that such contributions exceed the full-funding limitation (as defined in 

section 412(c)(7), determined without regard to subparagraph (A)(i)(I) thereof)’’

and inserting ‘‘except, in the case of a multiemployer plan, to the extent that 

such contributions exceed the full-funding limitation (as defined in section 

431(c)(6))’’. 

(f) REPORTING REQUIREMENTS.—Section 6059(b) of such Code is amended—

(1) by striking ‘‘the accumulated funding deficiency (as defined in section 

412(a))’’ in paragraph (2) and inserting ‘‘the minimum required contribution determined under section 430, or the accumulated funding deficiency determined 

under section 431,’’, and 

(2) by striking paragraph (3)(B) and inserting: 

‘‘(B) the requirements for reasonable actuarial assumptions under section 

430(h)(1) or 431(c)(3), whichever are applicable, have been complied with,’’. 

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

beginning after December 31, 2006. 

Subtitle C—Other Provisions 

SEC. 121. MODIFICATION OF TRANSITION RULE TO PENSION FUNDING REQUIREMENTS. 

(a) IN GENERAL.—In the case of a plan that—

(1) was not required to pay a variable rate premium for the plan year beginning in 1996, 

(2) has not, in any plan year beginning after 1995, merged with another plan 

(other than a plan sponsored by an employer that was in 1996 within the controlled group of the plan sponsor); and 

(3) is sponsored by a company that is engaged primarily in the interurban or 

interstate passenger bus service, 

the rules described in subsection (b) shall apply for any plan year beginning after 

December 31, 2006. 

(b) MODIFIED RULES.—The rules described in this subsection are as follows: 

(1) For purposes of section 430(j)(3) of the Internal Revenue Code of 1986 and 

section 303(j)(3) of the Employee Retirement Income Security Act of 1974, the 

plan shall be treated as not having a funding shortfall for any plan year. 

(2) For purposes of—

(A) determining unfunded vested benefits under section 4006(a)(3)(E)(iii) 

of such Act, and 

(B) determining any present value or making any computation under section 412 of such Code or section 302 of such Act, 

the mortality table shall be the mortality table used by the plan. 

(3) Notwithstanding section 430(f)(4)(B) of such Code and section 303(f)(4)(B) 

of such Act, for purposes of section 430(c)(4)(A)(ii) of such Code and section 

303(c)(4)(A)(ii) of such Act, the value of plan assets is deemed to be such 

amount, reduced by the amount of the pre-funding balance if, pursuant to a 

binding written agreement with the Pension Benefit Guaranty Corporation enVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00022 Fmt 6659 Sfmt 6621 E:\HR\OC\HR232P2.XXX HR232P2
23 

tered into before January 1, 2007, the funding standard carryover balance is not 

available to reduce the minimum required contribution for the plan year. 

(4) Section 430(c)(4)(B) of such Code and section 303(c)(4)(B) of such Act (relating to phase-in of funding target for determination of funding shortfall) shall 

each be applied by substituting ‘‘2012’’ for ‘‘2011’’ therein and by substituting 

for the table therein the following: 

In the case of a plan year beginning in calendar year: 

The applicable 

percentage is: 

2007 ........................................................................................................................................................... 90 percent

2008 ........................................................................................................................................................... 92 percent

2009 ........................................................................................................................................................... 94 percent

2010 ........................................................................................................................................................... 96 percent

2011 ........................................................................................................................................................... 98 percent. 

(c) DEFINITIONS.—Any term used in this section which is also used in section 430 

of such Code or section 303 of such Act shall have the meaning provided such term 

in such section. If the same term has a different meaning in such Code and such 

Act, such term shall, for purposes of this section, have the meaning provided by 

such Code when applied with respect to such Code and the meaning provided by 

such Act when applied with respect to such Act. 

(d) SPECIAL RULE FOR 2006.—

(1) IN GENERAL.—Section 769(c)(3) of the Retirement Protection Act of 1994, 

as added by section 201 of the Pension Funding Equity Act of 2004, is amended 

by striking ‘‘and 2005’’ and inserting ‘‘, 2005, and 2006’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

plan years beginning after December 31, 2005. 

(e) CONFORMING AMENDMENT.—

(1) Section 769 of the Retirement Protection Act of 1994 is amended by striking subsection (c). 

(2) The amendment made by paragraph (1) shall take effect on December 31, 

2006, and shall apply to plan years beginning after such date. 

SEC. 122. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION PLANS WHEN EMPLOYER DEFINED BENEFIT PLAN IN AT-RISK STATUS. 

(a) IN GENERAL.—Subsection (b) of section 409A of the Internal Revenue Code of 

1986 (providing rules relating to funding) is amended by redesignating paragraphs 

(3) and (4) as paragraphs (4) and (5), respectively, and by inserting after paragraph 

(2) the following new paragraph: 

‘‘(3) EMPLOYER’S DEFINED BENEFIT PLAN IN AT-RISK STATUS.—If—

‘‘(A) during any period in which a defined benefit plan to which section 

412 applies is in an at-risk status (as defined in section 430(i)(3)), assets 

are set aside (directly or indirectly) in a trust (or other arrangement determined by the Secretary), or transferred to such a trust or other arrangement, for purposes of paying deferred compensation under a nonqualified 

deferred compensation plan of the employer maintaining the defined benefit 

plan, or 

‘‘(B) a nonqualified deferred compensation plan of the employer provides 

that assets will become restricted to the provision of benefits under the plan 

in connection with such at-risk status (or other similar financial measure 

determined by the Secretary) of the defined benefit plan, or assets are so 

restricted, 

such assets shall for purposes of section 83 be treated as property transferred 

in connection with the performance of services whether or not such assets are 

available to satisfy claims of general creditors. Subparagraph (A) shall not 

apply with respect to any assets which are so set aside before the defined benefit plan is in at-risk status.’’. 

(b) CONFORMING AMENDMENTS.—Paragraphs (4) and (5) of section 409A(b) of such 

Code, as redesignated by subsection (a) of this subsection, are each amended by 

striking ‘‘paragraph (1) or (2)’’ each place it appears and inserting ‘‘paragraph (1), 

(2), or (3)’’. 

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

transfers or reservations of assets after December 31, 2005. 

(d) SPECIAL RULE FOR 2006.—For purposes of determining if a plan is in at-risk 

status (within the meaning of section 409A of such Code, as added by this section) 

for any plan year beginning in 2006, such section shall be applied by substituting 

the plan’s modified funded current liability percentage for the plan’s funding target 

24 

attainment percentage. For purposes of the preceding sentence, the term ‘‘modified 

funded current liability percentage’’ means the funded current liability percentage 

(as defined in section 412(l)(8) of such Code), reduced as described in subparagraph 

(E) thereof. 

TITLE II—FUNDING RULES FOR 

MULTIEMPLOYER DEFINED BENEFIT PLANS 

Subtitle A—Amendments to Employee Retirement 

Income Security Act of 1974 

SEC. 201. FUNDING RULES FOR MULTIEMPLOYER DEFINED BENEFIT PLANS. 

[See section 201 of the bill as reported by the Committee on Education and the 

Workforce.] 

SEC. 202. ADDITIONAL FUNDING RULES FOR MULTIEMPLOYER PLANS IN ENDANGERED OR 

CRITICAL STATUS. 

[See section 202 of the bill as reported by the Committee on Education and the 

Workforce.] 

SEC. 203. MEASURES TO FORESTALL INSOLVENCY OF MULTIEMPLOYER PLANS. 

[See section 203 of the bill as reported by the Committee on Education and the 

Workforce.] 

SEC. 204. WITHDRAWAL LIABILITY REFORMS. 

[See section 204 of the bill as reported by the Committee on Education and the 

Workforce.] 

SEC. 205. REMOVAL OF RESTRICTIONS WITH RESPECT TO PROCEDURES APPLICABLE TO DISPUTES INVOLVING WITHDRAWAL LIABILITY. 

[See section 205 of the bill as reported by the Committee on Education and the 

Workforce.] 

Subtitle B—Amendments to Internal Revenue 

Code of 1986 

SEC. 211. FUNDING RULES FOR MULTIEMPLOYER DEFINED BENEFIT PLANS. 

(a) IN GENERAL.—Subpart A of part III of subchapter D of chapter 1 of the Internal Revenue Code of 1986 (added by section 112 of this Act) is amended by adding 

at the end the following new section: 

‘‘SEC. 431. MINIMUM FUNDING STANDARDS FOR MULTIEMPLOYER PLANS. 

‘‘(a) IN GENERAL.—For purposes of section 412, the accumulated funding deficiency of a multiemployer plan for any plan year is—

‘‘(1) except as provided in paragraph (2), the amount, determined as of the 

end of the plan year, equal to the excess (if any) of the total charges to the funding standard account of the plan for all plan years (beginning with the first plan 

year for which section 412 applies to the plan) over the total credits to such account for such years, and 

‘‘(2) if the multiemployer plan is in reorganization for any plan year, the accumulated funding deficiency of the plan determined under section 418B. 

‘‘(b) FUNDING STANDARD ACCOUNT.—

‘‘(1) ACCOUNT REQUIRED.—Each multiemployer plan to which section 412 applies shall establish and maintain a funding standard account. Such account 

shall be credited and charged solely as provided in this section. 

‘‘(2) CHARGES TO ACCOUNT.—For a plan year, the funding standard account 

shall be charged with the sum of—

‘‘(A) the normal cost of the plan for the plan year, 

‘‘(B) the amounts necessary to amortize in equal annual installments 

(until fully amortized)—

‘‘(i) in the case of a plan in existence on January 1, 1974, the unfunded past service liability under the plan on the first day of the first 

plan year to which section 412 applies, over a period of 40 plan years, 

‘‘(ii) in the case of a plan which comes into existence after January 

1, 1974, the unfunded past service liability under the plan on the first 

25 

day of the first plan year to which section 412 applies, over a period 

of 15 plan years, ‘‘(iii) separately, with respect to each plan year, the net increase (if 

any) in unfunded past service liability under the plan arising from plan 

amendments adopted in such year, over a period of 15 plan years, ‘‘(iv) separately, with respect to each plan year, the net experience 

loss (if any) under the plan, over a period of 15 plan years, and ‘‘(v) separately, with respect to each plan year, the net loss (if any) 

resulting from changes in actuarial assumptions used under the plan, 

over a period of 15 plan years, ‘‘(C) the amount necessary to amortize each waived funding deficiency 

(within the meaning of section 412(c)(3)) for each prior plan year in equal 

annual installments (until fully amortized) over a period of 15 plan years, ‘‘(D) the amount necessary to amortize in equal annual installments 

(until fully amortized) over a period of 5 plan years any amount credited 

to the funding standard account under section 412(b)(3)(D) (as in effect on 

the day before the date of the enactment of the Pension Protection Act of 

2005), and ‘‘(E) the amount necessary to amortize in equal annual installments (until 

fully amortized) over a period of 20 years the contributions which would be 

required to be made under the plan but for the provisions of section 

412(c)(7)(A)(i)(I) (as in effect on the day before the date of the enactment 

of the Pension Protection Act of 2005). 

‘‘(3) CREDITS TO ACCOUNT.—For a plan year, the funding standard account 

shall be credited with the sum of—

‘‘(A) the amount considered contributed by the employer to or under the 

plan for the plan year, 

‘‘(B) the amount necessary to amortize in equal annual installments (until 

fully amortized)—

‘‘(i) separately, with respect to each plan year, the net decrease (if 

any) in unfunded past service liability under the plan arising from plan 

amendments adopted in such year, over a period of 15 plan years, 

‘‘(ii) separately, with respect to each plan year, the net experience 

gain (if any) under the plan, over a period of 15 plan years, and 

‘‘(iii) separately, with respect to each plan year, the net gain (if any) 

resulting from changes in actuarial assumptions used under the plan, 

over a period of 15 plan years, 

‘‘(C) the amount of the waived funding deficiency (within the meaning of 

section 412(c)(3)) for the plan year, and 

‘‘(D) in the case of a plan year for which the accumulated funding deficiency is determined under the funding standard account if such plan year 

follows a plan year for which such deficiency was determined under the alternative minimum funding standard under section 412(g) (as in effect on 

the day before the date of the enactment of the Pension Protection Act of 

2005), the excess (if any) of any debit balance in the funding standard account (determined without regard to this subparagraph) over any debit balance in the alternative minimum funding standard account. 

‘‘(4) SPECIAL RULE FOR AMOUNTS FIRST AMORTIZED TO PLAN YEARS BEFORE

2007.—In the case of any amount amortized under section 412(b) (as in effect 

on the day before the date of the enactment of the Pension Protection Act of 

2005) over any period beginning with a plan year beginning before 2007, in lieu 

of the amortization described in paragraphs (2)(B) and (3)(B), such amount shall 

continue to be amortized under such section as so in effect. 

‘‘(5) COMBINING AND OFFSETTING AMOUNTS TO BE AMORTIZED.—Under regulations prescribed by the Secretary, amounts required to be amortized under 

paragraph (2) or paragraph (3), as the case may be—

‘‘(A) may be combined into one amount under such paragraph to be amortized over a period determined on the basis of the remaining amortization 

period for all items entering into such combined amount, and 

‘‘(B) may be offset against amounts required to be amortized under the 

other such paragraph, with the resulting amount to be amortized over a period determined on the basis of the remaining amortization periods for all 

items entering into whichever of the two amounts being offset is the greater. 

‘‘(6) INTEREST.—Except as provided in subsection (c)(9), the funding standard 

account (and items therein) shall be charged or credited (as determined under 

regulations prescribed by the Secretary) with interest at the appropriate rate 

consistent with the rate or rates of interest used under the plan to determine 

costs. 

26 

‘‘(7) CERTAIN AMORTIZATION CHARGES AND CREDITS.—In the case of a plan 

which, immediately before the date of the enactment of the Multiemployer Pension Plan Amendments Act of 1980, was a multiemployer plan (within the 

meaning of section 414(f) as in effect immediately before such date)— ‘‘(A) any amount described in paragraph (2)(B)(ii), (2)(B)(iii), or (3)(B)(i) 

of this subsection which arose in a plan year beginning before such date 

shall be amortized in equal annual installments (until fully amortized) over 

40 plan years, beginning with the plan year in which the amount arose, ‘‘(B) any amount described in paragraph (2)(B)(iv) or (3)(B)(ii) of this subsection which arose in a plan year beginning before such date shall be amortized in equal annual installments (until fully amortized) over 20 plan 

years, beginning with the plan year in which the amount arose, ‘‘(C) any change in past service liability which arises during the period 

of 3 plan years beginning on or after such date, and results from a plan 

amendment adopted before such date, shall be amortized in equal annual 

installments (until fully amortized) over 40 plan years, beginning with the 

plan year in which the change arises, and ‘‘(D) any change in past service liability which arises during the period 

of 2 plan years beginning on or after such date, and results from the changing of a group of participants from one benefit level to another benefit level 

under a schedule of plan benefits which—

‘‘(i) was adopted before such date, and 

‘‘(ii) was effective for any plan participant before the beginning of the 

first plan year beginning on or after such date, 

shall be amortized in equal annual installments (until fully amortized) over 

40 plan years, beginning with the plan year in which the change arises. 

‘‘(8) SPECIAL RULES RELATING TO CHARGES AND CREDITS TO FUNDING STANDARD

ACCOUNT.—For purposes of this section—

‘‘(A) WITHDRAWAL LIABILITY.—Any amount received by a multiemployer 

plan in payment of all or part of an employer’s withdrawal liability under 

part 1 of subtitle E of title IV of the Employee Retirement Income Security 

Act of 1974 shall be considered an amount contributed by the employer to 

or under the plan. The Secretary may prescribe by regulation additional 

charges and credits to a multiemployer plan’s funding standard account to 

the extent necessary to prevent withdrawal liability payments from being 

unduly reflected as advance funding for plan liabilities. 

‘‘(B) ADJUSTMENTS WHEN A MULTIEMPLOYER PLAN LEAVES REORGANIZATION.—If a multiemployer plan is not in reorganization in the plan year but 

was in reorganization in the immediately preceding plan year, any balance 

in the funding standard account at the close of such immediately preceding 

plan year—

‘‘(i) shall be eliminated by an offsetting credit or charge (as the case 

may be), but 

‘‘(ii) shall be taken into account in subsequent plan years by being 

amortized in equal annual installments (until fully amortized) over 30 

plan years. 

The preceding sentence shall not apply to the extent of any accumulated 

funding deficiency under section 418B(a) as of the end of the last plan year 

that the plan was in reorganization. 

‘‘(C) PLAN PAYMENTS TO SUPPLEMENTAL PROGRAM OR WITHDRAWAL LIABILITY PAYMENT FUND.—Any amount paid by a plan during a plan year to the 

Pension Benefit Guaranty Corporation pursuant to section 4222 of the Employee Retirement Income Security Act of 1974 or to a fund exempt under 

section 501(c)(22) pursuant to section 4223 of such Act shall reduce the 

amount of contributions considered received by the plan for the plan year. 

‘‘(D) INTERIM WITHDRAWAL LIABILITY PAYMENTS.—Any amount paid by an 

employer pending a final determination of the employer’s withdrawal liability under part 1 of subtitle E of title IV of such Act and subsequently refunded to the employer by the plan shall be charged to the funding standard account in accordance with regulations prescribed by the Secretary. 

‘‘(E) ELECTION FOR DEFERRAL OF CHARGE FOR PORTION OF NET EXPERIENCE LOSS.—If an election is in effect under section 412(b)(7)(F) (as in effect 

on the day before the date of the enactment of the Pension Protection Act 

of 2005) for any plan year, the funding standard account shall be charged 

in the plan year to which the portion of the net experience loss deferred 

by such election was deferred with the amount so deferred (and paragraph 

(2)(B)(iv) shall not apply to the amount so charged). 

‘‘(F) FINANCIAL ASSISTANCE.—Any amount of any financial assistance 

from the Pension Benefit Guaranty Corporation to any plan, and any repayVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00026 Fmt 6659 Sfmt 6621 E:\HR\OC\HR232P2.XXX HR232P2
27 

ment of such amount, shall be taken into account under this section and 

section 412 in such manner as is determined by the Secretary. 

‘‘(G) SHORT-TERM BENEFITS.—To the extent that any plan amendment increases the unfunded past service liability under the plan by reason of an 

increase in benefits which are payable under the plan during a period that 

does not exceed 14 years, paragraph (2)(B)(iii) shall be applied separately 

with respect to such increase in unfunded past service liability by substituting the number of years of the period during which such benefits are 

payable for ‘15’. 

‘‘(c) ADDITIONAL RULES.—

‘‘(1) DETERMINATIONS TO BE MADE UNDER FUNDING METHOD.—For purposes of 

this section, normal costs, accrued liability, past service liabilities, and experience gains and losses shall be determined under the funding method used to 

determine costs under the plan. 

‘‘(2) VALUATION OF ASSETS.—

‘‘(A) IN GENERAL.—For purposes of this section, the value of the plan’s assets shall be determined on the basis of any reasonable actuarial method 

of valuation which takes into account fair market value and which is permitted under regulations prescribed by the Secretary. 

‘‘(B) ELECTION WITH RESPECT TO BONDS.—The value of a bond or other 

evidence of indebtedness which is not in default as to principal or interest 

may, at the election of the plan administrator, be determined on an amortized basis running from initial cost at purchase to par value at maturity 

or earliest call date. Any election under this subparagraph shall be made 

at such time and in such manner as the Secretary shall by regulations provide, shall apply to all such evidences of indebtedness, and may be revoked 

only with the consent of the Secretary. 

‘‘(3) ACTUARIAL ASSUMPTIONS MUST BE REASONABLE.—For purposes of this section, all costs, liabilities, rates of interest, and other factors under the plan shall 

be determined on the basis of actuarial assumptions and methods—

‘‘(A) each of which is reasonable (taking into account the experience of the 

plan and reasonable expectations), and 

‘‘(B) which, in combination, offer the actuary’s best estimate of anticipated experience under the plan. 

‘‘(4) TREATMENT OF CERTAIN CHANGES AS EXPERIENCE GAIN OR LOSS.—For purposes of this section, if—

‘‘(A) a change in benefits under the Social Security Act or in other retirement benefits created under Federal or State law, or 

‘‘(B) a change in the definition of the term ‘wages’ under section 3121, or 

a change in the amount of such wages taken into account under regulations 

prescribed for purposes of section 401(a)(5), 

results in an increase or decrease in accrued liability under a plan, such increase or decrease shall be treated as an experience loss or gain. 

‘‘(5) FULL FUNDING.—If, as of the close of a plan year, a plan would (without 

regard to this paragraph) have an accumulated funding deficiency in excess of 

the full funding limitation—

‘‘(A) the funding standard account shall be credited with the amount of 

such excess, and 

‘‘(B) all amounts described in subparagraphs (B), (C), and (D) of subsection (b)(2) and subparagraph (B) of subsection (b)(3) which are required 

to be amortized shall be considered fully amortized for purposes of such 

subparagraphs. 

‘‘(6) FULL-FUNDING LIMITATION.—

‘‘(A) IN GENERAL.—For purposes of paragraph (5), the term ‘full-funding 

limitation’ means the excess (if any) of—

‘‘(i) the accrued liability (including normal cost) under the plan (determined under the entry age normal funding method if such accrued 

liability cannot be directly calculated under the funding method used 

for the plan), over 

‘‘(ii) the lesser of—

‘‘(I) the fair market value of the plan’s assets, or 

‘‘(II) the value of such assets determined under paragraph (2). 

‘‘(B) MINIMUM AMOUNT.—

‘‘(i) IN GENERAL.—In no event shall the full-funding limitation determined under subparagraph (A) be less than the excess (if any) of—

‘‘(I) 90 percent of the current liability of the plan (including the 

expected increase in current liability due to benefits accruing during the plan year), over 

28 

‘‘(II) the value of the plan’s assets determined under paragraph 

(2). ‘‘(ii) ASSETS.—For purposes of clause (i), assets shall not be reduced 

by any credit balance in the funding standard account. ‘‘(C) FULL FUNDING LIMITATION.—For purposes of this paragraph, unless 

otherwise provided by the plan, the accrued liability under a multiemployer 

plan shall not include benefits which are not nonforfeitable under the plan 

after the termination of the plan (taking into consideration section 

411(d)(3)). ‘‘(D) CURRENT LIABILITY.—For purposes of this paragraph— ‘‘(i) IN GENERAL.—The term ‘current liability’ means all liabilities to 

employees and their beneficiaries under the plan. ‘‘(ii) TREATMENT OF UNPREDICTABLE CONTINGENT EVENT BENEFITS.— For purposes of clause (i), any benefit contingent on an event other 

than—

‘‘(I) age, service, compensation, death, or disability, or 

‘‘(II) an event which is reasonably and reliably predictable (as determined by the Secretary), 

shall not be taken into account until the event on which the benefit is 

contingent occurs. ‘‘(iii) INTEREST RATE USED.—The rate of interest used to determine 

current liability under this paragraph shall be the rate of interest determined under subparagraph (E). 

‘‘(iv) MORTALITY TABLES.—

‘‘(I) COMMISSIONERS’ STANDARD TABLE.—In the case of plan years 

beginning before the first plan year to which the first tables prescribed under subclause (II) apply, the mortality table used in determining current liability under this paragraph shall be the table 

prescribed by the Secretary which is based on the prevailing commissioners’ standard table (described in section 807(d)(5)(A)) used 

to determine reserves for group annuity contracts issued on January 1, 1993. 

‘‘(II) SECRETARIAL AUTHORITY.—The Secretary may by regulation 

prescribe for plan years beginning after December 31, 1999, mortality tables to be used in determining current liability under this 

subsection. Such tables shall be based upon the actual experience 

of pension plans and projected trends in such experience. In prescribing such tables, the Secretary shall take into account results 

of available independent studies of mortality of individuals covered 

by pension plans. 

‘‘(v) SEPARATE MORTALITY TABLES FOR THE DISABLED.—Notwithstanding clause (iv)—

‘‘(I) IN GENERAL.—In the case of plan years beginning after December 31, 1995, the Secretary shall establish mortality tables 

which may be used (in lieu of the tables under clause (iv)) to determine current liability under this subsection for individuals who are 

entitled to benefits under the plan on account of disability. The 

Secretary shall establish separate tables for individuals whose disabilities occur in plan years beginning before January 1, 1995, and 

for individuals whose disabilities occur in plan years beginning on 

or after such date. 

‘‘(II) SPECIAL RULE FOR DISABILITIES OCCURRING AFTER 1994.—In 

the case of disabilities occurring in plan years beginning after December 31, 1994, the tables under subclause (I) shall apply only 

with respect to individuals described in such subclause who are 

disabled within the meaning of title II of the Social Security Act 

and the regulations thereunder. 

‘‘(vi) PERIODIC REVIEW.—The Secretary shall periodically (at least 

every 5 years) review any tables in effect under this subparagraph and 

shall, to the extent the Secretary determines necessary, by regulation 

update the tables to reflect the actual experience of pension plans and 

projected trends in such experience. 

‘‘(E) REQUIRED CHANGE OF INTEREST RATE.—For purposes of determining 

a plan’s current liability for purposes of this paragraph—

‘‘(i) IN GENERAL.—If any rate of interest used under the plan under 

subsection (b)(6) to determine cost is not within the permissible range, 

the plan shall establish a new rate of interest within the permissible 

range. 

‘‘(ii) PERMISSIBLE RANGE.—For purposes of this subparagraph—

29 

‘‘(I) IN GENERAL.—Except as provided in subclause (II), the term ‘permissible range’ means a rate of interest which is not more than 

5 percent above, and not more than 10 percent below, the weighted 

average of the rates of interest on 30-year Treasury securities during the 4-year period ending on the last day before the beginning 

of the plan year. ‘‘(II) SECRETARIAL AUTHORITY.—If the Secretary finds that the 

lowest rate of interest permissible under subclause (I) is unreasonably high, the Secretary may prescribe a lower rate of interest, except that such rate may not be less than 80 percent of the average 

rate determined under such subclause. ‘‘(iii) ASSUMPTIONS.—Notwithstanding paragraph (3)(A), the interest 

rate used under the plan shall be— ‘‘(I) determined without taking into account the experience of the 

plan and reasonable expectations, but ‘‘(II) consistent with the assumptions which reflect the purchase 

rates which would be used by insurance companies to satisfy the 

liabilities under the plan. ‘‘(7) ANNUAL VALUATION.— ‘‘(A) IN GENERAL.—For purposes of this section, a determination of experience gains and losses and a valuation of the plan’s liability shall be made 

not less frequently than once every year, except that such determination 

shall be made more frequently to the extent required in particular cases 

under regulations prescribed by the Secretary. 

‘‘(B) VALUATION DATE.—

‘‘(i) CURRENT YEAR.—Except as provided in clause (ii), the valuation 

referred to in subparagraph (A) shall be made as of a date within the 

plan year to which the valuation refers or within one month prior to 

the beginning of such year. 

‘‘(ii) USE OF PRIOR YEAR VALUATION.—The valuation referred to in 

subparagraph (A) may be made as of a date within the plan year prior 

to the year to which the valuation refers if, as of such date, the value 

of the assets of the plan are not less than 100 percent of the plan’s current liability (as defined in paragraph (6)(D) without regard to clause 

(iv) thereof). 

‘‘(iii) ADJUSTMENTS.—Information under clause (ii) shall, in accordance with regulations, be actuarially adjusted to reflect significant differences in participants. 

‘‘(iv) LIMITATION.—A change in funding method to use a prior year 

valuation, as provided in clause (ii), may not be made unless as of the 

valuation date within the prior plan year, the value of the assets of the 

plan are not less than 125 percent of the plan’s current liability (as defined in paragraph (6)(D) without regard to clause (iv) thereof). 

‘‘(8) TIME WHEN CERTAIN CONTRIBUTIONS DEEMED MADE.—For purposes of this 

section, any contributions for a plan year made by an employer after the last 

day of such plan year, but not later than two and one-half months after such 

day, shall be deemed to have been made on such last day. For purposes of this 

subparagraph, such two and one-half month period may be extended for not 

more than six months under regulations prescribed by the Secretary. 

‘‘(9) INTEREST RULE FOR WAIVERS AND EXTENSIONS.—The interest rate applicable for any plan year for purposes of computing the amortization charge described in subsection (b)(2)(C) and in connection with an extension granted 

under subsection (d) shall be the greater of—

‘‘(A) 150 percent of the Federal mid-term rate (as in effect under section 

1274 for the 1st month of such plan year), or 

‘‘(B) the rate of interest used under the plan for determining costs. 

‘‘(d) EXTENSION OF AMORTIZATION PERIODS FOR MULTIEMPLOYER PLANS.—In the 

case of a multiemployer plan—

‘‘(1) EXTENSION.—The period of years required to amortize any unfunded liability (described in any clause of subsection (b)(2)(B)) of any multiemployer 

plan shall be extended by the Secretary for a period of time (not in excess of 

5 years) if the Secretary determines that—

‘‘(A) absent the extension, the plan would have an accumulated funding 

deficiency in any of the next 10 plan years, 

‘‘(B) the plan sponsor has adopted a plan to improve the plan’s funding 

status, and 

‘‘(C) taking into account the extension, the plan is projected to have sufficient assets to timely pay its expected benefit liabilities and other anticipated expenditures 

30 

‘‘(2) ADDITIONAL EXTENSION.—The period of years required to amortize any 

unfunded liability (described in any clause of subsection (b)(2)(B)) of any multiemployer plan may be extended (in addition to any extension under paragraph 

(1)) by the Secretary for a period of time (not in excess of 5 years) if the Secretary determines that such extension would carry out the purposes of the Employee Retirement Income Security Act of 1974 and would provide adequate protection for participants under the plan and their beneficiaries and if the Secretary determines that the failure to permit such extension would—

‘‘(A) result in—

‘‘(i) a substantial risk to the voluntary continuation of the plan, or 

‘‘(ii) a substantial curtailment of pension benefit levels or employee 

compensation, and 

‘‘(B) be adverse to the interests of plan participants in the aggregate. 

‘‘(3) ADVANCE NOTICE.—

‘‘(A) IN GENERAL.—The Secretary shall, before granting an extension 

under this section, require each applicant to provide evidence satisfactory 

to the Secretary that the applicant has provided notice of the filing of the 

application for such extension to each affected party (as defined in section 

4001(a)(21) of the Employee Retirement Income Security Act of 1974) with 

respect to the affected plan. Such notice shall include a description of the 

extent to which the plan is funded for benefits which are guaranteed under 

title IV of such Act and for benefit liabilities. 

‘‘(B) CONSIDERATION OF RELEVANT INFORMATION.—The Secretary shall 

consider any relevant information provided by a person to whom notice was 

given under paragraph (1).’’. 

(b) CONFORMING AMENDMENTS.—

(1) Section 418(b)(2) of such Code is amended—

(A) by striking ‘‘section 412(b)(2)’’ in subparagraph (A) and inserting ‘‘section 431(b)(2)’’, and 

(B) by striking ‘‘section 412(b)(3)(B)’’ in subparagraph (B) and inserting 

‘‘section 431(b)(3)(B)’’. 

(2) Section 418B of such Code is amended—

(A) by striking ‘‘section 412(b)(2)(A) or (B)’’ in subsection (d)(1)(B) and inserting ‘‘section 431(b)(2)(A) or (B)’’, 

(B) by striking ‘‘section 412(c)(8)’’ in subsection (e) and inserting ‘‘section 

412(d)(2)’’, and 

(C) by striking ‘‘section 412(c)(3)’’ in subsection (g) and inserting ‘‘section 

431(c)(3)’’. 

(3) Section 418D(a)(2) of such Code is amended—

(A) by striking ‘‘section 412(c)(8)’’ and inserting ‘‘section 412(d)(2)’’, and 

(B) by striking ‘‘section 412(c)(10)’’ and inserting ‘‘section 431(c)(8)’’. 

(c) CLERICAL AMENDMENT.—The table of sections for subpart A of part III of subchapter D of chapter 1 of such Code is amended by adding after the item relating 

to section 430 the following new item: 

‘‘Sec. 431. Minimum funding standards for multiemployer plans.’’. 

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

years beginning after December 31, 2006. 

SEC. 212. ADDITIONAL FUNDING RULES FOR MULTIEMPLOYER PLANS IN ENDANGERED OR 

CRITICAL STATUS. 

(a) IN GENERAL.—Subpart A of part III of subchapter D of chapter 1 of the Internal Revenue Code of 1986 is amended by inserting after section 431 the following 

new section: 

‘‘SEC. 432. ADDITIONAL FUNDING RULES FOR MULTIEMPLOYER PLANS IN ENDANGERED STATUS OR CRITICAL STATUS. 

‘‘(a) ANNUAL CERTIFICATION BY PLAN ACTUARY.—

‘‘(1) IN GENERAL.—During the 90-day period beginning on first day of each 

plan year of a multiemployer plan, the plan actuary shall certify to the Secretary whether or not the plan is in endangered status for such plan year and 

whether or not the plan is in critical status for such plan year. 

‘‘(2) ACTUARIAL PROJECTIONS OF ASSETS AND LIABILITIES.—

‘‘(A) IN GENERAL.—In making the determinations under paragraph (1), 

the plan actuary shall make projections under subsections (b)(2) and (c)(2) 

for the current and succeeding plan years, using reasonable actuarial assumptions and methods, of the current value of the assets of the plan and 

the present value of all liabilities to participants and beneficiaries under 

the plan for the current plan year as of the beginning of such year, as based 

31 

on the actuarial statement prepared for the preceding plan year under section 103(d) of the Employee Retirement Income Security Act of 1974. ‘‘(B) DETERMINATIONS OF FUTURE CONTRIBUTIONS.—Any such actuarial 

projection of plan assets shall assume— ‘‘(i) reasonably anticipated employer and employee contributions for 

the current and succeeding plan years, assuming that the terms of the 

one or more collective bargaining agreements pursuant to which the 

plan is maintained for the current plan year continue in effect for succeeding plan years, or ‘‘(ii) that employer and employee contributions for the most recent 

plan year will continue indefinitely, but only if the plan actuary determines there have been no significant demographic changes that would 

make continued application of such terms unreasonable. ‘‘(3) PRESUMED STATUS IN ABSENCE OF TIMELY ACTUARIAL CERTIFICATION.—If 

certification under this subsection is not made before the end of the 90-day period specified in paragraph (1), the plan shall be presumed to be in critical status for such plan year until such time as the plan actuary makes a contrary 

certification. ‘‘(4) NOTICE.—In any case in which a multiemployer plan is certified to be in 

endangered status under paragraph (1) or enters into critical status, the plan 

sponsor shall, not later than 30 days after the date of the certification or entry, 

provide notification of the endangered or critical status to the participants and 

beneficiaries, the bargaining parties, the Pension Benefit Guaranty Corporation, 

the Secretary of the Treasury, and the Secretary of Labor. 

‘‘(b) FUNDING RULES FOR MULTIEMPLOYER PLANS IN ENDANGERED STATUS.—

‘‘(1) IN GENERAL.—In any case in which a multiemployer plan is in endangered status for a plan year and no funding improvement plan under this subsection with respect to such multiemployer plan is in effect for the plan year, 

the plan sponsor shall, in accordance with this subsection, amend the multiemployer plan to include a funding improvement plan upon approval thereof by the 

bargaining parties under this subsection. The amendment shall be adopted not 

later than 240 days after the date on which the plan is certified to be in endangered status under subsection (a)(1). 

‘‘(2) ENDANGERED STATUS.—A multiemployer plan is in endangered status for 

a plan year if, as determined by the plan actuary under subsection (a)—

‘‘(A) the plan’s funded percentage for such plan year is less than 80 percent, or 

‘‘(B) the plan has an accumulated funding deficiency for such plan year 

under section 431 or is projected to have such an accumulated funding deficiency for any of the 6 succeeding plan years, taking into account any extension of amortization periods under section 431(d). 

‘‘(3) FUNDING IMPROVEMENT PLAN.—

‘‘(A) BENCHMARKS.—A funding improvement plan shall consist of amendments to the plan formulated to provide, under reasonable actuarial assumptions, for the attainment, during the funding improvement period 

under the funding improvement plan, of the following benchmarks: 

‘‘(i) INCREASE IN FUNDED PERCENTAGE.—An increase in the plan’s 

funded percentage such that—

‘‘(I) the difference between 100 percent and the plan’s funded 

percentage for the last year of the funding improvement period, is 

not more than 

‘‘(II) 2⁄3 of the difference between 100 percent and the plan’s 

funded percentage for the first year of the funding improvement 

period. 

‘‘(ii) AVOIDANCE OF ACCUMULATED FUNDING DEFICIENCIES.—No accumulated funding deficiency for any plan year during the funding improvement period (taking into account any extension of amortization 

periods under section 431(d)). 

‘‘(B) FUNDING IMPROVEMENT PERIOD.—The funding improvement period 

for any funding improvement plan adopted pursuant to this subsection is 

the 10-year period beginning on the earlier of—

‘‘(i) the second anniversary of the date of the adoption of the funding 

improvement plan, or 

‘‘(ii) the first day of the first plan year of the multiemployer plan following the plan year in which occurs the first date after the day of the 

certification as of which collective bargaining agreements covering on 

the day of such certification at least 75 percent of active participants 

in such multiemployer plan have expired. 

‘‘(C) SPECIAL RULES FOR CERTAIN SERIOUSLY UNDERFUNDED PLANS.—

32 

‘‘(i) In the case of a plan in which the funded percentage of a plan 

for the plan year is 70 percent or less, subparagraph (A)(i)(II) shall be 

applied by substituting ‘

4⁄5’ for ‘2⁄3’ and subparagraph (B) shall be applied by substituting ‘the 15-year period’ for ‘the 10-year period’. 

‘‘(ii) In the case of a plan in which the funded percentage of a plan 

for the plan year is more than 70 percent but less than 80 percent, 

and—

‘‘(I) the plan actuary certifies within 30 days after certification 

under subsection (a)(1) that the plan is not able to attain the increase described in subparagraph (A)(i) over the period described 

in subparagraph (B), and 

‘‘(II) the plan year is prior to the day described in subparagraph 

(B)(ii), 

subparagraph (A)(i)(II) shall be applied by substituting ‘

4⁄5’ for ‘2⁄3’ and 

subparagraph (B) shall be applied by substituting ‘the 15-year period’

for ‘the 10-year period’. 

‘‘(iii) For any plan year following the year described in clause (ii)(II), 

subparagraph (A)(i)(II) and subparagraph (B) shall apply, except that 

for each plan year ending after such date for which the plan actuary 

certifies (at the time of the annual certification under subsection (a)(1) 

for such plan year) that the plan is not able to attain the increase described in subparagraph (A)(i) over the period described in subparagraph (B), subparagraph (B) shall be applied by substituting ‘the 15- 

year period’ for ‘the 10-year period’. 

‘‘(D) REPORTING.—A summary of any funding improvement plan or modification thereto adopted during any plan year, together with annual updates regarding the funding ratio of the plan, shall be included in the annual report for such plan year under section 104(a) of the Employee Retirement Income Security Act of 1974 and in the summary annual report described in section 104(b)(3) of such Act. 

‘‘(4) DEVELOPMENT OF FUNDING IMPROVEMENT PLAN.—

‘‘(A) ACTIONS BY PLAN SPONSOR PENDING APPROVAL.—Pending the approval of a funding improvement plan under this paragraph, the plan sponsor shall take all reasonable actions, consistent with the terms of the plan 

and applicable law, necessary to ensure—

‘‘(i) an increase in the plan’s funded percentage, and 

‘‘(ii) postponement of an accumulated funding deficiency for at least 

1 additional plan year. 

Such actions include applications for extensions of amortization periods 

under section 431(d), use of the shortfall funding method in making funding 

standard account computations, amendments to the plan’s benefit structure, 

reductions in future benefit accruals, and other reasonable actions consistent with the terms of the plan and applicable law. 

‘‘(B) RECOMMENDATIONS BY PLAN SPONSOR.—

‘‘(i) IN GENERAL.—During the period of 90 days following the date on 

which a multiemployer plan is certified to be in endangered status, the 

plan sponsor shall develop and provide to the bargaining parties alternative proposals for revised benefit structures, contribution structures, 

or both, which, if adopted as amendments to the plan, may be reasonably expected to meet the benchmarks described in paragraph (3)(A). 

Such proposals shall include—

‘‘(I) at least one proposal for reductions in the amount of future 

benefit accruals necessary to achieve the benchmarks, assuming no 

amendments increasing contributions under the plan (other than 

amendments increasing contributions necessary to achieve the 

benchmarks after amendments have reduced future benefit accruals to the maximum extent permitted by law), and 

‘‘(II) at least one proposal for increases in contributions under 

the plan necessary to achieve the benchmarks, assuming no 

amendments reducing future benefit accruals under the plan. 

‘‘(ii) REQUESTS BY BARGAINING PARTIES.—Upon the request of any 

bargaining party who—

‘‘(I) employs at least 5 percent of the active participants, or 

‘‘(II) represents as an employee organization, for purposes of collective bargaining, at least 5 percent of the active participants, 

the plan sponsor shall provide all such parties information as to other 

combinations of increases in contributions and reductions in future benefit accruals which would result in achieving the benchmarks. 

33 

‘‘(iii) OTHER INFORMATION.—The plan sponsor may, as it deems appropriate, prepare and provide the bargaining parties with additional 

information relating to contribution structures or benefit structures or 

other information relevant to the funding improvement plan. ‘‘(5) MAINTENANCE OF CONTRIBUTIONS PENDING APPROVAL OF FUNDING IM- PROVEMENT PLAN.—Pending approval of a funding improvement plan by the 

bargaining parties with respect to a multiemployer plan, the multiemployer 

plan may not be amended so as to provide— ‘‘(A) a reduction in the level of contributions for participants who are not 

in pay status, ‘‘(B) a suspension of contributions with respect to any period of service, or ‘‘(C) any new direct or indirect exclusion of younger or newly hired employees from plan participation. ‘‘(6) BENEFIT RESTRICTIONS PENDING APPROVAL OF FUNDING IMPROVEMENT

PLAN.—Pending approval of a funding improvement plan by the bargaining parties with respect to a multiemployer plan— ‘‘(A) RESTRICTIONS ON LUMP SUM AND SIMILAR DISTRIBUTIONS.—In any 

case in which the present value of a participant’s accrued benefit under the 

plan exceeds $5,000, such benefit may not be distributed as an immediate 

distribution or in any other accelerated form. 

‘‘(B) PROHIBITION ON BENEFIT INCREASES.—

‘‘(i) IN GENERAL.—No amendment of the plan which increases the liabilities of the plan by reason of any increase in benefits, any change 

in the accrual of benefits, or any change in the rate at which benefits 

become nonforfeitable under the plan may be adopted. 

‘‘(ii) EXCEPTION.—Clause (i) shall not apply to any plan amendment 

which is required as a condition of qualification under part I of subchapter D of chapter 1 of subtitle A. 

‘‘(7) DEFAULT CRITICAL STATUS IF NO FUNDING IMPROVEMENT PLAN ADOPTED.—

If no plan amendment adopting a funding improvement plan has been adopted 

by the end of the 240-day period referred to in subsection (b)(1), the plan enters 

into critical status as of the first day of the succeeding plan year. 

‘‘(8) RESTRICTIONS UPON APPROVAL OF FUNDING IMPROVEMENT PLAN.—Upon 

adoption of a funding improvement plan with respect to a multiemployer plan, 

the plan may not be amended—

‘‘(A) so as to be inconsistent with the funding improvement plan, or 

‘‘(B) so as to increase future benefit accruals, unless the plan actuary certifies in advance that, after taking into account the proposed increase, the 

plan is reasonably expected to meet the the benchmarks described in paragraph (3)(A). 

‘‘(c) FUNDING RULES FOR MULTIEMPLOYER PLANS IN CRITICAL STATUS.—

‘‘(1) IN GENERAL.—In any case in which a multiemployer plan is in critical 

status for a plan year as described in paragraph (2) (or otherwise enters into 

critical status under this section) and no rehabilitation plan under this subsection with respect to such multiemployer plan is in effect for the plan year, 

the plan sponsor shall, in accordance with this subsection, amend the multiemployer plan to include a rehabilitation plan under this subsection. The amendment shall be adopted not later than 240 days after the date on which the plan 

enters into critical status. 

‘‘(2) CRITICAL STATUS.—A multiemployer plan is in critical status for a plan 

year if—

‘‘(A) the plan is in endangered status for the preceding plan year and the 

requirements of subsection (b)(1) were not met with respect to the plan for 

such preceding plan year, or 

‘‘(B) as determined by the plan actuary under subsection (a), the plan is 

described in paragraph (3). 

‘‘(3) CRITICALITY DESCRIPTION.—For purposes of paragraph (2)(B), a plan is 

described in this paragraph if the plan is described in at least one of the following subparagraphs: 

‘‘(A) A plan is described in this subparagraph if, as of the beginning of 

the current plan year—

‘‘(i) the funded percentage of the plan is less than 65 percent, and 

‘‘(ii) the sum of—

‘‘(I) the market value of plan assets, plus 

‘‘(II) the present value of the reasonably anticipated employer 

and employee contributions for the current plan year and each of 

the 6 succeeding plan years, assuming that the terms of the one 

or more collective bargaining agreements pursuant to which the 

34 

plan is maintained for the current plan year continue in effect for 

succeeding plan years, 

is less than the present value of all nonforfeitable benefits for all participants and beneficiaries projected to be payable under the plan during the current plan year and each of the 6 succeeding plan years (plus 

administrative expenses for such plan years). ‘‘(B) A plan is described in this subparagraph if, as of the beginning of 

the current plan year, the sum of— ‘‘(i) the market value of plan assets, plus 

‘‘(ii) the present value of the reasonably anticipated employer and 

employee contributions for the current plan year and each of the 4 succeeding plan years, assuming that the terms of the one or more collective bargaining agreements pursuant to which the plan is maintained 

for the current plan year remain in effect for succeeding plan years, 

is less than the present value of all nonforfeitable benefits for all participants and beneficiaries projected to be payable under the plan during the 

current plan year and each of the 4 succeeding plan years (plus administrative expenses for such plan years). ‘‘(C) A plan is described in this subparagraph if— ‘‘(i) as of the beginning of the current plan year, the funded percentage of the plan is less than 65 percent, and 

‘‘(ii) the plan has an accumulated funding deficiency for the current 

plan year or is projected to have an accumulated funding deficiency for 

any of the 4 succeeding plan years, not taking into account any extension of amortization periods under section 431(d). 

‘‘(D) A plan is described in this subparagraph if—

‘‘(i)(I) the plan’s normal cost for the current plan year, plus interest 

(determined at the rate used for determining cost under the plan) for 

the current plan year on the amount of unfunded benefit liabilities 

under the plan as of the last date of the preceding plan year, exceeds 

‘‘(II) the present value, as of the beginning of the current plan year, 

of the reasonably anticipated employer and employee contributions for 

the current plan year, 

‘‘(ii) the present value, as of the beginning of the current plan year, 

of nonforfeitable benefits of inactive participants is greater than the 

present value, as of the beginning of the current plan year, of nonforfeitable benefits of active participants, and 

‘‘(iii) the plan is projected to have an accumulated funding deficiency 

for the current plan year or any of the 4 succeeding plan years, not taking into account any extension of amortization periods under section 

431(d). 

‘‘(E) A plan is described in this subparagraph if—

‘‘(i) the funded percentage of the plan is greater than 65 percent for 

the current plan year, and 

‘‘(ii) the plan is projected to have an accumulated funding deficiency 

during any of the succeeding 3 plan years, not taking into account any 

extension of amortization periods under section 431(d). 

‘‘(4) REHABILITATION PLAN.—

‘‘(A) IN GENERAL.—A rehabilitation plan shall consist of—

‘‘(i) amendments to the plan providing (under reasonable actuarial 

assumptions) for measures, agreed to by the bargaining parties, to increase contributions, reduce plan expenditures (including plan mergers 

and consolidations), or reduce future benefit accruals, or to take any 

combination of such actions, determined necessary to cause the plan to 

cease, during the rehabilitation period, to be in critical status, or 

‘‘(ii) reasonable measures to forestall possible insolvency (within the 

meaning of section 418E) if the plan sponsor determines that, upon exhaustion of all reasonable measures, the plan would not cease during 

the rehabilitation period to be in critical status. 

‘‘(B) REHABILITATION PERIOD.—The rehabilitation period for any rehabilitation plan adopted pursuant to this subsection is the 10-year period beginning on the earlier of—

‘‘(i) the second anniversary of the date of the adoption of the rehabilitation plan, or 

‘‘(ii) the first day of the first plan year of the multiemployer plan following the plan year in which occurs the first date, after the date of 

the plan’s entry into critical status, as of which collective bargaining 

agreements covering at least 75 percent of active participants in such 

multiemployer plan (determined as of such date of entry) have expired. 

35 

‘‘(C) REPORTING.—A summary of any rehabilitation plan or modification 

thereto adopted during any plan year, together with annual updates regarding the funding ratio of the plan, shall be included in the annual report for 

such plan year under section 104(a) of the Employee Retirement Income Security Act of 1974 and in the summary annual report described in section 

104(b)(3). ‘‘(5) DEVELOPMENT OF REHABILITATION PLAN.— ‘‘(A) PROPOSALS BY PLAN SPONSOR.— ‘‘(i) IN GENERAL.—Within 90 days after the date of entry into critical 

status (or the date as of which the requirements of subsection (b)(1) are 

not met with respect to the plan), the plan sponsor shall propose to all 

bargaining parties a range of alternative schedules of increases in contributions and reductions in future benefit accruals that would serve to 

carry out a rehabilitation plan under this subsection. ‘‘(ii) PROPOSAL ASSUMING NO CONTRIBUTION INCREASES.—Such proposals shall include, as one of the proposed schedules, a schedule of 

those reductions in future benefit accruals that would be necessary to 

cause the plan to cease to be in critical status if there were no further 

increases in rates of contribution to the plan. ‘‘(iii) PROPOSAL WHERE CONTRIBUTIONS ARE NECESSARY.—If the plan 

sponsor determines that the plan will not cease to be in critical status 

during the rehabilitation period unless the plan is amended to provide 

for an increase in contributions, the plan sponsor’s proposals shall include a schedule of those increases in contribution rates that would be 

necessary to cause the plan to cease to be in critical status if future 

benefit accruals were reduced to the maximum extent permitted by 

law. 

‘‘(B) REQUESTS FOR ADDITIONAL SCHEDULES.—Upon the request of any 

bargaining party who—

‘‘(i) employs at least 5 percent of the active participants, or 

‘‘(ii) represents as an employee organization, for purposes of collective 

bargaining, at least 5 percent of active participants, 

the plan sponsor shall include among the proposed schedules such schedules of increases in contributions and reductions in future benefit accruals 

as may be specified by the bargaining parties. 

‘‘(C) SUBSEQUENT AMENDMENTS.—Upon the adoption of a schedule of increases in contributions or reductions in future benefit accruals as part of 

the rehabilitation plan, the plan sponsor may amend the plan thereafter to 

update the schedule to adjust for any experience of the plan contrary to 

past actuarial assumptions, except that such an amendment may be made 

not more than once in any 3-year period. 

‘‘(D) ALLOCATION OF REDUCTIONS IN FUTURE BENEFIT ACCRUALS.—Any 

schedule containing reductions in future benefit accruals forming a part of 

a rehabilitation plan shall be applicable with respect to any group of active 

participants who are employed by any bargaining party (as an employer obligated to contribute under the plan) in proportion to the extent to which 

increases in contributions under such schedule apply to such bargaining 

party. 

‘‘(E) LIMITATION ON REDUCTION IN RATES OF FUTURE ACCRUALS.—Any 

schedule proposed under this paragraph shall not reduce the rate of future 

accruals below the lower of—

‘‘(i) a monthly benefit equal to 1 percent of the contributions required 

to be made with respect to a participant or the equivalent standard accrual rate for a participant or group of participants under the collective 

bargaining agreements in effect as of the first day of the plan year in 

which the plan enters critical status, or 

‘‘(ii) if lower, the accrual rate under the plan on such date. 

The equivalent standard accrual rate shall be determined by the trustees 

based on the standard or average contribution base units that they determine to be representative for active participants and such other factors as 

they determine to be relevant. 

‘‘(6) MAINTENANCE OF CONTRIBUTIONS AND RESTRICTIONS ON BENEFITS PENDING ADOPTION OF REHABILITATION PLAN.—The rules of paragraphs (5) and (6) of 

subsection (b) shall apply for purposes of this subsection by substituting the 

term ‘rehabilitation plan’ for ‘funding improvement plan’. 

‘‘(7) RESTRICTIONS UPON APPROVAL OF REHABILITATION PLAN.—Upon adoption 

of a rehabilitation plan with respect to a multiemployer plan, the plan may not 

be amended—

‘‘(A) so as to be inconsistent with the rehabilitation plan, or 

36 

‘‘(B) so as to increase future benefit accruals, unless the plan actuary certifies in advance that, after taking into account the proposed increase, the 

plan is reasonably expected to cease to be in critical status. ‘‘(8) IMPLEMENTATION OF DEFAULT SCHEDULE UPON FAILURE TO ADOPT REHA- BILITATION PLAN.—If the plan is not amended by the end of the 240-day period 

after entry into critical status to include a rehabilitation plan, the plan sponsor 

shall amend the plan to implement the schedule required by paragraph 

(5)(A)(ii). ‘‘(9) DEEMED WITHDRAWAL.—Upon the failure of any employer who has an obligation to contribute under the plan to make contributions in compliance with 

the schedule adopted under paragraph (4) as part of the rehabilitation plan, the 

failure of the employer may, at the discretion of the plan sponsor, be treated 

as a withdrawal by the employer from the plan under section 4203 of the Employee Retirement Income Security Act of 1974 or a partial withdrawal by the 

employer under section 4205 of such Act. ‘‘(d) DEFINITIONS.—For purposes of this section— ‘‘(1) BARGAINING PARTY.—The term ‘bargaining party’ means, in connection 

with a multiemployer plan— ‘‘(A) an employer who has an obligation to contribute under the plan, and 

‘‘(B) an employee organization which, for purposes of collective bargaining, represents plan participants employed by such an employer. ‘‘(2) FUNDED PERCENTAGE.—The term ‘funded percentage’ means the percentage expressed as a ratio of which— ‘‘(A) the numerator of which is the value of the plan’s assets, as determined under section 431(c)(2), and ‘‘(B) the denominator of which is the accrued liability of the plan. ‘‘(3) ACCUMULATED FUNDING DEFICIENCY.—The term ‘accumulated funding deficiency’ has the meaning provided such term in section 431(a). ‘‘(4) ACTIVE PARTICIPANT.—The term ‘active participant’ means, in connection 

with a multiemployer plan, a participant who is in covered service under the 

plan. ‘‘(5) INACTIVE PARTICIPANT.—The term ‘inactive participant’ means, in connection with a multiemployer plan, a participant who— ‘‘(A) is not in covered service under the plan, and 

‘‘(B) is in pay status under the plan or has a nonforfeitable right to benefits under the plan. ‘‘(6) PAY STATUS.—A person is in ‘pay status’ under a multiemployer plan if— ‘‘(A) at any time during the current plan year, such person is a participant or beneficiary under the plan and is paid an early, late, normal, or 

disability retirement benefit under the plan (or a death benefit under the 

plan related to a retirement benefit), or ‘‘(B) to the extent provided in regulations of the Secretary, such person 

is entitled to such a benefit under the plan. ‘‘(7) OBLIGATION TO CONTRIBUTE.—The term ‘obligation to contribute’ has the 

meaning provided such term under section 4212(a) of the Employee Retirement 

Income Security Act of 1974. ‘‘(8) ENTRY INTO CRITICAL STATUS.—A plan shall be treated as entering into 

critical status as of the date that such plan is certified to be in critical status 

under subsection (a)(1), is presumed to be in critical status under subsection 

(a)(3), or enters into critical status under subsection (b)(7).’’. (b) CLERICAL AMENDMENT.—The table of sections for subpart A of part III of subchapter D of chapter 1 of such Code is amended by adding at the end the following 

new item: 

‘‘Sec. 432. Additional funding rules for multiemployer plans in endangered status or critical status.’’. 

(c) EFFECTIVE DATE.—The amendment made by this section shall apply with respect to plan years beginning after December 31, 2005. 

(d) SPECIAL RULE FOR 2006.—In the case of any plan year beginning in 2006, any 

reference in section 432 of the Internal Revenue Code of 1986 (as added by this section) to section 431 of such Code (as added by this Act) shall be treated as a reference to the corresponding provision of such Code as in effect for plan years beginning in such year. 

SEC. 213. MEASURES TO FORESTALL INSOLVENCY OF MULTIEMPLOYER PLANS. 

(a) ADVANCE DETERMINATION OF IMPENDING INSOLVENCY OVER 5 YEARS.—Section 

418E(d)(1) of the Internal Revenue Code of 1986 is amended—

(1) by striking ‘‘3 plan years’’ the second place it appears and inserting ‘‘5 

plan years’’, and 

(2) by adding at the end the following new sentence: ‘‘If the plan sponsor 

makes such a determination that the plan will be insolvent in any of the next 

37 

5 plan years, the plan sponsor shall make the comparison under this paragraph 

at least annually until the plan sponsor makes a determination that the plan 

will not be insolvent in any of the next 5 plan years.’’. (b) EFFECTIVE DATE.—The amendments made by this section shall apply with respect to determinations made in plan years beginning after December 31, 2005. 

TITLE III—OTHER PROVISIONS 

SEC. 301. INTEREST RATE FOR 2006 FUNDING REQUIREMENTS. 

(a) IN GENERAL.—Subclause (II) of section 412(b)(5)(B)(ii) of the Internal Revenue 

Code of 1986 is amended— (1) by striking ‘‘January 1, 2006’’ and inserting ‘‘January 1, 2007’’, and 

(2) by striking ‘‘AND 2005’’ in the heading and inserting ‘‘, 2005, AND 2006’’. (b) CURRENT LIABILITY.—Subclause (IV) of section 412(l)(7)(C)(i) of such Code is 

amended— (1) by striking ‘‘or 2005’’ and inserting ‘‘, 2005, or 2006’’, and 

(2) by striking ‘‘AND 2005’’ in the heading and inserting ‘‘, 2005, AND 2006’’. (c) EFFECTIVE DATE.—The amendments made by this section shall apply to plan 

years beginning after December 31, 2005. 

SEC. 302. INTEREST RATE ASSUMPTION FOR DETERMINATION OF LUMP SUM DISTRIBUTIONS. 

(a) AMENDMENTS TO EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974.— [See section 301(a) of the bill as reported by the Committee on Education and the 

Workforce.] 

(b) AMENDMENTS TO INTERNAL REVENUE CODE OF 1986.—Section 417(e)(3)(A) of 

the Internal Revenue Code of 1986 is amended by striking clause (ii) and inserting 

the following: ‘‘(ii) For purposes of clause (i), the term ‘applicable mortality table’ means a mortality table, modified as appropriate by the Secretary, 

based on the mortality table specified for the plan year under section 

430(h)(3). ‘‘(iii) For purposes of clause (i), the term ‘applicable interest rate’ means the adjusted first, second, and third segment rates applied 

under rules similar to the rules of section 430(h)(2)(C) for the month 

before the date of the distribution or such other time as the Secretary 

may by regulations prescribe. ‘‘(iv) For purposes of clause (iii), the adjusted first, second, and third 

segment rates are the first, second, and third segment rates which 

would be determined under section 430(h)(2)(C) if— ‘‘(I) section 430(h)(2)(D)(i) were applied by substituting ‘the 

yields’ for ‘a 3-year weighted average of yields’, 

‘‘(II) section 430(h)(2)(G)(i)(II) were applied by substituting ‘section 417(e)(3)(A)(ii)(II)’ for ‘section 412(b)(5)(B)(ii)(II)’, and 

‘‘(III) the applicable percentage under section 430(h)(2)(G) were 

determined in accordance with the following table: 

‘‘In the case of plan years beginning in: The applicable percentage is:

2007 ................................................................................................................. 20 percent

2008 ................................................................................................................. 40 percent

2009 ................................................................................................................. 60 percent

2010 ................................................................................................................. 80 percent.’’. 

(c) SPECIAL RULE FOR PLAN AMENDMENTS.—A plan shall not fail to meet the requirements of section 411(d)(6) of the Internal Revenue Code of 1986 or section 

204(g) of the Employee Retirement Income Security Act of 1974 solely by reason of 

the adoption by the plan of an amendment necessary to meet the requirements of 

the amendments made by this section. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply with respect to plan years beginning after December 31, 2006. 

SEC. 303. INTEREST RATE ASSUMPTION FOR APPLYING BENEFIT LIMITATIONS TO LUMP SUM 

DISTRIBUTIONS. 

(a) IN GENERAL.—Clause (ii) of section 415(b)(2)(E) of the Internal Revenue Code 

of 1986 is amended to read as follows: 

‘‘(ii) For purposes of adjusting any benefit under subparagraph (B) for 

any form of benefit subject to section 417(e)(3), the interest rate assumption shall not be less than the greater of—

38 

‘‘(I) 5.5 percent, 

‘‘(II) the rate that provides a benefit of not more than 105 percent of the benefit that would be provided if the applicable interest 

rate (as defined in section 417(e)(3)) were the interest rate assumption, or ‘‘(III) the rate specified under the plan.’’. (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to distributions made in years beginning after December 31, 2005. 

SEC. 304. DISTRIBUTIONS DURING WORKING RETIREMENT. 

(a) AMENDMENT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974.— [See section 303(a) of the bill as reported by the Committee on Education and the 

Workforce.] 

(b) AMENDMENT TO THE INTERNAL REVENUE CODE OF 1986.—Subsection (a) of section 401 of the Internal Revenue Code of 1986 is amended by inserting after paragraph (34) the following new paragraph: ‘‘(35) DISTRIBUTIONS DURING WORKING RETIREMENT.—A trust forming part of 

a pension plan shall not be treated as failing to constitute a qualified trust 

under this section solely because a distribution is made from such trust to an 

employee who has attained age 62 and who is not separated from employment 

at the time of such distribution.’’. (c) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions in plan years beginning after December 31, 2005. 

SEC. 305. OTHER AMENDMENTS RELATING TO PROHIBITED TRANSACTIONS. 

[See section 304 of the bill as reported by the Committee on Education and the 

Workforce.] 

SEC. 306. CORRECTION PERIOD FOR CERTAIN TRANSACTIONS INVOLVING SECURITIES AND 

COMMODITIES. 

[See section 305 of the bill as reported by the Committee on Education and the 

Workforce.] 

SEC. 307. GOVERNMENT ACCOUNTABILITY OFFICE PENSION FUNDING REPORT. 

[See section 306 of the bill as reported by the Committee on Education and the 

Workforce.] 

TITLE IV—IMPROVEMENTS IN PBGC 

GUARANTEE PROVISIONS 

SEC. 401. INCREASES IN PBGC PREMIUMS. 

(a) FLAT-RATE PREMIUMS.—Section 4006(a)(3) of the Employee Retirement Income 

Security Act of 1974 (29 U.S.C. 1306(a)(3)) is amended— (1) by striking clause (i) of subparagraph (A) and inserting the following: 

‘‘(i) in the case of a single-employer plan, an amount equal to— ‘‘(I) for plan years beginning after December 31, 1990, and before January 1, 2006, $19, or ‘‘(II) for plan years beginning after December 31, 2005, the amount determined under subparagraph (F), 

plus the additional premium (if any) determined under subparagraph (E) for 

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

(2) by adding at the end the following new subparagraph: ‘‘(F)(i) Except as otherwise provided in this subparagraph, for purposes of determining the annual premium rate payable to the corporation by a single-employer 

plan for basic benefits guaranteed under this title, the amount determined under 

this subparagraph is the greater of $30 or the adjusted amount determined under 

clause (ii). 

‘‘(ii) For plan years beginning after 2006, the adjusted amount determined under 

this clause is the product derived by multiplying $30 by the ratio of—

‘‘(I) the national average wage index (as defined in section 209(k)(1) of the Social Security Act) for the first of the 2 calendar years preceding the calendar 

year in which the plan year begins, to 

‘‘(II) the national average wage index (as so defined) for 2004, 

with such product, if not a multiple of $1, being rounded to the next higher multiple 

of $1 where such product is a multiple of $0.50 but not of $1, and to the nearest 

multiple of $1 in any other case. 

‘‘(iii) For purposes of determining the annual premium rate payable to the corporation by a single-employer plan for basic benefits guaranteed under this title for 

any plan year beginning after 2005 and before 2010—

39 

‘‘(I) except as provided in subclause (II), the premium amount referred to in 

subparagraph (A)(i)(II) for any such plan year is the amount set forth in connection with such plan year in the following table: 

‘‘If the plan year begins in: The amount is: 

2006 ................................................................................................................. $21.20 

2007 ................................................................................................................. $23.40 

2008 ................................................................................................................. $25.60 

2009 ................................................................................................................. $27.80; or

‘‘(II) if the plan’s funding target attainment percentage for the plan year preceding the current plan year was less than 80 percent, the premium amount 

referred to in subparagraph (A)(i)(II) for such current plan year is the amount 

set forth in connection with such current plan year in the following table: 

‘‘If the plan year begins in: The amount is:

2006 ................................................................................................................. $22.67

2007 ................................................................................................................. $26.33

2008 or 2009 ................................................................................................... the amount provided under 

clause (i). 

‘‘(iv) For purposes of this subparagraph, the term ‘funding target attainment percentage’ has the meaning provided such term in section 303(d)(2).’’. 

(b) PREMIUM RATE FOR CERTAIN TERMINATED SINGLE-EMPLOYER PLANS.—Subsection (a) of section 4006 of such Act (29 U.S.C. 1306) is amended by adding at 

the end the following: 

‘‘(7) PREMIUM RATE FOR CERTAIN TERMINATED SINGLE-EMPLOYER PLANS.—

‘‘(A) IN GENERAL.—If there is a termination of a single-employer plan under 

clause (ii) or (iii) of section 4041(c)(2)(B) or section 4042, there shall be payable 

to the corporation, with respect to each applicable 12-month period, a premium 

at a rate equal to $1,250 multiplied by the number of individuals who were participants in the plan immediately before the termination date. Such premium 

shall be in addition to any other premium under this section. 

‘‘(B) SPECIAL RULE FOR PLANS TERMINATED IN BANKRUPTCY REORGANIZATION.—

If the plan is terminated under 4041(c)(2)(B)(ii) or under section 4042 and, as 

of the termination date, a person who is (as of such date) a contributing sponsor 

of the plan or a member of such sponsor’s controlled group has filed or has had 

filed against such person a petition seeking reorganization in a case under title 

11 of the United States Code, or under any similar law of a State or a political 

subdivision of a State (or a case described in section 4041(c)(2)(B)(i) filed by or 

against such person has been converted, as of such date, to such a case in which 

reorganization is sought), subparagraph (A) shall not apply to such plan until 

the date of the discharge of such person in such case. 

‘‘(C) APPLICABLE 12-MONTH PERIOD.—For purposes of subparagraph (A)—

‘‘(i) IN GENERAL.—The term ‘applicable 12-month period’ means—

‘‘(I) the 12-month period beginning with the first month following the 

month in which the termination date occurs, and 

‘‘(II) each of the first two 12-month periods immediately following the 

period described in subclause (I). 

‘‘(ii) PLANS TERMINATED IN BANKRUPTCY REORGANIZATION.—In any case in 

which the requirements of subparagraph (B) are met in connection with the 

termination of the plan with respect to 1 or more persons described in such 

subparagraph, the 12-month period described in clause (i)(I) shall be the 12- 

month period beginning with the first month following the month which includes the earliest date as of which each such person is discharged in the 

case described in such clause in connection with such person. 

‘‘(D) COORDINATION WITH SECTION 4007.—

‘‘(i) Notwithstanding section 4007—

‘‘(I) premiums under this paragraph shall be due within 30 days after 

the beginning of any applicable 12-month period, and 

‘‘(II) the designated payor shall be the person who is the contributing 

sponsor as of immediately before the termination date. 

‘‘(ii) The fifth sentence of section 4007(a) shall not apply in connection 

with premiums determined under this paragraph.’’. 

(c) RISK-BASED PREMIUMS.—

(1) EXTENSION THROUGH 2006.—Section 4006(a)(3)(E)(iii)(V) of such Act is 

amended by striking ‘‘January 1, 2006’’ and inserting ‘‘January 1, 2007’’. 

40 

(2) CONFORMING AMENDMENTS RELATED TO FUNDING RULES FOR SINGLE-EMPLOYER PLANS.—Section 4006(a)(3)(E) of such Act is amended by striking 

clauses (iii) and (iv) and inserting the following: 

‘‘(iii)(I) For purposes of clause (ii), except as provided in subclause (II), 

the term ‘unfunded vested benefits’ means, for a plan year, the amount 

which would be the plan’s funding shortfall (as defined in section 303(c)(4)), 

if the value of plan assets of the plan were equal to the fair market value 

of such assets and only vested benefits were taken into account. 

‘‘(II) The interest rate used in valuing vested benefits for purposes of subclause (I) shall be equal to the first, second, or third segment rate which 

would be determined under section 303(h)(2)(C) if section 303(h)(2)(D)(i) 

were applied by substituting ‘the yields’ for ‘the 3-year weighted average of 

yields’, as applicable under rules similar to the rules under section 

303(h)(2)(B).’’. 

(d) EFFECTIVE DATES.—

(1) IN GENERAL.—The amendments made by subsection (a) and (c)(1) shall 

apply to plan years beginning after December 31, 2005. 

(2) PREMIUM RATE FOR CERTAIN TERMINATED SINGLE-EMPLOYER PLANS.—The 

amendment made by subsection (b) shall apply with respect to cases commenced 

under title 11, United States Code, or under any similar law of a State or political subdivision of a State after October 26, 2005. 

(3) CONFORMING AMENDMENTS RELATED TO FUNDING RULES FOR SINGLE-EMPLOYER PLANS.—The amendments made by subsection (c)(2) shall take effect on 

December 31, 2006, and shall apply to plan years beginning after such date. 

TITLE V—DISCLOSURE 

SEC. 501. DEFINED BENEFIT PLAN FUNDING NOTICES. 

[See section 501 of the bill as reported by the Committee on Education and the 

Workforce.] 

SEC. 502. ADDITIONAL DISCLOSURE REQUIREMENTS. 

[See section 502 of the bill as reported by the Committee on Education and the 

Workforce.] 

SEC. 503. SECTION 4010 FILINGS WITH THE PBGC. 

(a) CHANGE IN CRITERIA FOR PERSONS REQUIRED TO PROVIDE INFORMATION TO

PBGC.—Section 4010(b) of the Employee Retirement Income Security Act of 1974 

(29 U.S.C. 1310(b)) is amended by striking paragraph (1), by redesignating paragraphs (2) and (3) as paragraphs (3) and (4), respectively, and by inserting before 

paragraph (3) (as so redesignated) the following new paragraphs: 

‘‘(1) the aggregate funding target attainment percentage of the plan (as defined in subsection (d)(2)) is less than 60 percent; 

‘‘(2)(A) the aggregate funding target attainment percentage of the plan (as defined in subsection (d)(2)) is less than 75 percent, and 

‘‘(B) the plan sponsor is in an industry with respect to which the corporation 

determines that there is substantial unemployment or underemployment and 

the sales and profits are depressed or declining;’’. 

(b) NOTICE TO PARTICIPANTS AND BENEFICIARIES.—Section 4010 of the Employee 

Retirement Income Security Act of 1974 (29 U.S.C. 1310) is amended by adding at 

the end the following new subsection: 

‘‘(d) NOTICE TO PARTICIPANTS AND BENEFICIARIES.—

‘‘(1) IN GENERAL.—Not later than 90 days after the submission by any person 

to the corporation of information or documentary material with respect to any 

plan pursuant to subsection (a), such person shall provide notice of such submission to each participant and beneficiary under the plan (and under all plans 

maintained by members of the controlled group of each contributing sponsor of 

the plan). Such notice shall also set forth—

‘‘(A) the number of single-employer plans covered by this title which are 

in at-risk status and are maintained by contributing sponsors of such plan 

(and by members of their controlled groups) with respect to which the funding target attainment percentage for the preceding plan year of each plan 

is less than 60 percent; 

‘‘(B) the value of the assets of each of the plans described in subparagraph (A) for the plan year, the funding target for each of such plans for 

the plan year, and the funding target attainment percentage of each of such 

plans for the plan year; and 

41 

‘‘(C) taking into account all single-employer plans maintained by the contributing sponsor and the members of its controlled group as of the end of 

such plan year—

‘‘(i) the aggregate total of the values of plan assets of such plans as 

of the end of such plan year, 

‘‘(ii) the aggregate total of the funding targets of such plans, as of the 

end of such plan year, taking into account only benefits to which participants and beneficiaries have a nonforfeitable right, and 

‘‘(iii) the aggregate funding targets attainment percentage with respect to the contributing sponsor for the preceding plan year. 

‘‘(2) DEFINITIONS.—For purposes of this subsection—

‘‘(A) VALUE OF PLAN ASSETS.—The term ‘value of plan assets’ means the 

value of plan assets, as determined under section 303(g)(3). 

‘‘(B) FUNDING TARGET.—The term ‘funding target’ has the meaning provided under section 303(d)(1). 

‘‘(C) FUNDING TARGET ATTAINMENT PERCENTAGE.—The term ‘funding target attainment percentage’ has the meaning provided in section 303(d)(2). 

‘‘(D) AGGREGATE FUNDING TARGETS ATTAINMENT PERCENTAGE.—The term 

‘aggregate funding targets attainment percentage’ with respect to a contributing sponsor for a plan year is the percentage, taking into account all 

plans maintained by the contributing sponsor and the members of its controlled group as of the end of such plan year, which 

‘‘(i) the aggregate total of the values of plan assets, as of the end of 

such plan year, of such plans, is of 

‘‘(ii) the aggregate total of the funding targets of such plans, as of the 

end of such plan year, taking into account only benefits to which participants and beneficiaries have a nonforfeitable right. 

‘‘(E) AT-RISK STATUS.—The term ‘at-risk status’ has the meaning provided 

in section 303(i)(3). 

‘‘(3) COMPLIANCE.—

‘‘(A) IN GENERAL.—Any notice required to be provided under paragraph 

(1) may be provided in written, electronic, or other appropriate form to the 

extent such form is reasonably accessible to individuals to whom the information is required to be provided. 

‘‘(B) LIMITATIONS.—In no case shall a participant or beneficiary be entitled under this subsection to receive more than one notice described in 

paragraph (1) during any one 12-month period. The person required to provide such notice may make a reasonable charge to cover copying, mailing, 

and other costs of furnishing such notice pursuant to paragraph (1). The 

corporation may by regulations prescribe the maximum amount which will 

constitute a reasonable charge under the preceding sentence. 

‘‘(4) NOTICE TO CONGRESS.—Concurrent with the provision of any notice under 

paragraph (1), such person shall provide such notice to the Committee on Education and the Workforce and the Committee on Ways and Means of the House 

of Representatives and the Committee on Health, Education, Labor, and Pensions and the Committee on Finance of the Senate, which shall be treated as 

materials provided in executive session.’’. 

(c) EFFECTIVE DATE.—The amendment made by this section shall apply with respect to plan years beginning after December 31, 2006. 

TITLE VI—INVESTMENT ADVICE 

SEC. 601. AMENDMENTS TO EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 PROVIDING PROHIBITED TRANSACTION EXEMPTION FOR PROVISION OF INVESTMENT 

ADVICE. 

[See section 601 of the bill as reported by the Committee on Education and the 

Workforce.] 

SEC. 602. AMENDMENTS TO INTERNAL REVENUE CODE OF 1986 PROVIDING PROHIBITED 

TRANSACTION EXEMPTION FOR PROVISION OF INVESTMENT ADVICE. 

(a) EXEMPTION FROM PROHIBITED TRANSACTIONS.—Subsection (d) of section 4975 

of the Internal Revenue Code of 1986 (relating to exemptions from tax on prohibited 

transactions) is amended—

(1) in paragraph (15), by striking ‘‘or’’ at the end; 

(2) in paragraph (16), by striking the period at the end and inserting ‘‘; or’’; 

and 

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

42 

‘‘(17) any transaction described in subsection (f)(8)(A) in connection with the 

provision of investment advice described in subsection (e)(3)(B)(i), in any case 

in which—

‘‘(A) the investment of assets of the plan is subject to the direction of plan 

participants or beneficiaries, 

‘‘(B) the advice is provided to the plan or a participant or beneficiary of 

the plan by a fiduciary adviser in connection with any sale, acquisition, or 

holding of a security or other property for purposes of investment of plan 

assets, and 

‘‘(C) the requirements of subsection (f)(8)(B) are met in connection with 

the provision of the advice.’’. 

(b) ALLOWED TRANSACTIONS AND REQUIREMENTS.—Subsection (f) of such section 

4975 (relating to other definitions and special rules) is amended by adding at the 

end the following new paragraph: 

‘‘(8) PROVISIONS RELATING TO INVESTMENT ADVICE PROVIDED BY FIDUCIARY ADVISERS.—

‘‘(A) TRANSACTIONS ALLOWABLE IN CONNECTION WITH INVESTMENT ADVICE

PROVIDED BY FIDUCIARY ADVISERS.—The transactions referred to in subsection (d)(17), in connection with the provision of investment advice by a 

fiduciary adviser, are the following: 

‘‘(i) the provision of the advice to the plan, participant, or beneficiary; 

‘‘(ii) the sale, acquisition, or holding of a security or other property 

(including any lending of money or other extension of credit associated 

with the sale, acquisition, or holding of a security or other property) 

pursuant to the advice; and 

‘‘(iii) the direct or indirect receipt of fees or other compensation by 

the fiduciary adviser or an affiliate thereof (or any employee, agent, or 

registered representative of the fiduciary adviser or affiliate) in connection with the provision of the advice or in connection with a sale, acquisition, or holding of a security or other property pursuant to the advice. 

‘‘(B) REQUIREMENTS RELATING TO PROVISION OF INVESTMENT ADVICE BY FIDUCIARY ADVISERS.—The requirements of this subparagraph (referred to in 

subsection (d)(17)(C)) are met in connection with the provision of investment advice referred to in subsection (e)(3)(B), provided to a plan or a participant or beneficiary of a plan by a fiduciary adviser with respect to the 

plan in connection with any sale, acquisition, or holding of a security or 

other property for purposes of investment of amounts held by the plan, if—

‘‘(i) in the case of the initial provision of the advice with regard to 

the security or other property by the fiduciary adviser to the plan, participant, or beneficiary, the fiduciary adviser provides to the recipient 

of the advice, at a time reasonably contemporaneous with the initial 

provision of the advice, a written notification (which may consist of notification by means of electronic communication)—

‘‘(I) of all fees or other compensation relating to the advice that 

the fiduciary adviser or any affiliate thereof is to receive (including 

compensation provided by any third party) in connection with the 

provision of the advice or in connection with the sale, acquisition, 

or holding of the security or other property, 

‘‘(II) of any material affiliation or contractual relationship of the 

fiduciary adviser or affiliates thereof in the security or other property, 

‘‘(III) of any limitation placed on the scope of the investment advice to be provided by the fiduciary adviser with respect to any 

such sale, acquisition, or holding of a security or other property, 

‘‘(IV) of the types of services provided by the fiduciary adviser in 

connection with the provision of investment advice by the fiduciary 

adviser, 

‘‘(V) that the adviser is acting as a fiduciary of the plan in connection with the provision of the advice, and 

‘‘(VI) that a recipient of the advice may separately arrange for 

the provision of advice by another adviser, that could have no material affiliation with and receive no fees or other compensation in 

connection with the security or other property, 

‘‘(ii) the fiduciary adviser provides appropriate disclosure, in connection with the sale, acquisition, or holding of the security or other property, in accordance with all applicable securities laws, 

‘‘(iii) the sale, acquisition, or holding occurs solely at the direction of 

the recipient of the advice, 

43 

‘‘(iv) the compensation received by the fiduciary adviser and affiliates 

thereof in connection with the sale, acquisition, or holding of the security or other property is reasonable, and 

‘‘(v) the terms of the sale, acquisition, or holding of the security or 

other property are at least as favorable to the plan as an arm’s length 

transaction would be. 

‘‘(C) STANDARDS FOR PRESENTATION OF INFORMATION.—The notification required to be provided to participants and beneficiaries under subparagraph 

(B)(i) shall be written in a clear and conspicuous manner and in a manner 

calculated to be understood by the average plan participant and shall be 

sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of the information required to be provided in the 

notification. 

‘‘(D) EXEMPTION CONDITIONED ON MAKING REQUIRED INFORMATION AVAILABLE ANNUALLY, ON REQUEST, AND IN THE EVENT OF MATERIAL CHANGE.—

The requirements of subparagraph (B)(i) shall be deemed not to have been 

met in connection with the initial or any subsequent provision of advice described in subparagraph (B) to the plan, participant, or beneficiary if, at 

any time during the provision of advisory services to the plan, participant, 

or beneficiary, the fiduciary adviser fails to maintain the information described in subclauses (I) through (IV) of subparagraph (B)(i) in currently accurate form and in the manner required by subparagraph (C), or fails—

‘‘(i) to provide, without charge, such currently accurate information to 

the recipient of the advice no less than annually, 

‘‘(ii) to make such currently accurate information available, upon request and without charge, to the recipient of the advice, or 

‘‘(iii) in the event of a material change to the information described 

in subclauses (I) through (IV) of subparagraph (B)(i), to provide, without charge, such currently accurate information to the recipient of the 

advice at a time reasonably contemporaneous to the material change in 

information. 

‘‘(E) MAINTENANCE FOR 6 YEARS OF EVIDENCE OF COMPLIANCE.—A fiduciary adviser referred to in subparagraph (B) who has provided advice referred to in such subparagraph shall, for a period of not less than 6 years 

after the provision of the advice, maintain any records necessary for determining whether the requirements of the preceding provisions of this paragraph and of subsection (d)(17) have been met. A transaction prohibited 

under subsection (c)(1) shall not be considered to have occurred solely because the records are lost or destroyed prior to the end of the 6-year period 

due to circumstances beyond the control of the fiduciary adviser. 

‘‘(F) EXEMPTION FOR PLAN SPONSOR AND CERTAIN OTHER FIDUCIARIES.—A 

plan sponsor or other person who is a fiduciary (other than a fiduciary adviser) shall not be treated as failing to meet the requirements of this section solely by reason of the provision of investment advice referred to in 

subsection (e)(3)(B) (or solely by reason of contracting for or otherwise arranging for the provision of the advice), if—

‘‘(i) the advice is provided by a fiduciary adviser pursuant to an arrangement between the plan sponsor or other fiduciary and the fiduciary adviser for the provision by the fiduciary adviser of investment 

advice referred to in such section, 

‘‘(ii) the terms of the arrangement require compliance by the fiduciary adviser with the requirements of this paragraph, 

‘‘(iii) the terms of the arrangement include a written acknowledgment 

by the fiduciary adviser that the fiduciary adviser is a fiduciary of the 

plan with respect to the provision of the advice, and 

‘‘(iv) the requirements of part 4 of subtitle B of title I of the Employee 

Retirement Income Security Act of 1974 are met in connection with the 

provision of such advice. 

‘‘(G) DEFINITIONS.—For purposes of this paragraph and subsection 

(d)(17)—

‘‘(i) FIDUCIARY ADVISER.—The term ‘fiduciary adviser’ means, with respect to a plan, a person who is a fiduciary of the plan by reason of 

the provision of investment advice by the person to the plan or to a 

participant or beneficiary and who is—

‘‘(I) registered as an investment adviser under the Investment 

Advisers Act of 1940 (15 U.S.C. 80b–1 et seq.) or under the laws 

of the State in which the fiduciary maintains its principal office 

and place of business, 

44 

‘‘(II) a bank or similar financial institution referred to in subsection (d)(4) or a savings association (as defined in section 3(b)(1) 

of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(1))), but 

only if the advice is provided through a trust department of the 

bank or similar financial institution or savings association which 

is subject to periodic examination and review by Federal or State 

banking authorities, ‘‘(III) an insurance company qualified to do business under the 

laws of a State, ‘‘(IV) a person registered as a broker or dealer under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), ‘‘(V) an affiliate of a person described in any of subclauses (I) 

through (IV), or ‘‘(VI) an employee, agent, or registered representative of a person 

described in any of subclauses (I) through (V) who satisfies the requirements of applicable insurance, banking, and securities laws 

relating to the provision of the advice. ‘‘(ii) AFFILIATE.—The term ‘affiliate’ of another entity means an affiliated person of the entity (as defined in section 2(a)(3) of the Investment 

Company Act of 1940 (15 U.S.C. 80a–2(a)(3))). ‘‘(iii) REGISTERED REPRESENTATIVE.—The term ‘registered representative’ of another entity means a person described in section 3(a)(18) of 

the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(18)) (substituting 

the entity for the broker or dealer referred to in such section) or a person described in section 202(a)(17) of the Investment Advisers Act of 

1940 (15 U.S.C. 80b–2(a)(17)) (substituting the entity for the investment adviser referred to in such section).’’. (c) EFFECTIVE DATE.—The amendments made by this section shall apply with respect to advice referred to in section 4975(c)(3)(B) of the Internal Revenue Code of 

1986 provided on or after January 1, 2006. 

TITLE VII—BENEFIT ACCRUAL STANDARDS 

SEC. 701. IMPROVEMENTS IN BENEFIT ACCRUAL STANDARDS. 

(a) AMENDMENTS TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF

1974.—[See section 701(a) of the bill as reported by the Committee on Education 

and the Workforce.] 

(b) AMENDMENTS TO THE INTERNAL REVENUE CODE OF 1986.— (1) RULES RELATING TO REDUCTION IN ACCRUED BENEFITS BECAUSE OF ATTAIN- MENT OF ANY AGE.—Subparagraph (H) of section 411(b)(1) of the Internal Revenue Code of 1986 is amended by adding at the end the following new clauses: ‘‘(vi) COMPARISON TO SIMILARLY SITUATED YOUNGER INDIVIDUAL.— ‘‘(I) IN GENERAL.—A plan shall not be treated as failing to meet 

the requirements of clause (i) if a participant’s entire accrued benefit, as determined as of any date under the formula for determining benefits as set forth in the text of the plan documents, 

would be equal to or greater than that of any similarly situated, 

younger individual. ‘‘(II) SIMILARLY SITUATED.—For purposes of this clause, an individual is similarly situated to a participant if such individual is 

identical to such participant in every respect (including period of 

service, compensation, position, date of hire, work history, and any 

other respect) except for age. ‘‘(III) DISREGARD OF SUBSIDIZED EARLY RETIREMENT BENEFITS.— In determining the entire accrued benefit for purposes of this 

clause, the subsidized portion of any early retirement benefit (including any early retirement subsidy that is fully or partially included or reflected in an employee’s opening balance or other transition benefits) shall be disregarded. ‘‘(vii) INTEREST ON HYPOTHETICAL ACCOUNTS.—A plan under which 

the accrued benefit payable under the plan upon distribution (or any 

portion thereof) is expressed as the balance of a hypothetical account 

maintained for the participant shall not be treated as failing to meet 

the requirements of clause (i) solely because interest accruing on such 

balance is taken into account. 

‘‘(viii) CERTAIN OFFSETS PERMITTED.—A plan shall not be treated as 

failing to meet the requirements of this subparagraph solely because 

the plan provides allowable offsets against those benefits under the 

45 

plan which are attributable to employer contributions, based on benefits which are provided under title II of the Social Security Act, the 

Railroad Retirement Act of 1974, another plan described in section 

401(a)maintained by the same employer, or under any retirement program for officers or employees of the Federal Government or of the government of any State or political subdivision thereof. For purposes of 

this clause, allowable offsets based on such benefits consist of offsets 

equal to all or part of the actual benefit payment amounts, reasonable 

projections or estimations of such benefit payment amounts, or actuarial equivalents of such actual benefit payment amounts, projections, 

or estimations (determined on the basis of reasonable actuarial assumptions). ‘‘(ix) PERMITTED DISPARITIES IN PLAN CONTRIBUTIONS OR BENEFITS.— A plan shall not be treated as failing to meet the requirements of this 

subparagraph solely because the plan provides a disparity in contributions or benefits with respect to which the requirements of section 

401(l) are met. ‘‘(x) PRE-RETIREMENT INDEXING PERMITTED.— ‘‘(I) IN GENERAL.—A plan shall not be treated as failing to meet 

the requirements of this subparagraph solely because the plan provides for pre-retirement indexing of accrued benefits under the 

plan. ‘‘(II) PRE-RETIREMENT INDEXING.—For purposes of this clause, the 

term ‘pre-retirement indexing’ means, in connection with an accrued benefit, the periodic adjustment of the accrued benefit by 

means of the application of a recognized index or methodology so 

as to protect the economic value of the benefit against inflation 

prior to distribution.’’. (2) DETERMINATIONS OF ACCRUED BENEFIT AS BALANCE OF BENEFIT AC- COUNT.—Subsection (a) of section 411 of such Code is amended by adding at the 

end the following new paragraph: ‘‘(13) DETERMINATIONS OF ACCRUED BENEFIT AS BALANCE OF BENEFIT AC- COUNT.—

‘‘(A) IN GENERAL.—A defined benefit plan under which the accrued benefit 

payable under the plan upon distribution (or any portion thereof) is expressed as the balance of a hypothetical account maintained for the participant shall not be treated as failing to meet the requirements of subsection 

(a)(2) and section 417(e) solely because of the amount actually made available for such distribution under the terms of the plan, in any case in which 

the applicable interest rate that would be used under the terms of the plan 

to project the amount of the participant’s account balance to normal retirement age is not greater than a market rate of return. ‘‘(B) REGULATIONS.—The Secretary may provide by regulation for rules 

governing the calculation of a market rate of return for purposes of subparagraph (A) and for permissible methods of crediting interest to the account (including variable interest rates) resulting in effective rates of return 

meeting the requirements of subparagraph (A).’’. (c) EFFECTIVE DATE.—The amendments made by this section shall apply to periods beginning on or after June 29, 2005. 

TITLE VIII—DEDUCTION LIMITATIONS 

SEC. 801. INCREASE IN DEDUCTION LIMITS. 

(a) INCREASE IN DEDUCTION LIMIT FOR SINGLE-EMPLOYER PLANS.—Section 404 of 

the Internal Revenue Code of 1986 (relating to deduction for contributions of an employer to an employees’ trust or annuity plan and compensation under a deferred 

payment plan) is amended— (1) in subsection (a)(1)(A), by inserting ‘‘in the case of a defined benefit plan 

other than a multiemployer plan, in an amount determined under subsection 

(o), and in the case of any other plan’’ after ‘‘section 501(a),’’, and 

(2) by inserting at the end the following new subsection: ‘‘(o) DEDUCTION LIMIT FOR SINGLE-EMPLOYER PLANS.—For purposes of subsection 

(a)(1)(A)—

‘‘(1) IN GENERAL.—In the case of a defined benefit plan to which subsection 

(a)(1)(A) applies (other than a multiemployer plan), the amount determined 

under this subsection for any taxable year shall be equal to the amount determined under paragraph (2) with respect to each plan year ending with or within 

the taxable year. 

46 

‘‘(2) DETERMINATION OF AMOUNT.—The amount determined under this paragraph for any plan year shall be equal to the excess (if any) of—

‘‘(A) the greater of—

‘‘(i) the sum of—

‘‘(I) 150 percent of the funding target applicable to the plan for 

such plan year, determined under section 430, plus 

‘‘(II) the target normal cost applicable to the plan for such plan 

year, determined under section 430(b), or 

‘‘(ii) in the case of a plan that is not in an at-risk status (as determined under 430(i)), the sum of—

‘‘(I) the funding target which would be applicable to the plan for 

such plan year if such plan were in an at-risk status, determined 

under section 430(d) (with regard to section 430(i)), plus 

‘‘(II) the target normal cost which would be applicable to the plan 

for such plan year if such plan were in an at-risk status, determined under section 430(d) (with regard to section 430(i)), over 

‘‘(B) the value of the plan assets (determined under section 430(g)). 

‘‘(3) SPECIAL RULE FOR TERMINATING PLANS.—In the case of a plan which, subject to section 4041 of the Employee Retirement Income Security Act of 1974, 

terminates during the plan year, the amount determined under paragraph (2) 

shall not be less than the amount required to make the plan sufficient for benefit liabilities (within the meaning of section 4041(d) of such Act). 

‘‘(4) DEFINITIONS.—Any term used in this subsection which is also used in section 430 shall have the same meaning given such term by section 430.’’. 

(b) INCREASE IN DEDUCTION LIMIT FOR MULTIEMPLOYER PLANS.—Section 

404(a)(1)(D) of such Code is amended to read as follows: 

‘‘(D) MINIMUM DEDUCTION FOR MULTIEMPLOYER PLANS.—In the case of a 

defined benefit plan which is a multiemployer plan, except as provided in 

regulations, the maximum amount deductible under the limitations of this 

paragraph shall not be less than the excess (if any) of—

‘‘(i) 140 percent of the current liability of the plan determined under 

section 431(c)(6)(D), over 

‘‘(ii) the value of the plan’s assets determined under section 

431(c)(2).’’. 

(c) TECHNICAL AND CONFORMING AMENDMENTS.—

(1) The last sentence of section 404(a)(1)(A) of such Code is amended by striking ‘‘section 412’’ each place it appears and inserting ‘‘section 431’’. 

(2) Section 404(a)(1)(B) of such Code is amended—

(A) by striking ‘‘In the case of a plan’’ and inserting ‘‘In the case of a multiemployer plan’’, 

(B) by striking ‘‘section 412(c)(7)’’ each place it appears and inserting ‘‘section 431(c)(6)’’, 

(C) by striking ‘‘section 412(c)(7)(B)’’ and inserting ‘‘section 431(c)(6)(D)’’, 

(D) by striking ‘‘section 412(c)(7)(A)’’ and inserting ‘‘section 431(c)(6)(A)’’, 

and 

(E) by striking ‘‘section 412’’ and inserting ‘‘section 431’’. 

(3) Section 404(a)(1) of such Code is amended by striking subparagraph (F). 

(4) Section 404(a)(7) of such Code is amended—

(A) in subparagraph (A)(ii), by striking ‘‘for the plan year’’ and all that 

follows and inserting ‘‘which are multiemployer plans for the plan year 

which ends with or within such taxable year (or for any prior plan year) 

and the maximum amount of employer contributions allowable under subsection (o) with respect to any such defined benefit plans which are not 

multiemployer plans for the plan year.’’, 

(B) by striking ‘‘section 412(l)’’ in the last sentence of subparagraph (A) 

and inserting ‘‘paragraph (1)(D)(ii)’’, and 

(C) by striking subparagraph (D) and inserting: 

‘‘(D) INSURANCE CONTRACT PLANS.—For purposes of this paragraph, a 

plan described in section 412(e)(3) shall be treated as a defined benefit 

plan.’’. 

(5) Section 404A(g)(3)(A) of such Code is amended by striking ‘‘paragraphs (3) 

and (7) of section 412(c)’’ and inserting ‘‘sections 430(h)(1) and 431(c)(3) and (6)’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to contributions for taxable years beginning after December 31, 2006. 

SEC. 802. UPDATING DEDUCTION RULES FOR COMBINATION OF PLANS. 

(a) IN GENERAL.—Subparagraph (C) of section 404(a)(7) of the Internal Revenue 

Code of 1986 (relating to limitation on deductions where combination of defined conVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00046 Fmt 6659 Sfmt 6621 E:\HR\OC\HR232P2.XXX HR232P2
47 

tribution plan and defined benefit plan) is amended by adding after clause (ii) the 

following new clause: ‘‘(iii) LIMITATION.—In the case of employer contributions to 1 or more 

defined contribution plans, this paragraph shall only apply to the extent that such contributions exceed 6 percent of the compensation otherwise paid or accrued during the taxable year to the beneficiaries 

under such plans. For purposes of this clause, amounts carried over 

from preceding taxable years under subparagraph (B) shall be treated 

as employer contributions to 1 or more defined contributions to the extent attributable to employer contributions to such plans in such preceding taxable years.’’. 

(b) CONFORMING AMENDMENTS.—Subparagraph (A) of section 4972(c)(6) of such 

Code (relating to nondeductible contributions) is amended to read as follows: 

‘‘(A) so much of the contributions to 1 or more defined contribution plans 

which are not deductible when contributed solely because of section 

404(a)(7) as does not exceed the amount of contributions described in section 401(m)(4)(A), or’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to contributions for taxable years beginning after December 31, 2006. 

TITLE IX—ENHANCED RETIREMENTS SAVINGS 

AND DEFINED CONTRIBUTION PLANS 

SEC. 901. PENSIONS AND INDIVIDUAL RETIREMENT ARRANGEMENT PROVISIONS OF ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 MADE PERMANENT. 

Title IX of the Economic Growth and Tax Relief Reconciliation Act of 2001 shall 

not apply to the provisions of, and amendments made by, subtitles (A) through (F) 

of title VI of such Act (relating to pension and individual retirement arrangement 

provisions). 

SEC. 902. SAVER’S CREDIT. 

(a) PERMANENCY.—Section 25B of the Internal Revenue Code of 1986 (relating to 

elective deferrals and IRA contributions by certain individuals) is amended by striking subsection (h). 

(b) VOLUNTARY DEPOSIT INTO QUALIFIED ACCOUNT.—

(1) Section 25B of such Code, as amended by subsection (a), is further amended by adding at the end the following new subsection: 

‘‘(h) VOLUNTARY DEPOSIT INTO QUALIFIED ACCOUNT.—

‘‘(1) IN GENERAL.—So much of any overpayment under section 6401(b) as does 

not exceed the amount allowed as a tax credit under subsection (a) shall, at the 

election of the taxpayer, be paid on behalf of the individual taxpayer to an applicable retirement plan designated by the individual, except that in the case 

of a joint return, each spouse shall be entitled to designate an applicable retirement plan with respect to payments attributable to such spouse. 

‘‘(2) APPLICABLE RETIREMENT PLAN.—For purposes of this subsection, the term 

‘applicable retirement plan’ means any eligible retirement plan (as defined in 

section 402(c)(8)(B)) that elects to accept deposits under this subsection.’’. 

(2) EFFECTIVE DATE.—The amendment made by paragraph (1) shall apply to 

taxable years beginning after December 31, 2006. 

SEC. 903. INCREASING PARTICIPATION THROUGH AUTOMATIC CONTRIBUTION ARRANGEMENTS. 

(a) IN GENERAL.—Section 401(k) of the Internal Revenue Code of 1986 (relating 

to cash or deferred arrangement) is amended by adding at the end the following new 

paragraph: 

‘‘(13) ALTERNATIVE METHOD FOR AUTOMATIC CONTRIBUTION ARRANGEMENTS TO

MEET NONDISCRIMINATION REQUIREMENTS.—

‘‘(A) IN GENERAL.—A qualified automatic contribution arrangement shall 

be treated as meeting the requirements of paragraph (3)(A)(ii). 

‘‘(B) QUALIFIED AUTOMATIC CONTRIBUTION ARRANGEMENT.—For purposes 

of this paragraph, the term ‘qualified automatic contribution arrangement’

means any cash or deferred arrangement which meets the requirements of 

subparagraphs (C) through (F). 

‘‘(C) AUTOMATIC DEFERRAL.—

‘‘(i) IN GENERAL.—The requirements of this subparagraph are met if, 

under the arrangement, each employee eligible to participate in the arrangement is treated as having elected to have the employer make elecVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00047 Fmt 6659 Sfmt 6621 E:\HR\OC\HR232P2.XXX HR232P2
48 

tive contributions in an amount equal to a qualified percentage of compensation. ‘‘(ii) ELECTION OUT.—The election treated as having been made under 

clause (i) shall cease to apply with respect to any employee if such employee makes an affirmative election— ‘‘(I) to not have such contributions made, or 

‘‘(II) to make elective contributions at a level specified in such affirmative election. ‘‘(iii) QUALIFIED PERCENTAGE.—For purposes of this subparagraph, 

the term ‘qualified percentage’ means, with respect to any employee, 

any percentage determined under the arrangement if such percentage 

is applied uniformly, does not exceed 10 percent, and is at least— ‘‘(I) 3 percent during the period ending on the last day of the first 

plan year which begins after the date on which the first elective 

contribution described in clause (i) is made with respect to such 

employee, ‘‘(II) 4 percent during the first plan year following the plan year 

described in subclause (I), ‘‘(III) 5 percent during the second plan year following the plan 

year described in subclause (I), and ‘‘(IV) 6 percent during any subsequent plan year. 

‘‘(iv) AUTOMATIC DEFERRAL FOR CURRENT EMPLOYEES NOT REQUIRED.—Clause (i) shall be applied without taking into account any 

employee who was eligible to participate in the arrangement (or a predecessor arrangement) immediately before the date on which such arrangement becomes a qualified automatic contribution arrangement 

(determined after application of this clause). 

‘‘(D) PARTICIPATION.—

‘‘(i) IN GENERAL.—An arrangement meets the requirements of this 

subparagraph for any year if, during the plan year or the preceding 

plan year, elective contributions are made on behalf of at least 70 percent of the employees eligible to participate in the arrangement other 

than—

‘‘(I) highly compensated employees, and 

‘‘(II) at the election of the plan administrator, employees described in subparagraph (C)(iv). 

‘‘(ii) FIRST PLAN YEAR.—An arrangement (other than a successor arrangement) shall be treated as meeting the requirements of this subparagraph with respect to the first plan year with respect to which 

such arrangement is a qualified automatic contribution arrangement 

(determined without regard to this subparagraph). 

‘‘(E) MATCHING OR NONELECTIVE CONTRIBUTIONS.—

‘‘(i) IN GENERAL.—The requirements of this subparagraph are met if, 

under the arrangement, the employer—

‘‘(I) makes matching contributions on behalf of each employee 

who is not a highly compensated employee in an amount equal to 

50 percent of the elective contributions of the employee to the extent such elective contributions do not exceed 6 percent of compensation, or 

‘‘(II) is required, without regard to whether the employee makes 

an elective contribution or employee contribution, to make a contribution to a defined contribution plan on behalf of each employee 

who is not a highly compensated employee and who is eligible to 

participate in the arrangement in an amount equal to at least 2 

percent of the employee’s compensation. 

‘‘(ii) APPLICATION OF RULES FOR MATCHING CONTRIBUTIONS.—The 

rules of clauses (ii) and (iii) of paragraph (12)(B) shall apply for purposes of clause (i)(I). 

‘‘(iii) WITHDRAWAL AND VESTING RESTRICTIONS.—An arrangement 

shall not be treated as meeting the requirements of clause (i) unless, 

with respect to employer contributions (including matching contributions) taken into account in determining whether the requirements of 

clause (i) are met—

‘‘(I) any employee who has completed at least 2 years of service 

(within the meaning of section 411(a)) has a nonforfeitable right to 

100 percent of the employee’s accrued benefit derived from such 

employer contributions, and 

‘‘(II) the requirements of subparagraph (B) of paragraph (2) are 

met with respect to all such employer contributions. 

49 

‘‘(iv) APPLICATION OF CERTAIN OTHER RULES.—The rules of subparagraphs (E)(ii) and (F) of paragraph (12) shall apply for purposes of subclauses (I) and (II) of clause (i). 

‘‘(F) NOTICE REQUIREMENTS.—

‘‘(i) IN GENERAL.—The requirements of this subparagraph are met if, 

within a reasonable period before each plan year, each employee eligible to participate in the arrangement for such year receives written notice of the employee’s rights and obligations under the arrangement 

which—

‘‘(I) is sufficiently accurate and comprehensive to apprise the employee of such rights and obligations, and 

‘‘(II) is written in a manner calculated to be understood by the 

average employee to whom the arrangement applies. 

‘‘(ii) TIMING AND CONTENT REQUIREMENTS.—A notice shall not be 

treated as meeting the requirements of clause (i) with respect to an employee unless—

‘‘(I) the notice explains the employee’s right under the arrangement to elect not to have elective contributions made on the employee’s behalf (or to elect to have such contributions made at a different percentage), 

‘‘(II) in the case of an arrangement under which the employee 

may elect among 2 or more investment options, the notice explains 

how contributions made under the arrangement will be invested in 

the absence of any investment election by the employee, and 

‘‘(III) the employee has a reasonable period of time after receipt 

of the notice described in subclauses (I) and (II) and before the first 

elective contribution is made to make either such election.’’. 

(b) MATCHING CONTRIBUTIONS.—Section 401(m) of such Code (relating to nondiscrimination test for matching contributions and employee contributions) is 

amended by redesignating paragraph (12) as paragraph (13) and by inserting after 

paragraph (11) the following new paragraph: 

‘‘(12) ALTERNATIVE METHOD FOR AUTOMATIC CONTRIBUTION ARRANGEMENTS.—

A defined contribution plan shall be treated as meeting the requirements of 

paragraph (2) with respect to matching contributions if the plan—

‘‘(A) is a qualified automatic contribution arrangement (as defined in subsection (k)(13)), and 

‘‘(B) meets the requirements of paragraph (11)(B).’’. 

(c) EXCLUSION FROM DEFINITION OF TOP-HEAVY PLANS.—

(1) ELECTIVE CONTRIBUTION RULE.—Clause (i) of section 416(g)(4)(H) of such 

Code is amended by inserting ‘‘or 401(k)(13)’’ after ‘‘section 401(k)(12)’’. 

(2) MATCHING CONTRIBUTION RULE.—Clause (ii) of section 416(g)(4)(H) of such 

Code is amended by inserting ‘‘or 401(m)(12)’’ after ‘‘section 401(m)(11)’’. 

(d) CORRECTIVE DISTRIBUTIONS.—

(1) IN GENERAL.—Section 414 of the Internal Revenue Code of 1986 (relating 

to definitions and special rules) is amended by adding at the end the following 

new subsection: 

‘‘(w) AUTOMATIC CONTRIBUTION ARRANGEMENTS.—

‘‘(1) IN GENERAL.—No tax shall be imposed under section 72(t) on a distribution from an applicable employer plan to the employee with respect to whom 

such contribution relates if such distribution does not exceed the erroneous 

automatic contribution amount and is made not later than the 1st April 15 following the close of the taxable year in which such contribution was made. 

‘‘(2) ERRONEOUS AUTOMATIC CONTRIBUTION AMOUNT.—For purposes of this 

subsection—

‘‘(A) IN GENERAL.—The term ‘erroneous automatic contribution amount’

means the lesser of—

‘‘(i) the amount of automatic contributions made during the applicable period which the employee elects in a notice to the plan administrator to treat as an erroneous automatic contribution amount for purposes of this subsection, or 

‘‘(ii) $500. 

‘‘(B) AUTOMATIC CONTRIBUTION.—The term ‘automatic contribution’

means contributions which, under the terms of the plan—

‘‘(i) the employee can elect to be made as contributions under the 

plan on behalf of the employee, or to the employee directly in cash, and 

‘‘(ii) which are made on behalf of the employee under the plan pursuant to a plan provision treating the employee as having elected to have 

the employer make such contributions on behalf of the employee until 

50 

the employee affirmatively elects not to have such contribution made 

or affirmatively elects to make contributions as a specified level. ‘‘(3) APPLICABLE EMPLOYER PLAN.—For purposes of this subsection, the term ‘applicable employer plan’means— ‘‘(A) an employees’ trust described in section 401(a) which is exempt from 

tax under section 501(a), and ‘‘(B) a plan under which amounts are contributed by an individual’s em- ployer for an annuity contract described in section 403(b). ‘‘(4) APPLICABLE PERIOD.—For purposes of this subsection, the term ‘applicable 

period’ means, with respect to any employee, the three month period that begins 

on the first date that an automatic contribution described in paragraph (2)(B) 

is made with respect to such employee.’’. (2) VESTING CONFORMING AMENDMENTS.— (A) Section 411(a)(3)(G) of such Code is amended by inserting ‘‘an erro- neous automatic contribution under section 414(w),’’ after ‘‘402(g)(2)(A),’’. (B) The heading of section 411(a)(3)(G) of such Code is amended by inserting ‘‘OR ERRONEOUS AUTOMATIC CONTRIBUTION’’ before the period. 

(C) Section 401(k)(8)(E) of such Code is amended by inserting ‘‘an erro- neous automatic contribution under section 414(w),’’ after ‘‘402(g)(2)(A),’’. (D) The heading of section 401(k)(8)(E) of such Code is amended by inserting ‘‘OR ERRONEOUS AUTOMATIC CONTRIBUTION’’ before the period. 

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

years beginning after December 31, 2005. 

SEC. 904. PENALTY-FREE WITHDRAWALS FROM RETIREMENT PLANS FOR INDIVIDUALS 

CALLED TO ACTIVE DUTY FOR AT LEAST 179 DAYS. 

(a) IN GENERAL.—Paragraph (2) of section 72(t) of the Internal Revenue Code of 

1986 (relating to 10-percent additional tax on early distributions from qualified retirement plans) is amended by adding at the end the following new subparagraph: ‘‘(G) DISTRIBUTIONS FROM RETIREMENT PLANS TO INDIVIDUALS CALLED TO

ACTIVE DUTY.— ‘‘(i) IN GENERAL.—Any qualified reservist distribution. ‘‘(ii) AMOUNT DISTRIBUTED MAY BE REPAID.—Any individual who receives a qualified reservist distribution may, at any time during the 2- 

year period beginning on the day after the end of the active duty period, make one or more contributions to an individual retirement plan 

of such individual in an aggregate amount not to exceed the amount 

of such distribution. The dollar limitations otherwise applicable to contributions to individual retirement plans shall not apply to any contribution made pursuant to the preceding sentence. No deduction shall 

be allowed for any contribution pursuant to this clause. ‘‘(iii) QUALIFIED RESERVIST DISTRIBUTION.—For purposes of this subparagraph, the term ‘qualified reservist distribution’ means any distribution to an individual if— ‘‘(I) such distribution is from an individual retirement plan, or 

from amounts attributable to employer contributions made pursuant to elective deferrals described in subparagraph (A) or (C) of 

section 402(g)(3) or section 501(c)(18)(D)(iii), ‘‘(II) such individual was (by reason of being a member of a reserve component (as defined in section 101 of title 37, United 

States Code)), ordered or called to active duty for a period in excess 

of 179 days or for an indefinite period, and ‘‘(III) such distribution is made during the period beginning on 

the date of such order or call and ending at the close of the active 

duty period. ‘‘(iv) APPLICATION OF SUBPARAGRAPH.—This subparagraph applies to 

individuals ordered or called to active duty after September 11, 2001, 

and before September 12, 2007. In no event shall the 2-year period referred to in clause (ii) end before the date which is 2-years after the 

date of the enactment of this subparagraph.’’. (b) CONFORMING AMENDMENTS.— (1) Section 401(k)(2)(B)(i) of such Code is amended by striking ‘‘or’’ at the end 

of subclause (III), by striking ‘‘and’’ at the end of subclause (IV) and inserting 

‘‘or’’, and by inserting after subclause (IV) the following new subclause: 

‘‘(V) in the case of a qualified reservist distribution (as defined 

in section 72(t)(2)(G)(iii)), the date on which a period referred to in 

subclause (III) of such section begins, and’’. 

(2) Section 403(b)(7)(A)(ii) of such Code is amended by inserting ‘‘(unless such 

amount is a distribution to which section 72(t)(2)(G) applies)’’ after ‘‘distributee’’. 

51 

(3) Section 403(b)(11) of such Code is amended by striking ‘‘or’’ at the end of 

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

inserting ‘‘, or’’, and by inserting after subparagraph (B) the following new subparagraph: 

‘‘(C) for distributions to which section 72(t)(2)(G) applies.’’. 

(c) EFFECTIVE DATE; WAIVER OF LIMITATIONS.—

(1) EFFECTIVE DATE.—The amendment made by this section shall apply to distributions after September 11, 2001. 

(2) WAIVER OF LIMITATIONS.—If refund or credit of any overpayment of tax resulting from the amendments made by this section is prevented at any time before the close of the 1-year period beginning on the date of the enactment of 

this Act by the operation of any law or rule of law (including res judicata), such 

refund or credit may nevertheless be made or allowed if claim therefor is filed 

before the close of such period. 

SEC. 905. WAIVER OF 10 PERCENT EARLY WITHDRAWAL PENALTY TAX ON CERTAIN DISTRIBUTIONS OF PENSION PLANS FOR PUBLIC SAFETY EMPLOYEES. 

(a) IN GENERAL.—Section 72(t)(2) of the Internal Revenue Code of 1986 (relating 

to subsection not to apply to certain distributions), as amended by section 904, is 

amended by adding at the end the following new subsection: 

‘‘(H) DROP DISTRIBUTIONS TO QUALIFIED PUBLIC SAFETY EMPLOYEES IN

GOVERNMENTAL PLANS.—

‘‘(i) IN GENERAL.—Distributions to an individual who is a qualified 

public safety employee from a governmental plan within the meaning 

of section 414(d) to the extent such distributions are attributable to a 

DROP benefit. 

‘‘(ii) DEFINITIONS.—For purposes of this subparagraph—

‘‘(I) DROP BENEFIT.—The term ‘DROP benefit’ means a feature 

of a governmental plan which is a defined benefit plan and under 

which an employee elects to receive credits to an account (including 

a notional account) in the plan which are not in excess of the plan 

benefits (payable in the form of an annuity) that would have been 

provided if the employee had retired under the plan at a specified 

earlier retirement date and which are in lieu of increases in the 

employee’s accrued pension benefit based on years of service after 

the effective date of the DROP election. 

‘‘(II) QUALIFIED PUBLIC SAFETY EMPLOYEE.—The term ‘qualified 

public safety employee’ means any employee of any police department or fire department organized and operated by a State or political subdivision of a State if the employee provides police protection, firefighting services, or emergency medical services for any 

area within the jurisdiction of such State or political subdivision 

and if the employee was eligible to retire on or before the date of 

such election and receive immediate retirement benefits.’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions after the date of the enactment of this Act. 

SEC. 906. COMBAT ZONE COMPENSATION TAKEN INTO ACCOUNT FOR PURPOSES OF DETERMINING LIMITATION AND DEDUCTIBILITY OF CONTRIBUTIONS TO INDIVIDUAL RETIREMENT PLANS. 

(a) IN GENERAL.—Subsection (f) of section 219 of the Internal Revenue Code of 

1986 is amended by redesignating paragraph (7) as paragraph (8) and by inserting 

after paragraph (6) the following new paragraph: 

‘‘(7) SPECIAL RULE FOR COMPENSATION EARNED BY MEMBERS OF THE ARMED

FORCES FOR SERVICE IN A COMBAT ZONE.—For purposes of subsections (b)(1)(B) 

and (c), the amount of compensation includible in an individual’s gross income 

shall be determined without regard to section 112.’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2005. 

SEC. 907. DIRECT PAYMENT OF TAX REFUNDS TO INDIVIDUAL RETIREMENT PLANS. 

(a) IN GENERAL.—The Secretary of the Treasury (or the Secretary’s delegate) shall 

make available a form (or modify existing forms) for use by individuals to direct 

that a portion of any refund of overpayment of tax imposed by chapter 1 of the Internal Revenue Code of 1986 be paid directly to an individual retirement plan (as 

defined in section 7701(a)(37) of such Code) of such individual. 

(b) EFFECTIVE DATE.—The form required by subsection (a) shall be made available 

for taxable years beginning after December 31, 2006. 

52 

SEC. 908. IRA ELIGIBILITY FOR THE DISABLED. 

(a) IN GENERAL.—Subsection (f) of section 219 of the Internal Revenue Code of 

1986 (relating to other definitions and special rules), as amended by this Act, is further amended by redesignating paragraph (8) as paragraph (9) and by inserting 

after paragraph (7) the following new paragraph: 

‘‘(8) SPECIAL RULE FOR CERTAIN DISABLED INDIVIDUALS.—In the case of an individual—

‘‘(A) who is disabled (within the meaning of section 72(m)(7)), and 

‘‘(B) who has not attained the applicable age (as defined in section 

401(a)(9)(H)) before the close of the taxable year, 

subparagraph (B) of subsection (b)(1) shall not apply.’’. 

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

years beginning after December 31, 2005. 

SEC. 909. ALLOW ROLLOVERS BY NONSPOUSE BENEFICIARIES OF CERTAIN RETIREMENT 

PLAN DISTRIBUTIONS. 

(a) IN GENERAL.—

(1) QUALIFIED PLANS.—Section 402(c) of the Internal Revenue Code of 1986 

(relating to rollovers from exempt trusts) is amended by adding at the end the 

following new paragraph: 

‘‘(11) DISTRIBUTIONS TO INHERITED INDIVIDUAL RETIREMENT PLAN OF NONSPOUSE BENEFICIARY.—

‘‘(A) IN GENERAL.—If, with respect to any portion of a distribution from 

an eligible retirement plan of a deceased employee, a direct trustee-to-trustee transfer is made to an individual retirement plan described in clause (i) 

or (ii) of paragraph (8)(B) established for the purposes of receiving the distribution on behalf of an individual who is a designated beneficiary (as defined by section 401(a)(9)(E)) of the employee and who is not the surviving 

spouse of the employee—

‘‘(i) the transfer shall be treated as an eligible rollover distribution 

for purposes of this subsection, 

‘‘(ii) the individual retirement plan shall be treated as an inherited 

individual retirement account or individual retirement annuity (within 

the meaning of section 408(d)(3)(C)) for purposes of this title, and 

‘‘(iii) section 401(a)(9)(B) (other than clause (iv) thereof) shall apply 

to such plan. 

‘‘(B) CERTAIN TRUSTS TREATED AS BENEFICIARIES.—For purposes of this 

paragraph, to the extent provided in rules prescribed by the Secretary, a 

trust maintained for the benefit of one or more designated beneficiaries 

shall be treated in the same manner as a trust designated beneficiary.’’. 

(2) SECTION 403(a) PLANS.—Subparagraph (B) of section 403(a)(4) of such 

Code (relating to rollover amounts) is amended by inserting ‘‘and (11)’’ after 

‘‘(7)’’. 

(3) SECTION 403(b) PLANS.—Subparagraph (B) of section 403(b)(8) of such 

Code (relating to rollover amounts) is amended by striking ‘‘and (9)’’ and inserting ‘‘, (9), and (11)’’. 

(4) SECTION 457 PLANS.—Subparagraph (B) of section 457(e)(16) of such Code 

(relating to rollover amounts) is amended by striking ‘‘and (9)’’ and inserting ‘‘, 

(9), and (11)’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions after December 31, 2005. 

TITLE X—PROVISIONS TO ENHANCE HEALTH 

CARE AFFORDABILITY 

SEC. 1001. TREATMENT OF ANNUITY AND LIFE INSURANCE CONTRACTS WITH A LONG-TERM 

CARE INSURANCE FEATURE. 

(a) EXCLUSION FROM GROSS INCOME.—Subsection (e) of section 72 of the Internal 

Revenue Code of 1986 (relating to amounts not received as annuities) is amended 

by redesignating paragraph (11) as paragraph (12) and by inserting after paragraph 

(10) the following new paragraph: 

‘‘(11) SPECIAL RULES FOR CERTAIN COMBINATION CONTRACTS PROVIDING LONGTERM CARE INSURANCE.—Notwithstanding paragraphs (2), (5)(C), and (10), in 

the case of any charge against the cash value of an annuity contract or the cash 

surrender value of a life insurance contract made as payment for coverage 

under a qualified long-term care insurance contract which is part of or a rider 

on such annuity or life insurance contract—

53 

‘‘(A) the investment in the contract shall be reduced (but not below zero) 

by such charge, and ‘‘(B) such charge shall not be includible in gross income.’’. (b) TAX-FREE EXCHANGES AMONG CERTAIN INSURANCE POLICIES.— (1) ANNUITY CONTRACTS CAN INCLUDE QUALIFIED LONG-TERM CARE INSURANCE

RIDERS.—Paragraph (2) of section 1035(b) of such Code is amended by adding 

at the end the following new sentence: ‘‘For purposes of the preceding sentence, 

a contract shall not fail to be treated as an annuity contract solely because a 

qualified long-term care insurance contract is a part of or a rider on such contract.’’. (2) LIFE INSURANCE CONTRACTS CAN INCLUDE QUALIFIED LONG-TERM CARE IN- SURANCE RIDERS.—Paragraph (3) of section 1035(b) of such Code is amended by 

adding at the end the following new sentence: ‘‘For purposes of the preceding 

sentence, a contract shall not fail to be treated as a life insurance contract solely because a qualified long-term care insurance contract is a part of or a rider 

on such contract.’’. (3) EXPANSION OF TAX-FREE EXCHANGES OF LIFE INSURANCE, ENDOWMENT, AND

ANNUITY CONTRACTS FOR LONG-TERM CARE CONTRACTS.—Subsection (a) of section 

1035 of such Code (relating to certain exchanges of insurance policies) is amended— (A) in paragraph (1) by striking ‘‘contract;’’ and inserting ‘‘contract or for 

a qualified long-term care insurance contract;’’, 

(B) in paragraph (2) by striking ‘‘contract;’’ and inserting ‘‘contract, or (C) 

for a qualified long-term care insurance contract;’’, and 

(C) in paragraph (3) by striking ‘‘contract.’’ and inserting ‘‘contract or for 

a qualified long-term care insurance contract.’’. 

(4) TAX-FREE EXCHANGES OF QUALIFIED LONG-TERM CARE INSURANCE CONTRACT.—Subsection (a) of section 1035 of such Code (relating to certain exchanges of insurance policies) is amended by striking ‘‘or’’ at the end of paragraph (2), by striking the period at the end of paragraph (3) and inserting ‘‘; 

or’’, and by inserting after paragraph (3) the following new paragraph: 

‘‘(4) a qualified long-term care insurance contract for a qualified long-term 

care insurance contract.’’. 

(c) TREATMENT OF COVERAGE PROVIDED AS PART OF A LIFE INSURANCE OR ANNUITY CONTRACT.—Subsection (e) of section 7702B of such Code (relating to treatment 

of qualified long-term care insurance) is amended to read as follows: 

‘‘(e) TREATMENT OF COVERAGE PROVIDED AS PART OF A LIFE INSURANCE OR ANNUITY CONTRACT.—

‘‘(1) COVERAGE TREATED AS CONTRACT.—Except as otherwise provided in regulations prescribed by the Secretary, in the case of any long-term care insurance 

coverage (whether or not qualified) provided by a rider on or as part of a life 

insurance contract or an annuity contract, this title shall apply as if the portion 

of the contract providing such coverage is a separate contract. 

‘‘(2) DENIAL OF DEDUCTION UNDER SECTION 213.—No deduction shall be allowed under section 213(a) for any payment made for coverage under a qualified 

long-term care insurance contract if such payment is made as a charge against 

the cash value of an annuity contract or the cash surrender value of a life insurance contract. 

‘‘(3) APPLICATION OF SECTION 7702.—Section 7702(c)(2) (relating to the guideline premium limitation) shall be applied by increasing the guideline premium 

limitation with respect to the life insurance contract, as of any date—

‘‘(A) by the sum of any charges (but not premium payments) against the 

life insurance contract’s cash surrender value (within the meaning of section 7702(f)(2)(A)) for coverage under the qualified long-term care insurance 

contract made to that date under the life insurance contract, less 

‘‘(B) any such charges the imposition of which reduces the premiums paid 

for the life insurance contract (within the meaning of section 7702(f)(1)). 

‘‘(4) PORTION DEFINED.—For purposes of this subsection, the term ‘portion’

means only the terms and benefits under a life insurance contract or annuity 

contract that are in addition to the terms and benefits under the contract without regard to long-term care insurance coverage. 

‘‘(5) ANNUITY CONTRACTS TO WHICH PARAGRAPH (1) DOES NOT APPLY.—For purposes of this subsection, none of the following shall be treated as an annuity 

contract: 

‘‘(A) A trust described in section 401(a) which is exempt from tax under 

section 501(a). 

‘‘(B) A contract—

‘‘(i) purchased by a trust described in subparagraph (A), 

‘‘(ii) purchased as part of a plan described in section 403(a), 

54 

‘‘(iii) described in section 403(b), 

‘‘(iv) provided for employees of a life insurance company under a plan 

described in section 818(a)(3), or ‘‘(v) from an individual retirement account or an individual retirement annuity. ‘‘(C) A contract purchased by an employer for the benefit of the employee 

(or the employee’s spouse). 

Any dividend described in section 404(k) which is received by a participant or 

beneficiary shall, for purposes of this paragraph, be treated as paid under a separate contract to which subparagraph (B)(i) applies.’’. (d) INFORMATION REPORTING.— (1) Subpart B of part III of subchapter A of chapter 61 of such Code (relating 

to information concerning transactions with other persons) is amended by adding at the end the following new section: 

‘‘SEC. 6050U. CHARGES OR PAYMENTS FOR QUALIFIED LONG-TERM CARE INSURANCE CONTRACTS UNDER COMBINED ARRANGEMENTS. 

‘‘(a) REQUIREMENT OF REPORTING.—Any person who makes a charge against the 

cash value of an annuity contract, or the cash surrender value of a life insurance 

contract, which is excludible from gross income under section 72(e)(11) shall make 

a return, according to the forms or regulations prescribed by the Secretary, setting 

forth—

‘‘(1) the amount of the aggregate of such charges against each such contract 

for the calendar year, ‘‘(2) the amount of the reduction in the investment in each such contract by 

reason of such charges, and ‘‘(3) the name, address, and TIN of the individual who is the holder of each 

such contract. ‘‘(b) STATEMENTS TO BE FURNISHED TO PERSONS WITH RESPECT TO WHOM INFOR- MATION IS REQUIRED.—Every person required to make a return under subsection (a) 

shall furnish to each individual whose name is required to be set forth in such return a written statement showing— ‘‘(1) the name, address, and phone number of the information contact of the 

person making the payments, and ‘‘(2) the information required to be shown on the return with respect to such 

individual. 

The written statement required under the preceding sentence shall be furnished to 

the individual on or before January 31 of the year following the calendar year for 

which the return under subsection (a) was required to be made.’’. (2) CLERICAL AMENDMENT.—The table of sections for subpart B of part III of 

subchapter A of such chapter 61 of such Code is amended by adding at the end 

the following new item: 

‘‘Sec. 6050U. Charges or payments for qualified long-term care insurance contracts under combined arrangements.’’. 

(e) TREATMENT OF POLICY ACQUISITION EXPENSES.—Subsection (e) of section 848 

of such Code (relating to classification of contracts) is amended by adding at the end 

the following new paragraph: ‘‘(6) TREATMENT OF CERTAIN QUALIFIED LONG-TERM CARE INSURANCE CONTRACT

ARRANGEMENTS.—An annuity or life insurance contract which includes a qualified long-term care insurance contract as a part of or a rider on such annuity 

or life insurance contract shall be treated as a specified insurance contract not 

described in subparagraph (A) or (B) of subsection (c)(1).’’. (f) TREATMENT AS QUALIFIED ADDITIONAL BENEFIT.—Subparagraph (A) of section 

7702(f)(5) of such Code (relating to qualified additional benefits) is amended by 

striking ‘‘or’’ at the end of clause (iv), by redesignating clause (v) as clause (vi), and 

by inserting after clause (iv) the following new clause: ‘‘(v) qualified long-term care insurance contract which is a part of or 

a rider on the contract, or’’. (g) EFFECTIVE DATES.— (1) IN GENERAL.—Except as provided by paragraph (2), the amendments made 

by this section shall apply to contracts issued before, on, or after December 31, 

2006, but only with respect to periods beginning after such date. 

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

with respect to exchanges occurring after December 31, 2006. 

SEC. 1002. DISPOSITION OF UNUSED HEALTH BENEFITS IN CAFETERIA PLANS AND FLEXIBLE 

SPENDING ARRANGEMENTS. 

(a) IN GENERAL.—Section 125 of the Internal Revenue Code of 1986 (relating to 

cafeteria plans) is amended by redesignating subsections (h) and (i) as subsections 

(i) and (j), respectively, and by inserting after subsection (g) the following: 

55 

‘‘(h) CONTRIBUTIONS OF CERTAIN UNUSED HEALTH BENEFITS.—

‘‘(1) IN GENERAL.—For purposes of this title, a plan or other arrangement 

shall not fail to be treated as a cafeteria plan solely because qualified benefits 

under such plan include a health flexible spending arrangement under which 

not more than $500 of unused health benefits may be—

‘‘(A) carried forward to the succeeding plan year of such health flexible 

spending arrangement, or 

‘‘(B) to the extent permitted by section 106(d), contributed by the employer to a health savings account (as defined in section 223(d)) maintained 

for the benefit of the employee. 

‘‘(2) HEALTH FLEXIBLE SPENDING ARRANGEMENT.—For purposes of this subsection, the term ‘health flexible spending arrangement’ means a flexible spending arrangement (as defined in section 106(c)) that is a qualified benefit and 

only permits reimbursement for expenses for medical care (as defined in section 

213(d)(1), without regard to subparagraphs (C) and (D) thereof). 

‘‘(3) UNUSED HEALTH BENEFITS.—For purposes of this subsection, with respect 

to an employee, the term ‘unused health benefits’ means the excess of—

‘‘(A) the maximum amount of reimbursement allowable to the employee 

for a plan year under a health flexible spending arrangement, over 

‘‘(B) the actual amount of reimbursement for such year under such arrangement.’’. 

(b) EFFECTIVE DATE.—The amendments made by subsection (a) shall apply to taxable years beginning after December 31, 2005. 

SEC. 1003. DISTRIBUTIONS FROM GOVERNMENTAL RETIREMENT PLANS FOR HEALTH AND 

LONG-TERM CARE INSURANCE FOR PUBLIC SAFETY OFFICERS. 

(a) IN GENERAL.—Section 402 of the Internal Revenue Code of 1986 (relating to 

taxability of beneficiary of employees’ trust) is amended by adding at the end the 

following new subsection: 

‘‘(l) DISTRIBUTIONS FROM GOVERNMENTAL PLANS FOR HEALTH AND LONG-TERM

CARE INSURANCE.—

‘‘(1) IN GENERAL.—In the case of an employee who is an eligible retired public 

safety officer who makes the election described in paragraph (6) with respect 

to any taxable year of such employee, gross income of such employee for such 

taxable year does not include any distribution from an eligible retirement plan 

to the extent that the aggregate amount of such distributions does not exceed 

the amount paid by such employee for qualified health insurance premiums of 

the employee, his spouse, or dependents (as defined in section 152) for such taxable year. 

‘‘(2) LIMITATION.—The amount which may be excluded from gross income for 

the taxable year by reason of paragraph (1) shall not exceed $5,000. 

‘‘(3) DISTRIBUTIONS MUST OTHERWISE BE INCLUDIBLE.—

‘‘(A) IN GENERAL.—An amount shall be treated as a distribution for purposes of paragraph (1) only to the extent that such amount would be includible in gross income without regard to paragraph (1). 

‘‘(B) APPLICATION OF SECTION 72.—Notwithstanding section 72, in determining the extent to which an amount is treated as a distribution for purposes of subparagraph (A), the aggregate amounts distributed from an eligible retirement plan in a taxable year (up to the amount excluded under 

paragraph (1)) shall be treated as includible in gross income (without regard to subparagraph (A)) to the extent that such amount does not exceed 

the aggregate amount which would have been so includible if all amounts 

distributed from all eligible retirement plans were treated as 1 contract for 

purposes of determining the inclusion of such distribution under section 72. 

Proper adjustments shall be made in applying section 72 to other distributions in such taxable year and subsequent taxable years. 

‘‘(4) DEFINITIONS.—For purposes of this subsection—

‘‘(A) ELIGIBLE RETIREMENT PLAN.—For purposes of paragraph (1), the 

term ‘eligible retirement plan’ means a governmental plan (within the 

meaning of section 414(d)) which is described in clause (iii), (iv), (v), or (vi) 

of subsection (c)(8)(B). 

‘‘(B) ELIGIBLE RETIRED PUBLIC SAFETY OFFICER.—The term ‘eligible retired 

public safety officer’ means an individual who, by reason of disability or attainment of normal retirement age, is separated from service as a public 

safety officer with the employer who maintains the eligible retirement plan 

from which distributions subject to paragraph (1) are made. 

‘‘(C) PUBLIC SAFETY OFFICER.—The term ‘public safety officer’ shall have 

the same meaning given such term by section 1204(8)(A) of the Omnibus 

Crime Control and Safe Streets Act of 1968 (42 U.S.C. 3796b(8)(A)). 

56 

‘‘(D) QUALIFIED HEALTH INSURANCE PREMIUMS.—The term ‘qualified 

health insurance premiums’ means premiums for coverage for the eligible 

retired public safety officer, his spouse, and dependents, by an accident or 

health insurance plan or qualified long-term care insurance contract (as defined in section 7702B(b)). 

‘‘(5) SPECIAL RULES.—For purposes of this subsection—

‘‘(A) DIRECT PAYMENT TO INSURER REQUIRED.—Paragraph (1) shall only 

apply to a distribution if payment of the premiums is made directly to the 

provider of the accident or health insurance plan or qualified long-term care 

insurance contract by deduction from a distribution from the eligible retirement plan. 

‘‘(B) RELATED PLANS TREATED AS 1.—All eligible retirement plans of an 

employer shall be treated as a single plan. 

‘‘(6) ELECTION DESCRIBED.—

‘‘(A) IN GENERAL.—For purposes of paragraph (1), an election is described 

in this paragraph if the election is made by an employee after separation 

from service with respect to amounts not distributed from an eligible retirement plan to have amounts from such plan distributed in order to pay for 

qualified health insurance premiums. 

‘‘(B) SPECIAL RULE.—A plan shall not be treated as violating the requirements of section 401, or as engaging in a prohibited transaction for purposes of section 503(b), merely because it provides for an election with respect to amounts that are otherwise distributable under the plan or merely 

because of a distribution made pursuant to an election described in subparagraph (A). 

‘‘(7) COORDINATION WITH MEDICAL EXPENSE DEDUCTION.—The amounts excluded from gross income under paragraph (1) shall not be taken into account 

under section 213. 

‘‘(8) COORDINATION WITH DEDUCTION FOR HEALTH INSURANCE COSTS OF SELFEMPLOYED INDIVIDUALS.—The amounts excluded from gross income under paragraph (1) shall not be taken into account under section 162(l).’’. 

(b) CONFORMING AMENDMENTS.—

(1) Section 403(a) of such Code (relating to taxability of beneficiary under a 

qualified annuity plan) is amended by inserting after paragraph (1) the following new paragraph: 

‘‘(2) SPECIAL RULE FOR HEALTH AND LONG-TERM CARE INSURANCE.—To the extent provided in section 402(l), paragraph (1) shall not apply to the amount distributed under the contract which is otherwise includible in gross income under 

this subsection.’’. 

(2) Section 403(b) of such Code (relating to taxability of beneficiary under annuity purchased by section 501(c)(3) organization or public school) is amended 

by inserting after paragraph (1) the following new paragraph: 

‘‘(2) SPECIAL RULE FOR HEALTH AND LONG-TERM CARE INSURANCE.—To the extent provided in section 402(l), paragraph (1) shall not apply to the amount distributed under the contract which is otherwise includible in gross income under 

this subsection.’’. 

(3) Section 457(a) of such Code (relating to year of inclusion in gross income) 

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

‘‘(3) SPECIAL RULE FOR HEALTH AND LONG-TERM CARE INSURANCE.—In the case 

of a plan of an eligible employer described in subsection (e)(1)(A), to the extent 

provided in section 402(l), paragraph (1) shall not apply to amounts otherwise 

includible in gross income under this subsection.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to distributions in taxable years beginning after December 31, 2005. 

CONTENTS 

Page 

I. Summary and Background ........................................................................... 58 

A. Purpose and Summary .................................................................... 58 

B. Background and Need for Legislation ............................................ 63 

C. Legislative History ........................................................................... 63 

II. Explanation of the Bill .................................................................................. 64 

Title I: Reform of Funding Rules for Single-Employer Defined Benefit 

Pension Plans ............................................................................................. 64 

A. Minimum Funding Standards for Single-Employer Defined Benefit Pension Plans (secs. 111, 112, 114 and 301 of the bill 

and sec. 412 and new sec. 430 of the Code) ................................. 64 

57 

B. Benefit Limitations Under Single-Employer Defined Benefit 

Pension Plans .................................................................................. 83 

1. Prohibition on shutdown benefits and other unpredictable 

contingent event benefits (sec. 113(a) of the bill and new 

sec. 436 of the Code) ............................................................... 83 

2. Funding-based limits on benefits and benefit accruals (sec. 

113(b) of the bill and new sec. 437 of the Code) ................... 85 

C. Modification of Transition Rule to Pension Funding Requirements for Interstate Bus Company (sec. 121 of the bill) ............. 89 

D. Treatment of Nonqualified Deferred Compensation Plan when 

Employer’s Defined Benefit Plan is in At-Risk Status (sec. 

122 of the bill and sec. 409A of the Code) .................................... 92 

Title II: Funding Rules for Multiemployer Defined Benefit Plans ............ 94 

A. Funding Rules for Multiemployer Defined Benefit Plans (sec. 

211 of the bill and new sec. 431 of the Code) ............................... 95 

B. Additional Funding Rules for Multiemployer Plans in Endangered or Critical Status (sec. 212 of the bill and new sec. 

432 of the Code) .............................................................................. 99 

C. Measures to Forestall Insolvency of Multiemployer Plans (sec. 

302 of the bill and sec. 418E of the Code) .................................... 106 

Title III: Other Provisions ............................................................................. 107 

A. Interest Rate Assumption for Determination of Lump-Sum Distributions (sec. 302(b) of the bill and sec. 417 of the Code) ........ 107 

B. Interest Rate Assumption for Applying Benefit Limitations to 

Lump-Sum Distributions (sec. 303 of the bill and sec. 415 

of the Code) ..................................................................................... 109 

C. Distributions During Working Retirement (sec. 304(b) of the 

bill and new sec. 401(a)(35) of the Code) ...................................... 110 

Title IV: Improvements in PBGC Guarantee Provisions (sec. 401 of 

the bill and sec. 4006 of ERISA) ............................................................... 111 

Title V: Disclosure—Section 4010 Filings With the PBGC (sec. 503 

of the bill and sec. 4010 of ERISA) ........................................................... 116 

Title VI: Prohibited Transaction Exemption for the Provision of Investment Advice (sec. 602 of the bill and sec. 4975 of the Code) .................. 118 

Title VII: Benefit Accrual Standards (sec. 701(b) of the bill and secs. 

411 and 417 of the Code) ........................................................................... 121 

Title VIII: Deduction Limitations ................................................................. 129 

A. Increase in Deduction Limits (sec. 801 of the bill and sec. 404 

of the Code) ..................................................................................... 129 

B. Updating Deduction Rules for Combination of Plans (sec. 802 

of the bill and secs. 404(a)(7) and 4972 of the Code) ................... 131 

Title IX: Enhanced Retirement Savings and Defined Contribution Plans 132 

A. Permanency of EGTRRA Pension and IRA Provisions (sec. 901 

of the bill) ........................................................................................ 132 

B. Saver’s Credit Made Permanent (sec. 902 of the bill and sec. 

25B of the Code) ............................................................................. 135 

C. Increasing Participation Through Automatic Enrollment Arrangements (sec. 903 of the bill and secs. 401(k), 401(m), 

414(w), and 416 of the Code) ......................................................... 136 

D. Treatment of Distributions to Guardsmen Called to Active Duty 

(sec. 904 of the bill and secs. 72(t), 401(k), 403(b) of the bill) .... 141 

E. Inapplicability of 10–Percent Additional Tax on Early Distributions of Pension Plans of Public Safety Employees (sec. 905 

of the bill and sec. 72(t) of the Code) ............................................ 142 

F. Combat Zone Compensation Taken into Account for Purposes 

of IRA Contributions (sec. 906 of the bill and sec. 219 of 

the Code) ......................................................................................... 143 

G. Direct Deposit of Tax Refunds in an IRA (sec. 907 of the bill) .... 144 

H. IRA Eligibility for the Disabled (sec. 908 of the bill and sec. 

219 of the Code) .............................................................................. 145 

I. Rollovers by Nonspouse Beneficiaries (sec. 909 of the bill and 

secs. 402, 403(a)(4), 403(b)(8), and 457(e)(16) of the Code) ......... 146 

Title X: Provisions to Enhance Health Care Affordability ......................... 148 

A. Tax Treatment of Combined Annuity or Life Insurance Contracts with a Long-Term Care Insurance Feature (sec. 1001 

of the bill and secs. 72. 1035, and 7702B and new sec. 6050U 

of the Code) ..................................................................................... 148 

58 

B. Disposition of Unused Health Benefits in Flexible Spending 

Arrangements (sec. 1002 of the bill and sec. 125 of the Code) ... 153 

C. Permit Tax-Free Distributions from Governmental Retirement 

Plans for Premiums for Health and Long-Term Care Insurance 

for Public Safety Officers (sec. 1003 of the bill and sec. 402 

of the Code) ..................................................................................... 156 

III. Votes of the Committee ................................................................................. 157 

IV. Budget Effects of the Bill .............................................................................. 158 

A. Committee Estimate of Budgetary Effects ..................................... 158 

B. Statement Regarding New Budget Authority and Tax Expenditures Budget Authority .................................................................. 161 

C. Cost Estimate Prepared by the Congressional Budget Office ...... 161 

D. Macroeconomic Impact Analysis ..................................................... 176 

V. Other Matters to be Discussed Under the Rules of the House .................. 176 

A. Committee Oversight Findings and Recommendations ................ 176 

B. Statement of General Performance Goals and Objectives ............ 176 

C. Constitutional Authority Statement ............................................... 176 

D. Information Relating to Unfunded Mandates ............................... 176 

E. Applicability of House Rule XXI 5(b) .............................................. 176 

F. Tax Complexity Analysis ................................................................. 177 

VI. Changes in Existing Law Made by the Bill, as Reported ........................... 177 

VII. Dissenting Views ........................................................................................... 303 

I. SUMMARY AND BACKGROUND 

A. PURPOSE AND SUMMARY

PURPOSE

The bill, H.R. 2830, as amended, includes provisions for: (1) reform of funding rules for single-employer defined benefit pension 

plans (Title I); (2) funding rules for multiemployer defined benefit 

plans (Title II); (3) other provisions relating to pensions (Title III); 

(4) improvements in PBGC guarantee provisions (Title IV); (5) disclosure of pension plan information (Title V); (6) investment advice 

(Title VI); (7) benefit accrual standards (Title VII); (8) deduction 

limitations (Title VIII); (9) enhanced retirement savings and defined contribution plans (Title IX) ; and (10) provisions to enhance 

health care affordability (Title X). 

SUMMARY

I. Reform of funding rules for single-employer plans 

Funding rules for single-employer plans.—For plan years beginning in 2006, the bill applies the law as in effect for 2005, including 

the use of an interest rate based on long-term corporate bond rates 

to measure pension liabilities. For plan years beginning after 2006, 

the bill replaces the present-law two-tiered funding rules for singleemployer plans with a single set of rules. Under the new rules, employers must generally contribute: (1) the amount needed to amortize unfunded liabilities attributable to previously earned benefits 

(the plan’s ‘‘funding shortfall’’) over seven years, plus (2) the 

amount needed to fund benefits earned in the current year (the 

plan’s ‘‘normal cost’’). For this purpose, liabilities are measured 

using a modified interest rate yield curve based on a three-year 

weighted average of corporate bond rates. The modified yield consists of three ‘‘segment’’ rates based on the time when benefits are 

expected to be paid from the plan (within five years, between six 

and 20 years, and after 20 years). The bill also specifies a general 

mortality table to be used in valuing liabilities and permits the use 

of a plan-specific mortality table in certain cases. Special assumpVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00058 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
59 

tions must be used in measuring liabilities of ‘‘at-risk’’ plans (i.e., 

plans that are less than 60-percent funded). Several phase-in rules 

apply in measuring liabilities and determining a plan’s funding 

shortfall. The bill also modifies the rules relating to the use of credit balances, so that credit balances are adjusted to reflect gains and 

losses on plan assets, credit balances can be used to reduce required contributions only if a plan is at least 80-percent funded, 

and, subject to certain exceptions, the value of plan assets is reduced by any credit balances in determining required contributions 

and a plan’s funded status. 

Benefit limitations under single-employer plans.—Under the bill, 

a single-employer defined benefit pension plan may not provide 

benefits payable solely as a result of a plant shutdown or other unpredictable contingent event. In addition, benefit increases generally are not permitted if a plan is less than 80-percent funded 

unless the liability attributable to such increases is currently funded, lump-sums and other accelerated forms of distribution may not 

be made if a plan is less than 80-precent funded, and benefit accruals must be frozen if a plan is less than 60-percent funded. These 

provisions are generally effective after December 31, 2006, with a 

delayed effective date for plans maintained pursuant to collective 

bargaining agreements. 

Modification of transition rule to pension funding requirements.— The bill extends to 2006 special rules for determining required contributions and variable rate premiums in the case of a single-employer plan sponsored by a company engaged primarily in interurban or interstate passenger bus service and meeting certain 

other requirements and modifies the special rules for years after 

2006 when the new single-employer funding rules become effective. 

Treatment of nonqualified deferred compensation plan when employer defined benefit plan is in at-risk status.—Effective after December 31, 2005, if a defined benefit pension plan is in at-risk status (i.e., the plan is less than 60-percent funded), certain arrangements involving nonqualified deferred compensation are treated as 

property transferred in connection with the performance of services, resulting in current income inclusion and, in some cases, interest and a 20-percent additional tax. This treatment applies if assets are set aside (directly or indirectly) in a trust or other arrangement as determined by the Secretary of the Treasury, or transferred to such a trust or other arrangement, for purposes of paying 

nonqualified deferred compensation when the defined benefit pension plan is in at-risk status. The rule does not apply in the case 

of assets that are set aside before the defined benefit pension plan 

is in at-risk statute. The treatment also applies if a nonqualified 

deferred compensation plan provides that assets will be restricted 

to the provision of benefits under the plan in connection with the 

at-risk status (or other similar financial measure determined by 

the Secretary of Treasury) of any defined benefit pension plan of 

the employer or assets are so restricted. 

II. Funding rules for multiemployer defined benefit plans 

General funding rules for multiemployer plans.—Under the bill, 

for plan years beginning after December 31, 2006, in the case of 

multiemployer plans, the amortization periods attributable to past 

service liabilities and gains or losses from changes in actuarial asVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00059 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
60 

sumptions are 15 years, rather than 30 years. The bill also modifies the rules relating to extensions of amortization periods and the 

interest rate applicable in the case of a funding waiver or amortization extension. 

Additional funding rules for multiemployer plans in endangered 

or critical status.—The bill provides (1) criteria for identifying underfunded multiemployer plans that pose the risk of a funding deficiency or insolvency, and (2) procedures for developing a plan to 

improve funding status, effective for plan years beginning after December 31, 2005. 

Measures to forestall insolvency of multiemployer plans.—The bill 

increases the likelihood of anticipating future insolvencies by requiring multiemployer plans in reorganization status to make projections of possible insolvency over a longer period, effective for 

plan years beginning after December 31, 2005. 

III. Other provisions 

Interest rate for 2006 funding requirements.—In the case of single-employer plans, the bill applies an interest rate based on longterm corporate bonds for purposes of determining current liability 

for plan years beginning in 2006. 

Interest rate assumption for determination of lump-sum distributions.—Under the bill, the minimum present value of certain forms 

of benefit, such as lump sums, is determined using three segment 

rates, based on a yield curve of interest rates on investment-grade 

corporate bonds, and a specified mortality table. The changes to the 

statutory assumptions are phased in over five years beginning in 

2007. 

Interest rate assumption for applying benefit limitations to lumpsum distributions.—Under the bill, effective for distributions in 

years beginning after December 31, 2005, the interest rate used in 

applying the limits on benefits to certain forms of distributions, 

such as lump sums, is not less than the greatest of (1) 5.5 percent, 

(2) the rate that provides a benefit of not more than 105 percent 

of the benefit that would be provided using the statutory rate in 

determining minimum present value, and (3) the rate specified 

under the plan. 

Distributions during working retirement.—Effective for distributions in plan years beginning after December 31, 2005, a pension 

plan does not fail to be a qualified retirement plan solely because 

in-service distributions are made to participants who have attained 

age 62. 

IV. Improvements in PBGC guarantee provisions 

Beginning in 2006, the bill phases in (depending on a plan’s 

funded status) an increase in PBGC single-employer flat-rate premiums to $30 per participant per year as adjusted after 2006 to reflect increases in average wages as defined under the Social Security Act. The bill applies a new premium of $1,250 per participant 

for three years after termination of a single-employer plan in a distress termination (other than in liquidation proceedings) or an involuntary termination. In the case of termination due to a reorganization in bankruptcy, the liability for the premium does not arise 

(and the three-year period does not begin) until the employer is discharged from the bankruptcy proceeding. The bill applies an interVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00060 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
61 

est rate based on long-term corporate bonds in determining variable rate premiums for 2006 and conforms the rules for variable 

rate premiums to the new funding rules for years after 2006, including repeal of the full funding limit exception to variable rate 

premiums. 

V. Disclosure 

Effective for plan years beginning after December 31, 2006, the 

bill changes the standard for required reporting of financial information to the PBGC under section 4010 of ERISA, so that reporting is required if plans are less than 60-percent funded. In addition, if section 4010 reporting is required, notice and information 

about funded status must be provided to participants, beneficiaries, 

and Congressional committees with jurisdiction over pension plan 

funding. 

VI. Investment advice 

The bill provides prohibited transaction exemptions for the provision of investment advice to a plan and plan participants with respect to the investment of plan assets, as well as fees for such advice and investments made pursuant to such advice, provided certain requirements are met, including disclosure of specific information. 

VII. Benefit accrual standards 

The bill makes various changes in the application of the rules 

prohibiting age discrimination as applied to defined benefit pension 

plans, including hybrid plans. The bill allows hybrid plans to determine minimum lump sums as the balance of participants’ hypothetical accounts, provided that the rate of interest provided for 

under the plan is not greater than a market rate of interest. The 

provision is effective for periods beginning on or after June 29, 

2005. 

VIII. Deduction limits 

Increase in deduction limits.—Effective in 2006, the bill allows 

employers to make deductible contributions (1) to single-employer 

plans in an amount based on 150 percent of the plan’s funding target and (2) to multiemployer plans in an amount based on 140 percent of the plan’s current liability. 

Updating rules for combination of plans.—Effective 2006, in applying the combined limit on deductible contributions to defined 

benefit and defined contribution plans, only contributions to defined contribution plans exceeding six percent of compensation are 

taken into account. 

IX. Enhanced retirement savings and defined contribution plans 

Pension and individual retirement arrangement provisions of the 

Economic Growth and Tax Relief Reconciliation Act of 2001 made 

permanent.—Under the bill, the EGTRRA sunset for years beginning after December 31, 2010, does not apply to the pension and 

IRA provisions of EGTRRA. Thus, these provisions are made permanent. 

62 

Saver’s credit made permanent.—The bill makes the saver’s credit permanent and provides for the direct deposit of the credit to an 

IRA or plan that accepts such amounts. 

Increasing participation through automatic enrollment contribution arrangements.—The bill provides nondiscrimination safe harbors for elective deferrals and matching contributions made under 

a qualified automatic contribution arrangement, which is an arrangement that provides that participants are treated as having 

elected to make elective deferrals at certain scheduled rates (unless 

they elect otherwise). The provision is effective for plan years beginning after December 31, 2005. 

Penalty-free withdrawals from retirement plans for individuals 

called to active duty for at least 179 days.—The bill provides an exception to the 10-percent early withdrawal tax for distributions 

from an IRA or attributable to elective deferrals in the case of a 

reservist called to active duty on or after September 11, 2001, and 

before September 12, 2007, for at least 180 days or an indefinite 

period. Such amounts may be recontributed to an IRA within two 

years of the end of active duty. The statute of limitations for claiming a refund with respect to such a distribution is extended to one 

year after the date of enactment of the provision. 

Waiver of 10-percent early withdrawal penalty tax on certain distributions of pension plans for public safety employees.—Effective 

for distributions after the date of enactment, the 10-percent early 

withdrawal tax does not apply to certain benefits under a deferred 

retirement option plan (‘‘DROP’’) feature of a governmental defined 

benefit pension plan to qualified public safety employees. 

Combat zone compensation taken into account for purposes of determining limitation and deductibility of contributions to individual 

retirement plans.—Effective for years beginning after December 31, 

2005, compensation as defined for IRA purposes includes combat 

pay that is excludible from gross income. 

Direct payment of tax refunds to retirement plans.—The Secretary 

of the Treasury is directed to develop forms under which all or a 

portion of taxpayer refunds for taxable years beginning after December 31, 2006, can be deposited directly into IRAs. 

IRA eligibility for the disabled.—Effective for years beginning 

after December 31, 2005, the bill allows IRA contributions to be 

made by disabled individuals who have no compensation. 

Rollovers by nonspouse beneficiaries.—The bill allows a nonspouse beneficiary who inherits an interest in an employer-sponsored retirement plan to roll the interest over to an IRA, effective 

for distributions after December 31, 2005. The bill does not change 

the application of the minimum distribution rules for nonspouse 

beneficiaries. 

X. Provisions to enhance health care affordability 

Treatment of annuity and life insurance contracts with a longterm care insurance feature.—The bill provides rules for long-term 

care insurance coverage provided by a rider on or as part of an annuity contract and modifies the rules for long-term care insurance 

coverage provided by a rider on or as part of a life insurance contract. The provision is generally effective after December 31, 2006. 

Disposition of unused health benefits in cafeteria plans and flexible spending arrangements.—Effective for years beginning after DeVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00062 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
63 

cember 31, 2005, the bill allows up to $500 in unused health benefits under a health flexible spending account to be carried over to 

the next year or, in the case of an employee eligible for contributions to a health savings account (‘‘HSA’’), contributed to an HSA. 

Distributions from governmental retirement plans for health and 

long-term care insurance for public safety officers.—Effective for 

years beginning after December 31, 2005, the bill provides an exclusion of up to $5,000 for amounts distributed from an employersponsored governmental retirement plan in order to pay accident or 

health or long-term care insurance premiums for retired public 

safety officers. 

B. BACKGROUND AND NEED FOR LEGISLATION

The private pension system plays a critical role in the retirement 

income security of American workers. Currently, outdated funding 

rules have threatened the financial security of many pension plans 

and have allowed some employers to dramatically underfund their 

promised obligations to their employees. Among other changes, the 

bill makes modifications to the pension funding rules which will 

help companies solidify their pension promises and give their employees the financial security for which they have worked. 

The bill also contains provisions that will increase the tax-favored savings opportunities for Americans. For example, the bill 

makes permanent the retirement savings provisions that were part 

of the Economic Growth and Tax Relief Reconciliation Act of 2001. 

The bill also takes steps to make health care, including long-term 

care, more affordable. 

C. LEGISLATIVE HISTORY

Background 

H.R. 2830 was introduced on June 9, 2005, and was referred to 

the Committee on Education and the Workforce and in addition to 

the Committee on Ways and Means, for a period to be determined 

by the Speaker, in each case for consideration of such provisions as 

fall within the jurisdiction of the committee concerned. 

The Committee on Education and the Workforce marked up the 

bill on June 29, 2005, and order the bill, as amended, favorably reported. See H.R. Rpt. 109–232, Part I, for the bill as reported by 

the Committee on Education and the Workforce. 

Committee action 

The Committee on Ways and Means marked up the bill on November 9, 2005, and ordered the bill, as amended, favorably reported. 

Committee hearings 

Matters addressed by the bill have been the subject of Committee 

review in the current as well as preceding Congresses. 

The following full Committee and Subcommittee hearings related 

to matters in the bill have been held during the 109th Congress. 

• Hearing on funding rules for multiemployer defined benefit 

plans in H.R. 2830, the ‘‘Pension Protection Act of 2005’’ (June 28, 

2005, Subcommittee on Select Revenue Measures) 

64 

1 Code sec. 412; ERISA secs. 301–308. The minimum funding rules also apply to multiemployer plans, but the rules for multiemployer plans differ in various respects from the rules applicable to single-employer plans. The rules for multiemployer plans are discussed in Part II of 

this document. The minimum funding rules do not apply to governmental plans or to church 

plans, except church plans with respect to which an election has been made to have various 

ERISA and Code requirements, including the funding requirements, apply to the plan. In addition, special rules apply to certain plans funded exclusively by the purchase of individual insurance contracts (referred to as ‘‘insurance contract’’ plans). 

• Hearing on retirement policy challenges and opportunities of 

our aging society (May 19, 2005, Full Committee) • Hearing on long-term care (April 19, 2005, Subcommittee on 

Health) • Hearing on the President’s proposal for single-employer pension funding reform (March 8, 2005, Subcommittee on Select Revenue Measures) 

The following full Committee and Subcommittee hearings related 

to matters in the bill were held during the 108th Congress: • Joint hearing on examining pension security and defined benefit plans, the Bush Administration’s proposal to replace the 30- 

year Treasury rate (July 15, 2003; Subcommittee on Select Revenue Measures). • Challenges facing pension plan funding (April 30, 2003; Subcommittee on Select Revenue Measures). • Hearing on the President’s fiscal year 2004 budget (February 

5, 2003, Full Committee). • Hearing on the President’s fiscal year 2004 budget (February 

4, 2003, Full committee). 

Previous consideration of legislation 

A number of provisions in the bill as reported have previously 

passed the House, including the provisions relating to investment 

advice, treating combat pay as compensation for purposes of the 

IRA rules, providing for qualified reservist distributions, and allowing the rollover of unused amounts in a flexible spending arrangement. 

II. EXPLANATION OF THE BILL 

TITLE I: REFORM OF FUNDING RULES FOR SINGLEEMPLOYER DEFINED BENEFIT PENSION PLANS 

A. MINIMUM FUNDING STANDARDS FOR SINGLE-EMPLOYER DEFINED

BENEFIT PENSION PLANS

(Secs. 111, 112, 114 and 301 of the bill and sec. 412 and new sec. 

430 of the Code) 

PRESENT LAW

IN GENERAL

Single-employer defined benefit pension plans are subject to minimum funding requirements under the Employee Retirement Income Security Act of 1974 (‘‘ERISA’’) and the Internal Revenue 

Code (the ‘‘Code’’).1 The amount of contributions required for a plan 

year under the minimum funding rules is generally the amount 

needed to fund benefits earned during that year plus that year’s 

portion of other liabilities that are amortized over a period of years, 

65 

such as benefits resulting from a grant of past service credit. The 

amount of required annual contributions is determined under one 

of a number of acceptable actuarial cost methods. Additional contributions are required under the deficit reduction contribution 

rules in the case of certain underfunded plans. No contribution is 

required under the minimum funding rules in excess of the full 

funding limit (described below). 

General minimum funding rules 

Funding standard account 

As an administrative aid in the application of the funding requirements, a defined benefit pension plan is required to maintain 

a special account called a ‘‘funding standard account’’ to which 

specified charges and credits are made for each plan year, including a charge for normal cost and credits for contributions to the 

plan. Other charges or credits may apply as a result of decreases 

or increases in past service liability as a result of plan amendments, experience gains or losses, gains or losses resulting from a 

change in actuarial assumptions, or a waiver of minimum required 

contributions. 

In determining plan funding under an actuarial cost method, a 

plan’s actuary generally makes certain assumptions regarding the 

future experience of a plan. These assumptions typically involve 

rates of interest, mortality, disability, salary increases, and other 

factors affecting the value of assets and liabilities. If the plan’s actual unfunded liabilities are less than those anticipated by the actuary on the basis of these assumptions, then the excess is an experience gain. If the actual unfunded liabilities are greater than those 

anticipated, then the difference is an experience loss. Experience 

gains and losses for a year are generally amortized as credits or 

charges to the funding standard account over five years. 

If the actuarial assumptions used for funding a plan are revised 

and, under the new assumptions, the accrued liability of a plan is 

less than the accrued liability computed under the previous assumptions, the decrease is a gain from changes in actuarial assumptions. If the new assumptions result in an increase in the accrued liability, the plan has a loss from changes in actuarial assumptions. The accrued liability of a plan is the actuarial present 

value of projected pension benefits under the plan that will not be 

funded by future contributions to meet normal cost or future employee contributions. The gain or loss for a year from changes in 

actuarial assumptions is amortized as credits or charges to the 

funding standard account over ten years. 

If minimum required contributions are waived (as discussed 

below), the waived amount (referred to as a ‘‘waived funding deficiency’’) is credited to the funding standard account. The waived 

funding deficiency is then amortized over a period of five years, beginning with the year following the year in which the waiver is 

granted. Each year, the funding standard account is charged with 

the amortization amount for that year unless the plan becomes 

fully funded. 

If, as of the close of a plan year, the funding standard account 

reflects credits at least equal to charges, the plan is generally 

treated as meeting the minimum funding standard for the year. If, 

66 

as of the close of the plan year, charges to the funding standard 

account exceed credits to the account, then the excess is referred 

to as an ‘‘accumulated funding deficiency.’’ Thus, as a general rule, 

the minimum contribution for a plan year is determined as the 

amount by which the charges to the funding standard account 

would exceed credits to the account if no contribution were made 

to the plan. For example, if the balance of charges to the funding 

standard account of a plan for a year would be $200,000 without 

any contributions, then a minimum contribution equal to that 

amount would be required to meet the minimum funding standard 

for the year to prevent an accumulated funding deficiency. 

Credit balances 

If credits to the funding standard account exceed charges, a 

‘‘credit balance’’ results. A credit balance results, for example, if 

contributions in excess of minimum required contributions are 

made. Similarly, a credit balance may result from large net experience gains. The amount of the credit balance, increased with interest at the rate used under the plan to determine costs, can be used 

to reduce future required contributions. 

Funding methods and general concepts 

A defined benefit pension plan is required to use an acceptable 

actuarial cost method to determine the elements included in its 

funding standard account for a year. Generally, an actuarial cost 

method breaks up the cost of benefits under the plan into annual 

charges consisting of two elements for each plan year. These elements are referred to as: (1) normal cost; and (2) supplemental 

cost. 

The plan’s normal cost for a plan year generally represents the 

cost of future benefits allocated to the year by the funding method 

used by the plan for current employees and, under some funding 

methods, for separated employees. Specifically, it is the amount actuarially determined that would be required as a contribution by 

the employer for the plan year in order to maintain the plan if the 

plan had been in effect from the beginning of service of the included employees and if the costs for prior years had been paid, 

and all assumptions as to interest, mortality, time of payment, etc., 

had been fulfilled. The normal cost will be funded by future contributions to the plan: (1) in level dollar amounts; (2) as a uniform 

percentage of payroll; (3) as a uniform amount per unit of service 

(e.g., $1 per hour); or (4) on the basis of the actuarial present values of benefits considered accruing in particular plan years. 

The supplemental cost for a plan year is the cost of future benefits that would not be met by future normal costs, future employee 

contributions, or plan assets. The most common supplemental cost 

is that attributable to past service liability, which represents the 

cost of future benefits under the plan: (1) on the date the plan is 

first effective; or (2) on the date a plan amendment increasing plan 

benefits is first effective. Other supplemental costs may be attributable to net experience losses, changes in actuarial assumptions, 

and amounts necessary to make up funding deficiencies for which 

a waiver was obtained. Supplemental costs must be amortized (i.e., 

recognized for funding purposes) over a specified number of years, 

67 

2 Under present law, certain changes in actuarial assumptions that decrease the liabilities of 

an underfunded single-employer plan must be approved by the Secretary of the Treasury. 3The deficit reduction contribution rules apply to single-employer plans, other than single-employer plans with no more than 100 participants on any day in the preceding plan year. Singleemployer plans with more than 100 but not more than 150 participants are generally subject 

to lower contribution requirements under these rules. 4 Under an alternative test, a plan is not subject to the deficit reduction contribution rules 

for a plan year if (1) the plan’s funded current liability percentage for the plan year is at least 

80 percent, and (2) the plan’s funded current liability percentage was at least 90 percent for 

each of the two immediately preceding plan years or each of the second and third immediately 

preceding plan years. 5 In determining a plan’s funded current liability percentage for a plan year, the value of the 

plan’s assets is generally reduced by the amount of any credit balance under the plan’s funding 

standard account. However, this reduction does not apply in determining the plan’s funded current liability percentage for purposes of whether an additional charge is required under the deficit reduction contribution rules. 

depending on the source. For example, the cost attributable to a 

past service liability is generally amortized over 30 years. 

Normal costs and supplemental costs under a plan are computed 

on the basis of an actuarial valuation of the assets and liabilities 

of a plan. An actuarial valuation is generally required annually 

and is made as of a date within the plan year or within one month 

before the beginning of the plan year. However, a valuation date 

within the preceding plan year may be used if, as of that date, the 

value of the plan’s assets is at least 100 percent of the plan’s current liability (i.e., the present value of benefit liabilities under the 

plan, as described below). 

For funding purposes, the actuarial value of plan assets may be 

used, rather than fair market value. The actuarial value of plan assets is the value determined under a reasonable actuarial valuation 

method that takes into account fair market value and is permitted 

under Treasury regulations. Any actuarial valuation method used 

must result in a value of plan assets that is not less than 80 percent of the fair market value of the assets and not more than 120 

percent of the fair market value. In addition, if the valuation method uses average value of the plan assets, values may be used for 

a stated period not to exceed the five most recent plan years, including the current year. 

In applying the funding rules, all costs, liabilities, interest rates, 

and other factors are required to be determined on the basis of actuarial assumptions and methods, each of which is reasonable (taking into account the experience of the plan and reasonable expectations), or which, in the aggregate, result in a total plan contribution equivalent to a contribution that would be obtained if each assumption and method were reasonable. In addition, the assumptions are required to offer the actuary’s best estimate of anticipated 

experience under the plan.2

Additional contributions for underfunded plans 

In general 

Under special funding rules (referred to as the ‘‘deficit reduction 

contribution’’ rules),3 an additional charge to a plan’s funding 

standard account is generally required for a plan year if the plan’s 

funded current liability percentage for the plan year is less than 

90 percent.4 A plan’s ‘‘funded current liability percentage’’ is generally the actuarial value of plan assets as a percentage of the 

plan’s current liability.5 In general, a plan’s current liability means 

68 

6 If the Secretary of the Treasury prescribes a new mortality table to be used in determining 

current liability, as described below, the deficit reduction contribution may include an additional 

amount. 7 In making these computations, the value of the plan’s assets is reduced by the amount of 

any credit balance under the plan’s funding standard account. 8The weighting used for this purpose is 40 percent, 30 percent, 20 percent and 10 percent, 

starting with the most recent year in the four-year period. Notice 88–73, 1988–2 C.B. 383. 

all liabilities to employees and their beneficiaries under the plan, 

determined on a present-value basis. 

The amount of the additional charge required under the deficit 

reduction contribution rules is the sum of two amounts: (1) the excess, if any, of (a) the deficit reduction contribution (as described 

below), over (b) the contribution required under the normal funding 

rules; and (2) the amount (if any) required with respect to unpredictable contingent event benefits. The amount of the additional 

charge cannot exceed the amount needed to increase the plan’s 

funded current liability percentage to 100 percent (taking into account any expected increase in current liability due to benefits accruing during the plan year). 

The deficit reduction contribution is the sum of (1) the ‘‘unfunded 

old liability amount,’’ (2) the ‘‘unfunded new liability amount,’’ and 

(3) the expected increase in current liability due to benefits accruing during the plan year.6 The ‘‘unfunded old liability amount’’ is 

the amount needed to amortize certain unfunded liabilities under 

1987 and 1994 transition rules. The ‘‘unfunded new liability 

amount’’ is the applicable percentage of the plan’s unfunded new 

liability. Unfunded new liability generally means the unfunded current liability of the plan (i.e., the amount by which the plan’s current liability exceeds the actuarial value of plan assets), but determined without regard to certain liabilities (such as the plan’s unfunded old liability and unpredictable contingent event benefits). 

The applicable percentage is generally 30 percent, but decreases by 

.40 of one percentage point for each percentage point by which the 

plan’s funded current liability percentage exceeds 60 percent. For 

example, if a plan’s funded current liability percentage is 85 percent (i.e., it exceeds 60 percent by 25 percentage points), the applicable percentage is 20 percent (30 percent minus 10 percentage 

points (25 multiplied by .4)).7

A plan may provide for unpredictable contingent event benefits, 

which are benefits that depend on contingencies that are not reliably and reasonably predictable, such as facility shutdowns or reductions in workforce. The value of any unpredictable contingent 

event benefit is not considered in determining additional contributions until the event has occurred. The event on which an unpredictable contingent event benefit is contingent is generally not considered to have occurred until all events on which the benefit is 

contingent have occurred. 

Required interest rate and mortality table 

Specific interest rate and mortality assumptions must be used in 

determining a plan’s current liability for purposes of the special 

funding rule. For plans years beginning before January 1, 2004, the 

interest rate used to determine a plan’s current liability must be 

within a permissible range of the weighted average 8 of the interest 

rates on 30-year Treasury securities for the four-year period ending 

on the last day before the plan year begins. The permissible range 

69 

9 If the Secretary of the Treasury determines that the lowest permissible interest rate in this 

range is unreasonably high, the Secretary may prescribe a lower rate, but not less than 80 percent of the weighted average of the 30-year Treasury rate. 10 Code sec. 412(b)(5)(B)(iii)(II); ERISA sec. 302(b)(5)(B)(iii)(II). Under Notice 90–11, 1990–1 

C.B. 319, the interest rates in the permissible range are deemed to be consistent with the assumptions reflecting the purchase rates that would be used by insurance companies to satisfy 

the liabilities under the plan. 11Pub. L. No. 108–218 (2004). 12 In addition, under PFEA 2004, if certain requirements are met, reduced contributions under 

the deficit reduction contribution rules apply for plan years beginning after December 27, 2003, 

and before December 28, 2005, in the case of plans maintained by commercial passenger airlines, employers primarily engaged in the production or manufacture of a steel mill product or 

in the processing of iron ore pellets, or a certain labor organization. 13 Code sec. 412(l)(7)(C)(ii); ERISA sec. 302(d)(7)(C)(ii). 14 Rev. Rul. 95–28, 1995–1 C.B. 74. The IRS and the Treasury Department have announced 

that they are undertaking a review of the applicable mortality table and have requested comments on related issues, such as how mortality trends should be reflected. Notice 2003–62, 

2003–38 I.R.B. 576; Announcement 2000–7, 2000–1 C.B. 586. 15For plan years beginning before 2004, the full funding limitation was generally defined as 

the excess, if any, of (1) the lesser of (a) the accrued liability under the plan (including normal 

cost) or (b) a percentage (170 percent for 2003) of the plan’s current liability (including the current liability normal cost), over (2) the lesser of (a) the market value of plan assets or (b) the 

actuarial value of plan assets, but in no case less than the excess, if any, of 90 percent of the 

plan’s current liability over the actuarial value of plan assets. Under the Economic Growth and 

Tax Relief Reconciliation Act of 2001 (‘‘EGTRRA’’), the full funding limitation based on 170 percent of current liability is repealed for plan years beginning in 2004 and thereafter. The provisions of EGTRRA generally do not apply for years beginning after December 31, 2010. 

is generally from 90 percent to 105 percent (120 percent for plan 

years beginning in 2002 or 2003).9 The interest rate used under the 

plan generally must be consistent with the assumptions which reflect the purchase rates which would be used by insurance companies to satisfy the liabilities under the plan.10

Under the Pension Funding Equity Act of 2004 (‘‘PFEA 2004’’),11

a special interest rate applies in determining current liability for 

plan years beginning in 2004 or 2005.12 For these years, the interest rate used must be within a permissible range of the weighted 

average of the rates of interest on amounts invested conservatively 

in long-term investment-grade corporate bonds during the fouryear period ending on the last day before the plan year begins. The 

permissible range for these years is from 90 percent to 100 percent. 

The interest rate is to be determined by the Secretary of the Treasury on the basis of two or more indices that are selected periodically by the Secretary and are in the top three quality levels available. 

The Secretary of the Treasury is required to prescribe mortality 

tables and to periodically review (at least every five years) and update such tables to reflect the actuarial experience of pension plans 

and projected trends in such experience.13 The Secretary of the 

Treasury has required the use of the 1983 Group Annuity Mortality Table.14

Other rules 

Full funding limitation 

No contributions are required under the minimum funding rules 

in excess of the full funding limitation. The full funding limitation 

is the excess, if any, of (1) the accrued liability under the plan (including normal cost), over (2) the lesser of (a) the market value of 

plan assets or (b) the actuarial value of plan assets.15 However, the 

full funding limitation may not be less than the excess, if any, of 

90 percent of the plan’s current liability (including the current liability normal cost) over the actuarial value of plan assets. In genVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00069 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
70 

16 Code sec. 412(m); ERISA sec. 302(e). 17 If quarterly contributions are required with respect to a plan, the amount of a quarterly 

installment must also be sufficient to cover any shortfall in the plan’s liquid assets (a ‘‘liquidity 

shortfall’’). 18 Code sec. 412(d); ERISA sec. 303. Under similar rules, the amortization period applicable 

to an unfunded past service liability or loss may also be extended. 19 Code sec. 4971. An excise tax applies also if a quarterly installment is less than the amount 

required to cover the plan’s liquidity shortfall. 

eral, current liability is all liabilities to plan participants and beneficiaries accrued to date, whereas the accrued liability under the 

full funding limitation may be based on projected future benefits, 

including future salary increases. 

TIMING OF PLAN CONTRIBUTIONS

In general, plan contributions required to satisfy the funding 

rules must be made within 81⁄2 months after the end of the plan 

year. If the contribution is made by such due date, the contribution 

is treated as if it were made on the last day of the plan year. 

In the case of a plan with a funded current liability percentage 

of less than 100 percent for the preceding plan year, estimated contributions for the current plan year must be made in quarterly installments during the current plan year.16 The amount of each required installment is 25 percent of the lesser of (1) 90 percent of 

the amount required to be contributed for the current plan year or 

(2) 100 percent of the amount required to be contributed for the 

preceding plan year.17

Funding waivers 

Within limits, the Secretary of the Treasury is permitted to 

waive all or a portion of the contributions required under the minimum funding standard for a plan year (a ‘‘waived funding deficiency’’).18 A waiver may be granted if the employer (or employers) 

responsible for the contribution could not make the required contribution without temporary substantial business hardship and if 

requiring the contribution would be adverse to the interests of plan 

participants in the aggregate. Generally, no more than three waivers may be granted within any period of 15 consecutive plan years. 

The IRS is authorized to require security to be granted as a condition of granting a waiver of the minimum funding standard if the 

sum of the plan’s accumulated funding deficiency and the balance 

of any outstanding waived funding deficiencies exceeds $1 million. 

Failure to make required contributions 

An employer is generally subject to an excise tax if it fails to 

make minimum required contributions and fails to obtain a waiver 

from the IRS.19 The excise tax is 10 percent of the amount of the 

funding deficiency. In addition, a tax of 100 percent may be imposed if the funding deficiency is not corrected within a certain period. 

If the total of the contributions the employer fails to make (plus 

interest) exceeds $1 million and the plan’s funded current liability 

percentage is less than 100 percent, a lien arises in favor of the 

plan with respect to all property of the employer and the members 

of the employer’s controlled group. The amount of the lien is the 

total amount of the missed contributions (plus interest). 

71 

REASONS FOR CHANGE

The Committee believes that the defined benefit pension system 

must be strengthened in order to ensure a protected and reliable 

retirement system. Employees need greater pension security in 

order to prepare for retirement. Employers must have the ability 

to accurately measure and predict pension plan liabilities and their 

funding obligations in order to properly determine their capital allocations and expenditures for business planning purposes. 

The Committee believes that the current defined benefit pension 

system does not contain appropriate funding rules to ensure that 

pension plans are properly funded. The Committee believes that 

comprehensive funding rule changes are needed in order to address 

the systematic pension underfunding crisis that continues to 

threaten the financial security of millions of participants. In addition, the present-law single-employer defined benefit plan funding 

rules, including the existence of a dual set of rules, are overly complex. 

It is the view of the Committee that present-law pension funding 

rules permit underfunded plans to make up funding shortfalls over 

too long a period of time, putting workers at risk of having their 

plans terminate without adequate funding. The Committee believes 

that present-law funding rules should be modified to ensure that 

employers are required to make sufficient and consistent contributions to ensure that plans ultimately meet a 100 percent funding 

target. 

The Committee believes that liabilities should be measured more 

precisely than required under present law. The Committee believes 

that the comprehensive pension reforms must include permanent 

interest rate reforms that generally reflect the timing of when liabilities are to be paid out. The Committee believes that the general matching of discount rates of differing maturities to pension 

obligations is the most accurate and practical way to measure the 

cost of meeting pension obligations and that a yield curve concept 

should be used. The Committee understands that use of a yield 

curve to measure other types of financial liabilities, such as car 

loans, mortgages, and certificates of deposit, is a common and prudent business practice. 

The Committee believes that accuracy in measuring pension liabilities and providing plan sponsors the ability to predict and 

budget for pension contributions are both important considerations. 

The Committee believes that the present-law rules do not appropriately balance these concerns, and that slightly reducing the 

smoothing periods under present law would improve accuracy while 

maintaining predictability. Thus, the Committee bill incorporates 

smoothing techniques in applying the modified yield curve and in 

determining asset values. However, the bill also generally reduces 

by one year the period over which smoothing is permitted. 

The Committee also believes that the mortality table required to 

be used under present law in calculating plan liabilities is outdated 

and may cause certain plans to appear to be better funded with 

fewer liabilities. Thus, the Committee believes that it is appropriate to update the mortality table required to be used and to 

allow the use of plan-specific mortality tables upon approval of Secretary of the Treasury. 

72 

20The provision does not change the funding rules applicable to insurance contract plans. Proposed changes to the funding rules for multiemployer plans are discussed in Part II below. Governmental plans and church plans continue to be exempt from the funding rules to the extent 

provided under present law. 

The present-law rules relating to credit balances have been identified as contributing to plan underfunding. Under present law, a 

credit balance is increased each year based on an assumed rate of 

interest, even if plan assets have failed to earn that rate of return 

or suffered losses. In addition, credit balances can be used to offset 

required contributions, even in the case of a seriously underfunded 

plan, thus slowing plan funding. Indeed, as benefits continue to accrue, using credit balances to offset required contributions causes 

funded status to deteriorate further. The PBGC has noted that in 

some large plan terminations, the use of credit balances allowed a 

‘‘funding holiday’’ for several years before plan termination, at 

which time the plans were significantly underfunded. Because credit balances were perceived as having such a harmful effect on funding, the Administration proposal would have eliminated the credit 

balances accumulated under present law, as well as prohibited new 

balances from accumulating. The bill does not adopt the strict approach of the Administration proposal. Rather, the bill both preserves the ability to use present-law balances, as well as permits 

new balances to accumulate. However, use of new balances is more 

limited to counteract some of the harmful effects associated with 

credit balances under present law. 

The Committee is also concerned about seriously underfunded 

plans as such plans present a risk to employees, as well as to the 

PBGC insurance program and to other PBGC premium payors. If 

the PBGC does not remain solvent, there may be increased pressures for guaranteed benefits to be paid from general revenues, 

thus imposing additional burdens on American taxpayers generally. 

The Committee believes that it is appropriate to require underfunded plans to use certain additional assumptions and loading factors in determining their funding obligations. 

EXPLANATION OF PROVISION

Interest rate required for plan years beginning in 2006 

For plan years beginning after December 31, 2005, and before 

January 1, 2007, the provision applies the present-law funding 

rules, with an extension of the interest rate applicable in determining current liability for plan years beginning in 2004 and 2005. 

Thus, in determining current liability for funding purposes for plan 

years beginning in 2006, the interest rate used must be within the 

permissible range (90 to 100 percent) of the weighted average of 

the rates of interest on amounts invested conservatively in longterm investment-grade corporate bonds during the four-year period 

ending on the last day before the plan year begins. 

Funding rules for plan years beginning after 2006—in general 

For plan years beginning after December 31, 2006, in the case 

of single-employer defined benefit plans, the provision repeals the 

present-law funding rules (including the requirement that a funding standard account be maintained) and provides a new set of 

rules for determining minimum required contributions.20 Under the 

73 

provision, the minimum required contribution to a single-employer 

defined benefit pension plan for a plan year generally depends on 

a comparison of the value of the plan’s assets with the plan’s funding target and target normal cost. As described in more detail 

below, under the provision, credit balances generated under 

present law are carried over (into the ‘‘funding standard carryover 

balance’’) and generally may be used in certain circumstances to reduce otherwise required minimum contributions. In addition, as described more fully below, contributions in excess of the minimum 

contributions required under the provision generally are credited to 

a prefunding balance that may be used in certain circumstances to 

reduce otherwise required minimum contributions. To facilitate the 

use of such balances to reduce minimum required contributions, 

while avoiding use of such balances for more than one purpose, in 

some circumstances the value of plan assets is reduced by the 

prefunding balance and/or the funding standard carryover balance. 

The minimum required contribution for a plan year, based on the 

value of plan assets (reduced by any prefunding balance and funding standard carryover balance) compared to the funding target, is 

shown in the following table: 

If: The minimum required contribution is: 

the value of plan assets (reduced by any prefunding balance 

and funding standard carryover balance) is less than the 

funding target.

the sum of: (1) target normal cost; (2) any shortfall amortization charge; and (3) any waiver amortization charge. 

the value of plan assets (reduced by any prefunding balance 

and funding standard carryover balance) exceeds the 

funding target.

the target normal cost, reduced by the excess of (1) the 

value of plan assets (reduced by any prefunding balance 

and funding standard carryover balance), over (2) the 

funding target. 

the value of plan assets (reduced by any prefunding balance 

and funding standard carryover balance) equals the funding target.

the target normal cost. 

Under the provision, a plan’s funding target is the present value 

of all liabilities under the plan attributable to benefits accrued or 

earned as of the beginning of the plan year. A plan’s target normal 

cost for a plan year is the present value of benefits expected to accrue or be earned during the plan year. A shortfall amortization 

charge is the amount required to amortize a funding shortfall. In 

general, a plan has a funding shortfall for a plan year if the plan’s 

funding target for the year exceeds the value of the plan’s assets 

(reduced by any prefunding balance and funding standard carryover balance). A waiver amortization charge is the amount required 

to amortize a waiver funding deficiency. 

The provision specifies the interest rates and mortality table that 

must be used in determining a plan’s target normal cost and funding target, as well as certain other actuarial assumptions, including 

special assumptions if the value of a plan’s assets (reduced by any 

prefunding and funding standard carryover balances) for the preceding year was less than 60 percent of the plan’s funding target 

(an ‘‘at-risk’’ plan). 

Target normal cost 

Under the provision, the minimum required contribution for a 

plan year generally includes the plan’s target normal cost for the 

plan year. A plan’s target normal cost is the present value of all 

benefits expected to accrue or be earned under the plan during the 

74 

21 Benefits accruing during the plan year are taken into account in determining normal cost 

for the plan year. 

plan year (the ‘‘current’’ year). For this purpose, an increase in any 

benefit attributable to services performed in a preceding year by 

reason of a compensation increase during the current year is treated as having accrued during the current year. 

If the value of a plan’s assets (reduced by any funding standard 

carryover balance and prefunding balance) exceeds the plan’s funding target for a plan year, for purposes of determining the minimum required contribution for the plan year, normal cost is reduced by the excess. 

Funding target and shortfall amortization charges 

In general 

If the value of a plan’s assets (reduced by any prefunding balance 

if the employer elects to use the prefunding balance to reduce required contributions for the year) is less than the plan’s funding 

target for a plan year, the minimum required contribution is increased by a shortfall amortization charge. As discussed more fully 

below, the shortfall amortization charge is the aggregate of the annual installments for the plan year with respect to any shortfall 

amortization bases for the plan year and the six preceding plan 

years. 

Funding target 

A plan’s funding target for a plan year is the present value of 

all liabilities to participants and their beneficiaries under the plan 

for the plan year. For this purpose, liabilities are taken into account to the extent attributable to benefits (including any early retirement or similar benefits) accrued or earned as of the beginning 

of the plan year. Benefits accruing in the plan year are not taken 

into account, irrespective of whether the valuation date for the plan 

year is later than the first day of the plan year.21

Shortfall amortization charge 

The shortfall amortization charge for a plan year is the aggregate 

of the shortfall amortization installments for the plan year with respect to any shortfall amortization bases for that plan year and the 

six preceding plan years. The shortfall amortization installments 

with respect to a shortfall amortization base for a plan year are annual installments determined as the amount needed to amortize 

the shortfall amortization base in level annual installments over 

the seven-year period beginning with the plan year. The shortfall 

amortization installments for a plan year are determined using the 

appropriate segment interest rates for the plan year (discussed 

below). 

A shortfall amortization base is determined for a plan year based 

on the plan’s funding shortfall for the plan year, that is, the 

amount by which the plan’s funding target for the year exceeds the 

value of the plan’s assets (reduced by any funding standard carryover balance and prefunding balance). The shortfall amortization 

base is the excess of (1) the funding shortfall, over (2) the present 

value of (a) the aggregate shortfall amortization installments for 

the plan year and the five succeeding plan years that have been 

75 

22 In the case of single-employee plans, the provision repeals the present-law rules under 

which the amortization period applicable to an unfunded past service liability or loss may be 

extended. 

determined with respect to any shortfall amortization bases for 

each of the six preceding plan years and (b) the aggregate waiver 

amortization installments (discussed below) for the plan year and 

the four succeeding plan years that have been determined with respect to any waived funding deficiency for each of the five preceding plan years. Under a special rule, a shortfall amortization 

base does not have to be established for a year if the value of a 

plan’s assets (reduced by any prefunding balance, but only if the 

employer elects to use the prefunding balance to reduce required 

contributions for the year) is at least equal to the plan’s funding 

target for a plan year. 

A transition rule applies with respect to certain plans in determining a shortfall amortization base for a plan year beginning 

after 2006 and before 2011. The transition rule applies to a plan 

that is subject to the present-law funding rules for the 2006 plan 

year, but is not subject to the present-law deficit reduction contribution rules for that year (either because of the plan’s funded 

status or because the plan covers no more than 100 participants). 

Under the transition rule, for purposes of determining a shortfall 

amortization base for a plan year, the plan’s funding shortfall is 

calculated by reference to the applicable percentage of the plan’s 

funding target as shown in the following table: 

Calendar year in which 

plan year begins: 

Applicable percentage of funding target: 

2007 ..................................................................................................................................................................... 92 

2008 ..................................................................................................................................................................... 94 

2009 ..................................................................................................................................................................... 96 

2010 ..................................................................................................................................................................... 98 

Early deemed amortization of funding shortfalls for preceding years 

If a plan’s funding shortfall for a plan year is zero (i.e., the value 

of the plan’s assets, reduced by any funding standard carryover 

balance and prefunding balance, is at least equal to the plan’s 

funding target for the year), any shortfall amortization bases for 

preceding plan years are eliminated. In that case, for purposes of 

determining any shortfall amortization charges for that year and 

succeeding years, the shortfall amortization base for preceding 

years is zero. 

Waiver amortization charges 

The provision retains the present-law rules under which the Secretary of the Treasury may waive all or a portion of the contributions required under the minimum funding standard for a plan 

year (referred to as a ‘‘waived funding deficiency’’).22 If a plan has 

a waived funding deficiency for a plan year or any of the four preceding plan years, the minimum required contribution for the plan 

year is increased by the waiver amortization charge for the plan 

year. 

The waiver amortization charge for a plan year is the aggregate 

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76 

spect to any waiver amortization bases for the five preceding plan 

years. The waiver amortization installments with respect to a waiver amortization base for a plan year are annual installments determined as the amount needed to amortize the waiver amortization 

base in level annual installments over the five-year period beginning with the following plan year. The waiver amortization installments for a plan year are determined using the appropriate segment interest rates for the plan year (discussed below). The waiver 

amortization base for a plan year is the amount of the waived funding deficiency (if any) for the plan year. 

If a plan’s funding shortfall for a plan year is zero (i.e., the value 

of the plan’s assets, reduced by any funding standard carryover 

balance and prefunding balance, is at least equal to the plan’s 

funding target for the year), any waiver amortization bases for preceding plan years are eliminated. In that case, for purposes of determining any waiver amortization charges for that year and succeeding years, the waiver amortization base for preceding years is 

zero. 

Actuarial assumptions used in determining a plan’s target normal 

cost and funding target 

Interest rates 

The provision specifies the interest rates that must be used in 

determining a plan’s target normal cost and funding target. Under 

the provision, present value is determined using three interest 

rates (‘‘segment’’ rates), each of which applies to benefit payments 

expected to be made from the plan during a certain period. The 

first segment rate applies to payments expected to be made during 

the five-year period beginning on the first day of the plan year; the 

second segment rate applies to payments expected to be made during the 15-year period following the initial five-year period; and the 

third segment rate applies to payments expected to be made after 

the end of the 15-year period. Each segment rate is a single interest rate determined monthly by the Secretary of the Treasury on 

the basis of a corporate bond yield curve, taking into account only 

the portion of the yield curve based on corporate bonds maturing 

during the particular segment rate period. 

The corporate bond yield curve used for this purpose is to be prescribed on a monthly basis by the Secretary of the Treasury, reflecting a three-year weighted average of yields on investment 

grade corporate bonds with varying maturities. The three-year 

weighted average is an average determined using a methodology 

under which the most recent year is weighted 50 percent, the preceding year is weighted 35 percent, and the second preceding year 

is weighted 15 percent. 

The Secretary of the Treasury is directed to publish each month 

the corporate bond yield curve and each of the segment rates for 

the month. In addition, such Secretary is directed to publish a description of the methodology used to determine the yield curve and 

segment rates, which is sufficiently detailed to enable plans to 

make reasonable projections regarding the yield curve and segment 

rates for future months, based on a plan’s projection of future interest rates. 

77 

23The transition rule does not apply to a plan if its first plan year begins after December 31, 

2006. 24The applicable long-term corporate bond rate is a rate that is from 90 to 100 percent of 

the weighted average of the rates of interest on amounts invested conservatively in long-term 

investment-grade corporate bonds during the four-year period ending on the last day before the 

plan year begins as determined by the Secretary under the method in effect for 2006. 25 The transition rule does not apply to a plan if its first plan year begins after December 

31, 2006. 

Under the provision, the present value of liabilities under a plan 

is determined using the segment rates for the ‘‘applicable month’’ for the plan year. The applicable month is the month that includes 

the plan’s valuation date for the plan year, or, at the election of the 

plan sponsor, any of the four months preceding the month that includes the valuation date. An election of a preceding month applies 

to the plan year for which it is made and all succeeding plan years 

unless revoked with the consent of the Secretary of the Treasury. 

The provision provides a transition rule for plan years beginning 

in 2007 and 2008.23 Under this rule, for plan years beginning in 

2007, the first, second, or third segment rate with respect to any 

month is the sum of: (1) the product of the segment rate otherwise 

determined for the month, multiplied by 331⁄3 percent; and (2) the 

product of the applicable long-term corporate bond rate,24 multiplied by 662⁄3 percent. For plan years beginning in 2008, the first, 

second, or third segment rate with respect to any month is the sum 

of: (1) the product of the segment rate otherwise determined for the 

month, multiplied by 662⁄3 percent; and (2) the product of applicable long-term corporate bond rate multiplied by 331⁄3 percent. 

Under the provision, certain amounts are determined using the 

plan’s ‘‘effective interest rate’’ for a plan year. The effective interest 

rate with respect to a plan for a plan year is the single rate of interest which, if used to determine the present value of the liabilities taken into account in determining the plan’s funding target 

for the year, would result in an amount equal to the plan’s funding 

target (as determined using the first, second, and third segment 

rates). 

Mortality table 

The provision specifies the mortality table that must be used in 

determining present value or making any other computations. In 

general, the mortality table used must be the RP–2000 Combined 

Mortality Table, using Scale AA, as published by the Society of Actuaries, as in effect on the date of the enactment of the provision. 

Under Treasury regulations, any difference in present value resulting from the different assumptions under the required mortality 

table and the table used in determining current liability for plan 

years beginning in 2006 is to be phased in ratably over the first 

five plan years beginning in or after 2007, so as to be fully effective 

for the fifth plan year.25

The Secretary of the Treasury is directed to make revisions at 

least every 10 years in any tables in effect under the provision to 

reflect the actual experience of pension plans and projected trends 

in such experience. 

The provision also provides for the use of a different mortality 

table with respect to a plan, as requested by the plan sponsor and 

approved by the Secretary of Treasury. In order for the table to be 

used, the Secretary must determine that the table (1) reflects the 

78 

26 The provision retains the present-law rule under which certain changes in actuarial assumptions that decrease the liabilities of an underfunded single-employer plan must be approved by the Secretary of the Treasury. 

actual experience of the pension plan and projected trends in such 

experience and (2) is significantly different from the table otherwise required to be used. Such a table may generally be used for 

up to 10 years. However, the table shall no longer apply if the 

plan’s actuary determines that the table no longer meets the applicable criteria. A mortality table submitted to the Secretary for approval under the provision is treated as in effect for the succeeding 

plan year unless the Secretary, within the 180-day period beginning on the date of the submission, disapproves of the table and 

provides the reasons that the table fails to meet the applicable criteria. 

Other assumptions 

Under the provision, in determining any present value or making 

any computation, the probability that future benefits will be paid 

in optional forms of benefit provided under the plan must be taken 

into account (including the probability of lump-sum distributions 

determined on the basis of the plan’s experience and other related 

assumptions). In addition, there must be taken into account any 

difference in the present value of future benefit payments resulting 

from the use of actuarial assumptions, in determining benefit payments in any such optional form of benefit, that are different from 

those specified under the provision. 

The provision generally does not require other specified assumptions to be used in determining the plan’s target normal cost and 

funding target except in the case of at-risk plans (discussed below). 

However, similar to present law, the determination of present 

value or other computation must be made on the basis of actuarial 

assumptions and methods, each of which is reasonable (taking into 

account the experience of the plan and reasonable expectations), 

and which, in combination, offer the actuary’s best estimate of anticipated experience under the plan.26

Special assumptions for at-risk plans 

The provision applies special rules in determining the funding 

target and normal cost of a plan in at-risk status. A plan is in atrisk status for a plan year if the plan’s funding target attainment 

percentage for the preceding year was less than 60 percent. A 

plan’s funding target attainment percentage for a plan year is the 

ratio, expressed as a percentage, that the value of the plan’s assets 

(reduced by any funding standard carryover balance and 

prefunding balance) bears to the plan’s funding target for the year. 

For this purpose, the plan’s funding target is determined using the 

actuarial assumptions for plans that are not at-risk. 

The funding target of a plan in at-risk status for a plan year is 

generally the sum of: (1) the present value of all liabilities to participants and beneficiaries under the plan for the plan year, determined using (in addition to the normally required assumptions) an 

assumption that all participants will elect benefits at the times and 

in the forms that will result in the highest present value of liabilities, plus (2) a loading factor. The loading factor is the sum of (1) 

$700 times the number of participants in the plan, plus (2) four 

79 

27This loading factor is intended to reflect the cost of purchasing group annuity contracts in 

the case of termination of the plan. 28 Target normal cost for a plan in at-risk status does not include a loading factor of $700 

per plan participant. 

percent of the funding target determined without regard to the 

loading factor.27

The target normal cost of a plan in at-risk status for a plan year 

is generally the sum of: (1) the present value of benefits expected 

to accrue or be earned under the plan during the plan year, determined using (in addition to the normally required assumptions) an 

assumption that all participants will elect benefits at the times and 

in the forms that will result in the highest present value, plus (2) 

a loading factor. The loading factor is four percent of the target 

normal cost determined without regard to the loading factor.28

If a plan has been in at-risk status for fewer than five consecutive plan years, the amount of a plan’s funding target for a plan 

year is the sum of: (1) the amount of the funding target determined 

without regard to the at-risk rules, plus (2) the transition percentage for the plan year of the excess of the amount of the funding 

target determined under the at-risk rules over the amount determined without regard to the at-risk rules. Similarly, if a plan has 

been in at-risk status for fewer than five consecutive plan years, 

the amount of a plan’s target normal cost for a plan year is the 

sum of: (1) the amount of the target normal cost determined without regard to the at-risk rules, plus (2) the transition percentage 

for the plan year of the excess of the amount of the target normal 

cost determined under the at-risk rules over the amount determined without regard to the at-risk rules. The transition percentage is the product of 20 percent times the number of consecutive 

plan years for which the plan has been in at-risk status. 

Funding standard carryover balance or prefunding balance 

In general 

The bill preserves credit balances that have accumulated under 

present law (referred to as ‘‘funding standard carryover balances’’). 

In addition, for plan years beginning after 2005, new credit balances (referred to as ‘‘prefunding balances’’) result if an employer 

makes contributions greater than those required under the new 

funding rules. In general, under the bill, employers may choose 

whether to count funding standard carryover balances and 

prefunding balances in determining the value of plan assets or to 

use the balances to reduce required contributions, but not both. In 

this regard, the bill provides more favorable rules with respect to 

the use of funding standard carryover balances. 

Under the bill, if the value of a plan’s assets (reduced by any 

prefunding balance) is at least 80 percent of the plan’s funding target (determined without regard to the at-risk rules) for the preceding plan year, the plan sponsor may elect to credit all or a portion of the funding standard carryover balance or prefunding balance against the minimum required contribution for the current 

plan year (determined after any funding waiver), thus reducing the 

amount that must be contributed for the current year. 

The value of plan assets is generally reduced by any prefunding 

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80 

termining minimum required contributions. However, the plan 

sponsor may elect to reduce the prefunding balance or funding 

standard carryover balance, so that the value of plan assets is not 

required to be reduced by that amount in determining the minimum required contribution for the plan year. Any reduction of the 

prefunding balance or funding standard carryover balance applies 

before determining the balance that is available for crediting 

against minimum required contributions for the plan year. 

Funding standard carryover balance 

In the case of a single-employer plan that is in effect for a plan 

year beginning in 2006 and, as of the end of the 2006 plan year, 

has a positive balance in the funding standard account maintained 

under the funding rules as in effect for 2006, the plan sponsor may 

elect to maintain a funding standard carryover balance. The funding standard carryover balance consists of a beginning balance in 

the amount of the positive balance in the funding standard account 

as of the end of the 2006 plan year, has a positive balance in the 

funding standard account maintained under the funding rules as in 

effect for 2006, the plan sponsor may elect to maintain a funding 

standard carryover balance. The funding standard carryover balance consists of a beginning balance in the amount of the positive 

balance in the funding standard account as of the end of the 2006 

plan year, decreased (as described below) and adjusted to reflect 

the rate of net gain or loss on plan assets. 

For subsequent years (i.e., as of the valuation date for each plan 

year beginning after 2007), the funding standard carryover balance 

of a plan is decreased (but not below zero) by the sum of: (1) any 

amount credited to reduce the minimum required contribution for 

the preceding plan year, plus (2) any amount elected by the plan 

sponsor as a reduction in the funding standard carryover balance 

(thus reducing the amount by which the value of plan assets must 

be reduced in determining minimum required contributions). 

Prefunding balance 

The plan sponsor may elect to maintain a prefunding balance, 

which consists of a beginning balance of zero, increased and decreased (as described below) and adjusted to reflect the rate of net 

gain or loss on plan assets. 

For subsequent years (i.e., as of the valuation date for each plan 

year beginning after 2007 (the ‘‘current’’ plan year)), the prefunding 

balance of a plan is increased by the amount elected by the plan 

sponsor, not to exceed: (1) the excess (if any) of the aggregate total 

employer contributions for the preceding plan year, over (2) the 

minimum required contribution for the preceding plan year. For 

this purpose, the minimum required contribution for the preceding 

plan year is increased by interest, at the plan’s effective rate for 

the preceding plan year, on any portion of the required contribution 

remaining unpaid as of the valuation date for the current plan 

year, for the period beginning with the first day of the preceding 

plan year and ending on the date that the unpaid portion of the 

contribution is made. 

As of the valuation date for each plan year beginning after 2007, 

the prefunding balance of a plan is decreased (but not below zero) 

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81 

29 In the case of a plan’s first plan year, the ability to use a valuation date other than the 

first day of the plan year is determined by taking into account the number of participants the 

plan is reasonably expected to have on each day during that first plan year. 

quired contribution for the preceding plan year, plus (2) any 

amount elected by the plan sponsor as a reduction in the 

prefunding balance (thus reducing the amount by which the value 

of plan assets must be reduced in determining minimum required 

contributions). As discussed above, if the prefunding balance is 

used to reduce a minimum required contribution, the value of plan 

assets must be reduced by the prefunding balance in determining 

whether a shortfall amortization base must be established for the 

plan year (i.e., whether the value of plan assets for a plan year is 

less than the plan’s funding target for the plan year). Thus, the 

prefunding balance may not be included in the value of plan assets 

in order to avoid a shortfall amortization base for a plan year and 

also used to reduce the minimum required contribution for the 

same year. 

Other rules 

In determining the prefunding balance or funding standard carryover balance as of the valuation date for a plan year (before applying any increase or decrease as described above), the plan sponsor must adjust the balance in accordance with regulations prescribed by the Secretary of the Treasury, to reflect the rate of net 

gain or loss on plan assets. The rate of net gain or loss is determined on the basis of the fair market value of the plan assets and 

the gain or loss experienced by all plan assets for the period beginning with the valuation date for the preceding plan year and ending with the date preceding the valuation date for the current plan 

year, properly taking into account, in accordance with regulations, 

all contributions, distributions, and other plan payments made during the period. 

To the extent that a plan has a funding standard carryover balance of more than zero for a plan year, none of the plan’s 

prefunding balance may be credited to reduce a minimum required 

contribution, nor may an election be made to reduce the prefunding 

balance for purposes of determining the value of plan assets. Thus, 

the funding standard carryover balance must be used for these purposes before the prefunding balance may be used. 

Any election relating to the prefunding balance and funding 

standard carryover balance is to be made in such form and manner 

as the Secretary of the Treasury prescribes. 

Other rules and definitions 

Valuation date 

Under the provision, all determinations made with respect to 

minimum required contributions for a plan year (such as the value 

of plan assets and liabilities) must be made as of the plan’s valuation date for the plan year. In general, the valuation date for a 

plan year must be the first day of the plan year. However, any day 

in the plan year may be designated as the plan’s valuation date if, 

on each day during the preceding plan year, the plan had 500 or 

fewer participants.29 For this purpose, all defined benefit pension 

plans (other than multiemployer plans) maintained by the same 

82 

30The provision also retains the present-law rules under which the amount of any quarterly 

installment must be sufficient to cover any liquidity shortfall. 31The provision retains the present-law rules under which a lien in favor of the plan with 

respect to property of the employer (and members of the employer’s controlled group) arises in 

certain circumstances in which the employer fails to make required contributions. 

employer (or a predecessor employer), or by any member of such 

employer’s controlled group, are treated as a single plan, but only 

participants with respect to such employer or controlled group 

member are taken into account. 

Value of plan assets 

The provision allows the value of plan assets to be determined 

on the basis of any reasonable actuarial valuation method as under 

present law, with certain modifications. Any actuarial valuation 

method used may not result in a determination of the value of plan 

assets that at any time is less than 90 percent or more than 110 

percent of the fair market value of the assets at that time. In addition, a valuation method may not provide for averaging of fair market values over more than the three most recent plan years (including the current year). 

If a required contribution for a preceding plan year is made after 

the valuation date for the current year, the contribution is taken 

into account in determining the value of plan assets for the current 

plan year. For plan years beginning after 2007, the contribution is 

taken into account in the amount of its present value as of the 

valuation date for the current plan year, determined using the 

plan’s effective rate of interest for the preceding plan year. In addition, any required contribution for the current plan year is not 

taken into account in determining the value of plan assets. If a required contribution for the current plan year is made before the 

valuation date, the value of plan assets is reduced for interest on 

the contribution for the period from the time of contribution to the 

valuation date, determined using the plan’s effective rate of interest for the current plan year. 

Timing rules for contributions 

As under present law, the due date for the payment of a minimum required contribution for a plan year is 81⁄2 months after the 

end of the plan year. Any payment made on a date other than the 

valuation date for the plan year must be adjusted for interest at 

the plan’s effective rate of interest for the plan year for the period 

between the valuation date and the payment date. Similar to 

present-law rules, quarterly contributions must be made during a 

plan year if the plan had a funding shortfall for the preceding plan 

year (that is, if the value of the plan’s assets, reduced by the funding standard carryover balance and prefunding balance, was less 

than the plan’s funding target for the preceding plan year).30

Excise tax on failure to make minimum required contributions 

The provision retains the present-law rules under which an employer is generally subject to an excise tax if it fails to make minimum required contributions and fails to obtain a waiver from the 

IRS.31 The excise tax is 10 percent of the aggregate unpaid minimum required contributions for all plan years remaining unpaid 

83 

32Treas. Reg. sec. 1.401–1(b)(1)(i). 33See, e.g., Treas. Reg. secs. 1.401(a)(4)–3(f)(4) and 1.411(a)–7(c). 34 Code sec. 411(d)(6); ERISA sec. 204(g). 

as of the end of any plan year. In addition, a tax of 100 percent 

may be imposed if any unpaid minimum required contributions remain unpaid after a certain period. 

Conforming changes 

The provision makes various technical and conforming changes 

to reflect the new funding requirements. 

EFFECTIVE DATE

The extension of the present-law interest rate is effective for plan 

years beginning after December 31, 2005, and before January 1, 

2007. The modifications to the single-employer plan funding rules 

are generally effective for plan years beginning after December 31, 

2006. 

B. BENEFIT LIMITATIONS UNDER SINGLE-EMPLOYER DEFINED

BENEFIT PENSION PLANS

1. Prohibition on shutdown benefits and other unpredictable contingent event benefits (sec. 113(a) of the bill and new sec. 436 of 

the Code) 

PRESENT LAW

A plan may provide for unpredictable contingent event benefits, 

which are benefits that depend on contingencies other than age, 

service, compensation, death or disability or that are not reliably 

and reasonably predictable as determined by the Secretary. Some 

of these benefits are commonly referred to as ‘‘plant shutdown’’ benefits. Under present law, unpredictable contingent event benefits generally are not taken into account for funding purposes until 

the event has occurred. 

Defined benefit pension plans are not permitted to provide ‘‘layoff’’ benefits (i.e., severance benefits).32 However, defined benefit 

pension plans may provide subsidized early retirement benefits, including early retirement window benefits.33

An amendment of a qualified retirement plan may not decrease 

the accrued benefit of a plan participant.34 This restriction is sometimes referred to as the ‘‘anticutback’’ rule and applies to benefits 

that have already accrued. In general, an amendment may reduce 

the amount of future benefit accruals, provided that, in the case of 

a significant reduction in the rate of future benefit accrual, certain 

notice requirements are met. 

For purposes of the anticutback rule, an amendment is also 

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. 

REASONS FOR CHANGE

The Committee believes that plant shutdown benefits and other 

unpredictable contingent event benefits should not be provided 

84 

through qualified plans. Such benefits are more in the nature of 

severance benefits rather than retirement benefits because these 

benefits are inherently unpredictable and, therefore, difficult to 

prefund. Such benefits also represent a springing liability for the 

plan. For example, a plan provision could be in effect for many 

years that provides for payment of benefits upon an unpredictable 

contingent event. Because of the unpredictable nature of such a 

benefit, it is not funded in advance. However, if the event occurs, 

plan liabilities may be significantly increased as a result. Actual 

experience of the PBGC indicates that the occurrence of an event 

triggering such benefits can dramatically increase the level of 

underfunding in a plan and increase the likelihood of a plan terminating with insufficient assets. The Committee bill does not prohibit the payment of plant shutdown or other benefits, but rather 

seeks to enhance the security of pension benefits by ensuring that 

pension plan assets will not be diverted for nonretirement purposes. 

EXPLANATION OF PROVISION

Under the provision, a single-employer defined benefit pension 

plan may not provide benefits to which participants are entitled 

solely by reason of the occurrence of: (1) a plant shutdown; or (2) 

any other unpredictable contingent event. For this purpose, the 

term unpredictable contingent event means an event other than: 

(1) attainment of any age, performance of any service, receipt or 

derivation of any compensation, or the occurrence of death or disability; or (2) an event which is reasonably and reliably predictable 

(as determined by the Secretary of the Treasury). The provision 

does not prohibit an employer from providing plant shutdown benefits, but rather prohibits them from being funded with pension plan 

assets. 

Under the provision, a plan does not fail to meet the requirements of the anti-cutback rule solely by reason of the adoption of 

a plan amendment necessary to meet the requirements of the provision. 

EFFECTIVE DATE

The provision generally applies with respect to plant shutdowns, 

or other unpredictable contingent events, occurring after December 

31, 2006. 

In the case of a plan maintained pursuant to one or more collective bargaining agreements between employee representatives and 

one or more employers ratified before the date of enactment of the 

provision, the provision does not apply to plan years beginning before the earlier of: (1) the later of (a) the date on which the last 

collective bargaining agreement relating to the plan terminates (determined without regard to any extension thereof agreed to after 

the date of enactment), or (b) the first day of the first plan year 

to which the provision would otherwise apply; or (2) January 1, 

2009. For this purpose, any plan amendment made pursuant to a 

collective bargaining agreement relating to the plan that amends 

the plan solely to conform to any requirement under the provision 

is not to be treated as a termination of the collective bargaining 

agreement. 

85 

35 Code sec. 412(d); ERISA sec. 303. 36 Code sec. 412(f); ERISA sec. 304(b)(1). 37 Code sec. 401(a)(29); ERISA sec. 307. 38 Code sec. 401(a)(33); ERISA sec. 204(i). 

2. Funding-based limits on benefits and benefit accruals (sec. 

113(b) of the bill and new sec. 437 of the Code) 

PRESENT LAW

In general 

Under present law, various restrictions may apply to benefit increases and distributions from a defined benefit pension plan, depending on the funding status of the plan. 

Limitation on certain benefit increases while funding waivers in effect 

Within limits, the IRS is permitted to waive all or a portion of 

the contributions required under the minimum funding standard 

for a plan year.35 A waiver may be granted if the employer responsible for the contribution could not make the required contribution 

without temporary substantial business hardship for the employer 

(and members of the employer’s controlled group) and if requiring 

the contribution would be adverse to the interests of plan participants in the aggregate. 

If a funding waiver is in effect for a plan, subject to certain exceptions, no plan amendment may be adopted that increases the liabilities of the plan by reason of any increase in benefits, any 

change in the accrual of benefits, or any change in the rate at 

which benefits vest under the plan.36

Security for certain plan amendments 

In the case of a single-employer defined benefit pension plan, if 

a plan amendment increasing current liability is adopted and the 

plan’s funded current liability percentage is less than 60 percent 

(taking into account the effect of the amendment, but disregarding 

any unamortized unfunded old liability), the employer and members of the employer’s controlled group must provide security in 

favor of the plan.37 The amount of security required is the excess 

of: (1) the lesser of (a) the amount by which the plan’s assets are 

less than 60 percent of current liability, taking into account the 

benefit increase, or (b) the amount of the benefit increase and prior 

benefit increases after December 22, 1987, over (2) $10 million. The 

amendment is not effective until the security is provided. 

The security must be in the form of a bond, cash, certain U.S. 

government obligations, or such other form as is satisfactory to the 

Secretary of the Treasury and the parties involved. The security is 

released after the funded liability of the plan reaches 60 percent. 

Prohibition on benefit increases during bankruptcy 

Subject to certain exceptions, if an employer maintaining a single-employer defined benefit pension plan is involved in bankruptcy 

proceedings, no plan amendment may be adopted that increases 

the liabilities of the plan by reason of any increase in benefits, any 

change in the accrual of benefits, or any change in the rate at 

which benefits vest under the plan.38

86 

39 Code sec. 401(a)(32); ERISA sec. 206(e). 40 Code sec. 411(d)(6); ERISA sec. 204(g). 

Restrictions on benefit payments due to liquidity shortfalls 

In the case of a single-employer plan with a funded current liability percentage of less than 100 percent for the preceding plan 

year, estimated contributions for the current plan year must be 

made in quarterly installments during the current plan year. If 

quarterly contributions are required with respect to a plan, the 

amount of a quarterly installment must also be sufficient to cover 

any shortfall in the plan’s liquid assets (a ‘‘liquidity shortfall’’). In 

general, a plan has a liquidity shortfall for a quarter if the plan’s 

liquid assets (such as cash and marketable securities) are less than 

a certain amount (generally determined by reference to disbursements from the plan in the preceding 12 months). 

If a quarterly installment is less than the amount required to 

cover the plan’s liquidity shortfall, limits apply to the benefits that 

can be paid from a plan during the period of underpayment. During 

that period, the plan may not make any prohibited payment, defined as: (1) any payment in excess of the monthly amount paid 

under a single life annuity (plus any social security supplement 

provided under the plan) in the case of a participant or beneficiary 

whose annuity starting date occurs during the period; (2) any payment for the purchase of an irrevocable commitment from an insurer to pay benefits (e.g., an annuity contract); or (3) any other 

payment specified by the Secretary of the Treasury by regulations.39

Prohibition on reductions in accrued benefits 

An amendment of a qualified retirement plan may not decrease 

the accrued benefit of a plan participant.40 This restriction is sometimes referred to as the ‘‘anticutback’’ rule and applies to benefits 

that have already accrued. In general, an amendment may reduce 

the amount of future benefit accruals, provided that, in the case of 

a significant reduction in the rate of future benefit accrual, certain 

notice requirements are met. 

For purposes of the anticutback rule, an amendment is also 

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. 

REASONS FOR CHANGE

Under present law, sponsors of underfunded pension plans can 

continue to provide for additional accruals and, in some cases, may 

make benefit increases, pushing the cost of paying for such benefits 

off into the future. The Committee believes that plan sponsors 

should not be able to continue to increase benefits when a plan is 

underfunded. Companies should be more responsible with respect 

to pension benefits and should not continue to promise increased 

benefits when current promises are unfulfilled. The practice perpetuates systematic underfunding and is a moral hazard which threatens the retirement security of the participants and beneficiaries as 

well as the future of the defined benefit pension system. Lump 

87 

41 Under the provision, the present-law rules limiting benefit increases while an employer is 

in bankruptcy continue to apply. 

sums and other accelerated distributions from a severely underfunded plan allow certain participants to receive the full value of 

their benefits while depleting plan assets for those who remain in 

the plan. The Committee believes that appropriate restrictions 

should apply to underfunded plans to protect workers in the plan 

and to reduce the risk that underfunding will increase. 

EXPLANATION OF PROVISION

In general 

Under the provision, in the case of an underfunded single-employer defined benefit pension plan, limitations may apply with respect to: (1) plan amendments increasing benefit liabilities; (2) certain forms of distribution; and (3) benefit accruals. 

Limitations on plans less than 80-percent funded 

Limitations on plan amendments increasing benefit liabilities 

Certain plan amendments may not take effect during a plan year 

if the plan’s funding target attainment percentage for the plan 

year: (1) is less than 80 percent; or (2) would be less than 80 percent taking into account the amendment.41 In such a case, no 

amendment may take effect if it has the effect of increasing the liabilities of the plan by reason of any increase in benefits, the establishment of new benefits, any change in the rate of benefit accrual, 

or any change in the rate at which benefits vest under the plan. 

For this purpose, any increase in benefits by reason of an increase 

in the benefit rate provided under the plan or on the basis of an 

increase in compensation is treated as effected by a plan amendment. 

The limitation ceases to apply with respect to any plan year, effective as of the first day of the plan year (or, if later, the effective 

date of the amendment), if the plan sponsor makes a contribution 

(in addition to any minimum required contribution for the plan 

year), equal to: (1) if the plan’s funding target attainment percentage is less than 80 percent, the amount of the increase in the plan’s 

funding target for the plan year attributable to the amendment; or 

(2) if the plan’s funding target attainment percentage would be less 

than 80 percent taking into account the amendment, the amount 

sufficient to result in a funding target attainment percentage of 80 

percent. In addition, the limitation does not apply to a plan for the 

first five years the plan (or a predecessor plan) is in effect. 

Limitation on certain forms of distribution 

A plan must provide that, if the plan’s funding target attainment 

percentage is less than 80 percent for a plan year, the plan will not 

make any prohibited payments after the valuation date for the plan 

year. For this purpose, prohibited payment is defined as under the 

present-law rule restricting distributions during a period of a liquidity shortfall: (1) any payment in excess of the monthly amount 

paid under a single life annuity (plus any social security supplement provided under the plan) in the case of a participant or beneficiary whose annuity starting date occurs during the period; (2) 

88 

42Funding target attainment percentage is defined for this purpose as under the provision relating to minimum funding rules for single-employer plans. 

any payment for the purchase of an irrevocable commitment from 

an insurer to pay benefits (e.g., an annuity contract); or (3) any 

other payment specified by the Secretary of the Treasury by regulations. However, the restriction on distributions does not apply to a 

plan for any plan year if the terms of the plan (as in effect for the 

period beginning on June 29, 2005, and ending with the plan year) 

provide for no benefit accruals with respect to any participant during the period. 

Additional limitation on benefit accruals for plans less than 60-percent funded 

A plan must provide that, if the plan’s funding target attainment 

percentage is less than 60 percent for a plan year, all future benefit 

accruals under the plan must cease as of the valuation date for the 

plan year. However, this limitation does not apply to a plan for the 

first five years the plan (or a predecessor plan) is in effect. 

Funding target attainment percentage 

The term ‘‘funding target attainment percentage’’ means the 

ratio, expressed as a percentage, that the value of the plan’s assets 

(reduced by the plan’s funding standard carryover balance and 

prefunding balance) bears to the plan’s funding target for the year 

(i.e., the present value of liabilities under the plan).42 For this purpose, the plan’s funding target is determined using the actuarial 

assumptions for plans that are not at-risk. However, under a special rule, if a plan’s funding target attainment percentage is at 

least 100 percent, determined by not reducing the value of the 

plan’s assets by the plan’s funding standard carryover balance and 

prefunding balance, such reductions do not apply for this purpose. 

Determining funding levels 

Under the provision, certain presumptions apply in determining 

whether limitations apply with respect to a plan, subject to certification of the plan’s funding target attainment percentage by the 

plan’s enrolled actuary. If a plan was subject to a limitation for the 

preceding year, the plan’s funding target attainment percentage for 

the current year is presumed to be the same as the preceding year 

until the plan actuary certifies the plan’s actual funding target attainment percentage for the current year. If (1) a plan was not subject to a limitation for the preceding year, but its funding target 

attainment percentage for the preceding year was not more than 

10 percentage points greater than the threshold for a limitation, 

and (2) as of the first day of the fourth month of the current plan 

year, the plan actuary has not certified the plan’s actual funding 

target attainment percentage for the current year, the plan’s funding target attainment percentage is presumed to be reduced by 10 

percentage points as of that day and that day is deemed to be the 

plan’s valuation date for purposes of applying the benefit limitation. As a result, the limitation applies as of that date until the actuary certifies the plan’s actual funding target attainment percentage. In any other case, if the plan actuary has not certified the 

plan’s actual funding target attainment percentage by the first day 

89 

of the tenth month of the current plan year, for purposes of the 

limitations, the plan’s funding target attainment percentage is conclusively presumed to be less than 60 percent as of that day and 

that day is deemed to be the valuation date for the current plan 

year. 

A special rule applies in applying the presumption rules in 2007. 

Under the special rule, the plan’s ‘‘modified current liability percentage’’ for 2006 is substituted for the plan’s funding target attainment percentage for the preceding plan year. Modified funding 

current liability percentage is the plan’s funded current liability 

percentage for 2006, determined by reducing the value of the plan’s 

assets by any credit balance if the plan’s funded current liability 

percentage (before such a reduction) is less than 100 percent. 

Anticutback relief 

Under the provision, a plan does not fail to meet the requirements of the anti-cutback rule solely by reason of the adoption of 

a plan amendment necessary to meet the requirements of the provision. 

Restoration of benefits 

If a limitation on distributions or accruals applies with respect 

to a plan year (other than because of a presumption as to the plan’s 

funding target attainment percentage) and the limitation ceases to 

apply for a subsequent year, the plan may provide for the resumption of such distributions or accruals only by means of the adoption 

of a plan amendment after the valuation date for the subsequent 

plan year. 

EFFECTIVE DATE

The provision generally applies with respect to plan years beginning after December 31, 2006. 

In the case of a plan maintained pursuant to one or more collective bargaining agreements between employee representatives and 

one or more employers ratified before the date of enactment of the 

provision, the provision does not apply to plan years beginning before the earlier of: (1) the later of (a) the date on which the last 

collective bargaining agreement relating to the plan terminates (determined without regard to any extension thereof agreed to after 

the date of enactment), or (b) the first day of the first plan year 

to which the provision would otherwise apply; or (2) January 1, 

2009. For this purpose, any plan amendment made pursuant to a 

collective bargaining agreement relating to the plan that amends 

the plan solely to conform to any requirement under the provision 

is not to be treated as a termination of the collective bargaining 

agreement. 

C. MODIFICATION OF TRANSITION RULE TO PENSION FUNDING

REQUIREMENTS FOR INTERSTATE BUS COMPANY

(Sec. 121 of the bill) 

PRESENT LAW

Defined benefit pension plans are required to meet certain minimum funding rules. In some cases, additional contributions are reVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00089 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
90 

quired if a single-employer defined benefit pension plan is underfunded. Additional contributions generally are not required in the 

case of a plan with a funded current liability percentage of at least 

90 percent. A plan’s funded current liability percentage is the value 

of plan assets as a percentage of current liability. In general, a 

plan’s current liability means all liabilities to employees and their 

beneficiaries under the plan. In the case of a plan with a funded 

current liability percentage of less than 100 percent for the preceding plan year, estimated contributions for the current plan year 

must be made in quarterly installments during the current plan 

year. 

The PBGC insures benefits under most single-employer defined 

benefit pension plans in the event the plan is terminated with insufficient assets to pay for plan benefits. The PBGC is funded in 

part by a flat-rate premium per plan participant, and a variable 

rate premium based on the amount of unfunded vested benefits 

under the plan. A specified interest rate and a specified mortality 

table apply in determining unfunded vested benefits for this purpose. 

A special rule modifies the minimum funding requirements in 

the case of certain plans. The special rule applies in the case of 

plans that (1) were not required to pay a variable rate PBGC premium for the plan year beginning in 1996, (2) do not, in plan years 

beginning after 1995 and before 2009, merge with another plan 

(other than a plan sponsored by an employer that was a member 

of the controlled group of the employer in 1996), and (3) are sponsored by a company that is engaged primarily in interurban or 

interstate passenger bus service. 

The special rule generally treats a plan to which it applies as 

having a funded current liability percentage of at least 90 percent 

for plan years beginning after 1996 and before 2004 if for such plan 

year the funded current liability percentage is at least 85 percent. 

If the funded current liability of the plan is less than 85 percent 

for any plan year beginning after 1996 and before 2004, the relief 

from the minimum funding requirements generally applies only if 

certain specified contributions are made. 

For plan years beginning in 2004 and 2005, the funded current 

liability percentage of the plan is treated as at least 90 percent for 

purposes of determining the amount of required contributions (100 

percent for purposes of determining whether quarterly contributions are required). As a result, for these years, additional contributions and quarterly contributions are not required with respect to 

the plan. In addition, for these years, the mortality table used 

under the plan is used in determining the amount of unfunded 

vested benefits under the plan for purposes of calculating PBGC 

variable rate premiums. 

For plan years beginning after 2005 and before 2010, the funded 

current liability percentage generally will be deemed to be at least 

90 percent if the actual funded current liability percentage is at 

least at certain specified levels. The relief from the minimum funding requirements generally applies for a plan year beginning in 

2006, 2007, or 2008 only if contributions to the plan for the plan 

year equal at least the expected increase in current liability due to 

benefits accruing during the plan year. 

91 

43The term ‘‘funding shortfall’’ is defined under the provision relating to minimum funding 

rules for single-employer plans and means: (1) the excess (if any) of the plan’s funding target 

for the plan year (i.e., the present value of liabilities under the plan), over (2) the value of the 

plan’s assets, reduced by any prefunding and funding standard carryover balances. 

REASONS FOR CHANGE

The present-law funding rules for plans maintained by certain 

interstate bus companies were enacted because the Congress determined that the generally applicable funding rules required greater 

contributions for such plans than were warranted given the special 

characteristics of such plans. In particular, these plans are closed 

to new participants and have demonstrated mortality significantly 

greater than that predicted under mortality tables that the plans 

would otherwise be required to use for minimum funding purposes. 

The Committee believes that it is appropriate to extend to 2006 the 

special rule that applies to such plans for 2004 and 2005 and, for 

years after 2006, to modify the special rule to reflect the changes 

made in the minimum funding rules. 

EXPLANATION OF PROVISION

The provision revises the special rule for a plan that is sponsored 

by a company engaged primarily in interurban or interstate passenger bus service and that meets the other requirements for the 

special rule under present law. The provision extends the application of the special rule for plan years beginning in 2004 and 2005 

to plan years beginning in 2006. The provision also provides several special rules relating to determining minimum required contributions and unfunded vested benefits for plan years beginning 

after 2006 when the new funding rules for single-employer plans 

apply. 

Under the provision, for the plan year beginning in 2006, a plan’s 

funded current liability percentage of a plan is treated as at least 

90 percent for purposes of determining the amount of required contributions (100 percent for purposes of determining whether quarterly contributions are required). As a result, for the 2006 plan 

year, additional contributions and quarterly contributions are not 

required with respect to the plan. In addition, the mortality table 

used under the plan is used in determining the amount of unfunded vested benefits under the plan for purposes of calculating 

PBGC variable rate premiums. 

Under the provision, for plan years beginning after 2006, the 

mortality table used under the plan is used in determining: (1) any 

present value or making any computation under the minimum 

funding rules applicable to the plan; and (2) the amount of unfunded vested benefits under the plan for purposes of calculating 

PBGC variable rate premiums. Under a special phase-in, for purposes of determining the plan’s funding shortfall for plan years beginning after 2006 and before 2012, the applicable percentage of 

the plan’s funding shortfall is the following: 90 percent for 2007, 92 

percent for 2008, 94 percent for 2009, 96 percent for 2010, and 98 

percent for 2011.43 In addition, in determining minimum required 

contributions for plan years beginning after 2006, the value of plan 

assets is reduced only by the plan’s prefunding balance (i.e., not by 

the plan’s funding standard carryover balance) if, pursuant to a 

written agreement with the PBGC entered into before January 1, 

92 

44 Code sec. 409A. 

2007, the funding standard carryover balance is not available to reduce the minimum required contribution for the plan year. Moreover, for purposes of the quarterly contributions requirement, the 

plan is treated as not having a funding shortfall for any plan year. 

As a result, quarterly contributions are not required with respect 

to the plan. 

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2005. 

D. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION PLAN

WHEN EMPLOYER’S DEFINED BENEFIT PLAN IS IN AT-RISK STATUS

(Sec. 122 of the bill and sec. 409A of the Code) 

PRESENT LAW

Amounts deferred under a nonqualified deferred compensation 

plan for all taxable years are currently includible in gross income 

to the extent not subject to a substantial risk of forfeiture and not 

previously included in gross income, unless certain requirements 

are satisfied.44 For example, distributions from a nonqualified deferred compensation plan may be allowed only upon certain times 

and events. Rules also apply for the timing of elections. If the requirements are not satisfied, in addition to current income inclusion, interest at the underpayment rate plus one percentage point 

is imposed on the underpayments that would have occurred had 

the compensation been includible in income when first deferred, or 

if later, when not subject to a substantial risk of forfeiture. The 

amount required to be included in income is also subject to a 20- 

percent additional tax. 

In the case of assets set aside in a trust (or other arrangement) 

for purposes of paying nonqualified deferred compensation, such assets are treated as property transferred in connection with the performance of services under Code section 83 at the time set aside 

if such assets (or trust or other arrangement) are located outside 

of the United States or at the time transferred if such assets (or 

trust or other arrangement) are subsequently transferred outside of 

the United States. A transfer of property in connection with the 

performance of services under Code section 83 also occurs with respect to compensation deferred under a nonqualified deferred compensation plan if the plan provides that upon a change in the employer’s financial health, assets will be restricted to the payment 

of nonqualified deferred compensation. 

REASONS FOR CHANGE

The Committee believes that it is inappropriate for companies 

with qualified defined benefit pension plans to set aside assets for 

nonqualified deferred compensation plans covering executives while 

the qualified plan is not adequately funded. If the qualified pension 

plan that benefits rank-and-file workers is underfunded, employer 

resources should be used to improve the funding status of the 

93 

45 At-risk status is defined as under the provision relating to funding rules for single-employer 

defined benefit pension plans and applies if a plan’s funding target attainment percentage for 

the preceding year was less than 60 percent. 

qualified pension plan before setting assets aside to provide for 

nonqualified deferred compensation arrangements of executives. 

While rank-and-file employees have little control over a company’s decision to fund its pension plans, executives often have control in determining how nonqualified deferred compensation plans 

will be operated. In addition, executives who are covered by a nonqualified deferred compensation plan may also be instrumental in 

deciding how much to contribute to the defined benefit pension 

plan, thus determining the funded status of the pension plan. 

The Committee believes that nonqualified deferred compensation 

plans covering executives should not be funded unless the employer’s qualified pension plan is adequately funded. 

EXPLANATION OF PROVISION

Under the provision, if during any period in which a defined benefit pension plan of an employer is in at-risk status,45 assets are 

set aside (directly or indirectly) in a trust (or other arrangement 

as determined by the Secretary of the Treasury), or transferred to 

such a trust or other arrangement, for purposes of paying deferred 

compensation, such transferred assets are treated as property 

transferred in connection with the performance of services (whether 

or not such assets are available to satisfy the claims of general 

creditors) under Code section 83. The rule does not apply in the 

case of assets that are set aside before the defined benefit pension 

plan is in at-risk status. 

If a nonqualified deferred compensation plan of an employer provides that assets will be restricted to the provision of benefits 

under the plan in connection with the at-risk status (or other similar financial measure determined by the Secretary of Treasury) of 

any defined benefit pension plan of the employer, or assets are so 

restricted, such assets are treated as property transferred in connection with the performance of services (whether or not such assets are available to satisfy the claims of general creditors) under 

Code section 83. 

Any subsequent increases in the value of, or any earnings with 

respect to, transferred or restricted assets are treated as additional 

transfers of property. Interest at the underpayment rate plus one 

percentage point is imposed on the underpayments that would have 

occurred had the amounts been includible in income for the taxable 

year in which first deferred or, if later, the first taxable year not 

subject to a substantial risk of forfeiture. The amount required to 

be included in income is also subject to an additional 20-percent 

tax. 

For years before 2007, the provision applies if the modified funded current liability percentage of the defined benefit pension plan 

for the preceding plan year is less than 60 percent. The modified 

funded current liability percentage is the funded current liability 

percentage reduced by any credit balance. 

94 

EFFECTIVE DATE

The provision is effective for transfers or other reservations of assets after December 31, 2005. 

TITLE II: FUNDING RULES FOR MULTIEMPLOYER DEFINED 

BENEFIT PLANS 

A. FUNDING RULES FOR MULTIEMPLOYER DEFINED BENEFIT PLANS

(Sec. 211 of the bill and new sec. 431 of the Code) 

PRESENT LAW

Multiemployer plans 

A multiemployer plan is a plan to which more than one unrelated employer contributes, which is established pursuant to one or 

more collective bargaining agreements, and which meets such other 

requirements as specified by the Secretary of Labor. Multiemployer 

plans are governed by a board of trustees consisting of an equal 

number of employer and employee representatives. In general, the 

level of contributions to a multiemployer plan is specified in the applicable collective bargaining agreements, and the level of plan benefits is established by the plan trustees. 

Defined benefit multiemployer plans are subject to the same general minimum funding rules as single-employer plans, except that 

different rules apply in some cases. For example, different amortization periods apply for some costs in the case of multiemployer 

plans. In addition, the deficit reduction contribution rules do not 

apply to multiemployer plans. 

Funding standard account 

As an administrative aid in the application of the funding requirements, a defined benefit pension plan is required to maintain 

a special account called a ‘‘funding standard account’’ to which 

specified charges and credits are made for each plan year, including a charge for normal cost and credits for contributions to the 

plan. Other credits or charges or credits may apply as a result of 

decreases or increases in past service liability as a result of plan 

amendments or experience gains or losses, gains or losses resulting 

from a change in actuarial assumptions, or a waiver of minimum 

required contributions. 

If, as of the close of the plan year, charges to the funding standard account exceed credits to the account, then the excess is referred to as an ‘‘accumulated funding deficiency.’’ For example, if 

the balance of charges to the funding standard account of a plan 

for a year would be $200,000 without any contributions, then a 

minimum contribution equal to that amount would be required to 

meet the minimum funding standard for the year to prevent an accumulated funding deficiency. If credits to the funding standard account exceed charges, a ‘‘credit balance’’ results. The amount of the 

credit balance, increased with interest, can be used to reduce future required contributions. 

95 

Funding methods and general concepts 

In general 

A defined benefit pension plan is required to use an acceptable 

actuarial cost method to determine the elements included in its 

funding standard account for a year. Generally, an actuarial cost 

method breaks up the cost of benefits under the plan into annual 

charges consisting of two elements for each plan year. These elements are referred to as: (1) normal cost; and (2) supplemental 

cost. 

Normal cost 

The plan’s normal cost for a plan year generally represents the 

cost of future benefits allocated to the year by the funding method 

used by the plan for current employees and, under some funding 

methods, for separated employees. Specifically, it is the amount actuarially determined that would be required as a contribution by 

the employer for the plan year in order to maintain the plan if the 

plan had been in effect from the beginning of service of the included employees and if the costs for prior years had been paid, 

and all assumptions as to interest, mortality, time of payment, etc., 

had been fulfilled. 

Supplemental cost 

The supplemental cost for a plan year is the cost of future benefits that would not be met by future normal costs, future employee 

contributions, or plan assets. The most common supplemental cost 

is that attributable to past service liability, which represents the 

cost of future benefits under the plan: (1) on the date the plan is 

first effective; or (2) on the date a plan amendment increasing plan 

benefits is first effective. Other supplemental costs may be attributable to net experience losses, changes in actuarial assumptions, 

and amounts necessary to make up funding deficiencies for which 

a waiver was obtained. Supplemental costs must be amortized (i.e., 

recognized for funding purposes) over a specified number of years, 

depending on the source. 

Valuation of assets 

For funding purposes, the actuarial value of plan assets may be 

used, rather than fair market value. The actuarial value of plan assets is the value determined under a reasonable actuarial valuation 

method that takes into account fair market value and is permitted 

under Treasury regulations. Any actuarial valuation method used 

must result in a value of plan assets that is not less than 80 percent of the fair market value of the assets and not more than 120 

percent of the fair market value. In addition, if the valuation method uses average value of the plan assets, values may be used for 

a stated period not to exceed the five most recent plan years, including the current year. 

Reasonableness of assumptions 

In applying the funding rules, all costs, liabilities, interest rates, 

and other factors are required to be determined on the basis of actuarial assumptions and methods, each of which is reasonable (taking into account the experience of the plan and reasonable expectaVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00095 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
96 

tions), or which, in the aggregate, result in a total plan contribution equivalent to a contribution that would be obtained if each assumption and method were reasonable. In addition, the assumptions are required to offer the actuary’s best estimate of anticipated 

experience under the plan. 

Charges and credits to the funding standard account 

In general 

Under the minimum funding standard, the portion of the cost of 

a plan that is required to be paid for a particular year depends 

upon the nature of the cost. For example, the normal cost for a 

year is generally required to be funded currently. Other costs are 

spread (or amortized) over a period of years. In the case of a multiemployer plan, past service liability is amortized over 40 or 30 

years depending on how the liability arose, experience gains and 

losses are amortized over 15 years, gains and losses from changes 

in actuarial assumptions are amortized over 30 years, and waived 

funding deficiencies are amortized over 15 years. 

Normal cost 

Each plan year, a plan’s funding standard account is charged 

with the normal cost assigned to that year under the particular acceptable actuarial cost method adopted by the plan. The charge for 

normal cost will require an offsetting credit in the funding standard account. Usually, an employer contribution is required to create the credit. For example, if the normal cost for a plan year is 

$150,000, the funding standard account would be charged with that 

amount for the year. Assuming that there are no other credits in 

the account to offset the charge for normal cost, an employer contribution of $150,000 will be required for the year to avoid an accumulated funding deficiency. 

Past service liability 

There are three separate charges to the funding standard account one or more of which may apply to a multiemployer plan as 

the result of past service liabilities. In the case of a plan in existence on January 1, 1974, past service liability under the plan on 

the first day on which the plan was first subject to ERISA is amortized over 40 years. In the case of a plan which was not in existence on January 1, 1974, past service liability under the plan on 

the first day on which the plan was first subject to ERISA is amortized over 30 years. Past service liability due to plan amendments 

is amortized over 30 years. 

Experience gains and losses 

In determining plan funding under an actuarial cost method, a 

plan’s actuary generally makes certain assumptions regarding the 

future experience of a plan. These assumptions typically involve 

rates of interest, mortality, disability, salary increases, and other 

factors affecting the value of assets and liabilities. The actuarial 

assumptions are required to be reasonable, as discussed below. If 

the plan’s actual unfunded liabilities are less than those anticipated by the actuary on the basis of these assumptions, then the 

excess is an experience gain. If the actual unfunded liabilities are 

97 

greater than those anticipated, then the difference is an experience 

loss. In the case of a multiemployer plan, experience gains and 

losses for a year are generally amortized over a 15-year period, resulting in credits or charges to the funding standard account. 

Gains and losses from changes in assumptions 

If the actuarial assumptions used for funding a plan are revised 

and, under the new assumptions, the accrued liability of a plan is 

less than the accrued liability computed under the previous assumptions, the decrease is a gain from changes in actuarial assumptions. If the new assumptions result in an increase in the accrued liability, the plan has a loss from changes in actuarial assumptions. The accrued liability of a plan is the actuarial present 

value of projected pension benefits under the plan that will not be 

funded by future contributions to meet normal cost or future employee contributions. In the case of a multiemployer plan, the gain 

or loss for a year from changes in actuarial assumptions is amortized over a period of 30 years, resulting in credits or charges to 

the funding standard account. 

Funding waivers and amortization of waived funding deficiencies 

Within limits, the Secretary of the Treasury is permitted to 

waive all or a portion of the contributions required under the minimum funding standard for the year (a ‘‘waived funding deficiency’’). In the case of a multiemployer plan, a waiver may be 

granted if 10 percent or more of the number of employers contributing to the plan could not make the required contribution without 

temporary substantial business hardship and if requiring the contribution would be adverse to the interests of plan participants in 

the aggregate. The minimum funding requirements may not be 

waived with respect to a multiemployer plan for more five out of 

any 15 consecutive years. 

If a funding deficiency is waived, the waived amount is credited 

to the funding standard account. In the case of a multiemployer 

plan, the waived amount is then amortized over a period of 15 

years, beginning with the year following the year in which the 

waiver is granted. Each year, the funding standard account is 

charged with the amortization amount for that year unless the 

plan becomes fully funded. In the case of a multiemployer plan, the 

interest rate used for purposes of determining the amortization on 

the waived amount is the rate determined under section 6621(b) of 

the Internal Revenue Code (relating to the Federal short-term 

rate). 

Extension of amortization periods 

Amortization periods may be extended for up to 10 years by the 

Secretary of the Treasury if the Secretary finds that the extension 

would carry out the purposes of ERISA and would provide adequate protection for participants under the plan and if such Secretary determines that the failure to permit such an extension 

would (1) result in a substantial risk to the voluntary continuation 

of the plan or a substantial curtailment of pension benefit levels or 

employee compensation, and (2) be adverse to the interests of plan 

participants in the aggregate. The interest rate with respect to exVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00097 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
98 

tensions of amortization periods is the same as that used with respect to waived funding deficiencies. 

Alternative funding standard account 

As an alternative to applying the rules described above, a plan 

which uses the entry age normal cost method may satisfy an alternative minimum funding standard. Under the alternative, the minimum required contribution for the year is generally based on the 

amount necessary to bring the plan’s assets up to the present value 

of accrued benefits, determine using the actuarial assumptions that 

apply when a plan terminates. The alternative standard has been 

rarely used. 

REASONS FOR CHANGE

The Committee believes that in order for multiemployer plans to 

continue to provide valuable pension benefits to union workers, the 

multiemployer pension system must be self-sustaining for the long 

term. The Committee believes that certain modifications to the 

multiemployer plan funding rules are appropriate in order to help 

ensure the long-term solvency of the multiemployer plan pension 

system. The Committee believes that it is appropriate to streamline 

all amortization periods to a maximum of 15 years. The Committee 

also believes that the rules governing amortization extensions for 

multiemployer plans should be modified. 

EXPLANATION OF PROVISION

The provision modifies the amortization periods applicable to 

multiemployer plans so that the amortization period for most 

charges is 15 years. Under the provision, in the case of a plan 

which was not in existence on January 1, 1974, past service liability under the plan on the first day on which the plan is first subject 

to ERISA is amortized over 15 years (rather than 30); past service 

liability due to plan amendments is amortized over 15 years (rather than 30); and experience gains and losses resulting from a 

change in actuarial assumptions are amortized over 15 years (rather than 30). As under present law, experience gains and losses and 

waived funding deficiencies are amortized over 15 years. The new 

amortization periods do not apply to amounts being amortized 

under present-law amortization periods, that is, no recalculation of 

amortization schedules already in effect is required under the provision. The provision eliminates the alternative funding standard 

account. 

The provision provides that in applying the funding rules, all 

costs, liabilities, interest rates, and other factors are required to be 

determined on the basis of actuarial assumptions and methods, 

each of which is reasonable (taking into account the experience of 

the plan and reasonable expectations). In addition, as under 

present law, the assumptions are required to offer the actuary’s 

best estimate of anticipated experience under the plan. 

The provision provides that, upon application to the Secretary of 

the Treasury, the Secretary is to grant an extension of the amortization period with respect to any unfunded past service liability, 

investment loss, or experience loss if the Secretary determines that 

(1) absent the extension, the plan would have an accumulated 

funding deficiency in any of the next ten plan years, (2) the plan 

99 

46See section II.A. for a discussion of the minimum funding rules for multiemployer defined 

benefit plans. 47 ERISA sec. 4241. 48 ERISA sec. 4244A. 

sponsor has adopted a plan to improve the plan’s funding status, 

and (3) taking into account the extension, the plan is projected to 

have sufficient assets to timely pay its expected benefit liabilities 

and other anticipated expenditures. The extension may not exceed 

five years. 

The Secretary of the Treasury may also grant an additional extension of such amortization periods for an additional five years. 

The standards for determining whether such an extension may be 

granted are the same as under present law. 

As under present law, these extensions do not apply unless the 

applicant demonstrates to the satisfaction of the Treasury Secretary that notice of the application has been provided to each affected party (as defined in ERISA section 4001(a)(21)). 

The provision modifies the interest rate applicable to waived 

funding deficiencies and extensions of amortization periods so that 

it is the greater of (1) 150 percent of the Federal mid-term rate, 

or (2) the rate of interest used under the plan in determining costs. 

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2006. 

B. ADDITIONAL FUNDING RULES FOR MULTIEMPLOYER PLANS IN

ENDANGERED OR CRITICAL STATUS

(Sec. 212 of the bill and new sec. 432 of the Code) 

PRESENT LAW

Multiemployer defined benefit plans are subject to minimum 

funding rules similar to those applicable to single-employer plans.46

Certain modifications to the single-employer plan funding rules 

apply to multiemployer plans that experience financial difficulties, 

referred to as ‘‘reorganization status.’’ A plan is in reorganization 

status for a year if the contribution needed to balance the charges 

and credits to its funding standard account exceeds its ‘‘vested benefits charge.’’ 47 The plan’s vested benefits charge is generally the 

amount needed to amortize, in equal annual installments, unfunded vested benefits under the plan over: (1) 10 years in the case 

of obligations attributable to participants in pay status; and (2) 25 

years in the case of obligations attributable to other participants. 

A plan in reorganization status is eligible for a special funding 

credit. In addition, a cap on year-to-year contribution increases and 

other relief is available to employers that continue to contribute to 

the plan. 

Subject to certain requirements, a multiemployer plan in reorganization status may also be amended to reduce or eliminate accrued benefits in excess of the amount of benefits guaranteed by 

the PBGC.48 In order for accrued benefits to be reduced, at least 

six months before the beginning of the plan year in which the 

amendment is adopted, notice must be given that the plan is in reorganization status and that, if contributions to the plan are not 

100 

49 ERISA sec. 4245. 50The limit of benefits that the PBGC guarantees under a multiemployer plan is the sum of 

100 percent of the first $11 of monthly benefits and 75 percent of the next $33 of monthly benefits for each year of service. ERISA sec. 4022A(c). 

increased, accrued benefits will be reduced or an excise tax will be 

imposed on employers obligated to contribute to the plan. The notice must be provided to plan participants and beneficiaries, any 

employer who has an obligation to contribute to the plan, and any 

employee organization representing employees in the plan. 

In the case of multiemployer plans, the PBGC insures plan insolvency, rather than plan termination. A plan is insolvent when its 

available resources are not sufficient to pay the plan benefits for 

the plan year in question, or when the sponsor of a plan in reorganization reasonably determines, taking into account the plan’s recent and anticipated financial experience, that the plan’s available 

resources will not be sufficient to pay benefits that come due in the 

next plan year.49 An insolvent plan is required to reduce benefits 

to the level that can be covered by the plan’s assets. However, benefits cannot be reduced below the level guaranteed by the PBGC.50

If a multiemployer plan is insolvent, the PBGC guarantee is provided in the form of loans to the plan trustees. If the plan recovers 

from insolvency status, loans from the PBGC can be repaid. Plans 

in reorganization status are required to compare assets and liabilities to determine if the plan will become insolvent in the future. 

REASONS FOR CHANGE

The Committee believes that the multiemployer pension plan 

funding and benefit structures need to be reformed, including the 

addition of quantifiable measures of improvement and adjustments 

to the benefit structures for severely underfunded plans in order to 

maintain the health of the plans that are in existence. The Committee recognizes that adjustments to contribution and benefit levels of multiemployer pension plans may be difficult to achieve because contribution and benefit levels are set through the collective 

bargaining process. Thus, the multiemployer pension plan system 

would benefit if benchmarks were put in place to identify endangered plans so that steps to improve the funded status of such 

plans can be taken before such plans become severely underfunded. 

Similarly, severely underfunded plans should be identified and required to take steps to improve their funded status. The Committee 

believes that a structure should be established for identifying troubled multiemployer pension plans by providing appropriate triggers 

for determining when plans are underfunded as well as quantifiable benchmarks for measuring a plan’s funding improvement. 

EXPLANATION OF PROVISION

In general 

The provision provides additional funding rules for multiemployer defined benefit plans that are in endangered or critical status. The present-law reorganization and insolvency rules continue 

to apply. 

Within 90 days after the first day of the plan year, the plan actuary must certify to the Secretary of the Treasury whether or not 

the plan is in endangered or critical status for the plan year. If the 

101 

certification is not made within this period, the plan is presumed 

to be in critical status until the plan actuary makes a contrary certification. In making the determination whether a plan is in endangered or critical status, the plan actuary must make projections for 

the current and succeeding plan years, using reasonable actuarial 

assumptions and methods, of the current value of plan assets and 

the present value of liabilities under the plan for the current year 

as of the beginning of the year, based on the actuarial statement 

for the preceding plan year. Any actuarial projection of plan assets 

must assume (1) reasonably anticipated employer and employee 

contributions for the current and succeeding plan years, assuming 

that the terms of one or more collective bargaining agreements pursuant to which the plan is maintained for the current plan year 

continue in effect for the succeeding plan years, or (2) that employer and employee contributions for the most recent plan year 

will continue indefinitely, but only if the plan actuary determines 

that there have been no significant demographic changes that 

would make continued application of such terms unreasonable. 

If a plan is certified to be in endangered status or enters into 

critical status, notice must be provided within 30 days after the 

date of certification or entry to the participants and beneficiaries, 

the bargaining parties, the PBGC, the Secretary of the Treasury 

and the Secretary of Labor. 

Endangered status 

A multiemployer plan is in endangered status if the plan’s funded percentage for the plan year is less than 80 percent, or the plan 

has an accumulated funding deficiency for the plan year or is projected to have an accumulated funding deficiency in any of the six 

succeeding plan years (taking into account amortization extensions). A plan’s funded percentage is the percentage of plan assets 

over accrued liability of the plan. 

Within 240 days after a plan is certified as endangered (if no 

funding improvement plan is in effect for the plan year), the plan 

sponsor must amend the multiemployer plan to include a funding 

improvement plan approved by the bargaining parties. The funding 

improvement plan must provide that during the funding improvement period, the plan will have a certain required increase in the 

funded percentage and no accumulated funding deficiency for any 

plan year during the funding improvement period, taking into account amortization extensions (the ‘‘benchmarks’’). 

The provision requires that the plan’s funded percentage increase 

such that the difference between 100 percent and the plan’s funded 

percentage for the last year of the funding improvement plan is not 

more than two-thirds of the difference between 100 percent and the 

plan’s funded percentage for the first year of the funding improvement plan. Thus, the difference between 100 percent and the plan’s 

funded percentage must be reduced by at least one-third during the 

funding improvement period. The funding improvement period is 

the 10-year period beginning on the earlier of (1) the second anniversary of the date of adoption of the funding improvement plan, 

or (2) the first day of the first plan year following the year (after 

certification of endangered status) in which the collective bargaining agreements covering at least 75 percent of active participants have expired. 

102 

In the case in which the funded percentage of a plan is 70 percent or less, the provision requires that the plan’s funded percentage increase such that the difference between 100 percent and the 

plan’s funded percentage for the last year of the funding improvement plan is not more than four-fifths of the difference between 

100 percent and the plan’s funded percentage for the first year of 

the funding improvement plan. Thus, the difference between 100 

percent and the plan’s funded percentage must be reduced by at 

least one-fifth during the funding improvement period. In addition, 

a 15-year funding improvement period is used. If the plan year is 

prior to the first day of the first plan year following the plan year 

in which occurs the first date (after the day of the certification) as 

of which collective bargaining agreements covering at least 75 percent of active participants in the multiemployer plan have expired, 

the same requirements apply in the case of a plan in which the 

funded percentage is more than 70 percent, but less than 80 percent, if the plan actuary certifies within 30 days after certification 

of endangered status that the plan is not able to attain the funding 

percentage increase otherwise required by the provision (i.e., the 

difference between 100 percent and the plan’s funded percentage 

must be reduced by at least one-third during the funding improvement period) over the funding improvement period. For subsequent 

years for such plans, if the plan actuary certifies that the plan is 

not able to attain the increase generally required under the provision, a 15-year funding improvement period is used. 

Within 90 days after a plan is certified as endangered, the plan 

sponsor must provide to the bargaining parties alternative provisions for revised benefit structures, contribution structures, or 

both, which if adopted as amendments to the plan may be reasonably expected to meet the benchmark requirements for the funding 

improvement plan. The provisions must include (1) at least one 

provision for reductions in the amount of future benefit accruals 

necessary to achieve the benchmarks, assuming no amendments increasing contributions under the plan (other than amendments increasing contributions necessary to achieve the benchmarks after 

amendments have reduced future benefit accruals to the maximum 

extent permitted by law) and (2) at least one provision for increases 

in contributions necessary to achieve the benchmarks assuming no 

amendments reducing future benefit accruals under the plan. Upon 

request of any bargaining party who employs at least five percent 

of the active participants, or represents as an employee organization at least five percent of the active participants, the plan sponsor must provide information on other combinations of increases in 

contributions and reductions in future benefit accruals which would 

result in achieving the benchmarks. The plan sponsor may provide 

additional information as it deems appropriate. 

Pending approval of the funding improvement plan, the plan 

sponsor must take all reasonable actions (consistent with the terms 

of the plan and present law) necessary to ensure an increase in the 

plan’s funded percentage and a postponement of an accumulated 

funding deficiency for at least one additional plan year. These actions include applications for extensions of amortization periods, 

use of the shortfall funding method in making funding standard account computations, amendments to the plan’s benefit structure, 

reductions in future benefit accruals, and other reasonable actions. 

103 

In addition, pending approval of a funding improvement plan, 

the plan may not be amended to provide (1) a reduction in the level 

of contributions for participants who are not in pay status; (2) a 

suspension of contributions with respect to any period of service; or 

(3) any new or indirect exclusion of younger or newly hired employees from plan participation. Pending approval of a funding improvement plan, restrictions apply on lump sum and other similar 

distributions. If the present value of participant’s accrued benefit 

exceeds $5,000, the benefit may not be distributed as an immediate 

distribution or in any other accelerated form. In addition, except in 

the case of amendments required as a condition of qualification 

under the Internal Revenue Code, no amendment may be adopted 

which increases liabilities of the plan by reason of any increase in 

benefits, any change in accrual of benefits, or any change in the 

rate at which benefits become nonforfeitable. 

If no plan is adopted by the end of the 240-day period after a 

plan is certified as endangered, the plan enters into critical status 

as of the first day of the succeeding plan year. Notice must be provided to participants and beneficiaries, the bargaining parties, the 

PBGC, the Secretary of Treasury and the Secretary of Labor within 

30 days after the plan enters critical status. 

A summary of any funding improvement plan and any modifications, together with annual updates regarding the funding ratio of 

the plan, must be included in the plan’s annual report and summary annual report. 

Upon adoption of a funding improvement plan, the plan may not 

be amended to be inconsistent with the funding improvement plan, 

or to increase future benefit accruals, unless the plan actuary certifies in advance that, after taking into account the proposed increase, the plan is reasonably expected to meet the benchmarks. 

Critical status 

There are several ways that a multiemployer plan can be in critical status for a plan year. A multiemployer plan is in critical status for a plan year if: 

1. As of the beginning of the current plan year, the funded 

percentage of the plan is less than 65 percent and the sum of 

(A) the market value of plan assets, plus (B) the present value 

of reasonably anticipated employer and employee contributions 

for the current plan year and each of the six succeeding plan 

years (assuming that the terms of the collective bargaining 

agreements continue in effect) is less than the present value of 

all nonforfeitable benefits for all participants and beneficiaries 

projected to be payable under the plan during the plan year 

and each of the six succeeding plan years (plus administrative 

expenses), 

2. As of the beginning of the current plan year, the sum of 

(A) the market value of plan assets, plus (B) the present value 

of the reasonably anticipated employer and employee contributions for the current plan year and each of the four succeeding 

plan years (assuming that the terms of the collective bargaining agreements continue in effect) is less than the present 

value of all nonforfeitable benefits for all participants and 

beneficiaries projected to be payable under the plan during the 

104 

current plan year and each of the four succeeding plan years 

(plus administrative expenses), 

3. As of the beginning of the current plan year, the funded 

percentage of the plan is less than 65 percent and the plan has 

an accumulated funding deficiency for the current plan year or 

is projected to have an accumulated funding deficiency for any 

of the four succeeding plan years (not taking into account amortization period extensions), 

4. (A) The plan’s normal cost for the current plan year, plus 

interest for the current plan year on the amount of unfunded 

benefit liabilities under the plan as of the last day of the preceding year, exceeds the present value (as of the beginning of 

the plan year) of the reasonably anticipated employer and employee contributions for the current plan year, (B) the present 

value (as of the beginning of the plan year) of nonforfeitable 

benefits of inactive participants is greater than the present 

value (as of the beginning of the current plan year) of nonforfeitable benefits of active participants, and (C) the plan is 

projected to have an accumulated funding deficiency for the 

current plan year or any of the four succeeding plan years (not 

taking into account amortization period extensions), or 

5. (A) The funded percentage of the plan is greater than 65 

percent for the current plan year and (B) the plan is projected 

to have an accumulated funding deficiency during any of the 

succeeding three plan years (not taking into account amortization period extensions). 

As previously discussed, a plan is in critical status if the plan is 

in endangered status for the preceding plan year and the requirements applicable to endangered plans were not met with respect to 

the plan. A plan is also in critical status if the annual certification 

as to whether a plan is in endangered or critical status is not 

made. 

If a plan is in critical status for a plan year (and no rehabilitation plan is currently in effect for the plan year), the plan must be 

amended within 240 days after the plan enters critical status to include a rehabilitation plan. A plan is treated as entering into critical status as of the date that the plan is certified to be in critical 

status, is presumed to be in critical status because no certification 

is made, or enters into critical status because the requirements of 

endangered status are not satisfied. 

A rehabilitation plan must consist of (1) amendments to the plan 

providing for measures, agreed to by the bargaining parties, to increase contributions, reduce plan expenditures, or reduce future 

benefit accruals, or to take any combination of such actions, determined necessary to cause the plan to cease to be in critical status 

during the rehabilitation period, or (2) reasonable measures to forestall possible insolvency if the plan sponsor determines that upon 

exhaustion of all reasonable measures, the plan would not cease to 

be in critical status during the rehabilitation period. 

The rehabilitation period is the 10-year period beginning on the 

earlier of (1) the second anniversary of the date of adoption of the 

rehabilitation plan or (2) the first day of the first plan year following the year (after entry into critical status) in which the collective bargaining agreements covering at least 75 percent of active 

participants have expired. 

105 

Within 90 days after the date of entry into critical status the 

plan sponsor must propose to all bargaining parties a range of alternative schedules of increases in contributions and reductions in 

future benefit accruals that would carry out a rehabilitation plan. 

One schedule must show the reductions in future benefit accruals 

that would be necessary to cause the plan to cease to be in critical 

status if there were no further increases in rates of contribution to 

the plan. If the plan sponsor determines that the plan will not 

cease to be in critical status during the rehabilitation period unless 

the plan is amended to provide for an increase in contributions, one 

schedule must show the increases in contribution rates that would 

be necessary to cause the plan to cease to be in critical status if 

future benefit accruals were reduced to the maximum extent permitted by law. Upon request of any bargaining party who employs 

at least five percent of the active participants, or represents as an 

employee organization for purposes of collective bargaining at least 

five percent of the participants, the plan sponsor must include 

among the proposed schedules such schedules of increases in contributions and reductions in future benefit accruals as may be specified by the bargaining parties. 

Any schedule including reductions in future benefit accruals 

forming part of a rehabilitation plan is applicable with respect to 

any group of active participants who are employed by any bargaining party in proportion to the extent to which increases in contributions under the schedule apply to such bargaining party. Any 

proposed schedule cannot reduce the rate of future accruals below 

the lower of (1) a monthly benefit equal to one percent of the contributions required to be made with respect to a participant or the 

equivalent standard accrual rate for a participant or group of participants under the collective bargaining agreements in effect as of 

the first day of the plan year in which the plan enters critical status, or (2) the accrual rate under the plan. The equivalent standard 

accrual rate is determined by the trustees based on the standard 

or average contribution base units that they determine to be representative for active participants and such other factors they determine to be relevant. 

Pending approval of a rehabilitation plan, the plan may not be 

amended to provide (1) a reduction in the level of contributions for 

participants who are not in pay status; (2) a suspension of contributions with respect to any period of service; or (3) any new or 

indirect exclusion of younger or newly hired employees from plan 

participation. Pending approval of a funding improvement plan, restrictions apply on lump sum and other similar distributions. If the 

present value of participant’s accrued benefit exceeds $5,000, the 

benefit may not be distributed as an immediate distribution or in 

any other accelerated form. In addition, pending approval of a rehabilitation plan, except in the case of amendments required as a 

condition of qualification under the Internal Revenue Code, no 

amendment may be adopted which increases liabilities of the plan 

by reason of any increase in benefits, any change in accrual of benefits, or any change in the rate at which benefits become nonforfeitable. 

Upon adoption of a rehabilitation plan, the plan may not be 

amended to be inconsistent with the rehabilitation plan or to increase future benefit accruals, unless the plan actuary certifies in 

106 

51 Code sec. 418E(d)(1); ERISA sec. 4245(d)(1). 

advance, that after taking into account the proposed increase, the 

plan is reasonably expected to cease to be in critical status. 

Upon the adoption of a schedule of increases in contributions or 

reduction in future benefit accruals as part of a rehabilitation plan, 

the plan sponsor may, no more than once in any three-year period, 

amend the plan to update the schedule to adjust for any experience 

of the plan contrary to past actuarial assumptions. A summary of 

the rehabilitation plan and any modifications, together with annual 

updates regarding the funding ratio of the plan, must be included 

in the annual report and summary annual report for the plan year. 

The failure of an employer to make contributions in compliance 

with the rehabilitation schedule may, at the discretion of the plan 

sponsor, be treated as a complete or partial withdrawal from the 

plan. 

If the rehabilitation plan is not adopted within the 240-day period after entry into critical status, the plan must be amended to 

implement the schedule proposed by the plan sponsor that shows 

the reductions in future benefit accruals that would be necessary 

to cause the plan to cease to be in critical status if there were no 

further increases in rates of contributions to the plan. 

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2005. 

C. MEASURES TO FORESTALL INSOLVENCY OF MULTIEMPLOYER

PLANS

(Sec. 302 of the bill and sec. 418E of the Code) 

PRESENT LAW

In the case of multiemployer plans, the PBGC insures plan insolvency, rather than plan termination. A plan is insolvent when its 

available resources are not sufficient to pay the plan benefits for 

the plan year in question, or when the sponsor of a plan in reorganization reasonably determines, taking into account the plan’s recent and anticipated financial experience, that the plan’s available 

resources will not be sufficient to pay benefits that come due in the 

next plan year. 

In order to anticipate future insolvencies, at the end of the first 

plan year in which a plan is in reorganization and at least every 

three plans year thereafter, the plan sponsor must compare the 

value of plan assets for the plan year with the total amount of benefit payments made under the plan for the plan year.51 Unless the 

plan sponsor determines that the value of plan assets exceeds three 

times the total amount of benefit payments, the plan sponsor must 

determine whether the plan will be insolvent for any of the next 

three plan years. 

REASONS FOR CHANGE

The Committee believes that future insolvencies can be better 

anticipated if plan sponsors of plans in reorganization status are 

107 

52 Code sec. 417(e)(3); ERISA sec. 205(g)(3). 

required to make future projections of insolvency for a longer time 

period. 

EXPLANATION OF PROVISION

The provision modifies the requirements for anticipating future 

insolvencies of plans in reorganization status. Under the provision, 

unless the plan sponsor determines that the value of plan assets 

exceeds three times the total amount of benefit payments, the plan 

sponsor must determine whether the plan will be insolvent for any 

of the next five plan years, rather than three plan years as under 

present law. If the plan sponsor makes a determination that the 

plan will be insolvent for any of the next five plan years, the plan 

sponsor must make the comparison of plan assets and benefit payments under the plan at least annually until the plan sponsor 

makes a determination that the plan will not be insolvent in any 

of the next five plan years. 

EFFECTIVE DATE

The provision is effective with respect to determinations made in 

plan years beginning after December 31, 2005. 

TITLE III: OTHER PROVISIONS 

A. INTEREST RATE ASSUMPTION FOR DETERMINATION OF LUMP-SUM

DISTRIBUTIONS

(Sec. 302(b) of the bill and sec. 417 of the Code) 

PRESENT LAW

Accrued benefits under a defined benefit pension plan generally 

must be paid in the form of an annuity for the life of the participant unless the participant consents to a distribution in another 

form. Defined benefit pension plans generally provide that a participant may choose among other forms of benefit offered under the 

plan, such as a lump-sum distribution. These optional forms of benefit generally must be actuarially equivalent to the life annuity 

benefit payable to the participant. 

A defined benefit pension plan must specify the actuarial assumptions that will be used in determining optional forms of benefit under the plan in a manner that precludes employer discretion 

in the assumptions to be used. For example, a plan may specify 

that a variable interest rate will be used in determining actuarial 

equivalent forms of benefit, but may not give the employer discretion to choose the interest rate. 

Statutory assumptions must be used in determining the minimum value of certain optional forms of benefit, such as a lump 

sum.52 That is, the lump sum payable under the plan may not be 

less than the amount of the lump sum that is actuarially equivalent to the life annuity payable to the participant, determined 

using the statutory assumptions. The statutory assumptions consist of an applicable mortality table (as published by the IRS) and 

an applicable interest rate. 

108 

The applicable interest rate is the annual interest rate on 30- 

year Treasury securities, determined as of the time that is permitted under regulations. The regulations provide various options 

for determining the interest rate to be used under the plan, such 

as the period for which the interest rate will remain constant (‘‘stability period’’) and the use of averaging. 

REASONS FOR CHANGE

The Committee believes that the rate used to determine the 

amount of lump-sum distributions should be consistent with the 

rate used to measure plan liabilities for funding purposes. This is 

consistent with the rules under prior law (before the adoption of 

temporary interest rate provisions for funding purposes) which 

used a rate based on 30-year Treasury securities both for calculating lump sums and funding purposes. A consistent rate will enable plans to better fund for liabilities associated with lump-sum 

distributions. In addition, using an artificially low interest rate in 

calculating lump sums will result in inflated lump sums which are 

not the actuarial equivalent of a lifetime annuity. This makes lump 

sums more attractive than an annuity, thereby encouraging more 

employees to take lump-sum distributions. This may reduce retirement income security by discouraging annuitization. This also 

leads to a drain on pension plan assets, which can undermine the 

retirement income security of other plan participants. Use of an accurate interest rate will result in proper measurement of lump 

sums and will better enable employers to fund for such benefits. 

The Committee also believes that the accuracy of measuring lumpsum benefits will be improved by the use of a more current mortality table. 

The Committee recognizes that an immediate change in the interest rate used to calculate lump-sum benefits will in some cases 

reduce the amount of these benefits, which may cause participants 

to terminate employment in order to avoid any possible reduction. 

The Committee believes that a deferred effective date followed by 

a phase-in period of the yield-curve rates will mitigate any potential effect on participants and will provide participants with time 

to evaluate the impact of the change in interest rates on their benefits. 

EXPLANATION OF PROVISION

The provision changes the mortality table and interest rate used 

to calculate the minimum value of lump sums payable from a defined benefit pension plan. 

The mortality table that must be used for calculating lump sums 

is based on the mortality table required for minimum funding purposes (i.e., the RP–2000 Combined Mortality Table, using Scale AA, 

as published by the Society of Actuaries, as in effect on the date 

of enactment of the bill and revised from time to time) modified as 

appropriate by the Secretary of the Treasury. It is intended that 

the Secretary will prescribe gender-neutral tables for use in determining minimum lump sums. 

The provision provides that minimum lump-sum values are to be 

calculated using the adjusted first, second, and third segment rates 

as applied under the funding rules, with certain modifications, for 

the month before the date of distribution or such other time as the 

109 

53 Code sec. 415(b). 

Secretary of the Treasury may prescribe by regulation. The adjusted first, second, and third segment rates are derived from a corporate bond yield curve prescribed by the Secretary of the Treasury 

for such month which reflects the yields on investment grade corporate bonds with varying maturities (rather than a three-year 

weighted average, as under the minimum funding rules). Thus, the 

interest rate that applies depends upon how many years in the future a participant’s annuity payment will be made. Typically, a 

higher interest rate applies for payments made further out in the 

future. 

A transition rule applies for distributions in 2007 through 2010. 

For distributions in 2007 through 2010, lump-sum values are determined as the weighted average of two values: (1) the value of the 

lump sum determined under the methodology under present law 

(the ‘‘old’’ methodology); and (2) the value of the lump sum determined using the methodology applicable for 2007 and thereafter 

(the ‘‘new’’ methodology). For distributions in 2007, the weighting 

factor is 80 percent for the lump-sum value determined under the 

old methodology and 20 percent for the lump-sum determined 

under the new methodology. For distributions in 2008, the 

weighting factor is 60 percent for the lump-sum value determined 

under the old methodology and 40 percent for the lump-sum determined under the new methodology. For distributions in 2009, the 

weighting factor is 40 percent for the lump-sum value determined 

under the old methodology and 60 percent for the lump-sum determined under the new methodology. For distributions in 2010, the 

weighting factor is 20 percent for the lump-sum value determined 

under the old methodology and 80 percent for the lump-sum determined under the new methodology. 

The provision also provides that a plan amendment requiring the 

use of the prescribed table and interest rate will not result in a violation of the rule that accrued benefits may not be decreased by 

plan amendment. 

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2006. 

B. INTEREST RATE ASSUMPTION FOR APPLYING BENEFIT

LIMITATIONS TO LUMP-SUM DISTRIBUTIONS

(Sec. 303 of the bill and sec. 415 of the Code) 

PRESENT LAW

Annual benefits payable under a defined benefit pension plan 

generally may not exceed the lesser of (1) 100 percent of average 

compensation, or (2) $170,000 (for 2005).53 The dollar limit generally applies to a benefit payable in the form of a straight life annuity. If the benefit is not in the form of a straight life annuity 

(e.g., a lump sum), the benefit generally is adjusted to an equivalent straight life annuity. For purposes of adjusting a benefit in a 

form that is subject to the minimum value rules, such as a lumpsum benefit, the interest rate used generally must be not less than 

110 

54Treas. Reg. sec. 1.401–1(b)(1)(i). 55See, e.g., Rev. Rul. 74–254. 

the greater of: (1) the rate applicable in determining minimum 

lump sums, i.e., the interest rate on 30-year Treasury securities; or 

(2) the interest rate specified in the plan. In the case of plan years 

beginning in 2004 or 2005, the interest rate used must be not less 

than the greater of: (1) 5.5 percent; or (2) the interest rate specified 

in the plan. 

REASONS FOR CHANGE

As noted above, the Committee believes that lump-sum distributions should generally be determined using interest rates based on 

a corporate bond yield curve. However, the Committee recognizes 

that some plans use a fixed rate of interest in determining lumpsum benefits rather than the variable rate that is required under 

the minimum present value rules (provided that the resulting lump 

sum cannot be less than the minimum present value) and that use 

of a fixed rate rather than a variable rate can make the value of 

benefits more predictable for employees and also make employers’

required contributions more predictable. The Committee believes 

that it should be permissible to use a fixed rate in applying the 

benefit limits to lump sums, provided that the resulting benefit is 

not significantly greater than the benefit that would result using 

interest rates based on a corporate bond yield curve. 

EXPLANATION OF PROVISION

Under the provision, for purposes of adjusting a benefit in a form 

that is subject to the minimum value rules, such as a lump-sum 

benefit, the interest rate used generally must be not less than the 

greater of: (1) 5.5 percent; (2) the rate that provides a benefit of 

not more than 105 percent of the benefit that would be provided 

if the rate applicable in determining minimum lump sums were 

used; or (3) the interest rate specified in the plan. 

EFFECTIVE DATE

The provision is effective for distributions made in years beginning after December 31, 2005. 

C. DISTRIBUTIONS DURING WORKING RETIREMENT

(Sec. 304(b) of the bill and new sec. 401(a)(35) of the Code) 

PRESENT LAW

For purposes of the qualification requirements applicable to pension plans, stock bonus plans, and profit-sharing plans, a pension 

plan is a plan established and maintained primarily to provide systematically for the payment of definitely determinable benefits to 

employees over a period of years, usually life, after retirement.54 A 

pension plan (i.e., a defined benefit plan or money purchase pension plan) may not provide for distributions before the attainment 

of normal retirement age (commonly age 65) to participants who 

have not separated from employment.55

Under proposed regulations, in the case of a phased retirement 

program, a pension plan is permitted to pay a portion of a particiVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00110 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
111 

56Prop. Treas. Reg. secs. 1.401(a)–1(b)(1)(iv) and 1.401(a)–3. 

pant’s benefits before attainment of normal retirement age.56 A 

phased retirement program is a program under which employees 

who are at least age 591⁄2 and are eligible for retirement may reduce (by at least 20 percent) the number of hours they customarily 

work and receive a pro rata portion of their retirement benefits, 

based on the reduction in their work schedule. 

REASONS FOR CHANGE

The Committee recognizes that allowing in-service distributions 

from a pension plan can lead to the premature depletion of retirement savings. The Committee also understands that retirement income security can be enhanced if employees who are eligible for 

early retirement continue working. The Committee is concerned 

that the present-law rule prohibiting in-service distributions from 

a pension plan before normal retirement age may cause employees 

who would otherwise continue working to retire in order to start 

receiving benefits. The Committee believes that greater flexibility 

should be provided so that pension plans may begin paying benefits 

to employees who have reached age 62 and are continuing to work 

for the employer. 

EXPLANATION OF PROVISION

Under the provision, a pension plan does not fail to be a qualified 

retirement plan merely because it provides for distributions to a 

participant who has attained age 62 and has not separated from 

employment at the time of the distribution. 

EFFECTIVE DATE

The provision is effective for distributions in plan years beginning after December 31, 2005. 

TITLE IV: IMPROVEMENTS IN PBGC GUARANTEE 

PROVISIONS 

(Sec. 401 of the bill and sec. 4006 of ERISA) 

PRESENT LAW

The PBGC 

The minimum funding requirements permit an employer to fund 

defined benefit plan benefits over a period of time. Thus, it is possible that a plan may be terminated at a time when plan assets 

are not sufficient to provide all benefits accrued by employees 

under the plan. In order to protect plan participants from losing retirement benefits in such circumstances, the Pension Benefit Guaranty Corporation (‘‘PBGC’’), a corporation within the Department of 

Labor, was created in 1974 under ERISA to provide an insurance 

program for benefits under most defined benefit plans maintained 

by private employers. 

Termination of single-employer defined benefit plans 

An employer may voluntarily terminate a single-employer plan 

only in a standard termination or a distress termination. The 

112 

57The four criteria for a distress termination are: (1) the contributing sponsor, and every 

member of the controlled group of which the sponsor is a member, is being liquidated in bankruptcy or any similar Federal law or other similar State insolvency proceedings; (2) the contributing sponsor and every member of the sponsor’s controlled group is being reorganized in bankruptcy or similar State proceeding; (3) the PBGC determines that termination is necessary to 

allow the employer to pay its debts when due; or (4) the PBGC determines that termination 

is necessary to avoid unreasonably burdensome pension costs caused solely by a decline in the 

employer’s work force. 58 ERISA sec. 4022(b) and (c). 59The PBGC generally pays the greater of the guaranteed benefit amount and the amount 

that was covered by plan assets when it terminated. Thus, depending on the amount of assets 

in the terminating plan, participants may receive more than the amount guaranteed by PBGC. 

Special rules limit the guaranteed benefits of individuals who are substantial owners covered 

by a plan whose benefits have not been increased by reason of any plan amendment. A substantial owner generally is an individual who: (1) owns the entire interest in an unincorporated 

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

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

PBGC may also involuntarily terminate a plan (that is, the termination is not voluntary on the part of the employer). 

A standard termination is permitted only if plan assets are sufficient to cover benefit liabilities. If assets in a defined benefit plan 

are not sufficient to cover benefit liabilities, the employer may not 

terminate the plan unless the employer (and members of the employer’s controlled group) meets one of four criteria of financial distress.57

The PBGC may institute proceedings to terminate a plan if it determines that the plan in question has not met the minimum funding standards, will be unable to pay benefits when due, has a substantial owner who has received a distribution greater than 

$10,000 (other than by reason of death) while the plan has unfunded nonforfeitable benefits, or may reasonably be expected to increase PBGC’s long-run loss unreasonably. The PBGC must institute proceedings to terminate a plan if the plan is unable to pay 

benefits that are currently due. 

Guaranteed benefits 

When an underfunded plan terminates, the amount of benefits 

that the PBGC will pay depends on legal limits, asset allocation, 

and recovery on the PBGC’s employer liability claim. The PBGC 

guarantee applies to ‘‘basic benefits.’’ Basic benefits generally are 

benefits accrued before a plan terminates, including (1) benefits at 

normal retirement age; (2) most early retirement benefits; (3) disability benefits for disabilities that occurred before the plan was 

terminated; and (4) certain benefits for survivors of plan participants. Generally only that part of the retirement benefit that is 

payable in monthly installments (rather than, for example, lumpsum benefits payable to encourage early retirement) is guaranteed.58

Retirement benefits that begin before normal retirement age are 

guaranteed, provided they meet the other conditions of guarantee 

(such as that before the date the plan terminates, the participant 

had satisfied the conditions of the plan necessary to establish the 

right to receive the benefit other than application for the benefit). 

Contingent benefits (for example, subsidized early retirement benefits) are guaranteed only if the triggering event occurs before plan 

termination. 

For plans terminating in 2005, the maximum guaranteed benefit 

for an individual retiring at age 65 is $3,698.86 per month or 

$44,386.32 per year.59 The dollar limit is indexed annually for 

113 

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

either the voting stock of the corporation or all the stock of the corporation; or (4) at any time 

within the preceding 60 months was a substantial owner under the plan. ERISA sec. 4022(b)(5). 60The phase in does not apply if the benefit is less than $20 per month. 

wage inflation. The guaranteed amount is reduced for benefits 

starting before age 65. 

In the case of a plan or a plan amendment that has been in effect 

for less than five years before a plan termination, the amount guaranteed is phased in by 20 percent a year.60

PBGC premiums 

In general 

The PBGC is funded by assets in terminated plans, amounts recovered from employers who terminate underfunded plans, premiums paid with respect to covered plans, and investment earnings. All covered single-employer plans are required to pay a flat 

per-participant premium and underfunded plans are subject to an 

additional variable rate premium based on the level of underfunding. The amount of both the flat rate premium and the variable rate premium are set by statute; the premiums are not indexed for inflation. 

Flat rate premiums 

The annual flat rate per participant premium is $19 per participant. 

Variable rate premiums 

The variable rate premium is equal to $9 per $1,000 of unfunded 

vested benefits. ‘‘Unfunded vested benefits’’ is the amount which 

would be the unfunded current liability (as defined under the minimum funding rules) if only vested benefits were taken into account 

and if benefits were valued at the variable premium interest rate. 

No variable rate premium is imposed for a year if contributions to 

the plan for the prior year were at least equal to the full funding 

limit for that year. 

In determining the amount of unfunded vested benefits, the interest rate used is generally 85 percent of the interest rate on 30 

year Treasury securities for the month preceding the month in 

which the plan year begins (100 percent of the interest rate on 30 

year Treasury securities for plan years beginning in 2002 and 

2003). Under the Pension Funding Equity Act of 2004, in determining the amount of unfunded vested benefits for plan years beginning after December 31, 2003, and before January 1, 2006, the 

interest rate used is 85 percent of the annual rate of interest determined by the Secretary of the Treasury on amounts invested conservatively in long term investment-grade corporate bonds for the 

month preceding the month in which the plan year begins. 

REASONS FOR CHANGE

Modifications to the PBGC premium structure, in conjunction 

with the provisions of the bill relating to defined benefit pension 

plan funding, will provide for increased retirement income security. 

The current flat-rate premium has not been modified since 1991 

and has not kept pace with increases in wages, which are typically 

114 

61 In general, if the premium amount as indexed is not a multiple of $1, the amount is rounded to the nearest $1; if the amount is a multiple of $.50, the amount is rounded to the next 

highest dollar amount. 

reflected in pension benefits. Thus, the Committee bill increases 

the PBGC flat-rate premium to reflect past increases in wages and 

provides for automatic increases in the future to reflect wage increases. 

Changes to the variable rate premium are also appropriate to 

better reflect the risk that underfunded plans present to the pension insurance system. Under present law, employers of some underfunded plans may avoid paying the variable rate premium if the 

plan is at the full funding limitation, even though the plan poses 

a greater risk than better funded plans. This possibility is eliminated under the bill. In addition, the Committee bill modifies the 

base for the premium to conform to the funding targets under the 

funding provisions of the bill. 

The Committee has noted that there is increasing use of bankruptcy reorganizations as a means of eliminating an employer’s liability for pension benefits and shifting that liability to the PBGC 

pension insurance system. The Committee believes employers that 

terminate their plans on an underfunded basis (other than in bankruptcy liquidation proceedings) should continue to bear some financial responsibility for pension benefits following reorganization. 

Thus, the Committee bill requires additional premiums specifically 

related to such plan terminations. The Committee also believes 

that further action in this area is needed and that the bankruptcy 

laws should be reformed to prevent employers from shedding pension liabilities and shifting them to others. 

EXPLANATION OF PROVISION

Flat rate premiums 

Beginning in 2006, the provision phases in an increase of the flat 

rate premium to $30 as adjusted for years after 2006 based on increases in average wages as defined under the Social Security 

Act.61 The rate of the phase-in depends on the funded status of the 

plan. In general, the flat rate premium for a single-employer plan 

is determined under the following table: 

If the plan year begins in: The flat rate premium is: 

2006 .......................................................................................... $21.20 

2007 .......................................................................................... $23.40 

2008 .......................................................................................... $25.60 

2009 .......................................................................................... $27.80 

2010 and thereafter ................................................................. $30, as adjusted starting in 2007 for increases in average 

wages 

A faster phase-in schedule applies to plans with funding below 

a certain level. If the funding target percentage of a plan for the 

preceding plan year was less than 80 percent, then the flat rate 

premium is determined under the following table: 

If the plan year begins in: The flat rate premium is: 

2006 .......................................................................................... $22.67 

2007 .......................................................................................... $26.33 

115 

62The assumptions used are the same as under the minimum funding rules. Thus, for a plan 

in at-risk status, the at-risk assumptions are used. 63For this purpose, the fair market value of plan assets is not reduced by the plan’s 

prefunding balance and funding standard carryover balance. 

If the plan year begins in: The flat rate premium is: 

2008 and thereafter ................................................................. $30, as adjusted starting in 2007 for increases in average 

wages 

Under the provision, the same flat rate premium will apply to all 

plans, regardless of funding status, in 2010 and thereafter. 

Variable rate premium 

For 2006, the provision extends the present-law rule under 

which, in determining the amount of unfunded vested benefits for 

variable rate premium purposes, the interest rate used is 85 percent of the annual rate of interest determined by the Secretary of 

the Treasury on amounts invested conservatively in long term investment-grade corporate bonds for the month preceding the month 

in which the plan year begins. 

Beginning in 2007, the determination of unfunded vested benefits for purposes of the variable rate premium is modified to conform to the funding rules of the provision. Thus, under the provision, unfunded vested benefits are equal to the amount which 

would be the plan’s funding shortfall for the year 62 if plan assets 

were valued at fair market value and only vested benefits were 

taken into account.63 In valuing unfunded vested benefits the interest rate is the first, second, and third segment rates which would 

be determined under the funding rules of the provision, if the segment rates were based on the yields of corporate bond rates, rather 

than a three-year average of such rates. Under the bill, deductible 

contributions are no longer limited by the full funding limit; thus, 

the rule providing that no variable rate premium is required if contributions for the prior plan year were at least equal to the full 

funding limit no longer applies under the provision. 

Premium for certain terminating plans 

The provision imposes a per-participant premium of $1,250 for 

each applicable 12-month period following certain plan terminations (called the ‘‘termination premium’’). The termination premium applies if the plan is terminated by the PBGC or in a distress termination by reason of (1) reorganization in bankruptcy (or 

similar State proceeding), (2) the inability of the employer to pay 

its debts when due, or (3) a determination that termination is necessary to avoid unreasonably burdensome pension costs caused 

solely by a decline in the employer’s work force. 

The applicable 12-month period is generally the 12-month period 

beginning with the month after the date in which the termination 

occurs and the next two 12-month periods. In the case of a termination due to reorganization, the liability for the termination premium does not arise until the employer is discharged from the reorganization proceeding (and the first 12-month period does not 

start until such discharge). 

116 

64 ERISA sec. 4010. 65 ERISA sec. 4071. 

EFFECTIVE DATE

The provision relating to flat-rate premiums is effective for plan 

years beginning after December 31, 2005. The extension of the 

present-law interest rate for purposes of calculating the variable 

rate premium is effective for plan years beginning in 2006. The 

modifications to the variable rate premiums to conform to the new 

funding rules of the provision are effective for plan years beginning 

after December 31, 2006. The provision relating to termination premiums is effective for reorganization proceedings begun after October 26, 2005. 

TITLE V: DISCLOSURE—SECTION 4010 FILINGS WITH THE 

PBGC 

(Sec. 503 of the bill and sec. 4010 of ERISA) 

PRESENT LAW

Present law provides that, in certain circumstances, the contributing sponsor of a single-employer plan covered by the PBGC (and 

members of the contributing sponsor’s controlled group) must provide certain information to the PBGC. This information (referred to 

as ‘‘section 4010 information’’) includes financial information with 

respect to the contributing sponsor (and controlled group members) 

and actuarial information with respect to single-employer plans 

maintained by the sponsor (and controlled group members).64 This 

reporting is required if: (1) the aggregate unfunded vested benefits 

(determined using the interest rate used in determining variablerate premiums) as of the end of the preceding plan year under all 

plans maintained by members of the controlled group exceed $50 

million (disregarding plans with no unfunded vested benefits); (2) 

the conditions for imposition of a lien (i.e., required contributions 

totaling more than $1 million have not been made) have occurred 

with respect to an underfunded plan maintained by a member of 

the controlled group; or (3) minimum funding waivers in excess of 

$1 million have been granted with respect to a plan maintained by 

any member of the controlled group and any portion of the waived 

amount is still outstanding. Information provided to the PBGC in 

accordance with these requirements is not available to the public. 

The PBGC may assess a penalty for a failure to provide the required information in the amount of up to $1,000 a day for each 

day the failure continues.65

REASONS FOR CHANGE

Workers and other plan participants need more accurate and 

timely information regarding their pension plans. Thus, the Committee believes that section 4010 reporting should be required by 

reason of the funding percentage of plans, rather than the amount 

of unfunded benefits. In addition, additional information about underfunded plans, particularly those in at-risk status, should be provided to participants and beneficiaries, as well as to the Congressional committees with jurisdiction over pension plans. 

117 

EXPLANATION OF PROVISION

The provision revises the circumstances in which reporting of 

section 4010 information is required. Specifically, instead of requiring reporting if the aggregate unfunded vested benefits as of the 

end of the preceding plan year under all plans maintained by members of the controlled group exceed $50 million, the provision requires reporting if: (1) the aggregate funding targets attainment 

percentage with respect to a controlled group for the preceding plan 

year is less than 60 percent; or (2) the aggregate funding targets 

attainment percentage with respect to a controlled group for the 

preceding plan year is less than 75 percent and the plan sponsor 

is in an industry with respect to which the PBGC determines that 

there is substantial unemployment or underemployment and the 

sales and profits are depressed or declining. The aggregate funding 

targets attainment percentage with respect to a controlled group 

for a plan year is the percentage, determined by taking into account all plans maintained by the members of the controlled group 

as of the end of the plan year, which: (1) the aggregate total of the 

values of plan assets, as of the end of the plan year, is of (2) the 

aggregate total of the funding targets of the plans, as of the end 

of the plan year, taking into account only vested benefits. 

Under the provision, any person submitting to the PBGC section 

4010 information with respect to a plan must provide notice thereof 

within 90 days to participants and beneficiaries under the plan 

(and under all plans maintained by members of the controlled 

group of each contributing sponsor of the plan). The notice must set 

forth: (1) the number of single-employer plans insured by the 

PBGC that are in at-risk status and maintained by contributing 

sponsors of the plan (and by members of their controlled groups) 

with respect to which the funding target attainment percentage for 

the preceding plan year is less than 60 percent; (2) the value of the 

assets of each plan for the plan year, the funding target for the 

plan year, and the funding target attainment percentage of each 

plan for the plan year and (3) taking into account all single-employer plans maintained by the contributing sponsor and the members of its controlled group, the aggregate total values of the assets 

of the plans as of the end of the plan year, the aggregate total of 

the funding targets of the plans (taking into account only vested 

benefits), and the aggregate funding targets attainment percentage 

(as defined above) with respect to the contributing sponsor for the 

preceding plan year. 

For purposes of the notice requirement, a plan is in ‘‘at-risk status’’ for a plan year if the plan’s funding target attainment percentage for the preceding year was less than 60 percent. A plan’s ‘‘funding target attainment percentage’’ means the ratio, expressed as a 

percentage, that the value of the plan’s assets (reduced by any 

funding standard carryover balance and prefunding balance) bears 

to the plan’s funding target for the year (determined without regard to the special assumptions that apply to at-risk plans). A 

plan’s funding target for a plan year is the present value of the liabilities to participants and beneficiaries under the plan. 

Any notice required to be provided under the provision may be 

provided in written, electronic, or other appropriate form to the extent such form is reasonably available to the persons to whom the 

118 

66 Code sec. 4975; ERISA sec. 406. Under ERISA, the prohibited transaction rules apply to 

employer-sponsored retirement plans and welfare benefit plans. Under the Code, the prohibited 

transaction rules apply to qualified retirement plans and qualified retirement annuities, as well 

as individual retirement accounts and annuities, Archer MSAs, health savings accounts, and 

Coverdell education savings accounts. The prohibited transaction rules under ERISA and the 

Code generally do not apply to governmental plans or church plans. 

information is required to be provided. A person is not entitled to 

receive more than one notice during any 12-month period. The person required to provide the notice may make a reasonable charge 

to cover copying, mailing, and other costs of furnishing the notice, 

subject to a maximum amount that may be prescribed by the 

PBGC. 

Concurrent with the provision of notice as required under the 

provision, notice must also be provided to the House Committees 

on Education and the Workforce and Ways and Means and the 

Senate Committees on Health, Education, Labor, and Pensions and 

Finance, which shall be treated as materials provided in executive 

session. 

The present-law authority of the PBGC to impose a penalty for 

failure to provide section 4010 information applies to a failure to 

provide the notice required under the provision. 

EFFECTIVE DATE

The provision is effective for plan years beginning after 2006. 

TITLE VI: PROHIBITED TRANSACTION EXEMPTION FOR THE 

PROVISION OF INVESTMENT ADVICE 

(Sec. 602 of the bill and sec. 4975 of the Code) 

PRESENT LAW

ERISA and the Code prohibit certain transactions between an 

employer-sponsored retirement plan and a disqualified person.66

Disqualified persons include a fiduciary of the plan, a person providing services to the plan, and an employer with employees covered by the plan. For this purpose, a fiduciary includes any person 

who (1) exercises any authority or control respecting management 

or disposition of the plan’s assets, (2) renders investment advice for 

a fee or other compensation with respect to any plan moneys or 

property, or has the authority or responsibility to do so, or (3) has 

any discretionary authority or responsibility in the administration 

of the plan. 

Prohibited transactions include (1) the sale, exchange or leasing 

of property, (2) the lending of money or other extension of credit, 

(3) the furnishing of goods, services or facilities, (4) the transfer to, 

or use by or for the benefit of, the income or assets of the plan, (5) 

in the case of a fiduciary, any act that deals with the plan’s income 

or assets for the fiduciary’s own interest or account, and (6) the receipt by a fiduciary of any consideration for the fiduciary’s own personal account from any party dealing with the plan in connection 

with a transaction involving the income or assets of the plan. However, certain transactions are exempt from prohibited transaction 

treatment, for example, certain loans to plan participants. 

Under ERISA, the Secretary of Labor may assess a civil penalty 

against a person who engages in a prohibited transaction, other 

than a transaction with a plan covered by the prohibited transVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00118 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
119 

action rules of the Code. The penalty may not exceed five percent 

of the amount involved in the transaction for each year or part of 

a year that the prohibited transaction continues. If the prohibited 

transaction is not corrected within 90 days after notice from the 

Secretary of Labor, the penalty may be up to 100 percent of the 

amount involved in the transaction. Under the Code, if a prohibited 

transaction occurs, the disqualified person who participates in the 

transaction is subject to a two-tier excise tax. The first level tax is 

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 100 percent of the amount involved. 

REASONS FOR CHANGE

The Committee believes that retirement savings can be enhanced 

by the provision of investment advice both to plan fiduciaries who 

are responsible for the investment of plan assets, or for choosing 

the investment options offered under a plan, and to individuals 

who are responsible for directing the investment of their accounts. 

The Committee wishes to facilitate the provision of investment advice by providing exemptions from the prohibited transaction rules 

(subject to certain safeguards) for the provision of investment advice, fees received for such advice, and investments made pursuant 

to such advice. 

EXPLANATION OF PROVISION

The provision adds a new category of prohibited transaction exemptions in connection with the provision of investment advice 

with respect to plan assets for a fee if: (1) the investment of plan 

assets is subject to the direction of plan participants or beneficiaries; (2) the advice is provided to the plan or a participant or 

beneficiary by a fiduciary adviser in connection with a sale, acquisition or holding of a security or other property (an ‘‘investment 

transaction’’) for purposes of investment of plan assets; and (3) certain other requirements are met. Under the provision, the following 

are exempt from prohibited transaction treatment: (1) the provision 

of investment advice to the plan, participant or beneficiary; (2) an 

investment transaction (including any lending of money or other 

extension of credit associated with the investment transaction) pursuant to the advice; and (3) the direct or indirect receipt of fees or 

other compensation by a fiduciary adviser or an affiliate thereof (or 

any employee, agent or registered representative of the fiduciary 

adviser or an affiliate) in connection with the provision of the advice or an investment transaction pursuant to the advice. 

Under the provision, certain requirements must be met in order 

for the exemption to apply. When initially providing advice about 

a security or other property, the fiduciary adviser must provide to 

the recipient of the advice, on a reasonably contemporaneous basis, 

written notification of specified information (discussed below) as 

well as any disclosure required in connection with the investment 

transaction under any applicable securities laws. In addition, the 

investment transaction must occur solely at the direction of the recipient of the advice; the compensation received by the adviser and 

its affiliates in connection with the investment transaction must be 

reasonable; and the terms of the investment transaction must be 

at least as favorable as an arm’s length transaction would be. 

120 

The written notification required to be provided by the fiduciary 

adviser must include information about the following: (1) all fees 

or compensation to be received by the adviser or any affiliate (including from a third party) in connection with the advice or the investment transaction; (2) any material affiliation or contractual relationship of the adviser or its affiliates in the security or other 

property involved in the investment transaction; (3) any limitation 

to be placed on the scope of the investment advice to be provided 

by the fiduciary adviser with respect to an investment transaction; 

(4) the types of services provided by the adviser in connection with 

the provision of investment advice; (5) the adviser’s status as a fiduciary of the plan in connection with the provision of the advice; 

and (6) the ability of the recipient of the advice separately to arrange for the provision of advice by another adviser that could have 

no material affiliation with and receive no fees or other compensation in connection with the security or other property. In addition, 

in connection with the initial advice or subsequent advice, the required information must be maintained in currently accurate form 

and must be provided to a recipient of investment advice (without 

charge) at least annually and also when requested by the recipient 

of the advice or when there is a material change in the information. In the event of a material change in the information, currently accurate information must be provided to the recipient at a 

time reasonably contemporaneous to the change. 

The written notification can be provided electronically. Any notification (or currently accurate information) must be written in a 

clear and conspicuous manner, calculated to be understood by the 

average plan participant, and be sufficiently accurate and comprehensive so as to reasonably apprise participants and beneficiaries of the required information. The Secretary of Labor is directed to issue a model form for the disclosure of fees and other 

compensation as required by the provision. 

The fiduciary adviser must maintain for at least six years any 

records necessary for determining whether the requirements for 

the prohibited transaction exemption were met. A prohibited transaction will not be considered to have occurred solely because 

records were lost or destroyed before the end of six years due to 

circumstances beyond the adviser’s control. 

For purposes of the provision, ‘‘fiduciary adviser’’ is defined as a 

person who is a fiduciary of the plan by reason of the provision of 

investment advice to the plan, a participant or beneficiary and who 

is also: (1) registered as an investment adviser under the Investment Advisers Act of 1940 or under State laws; (2) a bank, a similar financial institution supervised by the United States or a State, 

or a savings association (as defined under the Federal Deposit Insurance Act), but only if the advice is provided through a trust department that is subject to periodic examination and review by 

Federal or State banking authorities; (3) an insurance company 

qualified to do business under State law; (4) registered as a broker 

or dealer under the Securities Exchange Act of 1934; (5) an affiliate 

of any of the preceding; or (6) an employee, agent or registered representative of any of the preceding who satisfies the requirements 

of applicable insurance, banking and securities laws relating to the 

provision of advice. ‘‘Affiliate’’ means an affiliated person as defined 

under section 2(a)(3) of the Investment Company Act of 1940. ‘‘RegVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00120 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
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67 Code sec. 411(b)(1)(H); ERISA sec. 204(b)(1)(H). 

istered representative’’ means a person described in section 3(a)(18) 

of the Securities Exchange Act of 1934 or a person described in section 202(a)(17) of the Investment Advisers Act of 1940. 

Subject to certain requirements, the employer or other person 

who is a plan fiduciary, other than a fiduciary adviser, is not treated as failing to meet the prohibited transaction requirements (or 

the fiduciary requirements of ERISA), solely by reason of the provision of investment advice as permitted under the provision or of 

contracting for or otherwise arranging for the provision of the advice. This rule applies if: (1) the advice is provided under an arrangement between the employer or plan fiduciary and the fiduciary adviser for the provision of investment advice by the fiduciary 

adviser as permitted under the provision; (2) the terms of the arrangement require compliance by the fiduciary adviser with the requirements of the provision; and (3) the terms of the arrangement 

include a written acknowledgement by the fiduciary adviser that 

the fiduciary adviser is a plan fiduciary with respect to the provision of the advice. The fiduciary responsibility requirements of 

ERISA must also be met in connection with the provision of investment advice. 

The provision does not exempt the employer or a plan fiduciary 

from fiduciary responsibility under ERISA for the prudent selection 

and periodic review of a fiduciary adviser with whom the employer 

or plan fiduciary has arranged for the provision of investment advice. The employer or plan fiduciary does not have the duty to monitor the specific investment advice given by a fiduciary adviser. 

The provision also provides that nothing in the fiduciary responsibility provisions of ERISA is to be construed to preclude the use 

of plan assets to pay for reasonable expenses in providing investment advice. 

EFFECTIVE DATE

The provision is effective with respect to investment advice provided on or after January 1, 2006. 

TITLE VII: BENEFIT ACCRUAL STANDARDS 

(Sec. 701(b) of the bill and secs. 411 and 417 of the Code) 

PRESENT LAW

Prohibition on age discrimination 

In general 

A prohibition on age discrimination applies to benefit accruals 

under a defined benefit pension plan.67 Specifically, an employee’s 

benefit accrual may not cease, and the rate of an employee’s benefit 

accrual may not be reduced, because of the attainment of any age. 

However, this prohibition is not violated solely because the plan 

imposes (without regard to age) a limit on the amount of benefits 

that the plan provides or a limit on the number of years of service 

or years of participation that are taken into account for purposes 

of determining benefit accrual under the plan. Moreover, for purposes of this requirement, the subsidized portion of any early reVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00121 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
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68 67 Fed. Reg. 76123. 

tirement benefit may be disregarded in determining benefit accruals. 

In December 2002, the IRS issued proposed regulations that 

dealt with the application of the age discrimination rules.68 The 

proposed regulations included rules for applying the age discrimination rules with respect to accrued benefits, optional forms of benefit, ancillary benefits, and other rights and features provided 

under a plan. Under the proposed regulations, for purposes of applying the prohibition on age discrimination to defined benefit pension plans, an employee’s rate of benefit accrual for a year is generally the increase in the employee’s accrued normal retirement 

benefit (i.e., the benefit payable at normal retirement age) for the 

plan year. In the preamble to the proposed regulations, the IRS requested comments on other approaches to determining the rate of 

benefit accrual, such as allowing accrual rates to be averaged over 

multiple years (for example, to accommodate plans that provide a 

higher rate of accrual in earlier years) or, in the case of a plan that 

applies an offset, determining accrual rates before application of 

the offset. As discussed below, in June 2004, the IRS announced 

the withdrawal of the proposed regulations. 

Cash balance and other hybrid plans 

Certain types of defined benefit pension plans, such as cash balance plans and pension equity plans, are referred to as ‘‘hybrid’’ plans because they combine features of a defined benefit pension 

plan and a defined contribution plan. 

Under a cash balance plan, benefits are determined by reference 

to a hypothetical account balance. An employee’s hypothetical account balance is determined by reference to hypothetical annual allocations to the account (‘‘pay credits’’) (e.g., a certain percentage 

of the employee’s compensation for the year) and hypothetical earnings on the account (‘‘interest credits’’). Cash balance plans are generally designed so that, when a participant receives a pay credit for 

a year of service, the participant also receives the right to future 

interest on the pay credit, regardless of whether the participant 

continues employment (referred to as ‘‘front-loaded’’ interest credits). That is, the participant’s hypothetical account continues to be 

credited with interest after the participant stops working for the 

employer. As a result, if an employee terminates employment and 

defers distribution to a later date, interest credits will continue to 

be credited to that employee’s hypothetical account. 

Another type of hybrid plan is a pension equity plan (sometimes 

referred to as a ‘‘PEP’’). Under a pension equity plan, benefits are 

generally described as a percentage of final average pay, with the 

percentage determined on the basis of points received for each year 

of service, which are often weighted for older or longer service employees. Pension equity plans commonly provide interest credits for 

the period between a participant’s termination of employment and 

commencement of benefits. 

Because of the front-loaded nature of accruals under cash balance plans, there is a longer time for interest credits to accrue on 

a pay credit to the account of a younger employee. Thus, a pay 

credit received at a younger age may provide a larger annuity benVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00122 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
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69 274 F. Supp. 2d 1010 (S.D. I11. 2003). 70Statement of Stuart L. Brown, Chief Counsel Internal Revenue Service, before the Senate 

Committee on Health, Education, Labor, and Pensions (Sept. 21, 1999). 71 56 Fed. Reg. 47528 (Sept. 19, 1991). 72Pub. L. No. 108–199 (2004). 

efit at normal retirement age than the same pay credit received at 

an older age. A similar effect may occur with respect to other types 

of hybrid plan designs, including pension equity plans. 

Prior to the decision in the case of Cooper v. IBM Personal Pension Plan,69 described below, discussions regarding hybrid plans 

typically did not question the ability of the basic hybrid plan design 

to satisfy the age discrimination rules. IRS consideration of cash 

balance plans began in the early 1990s.70 At that time, the focus 

was on the question of whether such plans satisfied the nondiscrimination requirements under section 401(a)(4), which requires that benefits or contributions not discriminate in favor of 

highly compensated employees. Treasury regulations issued in 

1991 under section 401(a)(4) provided a safe harbor for cash balance plans that provide frontloaded interest credits and meet certain other requirements. In connection with the issuance of these 

regulations, Treasury spoke to the cash balance age discrimination 

issue. The preamble to the final regulations stated ‘‘[t]he fact that 

interest adjustments through normal retirement age are accrued in 

the year of the related hypothetical allocation will not cause a cash 

balance plan to fail to satisfy the requirements of section 

411(b)(1)(H), relating to age-based reductions in the rate at which 

benefits accrue under a plan.’’ 71 Many interpreted this language as 

Treasury’s position that cash balance plan designs do not violate 

the prohibitions on age discrimination. The IRS has not to date asserted that hybrid plan formulas result in per se violations of age 

discrimination requirements. The December 2002 proposed regulations, noted above, provided that an employee’s rate of benefit accrual for a year is generally the increase in the employee’s accrued 

normal retirement benefit (i.e., the benefit payable at normal retirement age) for the plan year. However, the proposed regulations 

provided a special rule under which an employee’s rate of benefit 

accrual under a cash balance plan meeting certain requirements 

(an ‘‘eligible’’ cash balance plan) was based on the rate of pay credit 

provided under the plan. Thus, under the proposed regulations, an 

eligible cash balance plan would not violate the prohibition on age 

discrimination solely because pay credits for younger employees 

earn interest credits for a longer period. 

Section 205 of the Consolidated Appropriations Act, 2004 (the 

‘‘2004 Appropriations Act’’), enacted January 24, 2004, provides 

that none of the funds made available in the 2004 Appropriations 

Act may be used by the Secretary of the Treasury, or his designee, 

to issue any rule or regulation implementing the 2002 proposed 

Treasury age discrimination regulations or any regulation reaching 

similar results.72 The 2004 Appropriations Act also required the 

Secretary of the Treasury within 180 days of enactment to present 

to Congress a legislative proposal for providing transition relief for 

older and longer-service participants affected by conversions of 

their employers’ traditional pension plans to cash balance plans. 

The Treasury Department complied with this requirement by including in the President’s budget for fiscal year 2005 a proposal reVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00123 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
124 

73 A similar proposal was also contained in the President’s budget proposal for fiscal year 

2006. 74 IRS Announcement 2004–57, 2004–27 I.R.B. 15. 75 117 F. Supp. 2d 812 (S.D. Ind. 2000). 76 222 F.R.D. 88 (D. Md. 2004). 77 No. 04–CV–6097, 2005 WL 3120268 (E.D. Pa. Nov. 21, 2005). 78 In Campbell v. BankBoston, 327 F.3d 1 (1st Cir. 2003), the plaintiff argued for the first time 

only on appeal that the cash balance plan at issue violated the age discrimination rules. The 

court therefore held that the issue had been waived and did not resolve the issue. However, 

the court briefly described the various arguments involved and the disagreement as to how rate 

of benefit accrual should be determined. 79The court also considered an age discrimination issue with respect to previous years during 

which the plan was designed as a pension equity plan and, for that purpose, also applied the 

age discrimination requirements on the basis of the annuity payable at age 65. 

lating to cash balance and other hybrid plans that specifically addresses conversions to such plans, the application of the age discrimination rules to such plans, and the determination of minimum 

lump sums under such plans.73 In June 2004, the IRS announced 

the withdrawal of the proposed age discrimination regulations, including the special rules for eligible cash balance plans.74 According to the Announcement, ‘‘[t]his will provide Congress an opportunity to * * * address cash balance and other hybrid plan issues 

through legislation.’’ The application of the age discrimination rules to hybrid plans 

has been the subject of litigation. This issue was first addressed in 

Eaton v. Onan Corporation.75 In that case, the court considered 

how the rate of an employee’s benefit accrual is determined for purposes of the age discrimination rules and concluded that the statute does not require the rate of benefit accrual to be measured solely by the value of a participant’s annuity payable at normal retirement age. The court found that, in the case of a cash balance plan, 

the rate of benefit accrual should be defined as the change in the 

employee’s cash balance account from one year to the next. The 

court held that a cash balance plan does not violate the prohibition 

on reducing the rate of benefit accrual because of age. This analysis 

has also been applied in two other cases, Tootle v. ARINC Inc.,76

and Register v. PNC Financial Services Group, Inc.,77 in which the 

courts found the Eaton v. Onan Corporation decision persuasive, 

rather than the Cooper v. IBM Personal Pension Plan decision.78

Only in Cooper v. IBM Personal Pension Plan has a court required the age discrimination requirements to be applied to a cash 

balance plan on the basis of the benefit payable in the form of an 

annuity commencing at normal retirement age, which was age 65 

under the plan.79 For this purpose, the court required interest 

credits to be projected and valued as an age 65 annuity. The court 

noted that, in terms of an age 65 annuity, interest credits will always be more valuable for a younger employee than for an older 

employee. Thus, the court concluded that an employee’s rate of benefit accrual declines as the employee gets older, in violation of the 

age discrimination rules. Although Eaton v. Onan Corporation had 

been decided in 2000, the court did not discuss the analysis in that 

case. 

Calculating minimum lump-sum distributions under hybrid plans 

Defined benefit pension plans, including cash balance plans and 

other hybrid plans, are required to provide benefits in the form of 

a life annuity commencing at a participant’s normal retirement 

age. If the plan permits benefits to be paid in certain other forms, 

125 

80 Code sec. 417(e); ERISA sec. 205(g)(3). For years before 1995, these provisions required the 

use of an interest rate based on interest rates determined by the PBGC. For years after 1994, 

these provisions require the use of an interest rate based on interest rates on 30-year Treasury 

securities and a mortality table specified by the IRS. 81 Notice 96–8, 1996–1996–1 C.B. 359. The Notice provides that regulations will be effective 

prospectively and, for plan years before regulations are effective, allows lump-sum distributions 

from cash balance plans that provide front-loaded interest credits to be based on a reasonable, 

good-faith interpretation of the minimum present value rules, taking into account preexisting 

guidance. The Notice further provides that plans that comply with the guidance in the Notice 

are deemed to be applying a reasonable, good-faith interpretation. 82 Berger v. Xerox Corp. Retirement Income Guarantee Plan, 338 F.3d 755 (7th Cir. 2003); 

Esden v. Bank of Boston, 229 F.3d 154 (2d Cir. 2000), cert. dismissed, 531 U.S. 1061 (2001); 

Lyons v. Georgia Pacific Salaried Employees Retirement Plan, 221 F.3d 1235 (11th Cir. 2000) 

Continued 

such as a lump sum, minimum present value rules apply, under 

which the alternative form of benefit cannot be less than the 

present value of the life annuity payable at normal retirement age, 

determined using certain statutorily prescribed interest and mortality assumptions.80

Most cash balance plans are designed to permit a lump-sum distribution of a participant’s hypothetical account balance upon termination of employment. This raises an issue as to whether a distribution of a participant’s hypothetical account balance satisfies 

the minimum present value rules. In 1996, the IRS issued proposed 

guidance (Notice 96–8) on the application of the minimum present 

value rules to lump-sum distributions under cash balance plans 

and requested public comments in anticipation of proposed regulations incorporating the proposed guidance.81

Under the proposed guidance, a lump-sum distribution from a 

cash balance plan cannot be less than the present value of the benefit payable at normal retirement age, determined using the statutory interest and mortality assumptions. For this purpose, a participant’s normal retirement benefit under a cash balance plan is 

generally determined by projecting the participant’s hypothetical 

account balance to normal retirement age by crediting to the account future interest credits at the plan rate, the right to which 

has already accrued, and converting the projected account balance 

to an actuarially equivalent life annuity payable at normal retirement age, using the interest and mortality assumptions specified in 

the plan. The proposed guidance also included rules under which 

cash balance plans can provide lump-sum distributions in the 

amount of participants’ hypothetical account balances if the rate at 

which interest credits are provided under the plan is not greater 

(or is assumed not to be greater) than the statutory interest rate. 

Under the approach in the proposed guidance, a difference in the 

rate of interest credits provided under the plan, which is used to 

project the account balance forward to normal retirement age, and 

the statutory rate used to determine the lump-sum value (i.e., 

present value) of the accrued benefit can cause a discrepancy between the value of the minimum lump-sum and the employee’s hypothetical account balance. This effect is sometimes referred to as 

‘‘whipsaw.’’ In particular, if the plan’s interest crediting rate is 

higher than the statutory interest rate, then the resulting lumpsum amount will generally be greater than the hypothetical account balance. 

Several courts, but not all, have applied an approach similar to 

the approach in the proposed guidance in cases involving the determination of lump sums under cash balance plans.82 Regulations adVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00125 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
126 

(‘‘Lyons II’’), cert. denied, 532 U.S. 967 (2001); and West v. Ak Steel Corp. Retirement Accumulation Plan, 318 F. Supp.2d 579 (S.D. Ohio 2004). In Lyons II, the court reversed a lower court 

holding in Lyons v. Georgia Pacific Salaried Employees Retirement Plan, 66 F. Supp.2d 1328 

(N.D. Ga. 1999) (‘‘Lyone I’’), relating to the application of the minimum present value rules in 

effect before 1995. The Lyons II court limited its analysis to the minimum present value rules 

in effect as of 1993 when Mr. Lyons received his lump-sum distribution; however, the court indicated that a different result could apply under the law in effect after 1994. On remand, in Lyons v. Georgia Pacific Salaried Employees Retirement Plan, 196 F. Supp.2d 1260 (N.D. Ga. 2002) 

(‘‘Lyons III’’), the lower court determined that payment of the hypothetical account balance did 

not violate the minimum present value rules in effect for years after 1994. 83 As mentioned above, the President’s budgets for fiscal years 2005 and 2006 include a proposal, relating to cash balance plans that specifically addresses the determination of minimum 

lump sums under such plans. The President’s proposal would eliminate the whipsaw effect and 

allow the plan to pay the hypothetical account balance, if certain requirements are satisfied. 84The undesirable effects of the lack of clarity in the law on both employers and employees 

was noted by the staff of the Joint Committee on Taxation in its Report of Investigation of Enron 

Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy 

Recommendations (JCS–3–03), February 2003, at Vol. I, 19, 38, 487 conducted at the request 

of the Senate Committee on Finance. The staff of the Joint Committee on Taxation recommended that clear rules for hybrid plans should be provided. 

dressing the application of the minimum present value rules to 

cash balance plans have not been issued.83

REASONS FOR CHANGE

The Committee understands that approximately 9 million American workers are currently covered under cash balance or other 

types of hybrid pension plans. The Committee believes that such 

plans play a valuable role in the future of the defined benefit pension plan system and providing retirement income security for employees. The Committee recognizes that because these plans combine the features of different types of plans, there may be questions 

as to how the defined benefit pension plan rules should be applied.84

The Committee is aware that some conversions of traditional defined benefit plans to hybrid plans raised some concern. The Committee also notes, however, that the IRS did not challenge the basic 

hybrid plan design and that, until the decision in Cooper v. IBM 

Personal Pension Plan, the legality of the basic hybrid plan design 

was not called into question. The court in that case found that the 

plan discriminated on the basis of age because the hypothetical accounts of younger workers accrue interest over a longer period of 

time, resulting in higher account balances. In effect, the court’s decision found that plans that reflect the time value of money are age 

discriminatory. This result could potentially call into question other 

types of plan designs under more traditional defined benefit plans. 

The Committee does not believe that a plan design is age discriminatory merely because the benefits reflect the time value of money. 

The Committee is aware that some employers have already responded to the uncertainty raised by this decision by freezing their 

hybrid plans whether or not their plan was converted from a traditional plan. Thus, the situation being faced by many employees is 

not whether they will have a traditional defined benefit plan or a 

hybrid plan, but whether they will be covered by any pension plan. 

With respect to the whipsaw issue, the Committee does not view 

the position taken by the IRS in Notice 96–8 to be a correct interpretation of present law. The Committee notes that this position 

has never been finalized in regulations and understands that the 

Treasury has been reviewing this position. The President’s proposal 

would take an approach similar to that in the Committee bill. The 

Committee also notes that the approach taken in Notice 96–8 could 

127 

harm plan participants. In response to the Notice, some employers 

have reduced the level of interest credits under their cash balance 

plans. In addition, the approach in the Notice provides a larger 

benefit for a participant who takes a distribution before normal retirement age. Thus, it penalizes employees who wait for their benefits until retirement, which is a perverse result for a retirement 

plan. 

The Committee believes that the uncertainty that exists with respect to certain aspects of hybrid plans (as well as other defined 

benefit pension plan designs) should be resolved by clarifying that 

the law accommodates the nature and design of these plans. Thus, 

the Committee bill adopts age discrimination standards that may 

be applied to all defined benefit plans, including hybrid plans, and 

also resolves other issues, such as the calculation of lump-sum benefits. 

In adopting these rules, the Committee is aware that our private 

pension system is a voluntary system that must accommodate various concerns, including those of employers and employees. In order 

to maintain a viable private pension system, the Committee believes that employers should have the ability to make plan design 

changes on a prospective basis without undue restriction or mandates with respect to future benefit levels. 

The Committee bill applies on a prospective basis because certain 

issues addressed by the bill are the subject of on-going litigation. 

However, the Committee views the provision as a clarification; the 

action of the Committee in clarifying the law should not cast any 

negative inference on the legality of hybrid plans. 

EXPLANATION OF PROVISION

Age discrimination rules 

Under the provision, a plan is not treated as violating the prohibition on age discrimination if a participant’s entire accrued benefit, as determined as of any date under the formula for determining benefits as set forth in the text of the plan documents, 

would be equal to or greater than that of any similarly situated, 

younger individual. For this purpose, an individual is similarly situated to a participant if the individual and the participant are (and 

always have been) identical in every respect (including period of 

service, compensation, position, date of hire, work history, and any 

other respect) except for age. In addition, in determining a participant’s entire accrued benefit for this purpose, the subsidized portion of any early retirement benefit (including any early retirement 

subsidy that is fully or partially included or reflected in an employee’s opening balance or other transition benefits) is disregarded. In 

some cases the value of an early retirement subsidy may be difficult to determine; it is therefore intended that a reasonable approximation of such value may be used for this purpose. The provision is intended to apply to hybrid plans, including pension equity 

plans. 

In addition, under the provision, plans do not violate the prohibition on age discrimination solely because of the following plan designs or features: 

1. A plan under which the accrued benefit payable under the 

plan upon distribution (or any portion thereof) is expressed as 

128 

the balance of a hypothetical account maintained for the participant is not treated as violating the prohibition on age discrimination solely because interest accruing on the account balance is taken into account. 

2. A plan is not treated as violating the prohibition on age 

discrimination solely because, under the plan, benefits attributable to employer contributions may be offset by: (1) Social 

Security or Railroad Retirement benefits; (2) benefits under another qualified retirement plan of the same employer; or (3) 

benefits under a retirement program for officers or employees 

of the Federal Government or a State or local government. For 

this purpose, allowable offsets based on such benefits may consist of offsets equal to all or part of the actual benefit payment 

amounts, reasonable projections or estimations of such benefit 

payment amounts, or actuarial equivalents of such actual benefit payment amounts, projections, or estimations (determined 

on the basis of reasonable actuarial assumptions). This provision is intended to codify the holding in Lunn v. Montgomery 

Ward & Company, Inc., 166 F.3d 880 (7th Cir. 1999). 

3. A plan is not treated as violating the prohibition on age 

discrimination solely because the plan provides for disparity in 

contributions or benefits with respect to which the permitted 

disparity requirements are met. 

4. A plan is not treated as violating the prohibition on age 

discrimination solely because the plan provides for pre-retirement indexing of accrued benefits under the plan. For this purpose, the term ‘‘pre-retirement indexing’’ means, in connection 

with an accrued benefit, the periodic adjustment of the accrued 

benefit by means of the application of a recognized index or 

methodology so as to protect the economic value of the benefit 

against inflation before distribution. It is intended that indexing is permitted both before and after benefit distributions 

begin and can protect the economic value of the benefit in 

whole or in part. The provision is not limited to the use of indices based on inflation (such as the consumer price index); however, it is the intent of the Committee to prohibit any pre-retirement indexing which results in a cumulative negative adjustment in a participant’s benefit. 

In providing rules for the application of the age discrimination 

requirements with respect to optional forms of benefit, ancillary 

benefits, and other rights and features provided under a plan, it is 

intended that the Secretary of Treasury has the authority to provide rules under which certain types of benefits, or other rights or 

features, do not violate the prohibition on age discrimination. 

Calculating minimum lump-sum distributions under hybrid plans 

The provision provides a special rule for determining minimum 

lump-sum benefits under a defined benefit pension plan under 

which the accrued benefit payable upon distribution (or any portion 

thereof) is expressed as the balance of a hypothetical account maintained for the participant. Under the provision, such a plan is not 

treated as violating the minimum present value rules solely because of the amount actually made available for distribution under 

the terms of the plan, in any case in which the applicable interest 

rate that would be used under the terms of the plan to project the 

129 

85 Code sec. 404. 86The full funding limitation is the excess, if any, of (1) the accrued liability of the plan (including normal cost), over (2) the lesser of (a) the market value of plan assets or (b) the actuarial 

value of plan assets. However, the full funding limit is not less than the excess, if any, of 90 

percent of the plan’s current liability (including the current liability normal cost) over the actuarial value of plan assets. 87 In the case of a plan with 100 or fewer participants, unfunded current liability for this purpose does not include the liability attributable to benefit increases for highly compensated employees resulting from a plan amendment that is made or becomes effective, whichever is later, 

within the last two years. 88 An overall deduction limit, described below, applies in the event an employer maintains a 

defined benefit plan and a defined contribution plan covering at least one of the same employees. 

amount of the participant’s account balance to normal retirement 

age is not greater than a market rate of return. The Secretary of 

the Treasury is given regulatory authority relating to: (1) the calculation of a market rate of return for this purpose; and (2) permissible methods of crediting interest to the account (including variable interest rates) resulting in effective rates of return not greater 

than a market rate of return. 

EFFECTIVE DATE

The provision is effective for periods beginning on or after June 

29, 2005. The Committee does not intend that the provision be interpreted as creating a negative inference regarding the legality of 

hybrid plans under present law. 

TITLE VIII: DEDUCTION LIMITATIONS 

A. INCREASE IN DEDUCTION LIMITS

(Sec. 801 of the bill and sec. 404 of the Code) 

Employer contributions to qualified retirement plans are deductible subject to certain limits.85

In the case of a defined benefit pension plan (including both single-employer and multiemployer plans), the employer generally 

may deduct the greater of: (1) the amount necessary to satisfy the 

minimum funding requirement of the plan for the year; or (2) the 

amount of the plan’s normal cost for the year plus the amount necessary to amortize certain unfunded liabilities over 10 years, but 

limited to the full funding limitation for the year.86 The maximum 

amount otherwise deductible generally is not less than the plan’s 

unfunded current liability.87 In the case of a single-employer plan 

covered by the PBGC insurance program that terminates during 

the year, the maximum deductible amount is generally not less 

than the amount needed to make the plan assets sufficient to fund 

benefit liabilities as defined for purposes of plan termination under 

the PBGC insurance program. 

In the case of a defined contribution plan, the employer generally 

may deduct contributions in an amount up to 25 percent of compensation paid or accrued during the employer’s taxable year.88

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. 

130 

REASONS FOR CHANGE

The Committee believes that employers should have greater 

flexibility to make additional contributions, particularly in good 

economic times when extra resources are available to fund a plan. 

Such additional contributions enable employers to improve the 

funded status of their plans and reduce the chance that the employer will be required to make larger contributions during an economic downturn or that the plan will terminate with significant 

underfunding. 

In the case of multiemployer defined benefit pension plans, the 

present-law deduction limits may also create the potential that contributions required under collective bargaining agreements are not 

deductible by the employers obligated to make the contributions. In 

that case, employers’ contribution obligations may be waived, or 

plan benefits (and thus plan liabilities) may be increased in order 

to assure that contributions are deductible. However, such measures may cause the plan’s funded status to deteriorate, especially 

in a period of economic downturn. In the case of multiemployer 

plans, the deduction limit for contributions should be increased to 

reduce the possibility that contributions required under collective 

bargaining agreements are not deductible. 

EXPLANATION OF PROVISION

The provision modifies the maximum deductible amount in the 

case of both single-employer defined benefit pension plans and multiemployer defined benefit pension plans. 

In the case of a single-employer defined benefit pension plan, the 

maximum deductible amount is equal to the greater of: 

1. the excess (if any) of the sum of 150 percent of the plan’s 

funding target plus the plan’s normal cost for the plan year 

over the value of plan assets (determined as under the minimum funding rules), and 

2. the excess (if any) of the sum of the plan’s at-risk normal 

cost and at-risk funding target for the plan year over the value 

of the plan assets (determined as under the minimum funding 

rules). For this purpose, the at-risk funding target and at-risk 

normal cost are used regardless of whether the plan is in fact 

in at-risk status. 

In determining the maximum deductible amount, the value of 

plan assets is not reduced by any pre-funding balance or funding 

standard account carryover balance. 

The provision retains the present-law rule, that, in the case of 

a single-employer plan covered by the PBGC that terminates during the year, the maximum deductible amount is generally not less 

than the amount needed to make the plan assets sufficient to fund 

benefit liabilities as defined for purposes of the PBGC termination 

insurance program. 

In the case of a multiemployer defined benefit plan, the maximum amount deductible is not less than 140 percent of current liability over the value of plan assets. 

EFFECTIVE DATE

The provision is effective for contributions for taxable years beginning after December 31, 2006. 

131 

89 Code sec. 404. 90See the discussion under A., above, for a description of the deduction rules for defined benefit and defined contribution plans. 91 Under the general EGTRRA sunset, this rule expires for plan years beginning after 2010. 

B. UPDATING DEDUCTION RULES FOR COMBINATION OF PLANS

(Sec. 802 of the bill and secs. 404(a)(7) and 4972 of the Code) 

PRESENT LAW

Employer contributions to qualified retirement plans are deductible subject to certain limits.89 In general, the deduction limit depends on the kind of plan.90

If an employer sponsors one or more defined benefit pension 

plans and one or more defined contribution plans that cover at 

least one of the same employees, an overall deduction limit applies 

to the total contributions to all plans for a plan year. The overall 

deduction limit generally is the greater of (1) 25 percent of compensation, or (2) the amount necessary to meet the minimum funding requirements of the defined benefit plan for the year, but not 

less than the amount of the plan’s unfunded current liability. 

Under EGTRRA, elective deferrals are not subject to the limits 

on deductions and are not taken into account in applying the limits 

to other employer contributions. The combined deduction limit of 

25 percent of compensation for defined benefit and defined contribution plans does not apply if the only amounts contributed to 

the defined contribution plan are elective deferrals.91

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. Certain contributions to a defined contribution plan that 

are nondeductible solely because of the overall deduction limit are 

disregarded in determining the amount of nondeductible contributions for purposes of the excise tax. Contributions that are disregarded are the greater of (1) the amount of contributions not in 

excess of six percent of the compensation of the employees covered 

by the defined contribution plan, or (2) the amount of matching 

contributions. 

REASONS FOR CHANGE

The Committee understands that the overall limit on deductible 

contributions has the effect of reducing, or even eliminating, employers’ ability to make deductible contributions to their defined 

contribution plans in years in which substantial contributions must 

be made to their defined benefit pension plans. As a result, employees may receive little or no contributions to their defined contribution plan accounts in such years. The Committee believes that the 

overall deduction limit should allow for defined contribution plan 

contributions up to certain levels without regard to contributions 

made to defined benefit pension plans. 

EXPLANATION OF PROVISION

Under the provision, the overall limit on employer deductions for 

contributions to combinations of defined benefit and defined contribution plans applies to contributions to one or more defined contribution plans only to the extent that such contributions exceed 

132 

92The saver’s credit (sec. 25B) expires at the end of 2006. Another provision of the bill makes 

the saver’s credit permanent. 

six percent of compensation otherwise paid or accrued during the 

taxable year to the beneficiaries under the plans. As under present 

law, for purposes of determining the excise tax on nondeductible 

contributions, matching contributions to a defined contribution 

plan that are nondeductible solely because of the overall deduction 

limit are disregarded. 

EFFECTIVE DATE

The provision is effective for contributions for taxable years beginning after December 31, 2006. 

TITLE IX: ENHANCED RETIREMENT SAVINGS AND DEFINED 

CONTRIBUTION PLANS 

A. PERMANENCY OF EGTRRA PENSION AND IRA PROVISIONS

(Sec. 901 of the bill) 

PRESENT LAW

In general 

The Economic Growth and Tax Relief Reconciliation Act of 2001 

(‘‘EGTRRA’’) made a number of changes to the Federal tax laws, 

including a variety of provisions relating to pensions and individual 

retirement arrangements (‘‘IRAs’’). However, in order to comply 

with reconciliation procedures under the Congressional Budget Act 

of 1974 (e.g., section 313 of the Budget Act, under which a point 

of order may be lodged in the Senate), EGTRRA included a ‘‘sunset’’ provision, pursuant to which the provisions of EGTRRA expire 

at the end of 2010. Specifically, EGTRRA’s provisions do not apply 

for taxable, plan, or limitation years beginning after December 31, 

2010, or to estates of decedents dying after, or gifts or generationskipping transfers made after, December 31, 2010. EGTRRA provides that, as of the effective date of the sunset, both the Internal 

Revenue Code and the Employee Retirement Income Security Act 

of 1974 (‘‘ERISA’’) will be applied as though EGTRRA had never 

been enacted. 

Certain provisions contained in EGTRRA expire before the general sunset date of 2010.92

List of affected provisions 

Following is a list of the provisions affected by the general 

EGTRRA sunset. 

Individual retirement arrangements (‘‘IRAs’’) 

• Increases in the IRA contribution limits, including the 

ability to make catch-up contributions (secs. 219, 408, and 

408A of the Code and sec. 601 of EGTRRA); and 

• Rules relating to deemed IRAs under employer plans (sec. 

408(q) of the Code and sec. 602 of EGTRRA). 

133 

Expanding coverage 

• Increases in the limits on contributions, benefits, and compensation under qualified retirement plans, tax-sheltered annuities, and eligible deferred compensation plans (secs. 

401(a)(17), 402(g), 408(p), 414(v), 415, and 457 of the Code and 

sec. 611 of EGTRRA); 

• Application of prohibited transaction rules to plan loans of 

S corporation owners, partners, and sole proprietors (sec. 4975 

of the Code and sec. 612 of EGTRRA); 

• Modification of the top-heavy rules (sec. 416 of the Code 

and sec. 613 of EGTRRA); 

• Elective deferrals not taken into account for purposes of 

deduction limits (sec. 404 of the Code and sec. 614 of 

EGTRRA); 

• Repeal of coordination requirements for deferred compensation plans of state and local governments and tax-exempt 

organizations (sec. 457 of the Code and sec. 615 of EGTRRA); 

• Modifications to deduction limits (sec. 404 of the Code and 

sec. 616 of EGTRRA); 

• Option to treat elective deferrals as after-tax Roth contributions (sec. 402A of the Code and sec. 617 of EGTRRA); 

• Credit for pension plan start-up costs (sec. 45E of the Code 

and sec. 619 of EGTRRA); and 

• Certain nonresident aliens excluded in applying minimum 

coverage requirements (secs. 410(b)(3) and 861(a)(3) of the 

Code). 

Enhancing fairness 

• Catch-up contributions for individuals age 50 and older 

(sec. 414 of the Code and sec. 631 of EGTRRA); 

• Equitable treatment for contributions of employees to defined contribution plans (secs. 403(b), 415, and 457 of the Code 

and sec. 632 of EGTRRA); 

• Faster vesting of employer matching contributions (sec. 

411 of the Code and sec. 633 of EGTRRA); 

• Modifications to minimum distribution rules (sec. 401(a)(9) 

of the Code and sec. 634 of EGTRRA); 

• Clarification of tax treatment of division of section 457 

plan benefits upon divorce (secs. 414(p) and 457 of the Code 

and sec. 635 of EGTRRA); 

• Provisions relating to hardship withdrawals (secs. 401(k) 

and 402 of the Code and sec. 636 of EGTRRA); and 

• Waiver of tax on nondeductible contributions for domestic 

and similar workers (sec. 4972(c)(6) of the Code and sec. 637 

of EGTRRA). 

Increasing portability 

• Rollovers of retirement plan and IRA distributions (secs. 

401, 402, 403(b), 408, 457, and 3405 of the Code and secs. 641–

644 of EGTRRA); 

• Treatment of forms of distribution (sec. 411(d)(6) of the 

Code and sec. 645 of EGTRRA); 

• Rationalization of restrictions on distributions (secs. 

401(k), 403(b), and 457 of the Code and sec. 646 of EGTRRA): 

134 

• Purchase of service credit under governmental pension 

plans (secs. 403(b) and 457 of the Code and sec. 647 of 

EGTRRA): 

• Employers may disregard rollovers for purposes of cashout rules (sec. 411(a)(11) of the Code and sec. 648 of EGTRRA); 

and 

• Minimum distribution and inclusion requirements for section 457 plans (sec. 457 of the Code and sec. 649 of EGTRRA). 

Strengthening pension security and enforcement 

• Phase in repeal of 160 percent of current liability funding 

limit; maximum deduction rules (secs. 404(a)(1), 412(c)(7), and 

4972(c) of the Code and secs. 651–652 of EGTRRA); 

• Excise tax relief for sound pension funding (sec. 4972 of 

the Code and sec. 653 of EGTRRA); 

• Modifications to section 415 limits for multiemployer plans 

(sec. 415 of the Code and sec. 654 of EGTRRA); 

• Investment of employee contributions in 401(k) plans (sec. 

655 of EGTRRA); 

• Prohibited allocations of stock in an S corporation ESOP 

(secs. 409 and 4979A of the Code and sec. 656 of EGTRRA); 

• Automatic rollovers of certain mandatory distributions 

(secs. 401(a)(31) and 402(f)(1) of the Code and sec. 657 of 

EGTRRA); 

• Clarification of treatment of contributions to a multiemployer plan (sec. 446 of the Code and sec. 658 of EGTRRA); 

and 

• Treatment of plan amendments reducing future benefit accruals (sec. 4980F of the Code and sec. 659 of EGTRRA). 

Reducing regulatory burdens 

• Modification of timing of plan valuations (sec. 412 of the 

Code and sec. 661 of EGTRRA); 

• ESOP dividends may be reinvested without loss of dividend deduction (sec. 404 of the Code and sec. 662 of EGTRRA); 

• Repeal transition rule relating to certain highly compensated employees (sec. 663 of EGTRRA); 

• Treatment of employees of tax-exempt entities for purposes 

of nondiscrimination rules (secs. 410, 401(k), and 401(m) of the 

Code and sec. 664 of EGTRRA); 

• Treatment of employer-provided retirement advice (sec. 

132 of the Code and sec. 665 of EGTRRA); and 

• Repeal of the multiple use test (sec. 401(m) of the Code 

and sec. 666 of EGTRRA). 

REASONS FOR CHANGE

The Committee believes that the retirement savings incentives 

under EGTRRA play a vital role in encouraging retirement savings 

and expanding access to employer-sponsored retirement plans. Uncertainty as to the continued availability of these incentives may 

discourage some individuals and employers from making full use of 

them. The Committee wishes to remove this uncertainty and encourage improvement in retirement savings rates by making the 

EGTRRA provisions permanent. 

135 

EXPLANATION OF PROVISION

The provision repeals the sunset provision of EGTRRA as applied 

to the provisions relating to pensions and IRAs. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

B. SAVER’S CREDIT MADE PERMANENT

(Sec. 902 of the bill and sec. 25B of the Code) 

PRESENT LAW

Present law provides a temporary nonrefundable tax credit for eligible taxpayers for qualified retirement savings contributions. The 

maximum annual contribution eligible for the credit is $2,000. The 

credit rate depends on the adjusted gross income (‘‘AGI’’) of the taxpayer. Joint returns with AGI of $50,000 or less, head of household 

returns of $37,500 or less, and single returns of $25,000 or less are 

eligible for the credit. The AGI limits applicable to single taxpayers 

apply to married taxpayers filing separate returns. 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 who are 18 or older, other than individuals who are fulltime students or claimed as a dependent on another taxpayer’s return. 

The credit is available with respect to: (1) elective deferrals to a 

qualified cash or deferred arrangement (a ‘‘section 401(k) plan’’), a 

tax-sheltered annuity (a ‘‘section 403(b)’’ annuity), an eligible deferred compensation arrangement of a State or local government (a 

‘‘section 457 plan’’), a SIMPLE, or a simplified employee pension 

(‘‘SEP’’); (2) contributions to a traditional or Roth IRA; and (3) voluntary after-tax employee contributions to a tax-sheltered annuity 

or qualified retirement plan. 

The amount of any contribution eligible for the credit is reduced 

by distributions received by the taxpayer (or by the taxpayer’s 

spouse if the taxpayer filed a joint return with the spouse) from 

any plan or IRA to which eligible contributions can be made 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 for which the credit is claimed and 

prior to the due date for filing the taxpayer’s return for the year. 

Distributions that are rolled over to another retirement plan do not 

affect the credit. 

The credit rates based on AGI are provided in Table 1, below. 

Table 1. CREDIT RATES FOR SAVER’S CREDIT 

Joint filers Heads of households All other filers Credit rate 

(percent) 

$0–$30,000 ................................... $0–$22,500 ................................. $0–$15,000 ................................. 50 

$30,001–$32,500 .......................... $22,501–$24,375 ........................ $15,001–$16,250 ........................ 20 

$32,501–$50,000 .......................... $24,376–$37,500 ........................ $16,251–$25,000 ........................ 10 

Over $50,000 ................................. Over $37,500 ............................... Over $25,000 ............................... 0 

136 

93Legally, a section 401(k) plan is not a separate type of plan, but is a profit-sharing, stock 

bonus, or pre-ERISA money purchase plan that contains a qualified cash or deferred arrangement. The terms ‘‘section 401(k) plan’’ and ‘‘401(k) plan’’ are used here for convenience. 94The maximum annual amount of elective deferrals that can be made by an individual is 

subject to a limit ($14,000 for 2005). An individual who has attained age 50 before the end of 

the taxable year may also make catch-up contributions to a section 401(k) plan, subject to a 

limit ($4,000 for 2005). 

The credit does not apply to taxable years beginning after December 31, 2006. 

REASONS FOR CHANGE

Many low- and middle-income individuals have inadequate savings for retirement. The Committee believes that the saver’s credit 

may provide an incentive for low- and middle-income individuals to 

save for retirement. The Committee believes that the credit should 

be made permanent to provide a consistent savings incentive. The 

Committee also believes that allowing direct deposit of the saver’s 

credit may make it easier for some individuals to save. 

EXPLANATION OF PROVISION

The provision makes the saver’s credit permanent. 

The provision also provides that an individual may direct that 

the amount of his or her saver’s credit be directly deposited by the 

Federal government into an IRA, qualified retirement plan, section 

403(b) annuity, or governmental section 457 plan designated by the 

individual (if the plan or other arrangement agrees to accept such 

direct deposits). The provision does not change the rules relating 

to the tax treatment of contributions to such plans or other arrangements. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

C. INCREASING PARTICIPATION THROUGH AUTOMATIC ENROLLMENT

ARRANGEMENTS

(Sec. 903 of the bill and secs. 401(k), 401(m), 414(w), and 416 of 

the Code) 

PRESENT LAW

Qualified cash or deferred arrangements—in general 

Under present law, most defined contribution plans may include 

a qualified cash or deferred arrangement (commonly referred to as 

a ‘‘section 401(k)’’ or ‘‘401(k)’’ plan),93 under which employees may 

elect to receive cash or to have contributions made to the plan by 

the employer on behalf of the employee in lieu of receiving cash. 

Contributions made to the plan at the election of the employee are 

referred to as ‘‘elective deferrals’’ or ‘‘elective contributions.’’ 94 A 

401(k) plan may be designed so that the employee will receive cash 

unless an affirmative election to make contributions is made. Alternatively, a plan may provide that elective contributions are made 

at a specified rate unless the employee elects otherwise (i.e., elects 

not to make contributions or to make contributions at a different 

rate). Arrangements that operate in this manner are sometimes referred to as ‘‘automatic enrollment’’ or ‘‘negative election’’ plans. In 

137 

95Treasury regulations provide that whether an employee has an effective opportunity to receive cash is based on all the relevant facts and circumstances, including the adequacy of notice 

of the availability of the election, the period of time during which an election may be made, and 

any other conditions on elections. Treas. Reg. sec. 1.401(k)–1(e)(2). 96 In lieu of matching contributions at rates equal to the safe harbor rates, a plan may provide 

for an alternative match if (1) the rate of the matching contributions does not increase as an 

employee’s rate of elective deferrals increases and (2) the amount of matching contributions at 

such rate of elective deferrals is at lest equal to the aggregate amount of contributions which 

would be made if rate of the matching contributions equaled the safe harbor rates. 

either case, the employee must have an effective opportunity to 

elect to receive cash in lieu of contributions.95

Nondiscrimination rules 

A special nondiscrimination test applies to elective deferrals 

under a section 401(k) plan, called the actual deferral percentage 

test or the ‘‘ADP’’ test. The ADP test compares the actual deferral 

percentages (‘‘ADPs’’) of the highly compensated employee group 

and the nonhighly compensated employee group. The ADP for each 

group generally is the average of the deferral percentages separately calculated for the employees in the group who are eligible to 

make elective deferrals for all or a portion of the relevant plan 

year. Each eligible employee’s deferral percentage generally is the 

employee’s elective deferrals for the year divided by the employee’s 

compensation for the year. 

The plan generally satisfies the ADP test if the ADP of the highly compensated employee group for the current plan year is either 

(1) not more than 125 percent of the ADP of the nonhighly compensated employee group for the prior plan year, or (2) not more 

than 200 percent of the ADP of the nonhighly compensated employee group for the prior plan year and not more than two percentage points greater than the ADP of the nonhighly compensated 

employee group for the prior plan year. 

Under a safe harbor, a section 401(k) plan is deemed to satisfy 

the special nondiscrimination test if the plan satisfies one of two 

contribution requirements and satisfies a notice requirement (a 

‘‘safe harbor section 401(k) plan’’). A plan satisfies the contribution 

requirement under the safe harbor rule if the employer either (1) 

satisfies a matching contribution requirement or (2) makes a nonelective contribution to a defined contribution plan of at least three 

percent of an employee’s compensation on behalf of each nonhighly 

compensated employee who is eligible to participate in the arrangement. A plan generally 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 three percent of compensation and (b) 50 percent of the employee’s elective deferrals from three to five percent of compensation; 96 and (2) the rate of match with respect to any elective deferrals for highly compensated employees is not greater than the rate 

of match for nonhighly compensated employees. 

Employer matching contributions are also subject to a special 

nondiscrimination test, the ‘‘ACP test,’’ which compares the average actual contribution percentages (‘‘ACPs’’) of matching contributions for the highly compensated employee group and the nonhighly compensated employee group. 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 

138 

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 two percentage points greater than the ACP of the 

nonhighly compensated employee group for the prior plan year. 

A safe harbor section 401(k) plan that provides for matching contributions is deemed to satisfy the ACP test if, in addition to meeting the safe harbor contribution and notice requirements under section 401(k), (1) matching contributions are not provided with respect to elective deferrals in excess of six percent of compensation, 

(2) the rate of matching contribution does not increase as the rate 

of an employee’s elective deferrals increases, and (3) the rate of 

matching contribution with respect to any rate of elective deferral 

of a highly compensated employee is no greater than the rate of 

matching contribution with respect to the same rate of deferral of 

a nonhighly compensated employee. 

Top-heavy rules 

Special rules apply in the case of a top-heavy plan. In general, 

a defined contribution plan is a top-heavy plan if the accounts of 

key employees account for more than 60 percent of the aggregate 

value of accounts under the plan. If a plan is a top-heavy plan, 

then certain minimum vesting standards and minimum contribution requirements apply. 

A plan that consists solely of contributions that satisfy the safe 

harbor plan rules for elective and matching contributions is not 

considered a top-heavy plan. 

Tax-sheltered annuities 

Tax-sheltered annuities (‘‘section 403(b) annuities’’) may provide 

for contributions on a salary reduction basis, similar to section 

401(k) plans. Matching contributions under a section 403(b) annuity are subject to the same nondiscrimination rules under section 

401(m) as matching contributions under a section 401(k) plan (sec. 

403(b)(12)). Thus, for example, the safe harbor method of satisfying 

the section 401(m) rules for matching contributions under a 401(k) 

plan applies to section 403(b) annuities. 

REASONS FOR CHANGE

Various studies indicate that an automatic enrollment feature 

can improve retirement savings rates, particularly for low- and 

middle-income participants. The Committee believes that providing 

nondiscrimination safe harbors for elective deferrals and matching 

contributions under plans that include an automatic enrollment 

feature, as well as allowing erroneous contributions to be distributed, will encourage employers to adopt such a feature. 

EXPLANATION OF PROVISION

In general 

Under the provision, a 401(k) plan that contains an automatic 

enrollment feature that satisfies certain requirements (a ‘‘qualified 

automatic enrollment feature’’) is treated as meeting the ADP test 

with respect to elective deferrals and the ACP test with respect to 

matching contributions. In addition, a plan consisting solely of conVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00138 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
139 

97Similar to the rule under the present-law safe harbor, in lieu of matching contributions at 

a rate equal to the safe harbor rate, a plan may provide for an alternative match if (1) the rate 

Continued 

tributions made pursuant to a qualified automatic enrollment feature is not subject to the top-heavy rules. 

A qualified automatic enrollment feature must meet certain requirements with respect to: (1) automatic deferral; (2) participation; 

(3) matching or nonelective contributions; and (4) notice to employees. 

Automatic deferral 

A qualified automatic enrollment feature must provide that, unless an employee elects otherwise, the employee is treated as making an election to make elective deferrals equal to a stated percentage of compensation not in excess of 10 percent and at least equal 

to: three percent of compensation for the first year the deemed election applies to the participant; four percent during the second year; 

five percent during the third year; and six percent during the 

fourth year and thereafter. The stated percentage must be applied 

uniformly to all eligible employees. Eligible employees mean all 

employees eligible to participate in the 401(k) plan, other than employees eligible to participate in the 401(k) plan immediately before 

the date on which the 401(k) plan (or a predecessor 401(k) plan) 

becomes a qualified automatic enrollment arrangement. Thus, for 

example, if an employer has a pre-existing 401(k) plan for which 

all employees are eligible, the automatic enrollment feature would 

be required to cover newly hired employees. The automatic enrollment feature may also cover existing employees. 

Participation requirement 

An automatic enrollment feature satisfies the participation requirement for a year if, for the plan year or the immediately preceding plan year, elective deferrals are made on behalf of at least 

70 percent of the employees eligible under the automatic enrollment arrangement other than highly compensated employees and 

employees who were eligible to participate in the 401(k) plan immediately before the qualified automatic enrollment arrangement 

is effective. The participation requirement is deemed to be satisfied 

for the first year the qualified automatic enrollment feature is in 

effect. 

Matching or nonelective contribution requirement 

Contributions 

An automatic enrollment feature satisfies the contribution requirement if the employer either (1) satisfies a matching contribution requirement or (2) makes a nonelective contribution to a defined contribution plan of at least two percent of an employee’s 

compensation on behalf of each nonhighly compensated employee 

who is eligible to participate in the automatic enrollment feature. 

A plan generally 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 50 percent of the employee’s elective deferrals as do not 

exceed six percent of compensation 97 and (2) the rate of match 

140 

of the matching contributions does not increase as an employee’s rate of elective deferrals increases and (2) the aggregate amount of matching contributions at such rate of elective deferrals 

is at least equal to the aggregate amount of matching contributions which would be made if 

the rate of matching contributions equaled the safe harbor rates. 98 Employees who are not required to be covered by the qualified automatic enrollment feature, i.e., employees previously covered under the 401(k) plan, are required to receive the notice 

if they are covered by the automatic enrollment feature. 

with respect to any elective deferrals for highly compensated employees is not greater than the rate of match for nonhighly compensated employees. The matching contributions may be made to 

the plan of which the automatic enrollment arrangement is a part 

or to another plan of the employer. 

A plan including an automatic enrollment feature that provides 

for matching contributions is deemed to satisfy the ACP test if, in 

addition to meeting the safe harbor contribution requirements applicable to the qualified automatic enrollment feature: (1) matching 

contributions are not provided with respect to elective deferrals in 

excess of six percent of compensation, (2) the rate of matching contribution does not increase as the rate of an employee’s elective deferrals increases, and (3) the rate of matching contribution with respect to any rate of elective deferral of a highly compensated employee is no greater than the rate of matching contribution with respect to the same rate of deferral of a nonhighly compensated employee. 

Vesting 

Any matching or other employer contributions taken into account 

in determining whether the requirements for a qualified automatic 

enrollment feature are satisfied must vest at least as rapidly as 

under two-year cliff vesting. That is, employees with at least two 

years of service must be 100 percent vested with respect to such 

contributions. 

Withdrawal restrictions 

Any matching or other employer contributions taken into account 

in determining whether the requirements for a qualified automatic 

enrollment feature are satisfied are subject to the withdrawal rules 

applicable to elective contributions. 

Notice requirement 

Under the notice requirement, each employee covered by the arrangement must receive notice of the arrangement which is sufficiently accurate and comprehensive to apprise the employee of such 

rights and obligations and is written in a manner calculated to be 

understood by the average employee to whom the arrangement applies.98 The notice must explain: (1) the employee’s right under the 

arrangement to elect not to have elective contributions made on the 

employee’s behalf or to elect to have contributions made in a different amount; and (2) how contributions made under the automatic enrollment arrangement will be invested in the absence of 

any investment election by the employee. The employee must be 

given a reasonable period of time after receipt of the notice and before the first election contribution is to be made to make an election with respect to contributions and investments. 

141 

Corrective distributions 

The provision includes rules under which erroneous automatic 

contributions may be distributed from the plan. It is intended that 

distributions of such amounts are generally treated as a payment 

of compensation, rather than as a contribution to and then a distribution from the plan. Thus, for example, the 10-percent early 

withdrawal tax does not apply to distributions of erroneous automatic contributions. In addition, it is intended that such contributions are not taken into account for purposes of applying the nondiscrimination rules, or the limit on elective deferrals. Similarly, it 

is intended that distributions of such contributions are not subject 

to the otherwise applicable withdrawal restrictions. 

Application to tax-sheltered annuities 

The new safe harbor rules for automatic contribution plans apply 

with respect to matching contributions under a section 403(b) annuity through the operation of section 403(b)(12). 

EFFECTIVE DATE

The provision is effective for years beginning after December 31, 

2005. 

D. TREATMENT OF DISTRIBUTIONS TO GUARDSMEN CALLED TO

ACTIVE DUTY

(Sec. 904 of the bill and secs. 72(t), 401(k), 403(b) of the bill) 

PRESENT LAW

Under present law, a taxpayer who receives a distribution from 

a qualified retirement plan prior to age 591⁄2, death, or disability 

generally is subject to a 10-percent early withdrawal tax on the 

amount includible in income, unless an exception to the tax applies. Among other exceptions, the early distribution tax does not 

apply to distributions made to an employee who separates from 

service after age 55, or to distributions that are part of a series of 

substantially equal periodic payments made for the life (or life expectancy) of the employee or the joint lives (or life expectancies) of 

the employee and his or her beneficiary. 

Certain amounts held in a 401(k) plan or in a 403(b) annuity 

may not be distributed before severance from employment, age 

591⁄2, death, disability, or financial hardship of the employee. 

REASONS FOR CHANGE

The Committee recognizes that members of reserve units who 

are called to active duty often face unique financial issues when 

the active duty is for an extended period of time. To help alleviate 

potential financial hardship due to extended active duty status, the 

Committee believes that reservists should be able to make needed 

withdrawals on their retirement savings. The Committee believes 

the 10-percent additional tax should not apply in these circumstances and reservists should have the opportunity to recontribute withdrawn amounts after they have completed their active 

duty service. 

142 

EXPLANATION OF PROVISION

Under the provision, the 10-percent early withdrawal tax does 

not apply to a qualified reservist distribution. A qualified reservist 

distribution is a distribution (1) from an IRA or attributable to 

elective deferrals under a qualified cash or deferred arrangement 

(a ‘‘section 401(k) plan’’) or similar arrangement, (2) made to an individual who (by reason of being a member of a reserve component) 

was ordered or called to active duty for a period in excess of 179 

days or for an indefinite period, and (3) that is made during the 

period beginning on the date of such order or call to duty and ending at the close of the active duty period. A 401(k) plan or tax-sheltered annuity does not violate the distribution restrictions applicable to such plans by reason of making a qualified reservist distribution. 

An individual who receives a qualified reservist distribution may, 

at any time during the two-year period beginning on the day after 

the end of the active duty period, make one or more contributions 

to an IRA of such individual in an aggregate amount not to exceed 

the amount of such distribution. The dollar limitations otherwise 

applicable to contributions to IRAs do not apply to any contribution 

made pursuant to the provision. No deduction is allowed for any 

contribution made under the provision. 

This provision applies to individuals ordered or called to active 

duty after September 11, 2001, and before September 12, 2007. The 

two-year period for making recontributions of qualified reservist 

distributions does not end before the date that is two years after 

the date of enactment. 

EFFECTIVE DATE

The provision applies to distributions after September 11, 2001. 

If refund or credit of any overpayment of tax resulting from the 

provision would be prevented at any time before the close of the 

one-year period beginning on the date of the enactment by the operation of any law or rule of law (including res judicata), such refund or credit may nevertheless be made or allowed if claim therefor is filed before the close of such period. 

E. INAPPLICABILITY OF 10-PERCENT ADDITIONAL TAX ON EARLY

DISTRIBUTIONS OF PENSION PLANS OF PUBLIC SAFETY EMPLOYEES

(Sec. 905 of the bill and sec. 72(t) of the Code) 

PRESENT LAW

Under present law, a taxpayer who receives a distribution from 

a qualified retirement plan prior to age 591⁄2, death, or disability 

generally is subject to a 10-percent early withdrawal tax on the 

amount includible in income, unless an exception to the tax applies. Among other exceptions, the early distribution tax does not 

apply to distributions made to an employee who separates from 

service after age 55, or to distributions that are part of a series of 

substantially equal periodic payments made for the life (or life expectancy) of the employee or the joint lives (or life expectancies) of 

the employee and his or her beneficiary. 

143 

REASONS FOR CHANGE

The Committee recognizes that public safety employees often retire earlier than workers in other professions. The Committee believes that it is appropriate to allow public safety employees to receive certain pension plan benefits without the imposition of the 

early withdrawal tax even if the distribution is made prior to the 

attainment of age 55. 

EXPLANATION OF PROVISION

Under the provision, the 10-percent early withdrawal tax does 

not apply to distributions to a qualified safety employee from a governmental plan to the extent that such distributions are attributable to a deferred retirement option plan or ‘‘DROP’’ benefit. A 

DROP benefit is a feature of a governmental defined benefit plan 

under which an employee elects to receive credits to an account (including a notional account) in the plan which are not in excess of 

the plan benefits that would have been provided if the employee 

had retired under the plan at a specified earlier retirement date 

and which are in lieu of increases in the employee’s accrued pension benefit under such defined benefit plan based on years of service after the effective date of the DROP election. The waiver of the 

penalty is available only to amounts that would have been payable 

as an annuity from the defined benefit plan had the individual retired and taken the defined benefit plan benefit. 

A qualified public safety employee is an employee of any police 

department or fire department organized and operated by a State 

or political subdivision of a State if the employee provides police 

protection, firefighting services, or emergency medical services for 

any area within the jurisdiction of such State or political subdivision and would have been eligible to retire on or before the effective date of the DROP election and receive an immediate retirement benefit under the defined benefit plan. 

EFFECTIVE DATE

The provision is effective for distributions made after the date of 

enactment. 

F. COMBAT ZONE COMPENSATION TAKEN INTO ACCOUNT FOR

PURPOSES OF IRA CONTRIBUTIONS

(Sec. 906 of the bill and sec. 219 of the Code) 

PRESENT LAW

There are two general types of individual retirement arrangements (‘‘IRAs’’): traditional IRAs and Roth IRAs. The total amount 

that an individual may contribute to one or more IRAs for a year 

is generally limited to the lesser of: (1) a dollar amount ($4,000 for 

2005); and (2) the amount of the individual’s compensation that is 

includible in gross income for the year. In the case of an individual 

who has attained age 50 before the end of the year, the dollar 

amount is increased by an additional amount ($500 for 2005). In 

the case of a married couple, contributions can be made up to the 

dollar limit for each spouse if the combined compensation of the 

spouses that is includible in gross income is at least equal to the 

144 

contributed amount. IRA contributions in excess of the applicable 

limit are generally subject to an excise tax of six percent per year 

until withdrawn. 

An individual may make contributions to a traditional IRA (up 

to the contribution limit) without regard to his or her adjusted 

gross income. An individual may deduct his or her contributions to 

a traditional IRA if neither the individual nor the individual’s 

spouse is an active participant in an employer-sponsored retirement plan. If an individual or the individual’s spouse is an active 

participant in an employer-sponsored retirement plan, the deduction is phased out for taxpayers with adjusted gross income over 

certain levels. 

Individuals with adjusted gross income below certain levels may 

make contributions to a Roth IRA (up to the contribution limit). 

Contributions to a Roth IRA are not deductible. 

Present law provides an exclusion from gross income for combat 

pay received by members of the Armed Forces. Thus, combat pay 

is not includible compensation for purposes of applying the limit on 

IRA contributions. 

REASONS FOR CHANGE

For members of the military serving in a combat zone, the exclusion of combat pay from compensation for IRA purposes may have 

the effect of reducing or even eliminating their ability to make IRA 

contributions. The Committee believes that compensation earned 

while serving in a combat zone should be taken into account for 

IRA purposes so that military personnel are not denied the opportunity to save for retirement while serving in a combat zone. 

EXPLANATION OF PROVISION

Under the provision, for purposes of applying the limit on IRA 

contributions, an individual’s gross income is determined without 

regard to the exclusion for combat pay. Thus, combat pay received 

by an individual is treated as includible compensation for purposes 

of determining the amount that the individual (and the individual’s 

spouse) can contribute to an IRA. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2005. 

G. DIRECT DEPOSIT OF TAX REFUNDS IN AN IRA 

(Sec. 907 of the bill) 

PRESENT LAW

Under current IRS procedures, a taxpayer may direct that his or 

her tax refund be deposited into a checking or savings account with 

a bank or other financial institution (such as a mutual fund, brokerage firm, or credit union) rather than having the refund sent to 

the taxpayer in the form of a check. 

REASONS FOR CHANGE

The Committee believes that taxpayers should be encouraged to 

use their tax refunds to enhance their retirement savings by being 

145 

able to have such refunds deposited directly into an IRA in the 

same way they can be deposited directly to a checking or savings 

account under present law. This will provide further opportunities 

for retirement savings. 

EXPLANATION OF PROVISION

The Secretary is directed to develop forms under which all or a 

portion of a taxpayer’s refund may be deposited in an IRA of the 

taxpayer (or the spouse of the taxpayer in the case of a joint return). The provision does not modify the rules relating to IRAs, including the rules relating to timing and deductibility of contributions. 

EFFECTIVE DATE

The form required by the provision is to be available for taxable 

years beginning after December 31, 2006. 

H. IRA ELIGIBILITY FOR THE DISABLED

(Sec. 908 of the bill and sec. 219 of the Code) 

PRESENT LAW

There are two general types of individual retirement arrangements (‘‘IRAs’’): traditional IRAs and Roth IRAs. The total amount 

that an individual may contribute to one or more IRAs for a year 

is generally limited to the lesser of: (1) a dollar amount ($4,000 for 

2005); and (2) the amount of the individual’s compensation that is 

includible in gross income for the year. In the case of an individual 

who has attained age 50 before the end of the year, the dollar 

amount is increased by an additional amount ($500 for 2005). In 

the case of a married couple, contributions can be made up to the 

dollar limit for each spouse if the combined compensation of the 

spouses that is includible in gross income is at least equal to the 

contributed amount. IRA contributions in excess of the applicable 

limit are generally subject to an excise tax of six percent per year 

until withdrawn. 

An individual may make contributions to a traditional IRA (up 

to the contribution limit) without regard to his or her adjusted 

gross income. An individual may deduct his or her contributions to 

a traditional IRA if neither the individual nor the individual’s 

spouse is an active participant in an employer-sponsored retirement plan. If an individual or the individual’s spouse is an active 

participant in an employer-sponsored retirement plan, the deduction is phased out for taxpayers with adjusted gross income over 

certain levels. 

Individuals with adjusted gross income below certain levels may 

make contributions to a Roth IRA (up to the contribution limit). 

Contributions to a Roth IRA are not deductible. 

REASONS FOR CHANGE

The Committee believes that an individual who is disabled 

should be permitted to accumulate savings for his or her later 

years on a tax-favored basis, even though he or she is unable to 

earn compensation. 

146 

99Sec. 72(m)(7). An individual is not considered to be disabled unless he or she furnishes proof 

of the existence of the disability in such form and manner as the Secretary may require. 100The IRS has the authority to waive the 60-day requirement if failure to waive the requirement would be against equity or good conscience, including cases of casualty, disaster, or other 

events beyond the reasonable control of the individual. Sec. 402(c)(3)(B). 101Sec. 402(c)(4). Certain other distributions also are not eligible rollover distributions, e.g., 

corrective distributions of elective deferrals in excess of the elective deferral limits and loans 

that are treated as deemed distributions. 102Some restrictions or special rules may apply to certain distributions. For example, aftertax amounts distributed from a plan can be rolled over only to a plan of the same type or to 

an IRA. 

EXPLANATION OF PROVISION

Under the provision, an individual who is disabled and who has 

not attained age 701⁄2 before the end of the taxable year may make 

contributions to an IRA even if he or she has no compensation. For 

this purpose, an individual is considered disabled if he or she is unable to engage in any substantial gainful activity by reason of any 

medically determinable physical or mental impairment which can 

be expected to result in death or to be of long-continued and indefinite duration.99

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2005. 

I. ROLLOVERS BY NONSPOUSE BENEFICIARIES

(Sec. 909 of the bill and secs. 402, 403(a)(4), 403(b)(8), and 

457(e)(16) of the Code) 

PRESENT LAW

Tax-free rollovers 

Under present law, a distribution from a qualified retirement 

plan, a tax-sheltered annuity (‘‘section 403(b) annuity’’), an eligible 

deferred compensation plan of a State or local government employer (a ‘‘governmental section 457 plan’’), or an individual retirement arrangement (an ‘‘IRA’’) generally is included in income for 

the year distributed. However, eligible rollover distributions may 

be rolled over tax free within 60 days to another plan, annuity, or 

IRA.100

In general, an eligible rollover distribution includes any distribution to the plan participant or IRA owner other than certain periodic distributions, minimum required distributions, and distributions made on account of hardship.101 Distributions to a participant 

from a qualified retirement plan, a tax-sheltered annuity, or a governmental section 457 plan generally can be rolled over to any of 

such plans or an IRA.102 Similarly, distributions from an IRA to 

the IRA owner generally are permitted to be rolled over into a 

qualified retirement plan, a tax-sheltered annuity, a governmental 

section 457 plan, or another IRA. 

Similar rollovers are permitted in the case of a distribution to 

the surviving spouse of the plan participant or IRA owner, but not 

to other persons. 

If an individual inherits an IRA from the individual’s deceased 

spouse, the IRA may be treated as the IRA of the surviving spouse. 

This treatment does not apply to IRAs inherited from someone 

147 

103 In the case of five-percent owners and distributions from an IRA, distributions must begin 

by the April 1 of the calendar year following the year in which the individual attains age 701⁄2. 

other than the deceased spouse. In such cases, the IRA is not treated as the IRA of the beneficiary. Thus, for example, the beneficiary 

may not make contributions to the IRA and cannot roll over any 

amounts out of the inherited IRA. Like the original IRA owner, no 

amount is generally included in income until distributions are 

made from the IRA. Distributions from the inherited IRA must be 

made under the rules that apply to distributions to beneficiaries, 

as described below. 

Minimum distribution rules 

Minimum distribution rules apply to tax-favored retirement arrangements. In the case of distributions prior to the death of the 

participant, distributions generally must begin by the April 1 of the 

calendar year following the later of the calendar year in which the 

participant (1) attains age 701⁄2 or (2) retires.103 The minimum distribution rules also apply to distributions following the death of the 

participant. If minimum distributions have begun prior to the participant’s death, the remaining interest generally must be distributed at least as rapidly as under the minimum distribution method 

being used prior to the date of death. If the participant dies before 

minimum distributions have begun, then either (1) the entire remaining interest must be distributed within five years of the death, 

or (2) distributions must begin within one year of the death over 

the life (or life expectancy) of the designated beneficiary. A beneficiary who is the surviving spouse of the participant is not required to begin distributions until the date the deceased participant would have attained age 701⁄2. Alternatively, if the surviving 

spouse makes a rollover from the plan into a plan or IRA of his 

or her own, minimum distributions generally would not need to 

begin until the surviving spouse attains age 701⁄2. 

REASONS FOR CHANGE

The Committee understands that, in practice, many plans provide that distributions to a beneficiary who is not the surviving 

spouse of the participant are paid out soon after the death of the 

participant in a lump sum, even though the minimum distribution 

rules would permit a longer payout period. The Committee understands that many beneficiaries would like to avoid the adverse tax 

consequences of an immediate lump sum, as well as take advantage of the opportunity to receive periodic payments for life or over 

the beneficiary’s lifetime. The Committee wishes to provide beneficiaries with additional flexibility regarding timing of distributions, consistent with the minimum distribution rules applicable to 

nonspouse beneficiaries. To accomplish this result, the Committee 

bill allows nonspouse beneficiaries to rollover benefits received 

after the death of the participant to an IRA and to receive distributions in a manner consistent with the minimum distribution rules 

for nonspouse IRA beneficiaries. 

EXPLANATION OF PROVISION

The provision provides that benefits of a beneficiary other than 

a surviving spouse may be transferred directly to an IRA. The IRA 

148 

is treated as an inherited IRA of the nonspouse beneficiary. Thus, 

for example, distributions from the inherited IRA are subject to the 

distribution rules applicable to beneficiaries. The provision applies 

to amounts payable to a beneficiary under a qualified retirement 

plan, governmental section 457 plan, or a tax-sheltered annuity. To 

the extent provided by the Secretary, the provision applies to benefits payable to a trust maintained for a designated beneficiary to 

the same extent it applies to the beneficiary. 

EFFECTIVE DATE

The provision is effective for distributions made after December 

31, 2005. 

TITLE X: PROVISIONS TO ENHANCE HEALTH CARE 

AFFORDABILITY 

A. TAX TREATMENT OF COMBINED ANNUITY OR LIFE INSURANCE

CONTRACTS WITH A LONG-TERM CARE INSURANCE FEATURE

(Sec. 1001 of the bill and secs. 72. 1035, and 7702B and new sec. 

6050U of the Code) 

PRESENT LAW

Annuity contracts 

In general, earnings and gains on amounts invested in a deferred 

annuity contract held by an individual are not subject to tax during 

the deferral period in the hands of the holder of the contract. When 

payout commences under a deferred annuity contract, the tax 

treatment of amounts distributed depends on whether the amount 

is received ‘‘as an annuity’’ (generally, as periodic payments under 

contract terms) or not. 

For amounts received as an annuity by an individual, an ‘‘exclusion ratio’’ is provided for determining the taxable portion of each 

payment (sec. 72(b)). The portion of each payment that is attributable to recovery of the taxpayer’s investment in the contract is 

not taxed. The taxable portion of each payment is ordinary income. 

The exclusion ratio is the ratio of the taxpayer’s investment in the 

contract to the expected return under the contract, that is, the total 

of the payments expected to be received under the contract. The 

ratio is determined as of the taxpayer’s annuity starting date. Once 

the taxpayer has recovered his or her investment in the contract, 

all further payments are included in income. If the taxpayer dies 

before the full investment in the contract is recovered, a deduction 

is allowed on the final return for the remaining investment in the 

contract (sec. 72(b)(3)). 

Amounts not received as an annuity generally are included as ordinary income if received on or after the annuity starting date. 

Amounts not received as an annuity are included in income to the 

extent allocable to income on the contract if received before the annuity starting date, i.e., as income first (sec. 72(e)(2)). In general, 

loans under the annuity contract, partial withdrawals and partial 

surrenders are treated as amounts not received as an annuity and 

are subject to tax as income first (sec. 72(e)(4)). Exceptions are provided in some circumstances, such as for certain grandfathered contracts, certain life insurance and endowment contracts (other than 

149 

modified endowment contracts), and contracts under qualified 

plans (sec. 72(e)(5)). Under these exceptions, the amount received 

is included in income, but only to the extent it exceeds the investment in the contract, i.e., as basis recovery first. 

Long-term care insurance contracts 

Tax treatment 

Present law provides favorable tax treatment for qualified longterm care insurance contracts meeting the requirements of section 

7702B. 

A qualified long-term care insurance contract is treated as an accident and health insurance contract (sec. 7702B(a)(1)). Amounts 

received under the contract generally are excludable from income 

as amounts received for personal injuries or sickness (sec. 

104(a)(3)). The excludable amount is subject to a dollar cap of $175 

per day or $63,875 annually (for 1997), as indexed, on per diem 

contracts only (sec. 7702B(d)). If payments under such contracts exceed the dollar cap, then the excess is excludable only to the extent 

of costs in excess of the dollar cap that are incurred for long-term 

care services. Amounts in excess of the dollar cap, with respect to 

which no actual costs were incurred for long-term care services, are 

fully includable in income without regard to the rules relating to 

return of basis under section 72. 

A plan of an employer providing coverage under a long-term care 

insurance contract generally is treated as an accident and health 

plan (benefits under which generally are excludable from the recipient’s income under section 105). 

Premiums paid for a qualified long-term care insurance contract 

are deductible as medical expenses, subject to a dollar cap on the 

deductible amount of the premium per year based on the insured 

person’s age at the end of the taxable year (sec. 213(d)(10)). Medical expenses generally are allowed as a deduction only to the extent they exceed 7.5 percent of adjusted gross income (sec. 213(a)). 

Unreimbursed expenses for qualified long-term care services provided to the taxpayer or the taxpayer’s spouse or dependent are 

treated as medical expenses for purposes of the itemized deduction 

for medical expenses (subject to the floor of 7.5 percent of adjusted 

gross income). Amounts received under a qualified long-term care 

insurance contract (regardless of whether the contract reimburses 

expenses or pays benefits on a per diem or other periodic basis) are 

treated as reimbursement for expense actually incurred for medical 

care (sec. 7702B(a)(2)). 

Definitions 

A qualified long-term care insurance contract is defined as any 

insurance contract that provides only coverage of qualified longterm care services, and that meets additional requirements (sec. 

7702B(b)). The contract is not permitted to provide for a cash surrender value or other money that can be paid, assigned or pledged 

as collateral for a loan, or borrowed (and premium refunds are to 

be applied as a reduction in future premiums or to increase future 

benefits). Per diem-type and reimbursement-type contracts are permitted. 

150 

Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing treating, mitigating, and rehabilitative 

services, and maintenance or personal care services that are required by a chronically ill individual and that are provided pursuant to a plan of care prescribed by a licensed health care practitioner (sec. 7702B(c)(1)). 

A chronically ill individual is generally one who has been certified within the previous 12 months by a licensed health care practitioner as being unable to perform (without substantial assistance) 

at least 2 activities of daily (ADLs) for at least 90 days due to a 

loss of functional capacity (or meeting other definitional requirements) (sec. 7702B(c)(2)). 

Long-term care riders on life insurance contracts 

In the case of long-term care insurance coverage provided by a 

rider on or as part of a life insurance contract, the requirements 

applicable to long-term care insurance contracts apply as if the portion of the contract providing such coverage were a separate contract (sec. 7702B(e)). The term ‘‘portion’’ means only the terms and 

benefits that are in addition to the terms and benefits under the 

life insurance contract without regard to long-term care coverage. 

As a result, if the applicable requirements are met by the longterm care portion of the contract, amounts received under the contract as provided by the rider are treated in the same manner as 

long-term care insurance benefits, whether or not the payment of 

such amounts causes a reduction in the contract’s death benefit or 

cash surrender value. 

The guideline premium limitation applicable under section 

7702(c)(2) is increased by the sum of charges (but not premium 

payments) against the life insurance contract’s cash surrender 

value, the imposition of which reduces premiums paid for the contract (within the meaning of sec. 7702(f)(1)). 

No medical expense deduction generally is allowed under section 

213 for charges against the life insurance contract’s cash surrender 

value, unless such charges are includible in income because the life 

insurance contract is treated as a ‘‘modified endowment contract’’

under section 72(e)(10) and 7702A (sec. 7702B(e)((3)). 

Tax-free exchanges of insurance contracts 

Present law provides for the exchange of certain insurance contracts without recognition of gain or loss (sec. 1035). No gain or 

loss is recognized on the exchange of: (1) a life insurance contract 

for another life insurance contract or for an endowment or annuity 

contract; or (2) an endowment contract for another endowment contract (that provides for regular payments beginning no later than 

under the exchanged contract) or for an annuity contract; or (3) an 

annuity contract for an annuity contract. The basis of the contract 

received in the exchange generally is the same as the basis of the 

contract exchanged (sec. 1031(d)). Tax-free exchanges of long-term 

care insurance contracts are not permitted. 

Capitalization of certain policy acquisition expenses of insurance 

companies 

In the case of an insurance company, specified policy acquisition 

expenses for any taxable year are required to be capitalized, and 

151 

are amortized generally over the 120-month period beginning with 

the first month in the second half of the taxable year (sec. 848). 

Specified policy acquisition expenses are determined as that portion of the insurance company’s general deductions for the taxable 

year that does not exceed a specific percentage of the net premiums 

for the taxable year on each of three categories of insurance contracts. For annuity contracts, the percentage is 1.75; for group life 

insurance contracts, the percentage is 2.05; and for all other specified insurance contracts, the percentage is 7.7. With certain exceptions, a specified insurance contract is any life insurance, annuity, 

or noncancellable accident and health insurance contract or combination thereof. 

REASONS FOR CHANGE

The Committee believes that Americans should be encouraged to 

provide for their long-term care needs as they age. The Committee 

notes that Congress has already provided favorable tax treatment 

to qualified long-term care insurance contracts and benefits, in recognition of the value of long-term care insurance as a means to defray the escalating costs to the government of long-term care provided through Medicaid and Medicare. Nevertheless, the cost of 

long-term care coverage, and the risk that the cost of such insurance will be lost if the purchaser does not need long-term care, 

among other factors, have hindered the widespread use of longterm care insurance to cover Americans’ long-term care needs. The 

Committee believes that providing certain additional tax incentives 

would help to foster the social policy of encouraging the use of longterm care insurance. The Committee believes that combination 

products (life insurance or annuity contracts combined with longterm care insurance contracts) may be attractive to individuals by 

providing more than one type of protection in one product. Such 

combination products may be more affordable for consumers because of cross-subsidization of risks within the contract. Specifically, in the case of combination contracts that provide long-term 

care coverage as a rider to an annuity contract, permitting the cost 

of the long-term care coverage to be charged against the cash value 

of the annuity contract without being treated as a taxable distribution under the contract would foster this social policy goal. Thus, 

the bill provides tax incentives for annuity-long-term care combination contracts that are similar to those already provided to life insurance contracts with long-term care insurance riders in recognition of their efficiency in promoting this social policy. The Committee believes it is not appropriate to permit a medical expense 

deduction with respect to such charges, because the charges are not 

included in the contract holder’s income (this is similar to the 

present-law rule). In addition, the Committee believes that the policy acquisition expenses of the insurance company should be subject to the present-law capitalization rule at the percentage applicable to long-term care insurance contracts (the highest applicable 

percentage). The Committee also believes that reporting with respect to these types of contracts is essential to full compliance and 

effective tax law enforcement. 

152 

EXPLANATION OF PROVISION

The provision provides for the tax rules applicable to long-term 

care insurance that is provided by a rider on or as part of an annuity contract, and modifies the tax rules applicable to long-term care 

insurance coverage provided by a rider on or as part of a life insurance contract. 

Under the provision, any charge against the cash value of an annuity contract or the cash surrender value of a life insurance contract made as payment for coverage under a qualified long-term 

care insurance contract that is part of or a rider on the annuity or 

life insurance contract is not includable in income. The investment 

in the contract is reduced (but not below zero) by the charge. 

The provision expands the rules for tax-free exchanges of certain 

insurance contracts. The provision provides that no gain or loss is 

recognized on the exchange of a life insurance contract, an endowment contract, an annuity contract, or a qualified long-term care 

insurance contract for a qualified long-term care insurance contract. The provision provides that a contract does not fail to be 

treated as an annuity contract, or as a life insurance contract, solely because a qualified long-term care insurance contract is a part 

of or a rider on such contract, for purposes of the rules for tax-free 

exchanges of certain life insurance contracts. 

The provision provides that, except as otherwise provided in regulations, for Federal tax purposes, in the case of a long-term care 

insurance contract (whether or not qualified) provided by a rider on 

or as part of a life insurance contract or an annuity contract, the 

portion of the contract providing long-term care insurance coverage 

is treated as a separate contract. The term ‘‘portion’’ means only 

the terms and benefits under a life insurance contract or annuity 

contract that are in addition to the terms and benefits under the 

contract without regard to long-term care coverage. As a result, if 

the applicable requirements are met by the long-term care portion 

of the contract, amounts received under the contract as provided by 

the rider are treated in the same manner as long-term care insurance benefits, whether or not the payment of such amounts causes 

a reduction in the life insurance contract’s death benefit or cash 

surrender value or in the annuity contract’s cash value. 

No deduction as a medical expense is allowed for any payment 

made for coverage under a qualified long-term care insurance contract if the payment is made as a charge against the cash value 

of an annuity contract or the cash surrender value of a life insurance contract. 

For purposes of the definition of a life insurance contract, the 

guideline premium limitation is increased by charges against the 

contract’s cash surrender value for coverage under the qualified 

long-term care insurance contract (reduced by charges that reduce 

the premiums paid for the life insurance contract). 

The provision provides that certain retirement-related arrangements are not treated as annuity contracts, for purposes of the provision. 

The provision requires information reporting by any person who 

makes a charge against the cash value of an annuity contract, or 

the cash surrender value of a life insurance contract, that is excludible from gross income under the provision. The information reVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00152 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
153 

104Sec. 401(k). 

quired to be reported includes the amount of the aggregate of such 

charges against each such contract for the calendar year, the 

amount of the reduction in the investment in the contract by reason of the charges, and the name, address, and taxpayer identification number of the holder of the contract. 

The provision modifies the application of the rules relating to 

capitalization of policy acquisition expenses of insurance companies. In the case of an annuity or life insurance contract that includes a qualified long-term care insurance contract as a part of or 

rider on the annuity or life insurance contract, the specified policy 

acquisition expenses that must be capitalized is determined using 

7.7 percent of the net premiums for the taxable year on such contracts. 

The provision increases the amount of pre-funding permitted by 

treating qualified long-term care insurance coverage under the 

rider as a qualified additional benefit, for purposes of the presentlaw definition of a life insurance contract. 

EFFECTIVE DATE

The provision is generally effective for contracts issued before, 

on, or after December 31, 2006, but only with respect to periods beginning after that date. The provision expanding the rules for taxfree exchanges of certain insurance contracts applies with respect 

to exchanges occurring after December 31, 2006. 

B. DISPOSITION OF UNUSED HEALTH BENEFITS IN FLEXIBLE

SPENDING ARRANGEMENTS

(Sec. 1002 of the bill and sec. 125 of the Code) 

PRESENT LAW

Flexible spending arrangements 

A flexible spending arrangement (‘‘FSA’’) is a reimbursement account or other arrangement under which an employee is reimbursed for medical expenses or other nontaxable employer-provided 

benefits, such as dependent care. Typically, FSAs are part of a cafeteria plan and may be funded through salary reduction. FSAs may 

also be provided by an employer outside of a cafeteria plan. FSAs 

are commonly used, for example, to reimburse employees for medical expenses not covered by insurance. 

There is no special exclusion for benefits provided under an FSA. 

Thus, benefits provided under an FSA are excludable from income 

only if there is a specific exclusion for the benefits in the Code (e.g., 

the exclusion for employer-provided health care (other than longterm care) or dependant care assistance coverage). If certain requirements are satisfied, contributions to a health FSA and all distributions to pay medical expenses are excludable from income and 

from wages for FICA tax purposes. 

FSAs that are part of a cafeteria plan must comply with the 

rules applicable to cafeteria plans generally. One of these rules is 

that a cafeteria plan may not offer deferred compensation except 

through a qualified cash or deferred arrangement.104 Under proposed Treasury regulations, a cafeteria plan is considered to permit 

154 

105Prop. Treas. Reg. 1.125–2 Q&A–5(a). 106 Notice 2005–42. 107Prop. Treas. Reg. 1.125–2 Q&A–7(b). 108Prop. Treas. Reg. 1.125–2 Q&A–7(c). 

the deferral of compensation if it includes a health FSA which reimburses participants for medical expenses incurred beyond the 

end of the plan year.105 Thus, amounts in an employee’s account 

that are not used for medical expenses incurred before the end of 

a plan year must be forfeited. This rule is often referred to as the 

‘‘use it or lose it’’ rule. The IRS recently issued guidance allowing 

a grace period immediately following the end of a plan year during 

which unused benefits or contributions remaining at the end of the 

plan year may be paid or reimbursed to plan participants for qualified benefit expenses incurred during a grace period.106 A plan may 

allow benefits not used during the plan year to be used to reimburse qualified expenses incurred during the period, not to exceed 

two and one-half months, immediately following the end of the plan 

year. 

Proposed Treasury regulations contain additional requirements 

with which health FSAs must comply in order for the coverage and 

benefits provided under the FSA to be excludable from income.107

These rules apply with respect to a health FSA without regard to 

whether the health FSA is provided through a cafeteria plan (i.e., 

without regard to whether an employee has an election to take 

cash or benefits). 

The proposed regulations define a health FSA as a benefit program that provides employees with coverage under which specified, 

incurred expenses may be reimbursed (subject to reimbursement 

maximums and any other reasonable conditions) and under which 

the maximum amount of reimbursement that is available to a participant for a period of coverage is not substantially in excess of the 

total premium (including both employee-paid and employer-paid 

portions of the premium) for such participant’s coverage. A maximum amount of reimbursement is not substantially in excess of 

the total premium if the maximum amount is less than 500 percent 

of the premium.108

Under the proposed regulations, the employer-provided health 

coverage under the FSA and the reimbursements and other benefits received under the health FSA are excludable from an employee’s income only if the health FSA satisfies certain additional requirements. According to the proposed regulations, health FSAs are 

required to: (1) Provide the maximum amount of reimbursement 

available under the FSA at all times during the period of coverage 

(properly reduced as of any particular time for prior reimbursements for the same period of coverage); (2) offer coverage for 12 

months or, in the case of a short plan year, the entire short plan 

year; (3) only reimburse medical expenses which meet the definition of medical care under section 213(d); (4) reimburse medical expenses for which the participant provides a written statement from 

an independent third party stating the amount of the medical expense and that the medical expense has not been reimbursed or is 

not reimbursable under any other health plan; (5) reimburse medical expenses which are incurred during the participant’s period of 

coverage; and (6) allocate experience gains with respect to a year 

155 

109Prop. Treas. Reg. 1.125–2 Q&A–7(b). 110Sec. 223. Revenue Ruling 2004–45 provides guidance on the extent to which individuals 

may make contributions to an HSA when also covered by a health FSA or a health reimbursement arrangement. 111These amounts are the same as the maximum deductible amounts permitted under a high 

deductible plan for purposes of Archer medical savings accounts (‘‘MSAs’’). 

of coverage among premium payers on a reasonable and uniform 

basis.109

Health savings accounts 

Present law provides that individuals with a high deductible 

health plan (and no other health plan other than a plan that provides certain permitted coverage) may establish a health savings 

account (‘‘HSA’’).110 An HSA is a tax-exempt trust or custodial account. Subject to certain limitations, contributions to an HSA are 

deductible above-the-line if made by the individual and are excludable from income and wages if made by the employer (including 

contributions made through a cafeteria plan through salary reduction). Earnings on amounts in an HSA accumulate on a tax-free 

basis. Distributions from an HSA that are for qualified medical expenses are excludable from gross income. Distributions from an 

HSA that are not used for qualified medical expenses are includible 

in gross income and are subject to an additional tax of 10 percent, 

unless the distribution is made after death, disability, or the individual attains the age of Medicare eligibility (i.e., age 65). HSAs 

provide the opportunity to pay for current out-of-pocket medical expenses on a tax-favored basis, as well as the ability to save for future medical and nonmedical expenses. 

A high deductible health plan is a health plan that has a deductible that is at least $1,000 for self-only coverage or $2,000 for family coverage (for 2005) and that has an out-of-pocket expense limit 

that is no more than $5,100 in the case of self-only coverage and 

$10,200 in the case of family coverage (for 2005). 

The maximum aggregate annual contribution that can be made 

to an HSA is the lesser of (1) 100 percent of the annual deductible 

under the high deductible health plan, or (2) for 2005, $2,650 in the 

case of self-only coverage and $5,250 in the case of family coverage.111 The annual contribution limits are increased for individuals who have attained age 55 by the end of the taxable year. In 

the case of policyholders and covered spouses who are age 55 or 

older, the HSA annual contribution limit is greater than the otherwise applicable limit by $600 in 2005, $700 in 2006, $800 in 2007, 

$900 in 2008, and $1,000 in 2009 and thereafter. 

REASONS FOR CHANGE

The Committee believes that individuals should not be required 

to forfeit all amounts reserved for health care expenses simply because the individual has inadequate expenses for that year, especially because it is difficult to accurately predict annual medical expenses. The Committee believes that the forfeiture rules cause individuals to make unnecessary medical expenditures at the end of 

the year to avoid forfeiting their balances. 

156 

112Secs. 402(a), 403(a), 403(b), 408(d), and 457(a). 113Sec. 72(t). 

EXPLANATION OF PROVISION

The provision allows up to $500 of unused health benefits in an 

employee’s health FSA to be carried forward to the employee’s 

health FSA for the next plan year. An employee’s unused health 

benefit is the excess of the maximum amount of reimbursement allowable to the employee over the actual amount of reimbursement 

made during the year. 

In the case of employees who are eligible individuals under the 

HSA rules (i.e., individuals who are covered under a high deductible health plan and no other health plan, other than certain permitted coverage) the provision also allows up to $500 of unused 

health benefits in an employee’s health FSA to be contributed on 

the employee’s behalf to an HSA maintained for the benefit of the 

employee. Amounts contributed to an HSA are treated as employer 

contributions for purposes of the HSA rules, including the limits on 

contributions. As in the case of other amounts contributed to an 

HSA through a cafeteria plan, such amounts are not subject to the 

requirement that, in the case of employer contributions, comparable contributions must be made on behalf of all employees. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2005. 

C. PERMIT TAX-FREE DISTRIBUTIONS FROM GOVERNMENTAL RETIREMENT PLANS FOR PREMIUMS FOR HEALTH AND LONG-TERM CARE

INSURANCE FOR PUBLIC SAFETY OFFICERS

(Sec. 1003 of the bill and sec. 402 of the Code) 

PRESENT LAW

Under present law, a distribution from a qualified retirement 

plan under section 401(a), a qualified annuity plan under section 

403(a), a tax-sheltered annuity under section 403(b) (a ‘‘403(b) annuity’’), an eligible deferred compensation plan maintained by a 

State or local government under section 457 (a ‘‘governmental 457 

plan’’), or an individual retirement arrangement under section 408 

(an ‘‘IRA’’) generally is included in income for the year distributed 

(except to the extent the amount received constitutes a return of 

after-tax contributions or a qualified distribution from a Roth 

IRA).112 In addition, a distribution from a qualified retirement or 

annuity plan, a 403(b) annuity, or an IRA received before age 59- 

1/2, death, or disability generally is subject to a 10-percent early 

withdrawal tax on the amount includible in income, unless an exception applies.113

REASONS FOR CHANGE

The Committee believes that retired public safety officers should 

be allowed to use certain pension distributions to pay for qualified 

health insurance premiums on a tax-free basis. The Committee believes that such treatment is appropriate when premiums are deVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00156 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
157 

114The term ‘‘public safety officer’’ has the same meaning as under section 1204(8)(A) of the 

Omnibus Crime Control and Safe Streets Act of 1986. 

ducted from amounts payable from a retirement plan and paid directly to the insurer. 

EXPLANATION OF PROVISION

The provision provides that certain pension distributions from an 

eligible retirement plan used to pay for qualified health insurance 

premiums are excludible from income. An eligible retirement plan 

includes a governmental qualified retirement or annuity plan, 

403(b) annuity, or 457 plan. The exclusion applies with respect to 

eligible retired public safety officers who make an election to have 

qualified health insurance premiums deducted from amounts distributed from an eligible retirement plan and paid directly to the 

insurer. An eligible retired public safety officer is an individual 

who, by reason of disability or attainment of normal retirement 

age, is separated from service as a public safety officer 114 with the 

employer who maintains the eligible retirement plan from which 

pension distributions are made. 

Qualified health insurance premiums include premiums for accident or health insurance or qualified long-term care insurance contracts covering the taxpayer, the taxpayer’s spouse, and the taxpayer’s dependents. The qualified health insurance premiums do 

not have to be for a plan sponsored by the employer; however, the 

exclusion does not apply to premiums paid by the employee and reimbursed with pension distributions. The maximum amount that 

may be excluded in any year is $5,000. Amounts excluded from income under the provision are not taken into account in determining 

the itemized deduction for medical expenses under section 213 or 

the deduction for health insurance of self-employed individuals 

under section 162. 

EFFECTIVE DATE

The provision is effective for distributions made in taxable years 

beginning after December 31, 2005. 

III. VOTES OF THE COMMITTEE 

In compliance with clause 3(b) of rule XIII of the Rules of the 

House of Representatives, the following statements are made concerning the vote of the Committee on Ways and Means in its consideration of H.R. 2830, the ‘‘Pension Protection Act of 2005.’’

MOTION TO REPORT RECOMMENDATIONS

The Chairman’s Amendment in the Nature of a Substitute, as 

amended, was ordered favorably reported by a rollcall vote of 23 

yeas to 17 nays (with a quorum being present). The vote was as 

follows: 

Representatives Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... ........... X .............

Mr. Shaw ............................... X ........... ............. Mr. Stark .............................. ........... X .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. ........... X .............

Mr. Herger ............................. X ........... ............. Mr. Cardin ............................ ........... X .............

Mr. McCrery ........................... X ........... ............. Mr. McDermott ..................... ........... X .............

158 

Representatives Yea Nay Present Representative Yea Nay Present 

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... ........... X .............

Mr. Ramstad ......................... X ........... ............. Mr. Neal ............................... ........... X .............

Mr. Nussle ............................. X ........... ............. Mr. McNulty .......................... ........... ........... .............

Mr. Johnson ........................... X ........... ............. Mr. Jefferson ........................ ........... X .............

Mr. English ........................... X ........... ............. Mr. Tanner ............................ ........... X .............

Mr. Hayworth ......................... X ........... ............. Mr. Becerra .......................... ........... X .............

Mr. Weller .............................. X ........... ............. Mr. Doggett .......................... ........... X .............

Mr. Hulshof ........................... X ........... ............. Mr. Pomeroy ......................... ........... X .............

Mr. Lewis (KY) ...................... X ........... ............. Ms. Tubbs Jones .................. ........... X .............

Mr. Foley ............................... X ........... ............. Mr. Thompson ...................... ........... X .............

Mr. Brady .............................. X ........... ............. Mr. Larson ............................ ........... X .............

Mr. Reynolds ......................... X ........... ............. Mr. Emanuel ......................... ........... X .............

Mr. Ryan ............................... ........... X .............

Mr. Cantor ............................. X ........... .............

Mr. Linder ............................. X ........... .............

Mr. Beauprez ......................... X ........... .............

Ms. Hart ................................ X ........... .............

Mr. Chocola ........................... X ........... .............

Mr. Nunes ............................. X ........... .............

VOTES ON AMENDMENTS

A rollcall vote was conducted on the following amendments to the 

Chairman’s Amendment in the Nature of a Substitute. 

A substitute amendment by Mr. McDermott was defeated by a 

rollcall vote of 16 yeas to 24 nays. The vote was as follows: 

Representatives Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... ........... X ............. Mr. Rangel ........................... X ........... .............

Mr. Shaw ............................... ........... X ............. Mr. Stark .............................. X ........... .............

Mrs. Johnson ......................... ........... X ............. Mr. Levin .............................. X ........... .............

Mr. Herger ............................. ........... X ............. Mr. Cardin ............................ X ........... .............

Mr. McCrery ........................... ........... X ............. Mr. McDermott ..................... X ........... .............

Mr. Camp .............................. ........... X ............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Ramstad ......................... ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Nussle ............................. ........... X ............. Mr. McNulty .......................... ........... ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Jefferson ........................ X ........... .............

Mr. English ........................... ........... X ............. Mr. Tanner ............................ X ........... .............

Mr. Hayworth ......................... ........... X ............. Mr. Becerra .......................... X ........... .............

Mr. Weller .............................. ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. Hulshof ........................... ........... X ............. Mr. Pomeroy ......................... X ........... .............

Mr. Lewis (KY) ...................... ........... X ............. Ms. Tubbs Jones .................. X ........... .............

Mr. Foley ............................... ........... X ............. Mr. Thompson ...................... X ........... .............

Mr. Brady .............................. ........... X ............. Mr. Larson ............................ X ........... .............

Mr. Reynolds ......................... ........... X ............. Mr. Emanuel ......................... X ........... .............

Mr. Ryan ............................... ........... X .............

Mr. Cantor ............................. ........... X .............

Mr. Linder ............................. ........... X .............

Mr. Beauprez ......................... ........... X .............

Ms. Hart ................................ ........... X .............

Mr. Chocola ........................... ........... X .............

Mr. Nunes ............................. ........... X .............

IV. BUDGET EFFECTS OF THE BILL 

A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS

In compliance with clause 3(d)(2) of the rule XIII of the Rules of 

the House of Representatives, the following statement is made concerning the effects on the budget of the revenue provisions of the 

bill, H.R. 2830 as reported. 

The bill is estimated to have the following effects on budget receipts for fiscal years 2006–2010: 

159 


Insert offset folio 182 here HR232.001
160 


Insert offset folio 183 here HR232.002
161 

B. STATEMENT REGARDING NEW BUDGET AUTHORITY AND TAX

EXPENDITURES BUDGET AUTHORITY

In compliance with clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives, the Committee states that the bill involves no new or increased budget authority. The Committee further states that the revenue reducing tax provisions involve increased tax expenditures. (See amounts in table in Part IV.A., 

above.) 

C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET

OFFICE

In compliance with clause 3(c)(3) of rule XIII of the Rules of the 

House of Representatives, requiring a cost estimate prepared by 

the CBO, the following statement by CBO is provided. 

U.S. CONGRESS, CONGRESSIONAL BUDGET OFFICE, Washington, DC, December 2, 2005 

Hon. WILLIAM ‘‘BILL’’ M. THOMAS, Chairman, Committee on Ways and Means, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 2830, the Pension Protection Act of 2005. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Craig Meklir. 

Sincerely, 

DONALD B. MARRON

(For Douglas Holtz-Eakin, Director). 

Enclosure. 

H.R. 2830—Pension Protection Act of 2005 

Summary: H.R. 2830 would make changes to the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal 

Revenue Code (IRC) that would affect the operations of private 

pension plans. It would also do so mostly by changing the funding 

requirements for tax-qualified, defined-benefit pension plans and 

the premiums paid to the Pension Benefit Guaranty corporation 

(PBGC). It would also extend certain tax incentives for retirement 

savings and modify tax provisions related to spending for health 

care. 

The budgetary effects of the bill would result from: 

• Increased income to the PBGC from premiums paid by the 

sponsors of pension plans—totaling an estimated $8.2 billion 

over the next 10 years. • A loss of federal income tax revenue, primarily because 

more rigorous funding rules would be imposed on plans’ sponsors; the Joint Committee on Taxation (JCT) estimates that 

the changes in law related to defined-benefit pension plans 

would reduce federal revenues by $5.0 billion over the 2006–

2015 period. 

• Additional benefit payments—totaling an estimated $0.5 

billion over 10 years—that the PBGC would have to make as 

a result of a number of changes made by the bill. 

162 

• Tax provisions affecting retirement savings and health 

care spending, which JCT estimates would reduce federal revenues by $37.7 billion and $29.2 billion, respectively, over the 

2006–2015 period. 

In combination, those effects would increase federal budget deficits over the 2006–2015 period by $64.1 billion, CBO estimates. 

The additional premium income would have another effect: it would 

increase the balances in the PBGC’s on-budget revolving fund and 

therefore forestall the need for significant transfers to that revolving fund from the PBGC’s nonbudgetary trust fund in order to pay 

insured benefits. Because those transfers are treated in the budget 

as offsetting collections (that is, offsets to outlays), smaller transfers would result in higher net outlays for PBGC’s on-budget revolving fund. The improvement in the financial condition of that 

fund would eliminate the need for $7.4 billion in transfers to the 

fund from 2013 through 2015, CBO estimates, thereby increasing 

on-budget outlays by that amount. Adding that effect to the other 

impacts of the bill, CBO projects that enacting H.R. 2830 would increase federal budget deficits by $71.5 billion over the 2006–2015 

period. 

Major provisions of H.R. 2830 would: • Require sponsors of single-employer pension plans to meet 

a funding target that is at least 100 percent of current liabilities; • Specify that the discount rate used to calculate the present 

value of current pension liabilities be based on a segmented 

yield curve of corporate bonds rather than the interest rate on 

30-year Treasury bonds; • Restrict the use of credit balances to offset required pension contributions; • Place limits on benefit accruals for participants in certain 

underfunded plans; • Increase the limits on the tax-deductible contributions 

sponsors may make to plans; 

• Increase the per-participant premium paid to the PBGC 

for single-employer plans; 

• Require sponsors of single-employer pension plans that 

have undergone distress or involuntary terminations to pay a 

termination premium for 3 years; 

• Change the funding rules for multiemployer pension plans; 

• Enhance disclosure requirements for both single-employer 

and multiemployer pension plans; and 

• Address the legal status of so-called hybrid defined-benefit 

pension plans. 

• Permanently extend tax provisions relating to pensions 

and individual retirement accounts currently set to expire at 

the end of 2010; 

• Permanently extend the saver’s tax credit for certain retirement savings accounts set to expire at the end of 2006; 

• Change the rules governing health flexible spending accounts; 

• Modify the rules about combinations of life and long-term 

care insurance; 

• Encourage firms to provide automatic enrollment for their 

employees in defined-contribution pension plans; and 

163 

• Allow tax-free distributions from retirement plans for certain public safety officers if the funds are used to pay premiums for health or long-term care insurance. 

Not all of these policies would directly affect federal spending or 

revenues. 

Pursuant to section 407 of H. Con. Res. 95 (the Concurrent Resolution on the Budget, Fiscal Year 2006), CBO estimates that enacting H.R. 2830 would not cause an increase in direct spending 

greater than $5 billion in any of the 10-year periods between 2016 

and 2055. 

CBO has reviewed the nontax portions of H.R. 2830 and determined that they contain no intergovernmental mandates as defined 

in the Unfunded Mandates Reform Act (UMRA) and would impose 

no costs on state, local, or tribal governments. Those provisions 

would impose a number of mandates on sponsors and administrators of single-employer and multiemployer private pension plans. 

CBO estimates that the direct cost of those private-sector mandates, less the direct savings from those mandates, would exceed 

the annual threshold specified in UMRA ($123 million in 2005, adjusted annually for inflation) in 2009 and subsequent years. 

JCT has determined that the tax provisions of H.R. 2830 contain 

no intergovernmental or private-sector mandates as defined in 

UMRA. CBO has reviewed the non-tax provisions of H.R. 2830 and 

determined that they contain no intergovernmental mandates as 

defined in UMRA and would impose no costs on state, local, or tribal governments. 

Estimated cost to the Federal Government: The estimated budgetary impact of H.R. 2830 is shown in the following table. The costs 

of this legislation would fall within budget function 600 (income security). 

164 

TABLE 1.

—ESTIMATED BUDGETARY IMPACT OF H.R. 2830 

By fiscal year, in millions of dollars

—

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 

CHANGES IN DIRECT SPENDING 

Changes in Flat-Rate Premiums Paid to PBGC: 

Estimated Budget Authority .................................................................................... 0 0 0 0 0 0 0 0 0 0 Estimated Outlays ................................................................................................... ¥79 ¥158 ¥240 ¥314 ¥552 ¥586 ¥655 ¥690 ¥759 ¥828 

Changes in Variable Premiums Paid to PBGC: 

Estimated Budget Authority .................................................................................... 0 0 0 0 0 0 0 0 0 0 Estimated Outlays ................................................................................................... 0 ¥14 ¥186 ¥264 ¥274 ¥212 ¥90 50 219 341 

Termination Premiums Paid to PBGC: 

Estimated Budget Authority .................................................................................... 0 0 0 0 0 0 0 0 0 0 Estimated Outlays ................................................................................................... ¥36 ¥109 ¥220 ¥298 ¥343 ¥354 ¥364 ¥375 ¥386 ¥398 

Changes in Net Benefits Payments: 

Estimated Budget Authority .................................................................................... 0 0 0 0 0 0 0 0 0 0 Estimated Outlays ................................................................................................... ¥1 * 6 19 35 54 72 88 101 112 Subtotal: 

Estimated Budget Authority ........................................................................... 0 0 0 0 0 0 0 0 0 0 Estimated Outlays .......................................................................................... ¥116 ¥281 ¥640 ¥857 ¥1,134 ¥1,097 ¥1,037 ¥927 ¥825 ¥773 

Changes in Transfers from PBGC’s Nonbudgetary Trust Fund: 

Estimated Budget Authority .................................................................................... 0 0 0 0 0 0 0 0 0 0 Estimated Outlays ................................................................................................... 0 0 0 0 0 0 0 1,068 3,092 3,222 Total Changes in Direct Spending: 

Estimated Budget Authority ........................................................................... 0 0 0 0 0 0 0 0 0 0 Estimated Outlays .......................................................................................... ¥116 ¥281 ¥640 ¥857 ¥1,134 ¥1,097 ¥1,037 141 2,267 2,449 

CHANGES IN REVENUES 

Changes to Funding Rules for Single-Employer Plans ................................................... 823 2,698 1,884 ¥1,345 ¥2,460 ¥2,179 ¥1,790 ¥1,115 ¥805 ¥711 

Changes to Funding Rules for Multiemployer Plans ....................................................... * ¥2 ¥8 ¥18 ¥28 ¥34 ¥40 ¥46 ¥52 ¥58 

Changes in Benefit Accrual Standards ........................................................................... ¥24 ¥9 1 6 ¥3 ¥8 6 25 29 13 Provisions Related to Retirement Savings ...................................................................... ¥88 ¥741 ¥1,892 ¥1,970 ¥2,029 ¥4,003 ¥5,732 ¥6,400 ¥7,078 ¥7,719 

Provisions Related to Health Care Spending .................................................................. ¥867 ¥1,490 ¥1,879 ¥2,238 ¥2,594 ¥3,071 ¥3,595 ¥4,028 ¥4,472 ¥4,918 

Other Provisions ............................................................................................................... 1 4 11 20 28 32 33 33 32 32 

Total Changes in Revenues .................................................................................... ¥155 460 ¥1,883 ¥5,545 ¥7,086 ¥9,263 ¥11,118 ¥11,531 ¥12,346 ¥13,361 

NET INCREASE OR DECREASE (¥) IN BUDGET DEFICITS 

Net of Transfers from PBGC’s Nonbudgetary Trust Fund ............................................... 39 ¥741 1,243 4,688 5,952 8,166 10,081 11,672 14,613 15,810 

165 

Excluding Transfers from PBGC’s Nonbudgetary Trust Fund .......................................... 39 ¥741 1,243 4,688 5,952 8,166 10,081 10,604 11,521 12,588 

Notes.

—PBGC

—Pension Benefit Guaranty Corporation. * less than $500,000. 

Sources: Congressional Budget Office and Joint Committee on Taxation. 

166 

Basis of Estimate: H.R. 2830 contains changes to both ERISA 

and the Internal Revenue Code that would affect sponsors of defined-benefit pension plans. Under current law, the funding rules 

are exactly the same in both ERISA and IRC. In certain instances, 

however, changes made by the bill to the pension funding requirements of ERISA are inconsistent with changes made to the funding 

rules in the IRC. That occurs because the amendments to the IRC 

adopted by the Ways and Means Committee reflect some policy differences from the amendments to ERISA adopted by the Committee on Education and the Workforce. CBO’s and JCT’s budget 

estimates assume that, if H.R. 2830 is enacted, additional changes 

would be made to ERISA to make it consistent with those changes 

made to IRC by H.R. 2830. Those estimates also assume that H.R. 

2830 and the corresponding changes to the ERISA will be enacted 

by December 2005. 

Direct spending 

Increase in Flat-Rate Premium. Under current law, sponsors of 

single-employer pension plans insured by the PBGC are required 

to pay the agency a premium of $19 per participant. H.R. 2830 

would increase the flat-rate premium to $30 per participant in 

2006 and index it to wage growth starting in 2007. However, no 

plans would pay the full increase immediately. The bill would 

phase in the rate increase differently depending on whether the 

ratio of a plan’s assets to its liabilities (known as its funding ratio) 

is above or below 80 percent. For plans that have a funding ratio 

of 80 percent or higher, the increased rate would be phased in over 

a five-year period; for plans with a funding ratio of less than 80 

percent, the rate increase would be phased in over a three-year period. Both phase-in periods would begin in 2006 and the premium 

rate for all single-employer plans would be the same approximately—$35 per participant—by 2010. 

About 35 million people currently participate in tax-qualified, 

single-employer pension plans. This figure includes active workers, 

former workers who are vested but have not started collecting retirement benefits, and annuitants. The number of participants in 

single-employer plans insured by the PBGC has remained nearly 

constant for the past decade, and CBO assumes it would remain 

steady for the next 10 years. 

The current premium of $19 per participant generates about 

$650 million in premium income annually for the PBGC. CBO estimates changes to the flat-rate premiums made by H.R. 2830 would 

increase receipts by $1.3 billion over the 2006–2010 period and $4.9 

billion over the 2006–2015 period. The varying amounts of additional premiums from year to year reflect both the phase in of the 

rate increase and the rounding of the new rates to the nearest dollar, as specified by the bill. Because the PBGC’s premiums are recorded as offsetting, collections to a mandatory spending account 

increases in premium collections are reflected in the budget as decreases in direct spending. 

Variable Premiums. Under current law, sponsors of single-employer plans with assets less than liabilities are generally required 

to pay a variable premium, which is based on the amount of underfunding in the plan. The variable premium rate is $9 per $1,000 

of underfunding. The amount of income from this type of premium 

167 

varies from year to year; in 2004 it generated approximately $800 

million in receipts. 

H.R. 2830 would affect how much the PBGC collects from variable premiums because it would change the way plans’ sponsors 

calculate the amount of underfunding. Starting in 2006, current 

law will require plans to discount their current liabilities, in order 

to determine the amount of underfunding, using an interest rate 

that is the four-year moving average of the rate on 30-year Treasury bonds. Public Law 108–218, the Pension Funding Equity Act, 

changed how current liabilities of covered plans are discounted during plan-years 2004 and 2005. During those two years current liabilities axe discounted using an interest rate on high-grade corporate bonds, as determined by the Department of the Treasury. 

H.R. 2830 would extend the use of the corporate bond rate for planyear 2006. Then, beginning with plan-year 2007, the bill would require plans to discount their pension obligations using a yield curve 

based on a three-year weighted average of yields on investmentgrade corporate bonds. The yield curve, which would be determined 

by the Secretary of the Treasury would be divided into three segments: yields for bonds maturing in the five-year period following 

the first day of each new plan-year; yields for bonds maturing during the next 15-year period; and yields for bonds maturing after the 

initial 20-year period. These segments would be used to discount 

benefit payments expected to be made by plans during each of the 

three periods. The shift to the segmented yield curve would be 

phased in over three years. 

When compared to interest rates on 30-year Treasury bonds, the 

segmented yield curve (and the single. corporate bond rate) would 

result in lower discount rates for participants whose benefits will 

be paid in the near term, and higher discount rates for participants 

whose benefits will be paid in later years. Discount rates and the 

present value of pension liabilities have an inverse relationship: increasing the discount rate results in a lower valuation of liability, 

while lowering the discount rate produces a higher valuation of liability. Based on information provided by the PBGC, CBO estimates that the segmented yield curve would reduce the present 

value of liabilities among all underfunded plans by approximately 

5 percent, thus reducing required future contributions by plans’

sponsors. 

Other changes to the funding rules (which are discussed in more 

detail later) would increase contributions. CBO estimates that, 

under H.R. 2830 firms initially would have to contribute less to 

their plans, but later would have to contribute more than under 

current law. The change in contribution patterns would affect how 

many plans are underfunded and how much underfunding exists in 

those plans. This, in turn, would affect the PBGC’s income from 

variable premiums. (The change in contributions would also have 

significant effects on federal revenues, as discussed later in this estimate.) 

H.R. 2830 would also have an effect on which plans are required 

to make a variable premium payment. Current law provides underfunded plans with ways to reduce or avoid variable premium payments. Plans that have reached a statutory ‘‘full funding limit’’ are 

exempt from paying a variable premium, even though they may be 

substantially underfunded. H.R. 2830 would eliminate the full 

168 

1 Because plans would be better funded on a current-liability basis in the long run, CBO expects that collections of variable premiums under H.R. 2830 would fall starting in 2013. 

funding limit exemption and would require all plans that are underfunded to pay the variable premium on any underfunding. 

CBO estimates that enacting H.R. 2830 would increase receipts 

from variable premiums by $738 million over the 2007–2010 period 

and by $430 million over the 2007–2015 period.1 As with flat-rate 

premiums, increases in receipts from variable premiums are reflected as decreases in direct spending. 

Premiums for Certain Terminated Single-Employer Plans. The 

legislation would create a new premium for sponsors of plans that 

are terminated on an involuntary or distressed-termination basis. 

The required payments would be $1,250 per plan participant for 

three years after the termination. For sponsors whose plans were 

terminated while the program was being reorganized under chapter 11 of the bankruptcy code, the premium would be levied after 

the sponsor emerges from bankruptcy. The premium would not 

apply to firms that are liquidated by a bankruptcy court. CBO estimates that these new premiums would total about $1.0 billion over 

the 2006–2010 period and $2.9 billion over the 2006–2015 period. 

Based on recent PBGC data on terminations, CBO estimates that 

underfunded plans with about 120,000 participants on average will 

be terminated in each of the next five years and the number of participants affected will be somewhat greater in subsequent years. 

We estimate that one-quarter of those terminations will involve liquidation bankruptcy filings. CBO assumes that firms will emerge 

from bankruptcy over several years following their filing date. The 

annual income from these payments would grow rapidly during the 

first few years as sponsors emerge from bankruptcy. 

PBGC’s Disbursements. H.R. 2830 would affect both how much 

sponsors are required to contribute to their plans and how much 

benefits may increase under certain plans insured by the PBGC. 

Such changes would affect the amount of unfunded liabilities that 

the PBGC assumes in the event that a pension plan is terminated 

(i.e., claims) and thus the payments the agency makes to beneficiaries in terminated plans. CBO estimates that the policies contained in H.R. 2930 would increase benefit outlays by $59 million 

over the 2006–2010 period and by $486 million over the 2006–2015 

period. 

Several of the changes to the pension funding rules would have 

countervailing effects on the contributions plans’ sponsors would be 

required to make over the next 10 years. Basing the discount rate 

for calculating the present value of liabilities on corporate bonds instead of Treasuries would cause the present value of current liabilities among underfunded plans to shrink by more than $50 billion 

in 2006, CBO estimates. This policy would have the effect of reducing required contributions by plans’ sponsors. 

Other changes made by the bill would also have an effect on required contributions. Current funding rules require that sponsors 

of insured plans make contributions above that amount are required only if the actuarial value of a plan’s assets is less than 90 

percent of its current liabilities. These additional payments (referred to as ‘‘deficit reduction contributions’’) can be amortized over 

periods ranging from three to 30 years, depending on how the 

169 

2 Under certain circumstances, plans can be between 80 percent and 90 percent funded before 

being required to make deficit reduction contributions. 

underfunding occurred.2 H.R. 2830 would require that, in addition 

to covering its normal costs, a sponsor must make additional contributions if assets are less than 100 percent of current liabilities 

(referred to as its ‘‘funding target’’). The bill generally would require the shortfall to be amortized over a period of seven years. 

These changes would have the effect of reducing required contributions for some plans (due to the seven-year amortization period) 

and increasing required contributions for others (because of the 

higher funding target). 

The bill also would limit the use of previously accumulated funding balances, which can be used to offset required contributions. 

Funding balances usually occur when a sponsor contributes more 

than the minimum required in a given year. Under current law, no 

matter how underfunded a plan is, its sponsor may use funding 

balances to reduce or eliminate required contributions. In addition, 

the value of funding balances is not adjusted for actual gains or 

losses on the assets in which they are invested. Instead, these balances are increased each year by the same rate of return assumed 

for other assets held by the plan. H.R. 2830 would allow only plans 

that have a funding ratio of 80 percent or higher to use funding 

balances to offset required pension contributions. In addition, the 

bill would require plans to adjust the value of any balances for net 

gains or losses on the plan’s assets. These changes to the use of 

funding balances would generally have the effect of increasing required contributions. 

H.R. 2830 would also affect required contributions by: reducing 

the ‘‘smoothie’’ period used to calculate the actuarial value of assets 

and liabilities; updating the mortality table used to project future 

benefits; and adding a ‘‘loading factor’’ to the funding target of 

plans that are less than 60 percent funded. 

In addition to changes in the funding rules, H.R. 2830 would also 

restrict some benefit payments for certain underfunded plans. Specially, the bill would limit the ability of plans with a funding ratio 

of less than 80 percent to make lump-sum payments or to amend 

the plan to increase benefits. It also would effectively freeze normal 

benefit increases in plans with funding ratios of less than 60 percent. In addition, the bill would prohibit plans from paying benefits 

for unpredictable contingent events, such as shutdown benefits to 

workers in facilities that are closed. If enacted these policies would 

reduce liabilities, and therefore reduce benefit payments that the 

PBGC would be required to make for plans that are terminated in 

the future. 

Accounting for all the policy changes contained in H.R. 2803, 

CBO estimates that the annual shortfall between assets and liabilities (on a present-value basis) among plans that the PBGC takes 

over during the 2006–2015 period would increase by several hundred million dollars. The larger shortfall would manifest itself in 

higher outlays for benefit payments by the PBGC, as those liabilities eventually come due, with a significant portion of those claims 

being paid well after 2015. The biggest reason for the increase in 

claims is the projected decrease in required contributions, as least 

during the first several years of the period, due to use of the corVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00169 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
170 

3The highest discount would be used to calculate plans’ ‘‘current liabilities,’’ which is used to 

determine funding requirements and any premium payments on underfunding. The bill would 

not, however, affect the discount rate used to calculate plans’ ‘‘termination liability,’’ which represents the present value of all future benefit payments owned by the PBGC upon termination 

of a plan. 4The PBGC has several different on-budget revolving funds and two nonbudgetary trust 

funds. For simplicity in the budgetary presentation, CBO combines the various on-budget and 

nonbudgetary funds into just two funds. 

porate bond yield curve to discount current liabilities.3 This effect 

would be offset to some degree, especially during the second half 

of the budget window, by the higher funding target and limits on 

benefits accruals. Overall, however, CBO estimates that the bill 

would lead to an increase in underfunding among plans that would 

be terminated over the next decade, thus increasing outlays by the 

PBGC for pension benefits. 

Transfers from PBGC’s Trust Fund. The PBGC’s assets are held 

in two separate funds: an on-budget revolving fund and a nonbudgetary trust fund.4 The on-budget fund receives premium payments 

and makes outlays for benefit payments and administrative costs. 

The nonbudgetary trust fund holds assets from terminated plans 

until those assets are liquidated, transferred to the on-budge revolving fund, and spent. Transfers from the nonbudgetary fund to 

the on-budget fund cover approximately half of all benefit payments and most of the PBGC’s administrative costs. As with premiums, these transfers are offsetting collections to a mandatory account, and are reflected in the budget as offsets to outlays. 

In CBO’s current law projections, the combination of rising benefit payments and level premium income will cause the agency’s 

on-budget fund to be completely exhausted in about 2013. No 

precedent exists for how the PBGC would proceed if its on-budget 

fund is depleted. However, CBO assumes that the agency would 

cover its expenses by increasing the percentage of benefits and 

other expenses being paid through transfers from its nonbudgetary 

trust fund, thus increasing offsetting collections above what they 

would have been if the fund had remained solvent. 

CBO estimates the increases in premium receipts resulting from 

H.R. 2830 would cause the on-budget fund to remain solvent beyond 2015. Because the bill would improve the finances of the onbudget fund, the PBGC would not need to increase the amounts 

transferred from the nonbudgetary fund in order to help cover benefit payments and other expenses during most of the 10-year projection period. By allowing the on-budge fund to remain solvent 

through the next decade, the bill would reduce those transfers by 

$7.4 billion over the 2013–2015 period. Because this change would 

reduce an offset to mandatory spending, it would result in a net increase in such spending. 

Revenues 

H.R. 2830 would alter existing tax law related to the treatment 

of pension plans, certain types of retirement savings, and health 

care spending. CBO and JCT estimate that enacting H.R. 2830 

would reduce revenues by $14.2 billion over the 2006–2010 period 

and by $71.8 billion over the 2006–2015 period (see Table 2). 

H.R. 2830 would affect federal revenues by: 

• Altering funding rules for single-employer, defined-benefit 

pension plans. By affecting the amount of tax-deductible conVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00170 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
171 

tributions firms make to their pension plans, these changes 

would increase revenues by $5.4 billion over the 2006–2008 pe- riod and then decrease revenues by $10.4 billion over the 

2009–2015 period. The change from increases to decreases in 

revenues is due to the differing phase-in rates of the stricter 

funding rules and the new discount rates. In the short run, the 

higher discount rates would reduce contributions and increase 

revenues before the stricter funding rules come fully into effect. Over the longer term, however, the stricter funding rules 

would more than offset the effect of the higher discount rates, 

leading to overall revenue losses. • Permanently extending provisions relating to pensions and 

individual retirement accounts (IRAs) that were enacted in the 

Economic Growth and Tax Relief Reconciliation Act 2001 

(EGTRRA). Those provisions, which include increased annual 

contribution limits for IRA’s and qualified pension plans, are 

scheduled to expire at the end of 2010. JCT estimates that the 

permanent extensions would decrease revenues by $20.4 billion 

over the 2011–2015 period. 

172 

TABLE 2.

—ESTIMATED IMPACT OF H.R. 2830 ON FEDERAL REVENUES 

By fiscal year, in millions of dollars

—

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 

CHANGES IN REVENUES 

Changing Funding Rules for Single-Employer Plans ...................................................... 823 2,698 1,884 ¥1,345 ¥2,460 ¥2,179 ¥1,790 ¥1,115 ¥805 ¥711 

Permanent Extension of Certain EGTRRA Provisions ...................................................... 0 0 0 0 0 ¥1,899 ¥3,581 ¥4,274 ¥4,977 ¥5,625 

Changing Flexible Spending Account Rules: 

On-Budget ............................................................................................................... ¥474 ¥825 ¥1,012 ¥1,155 ¥1,238 ¥1,336 ¥1,407 ¥1,465 ¥1,530 ¥1,587 

Off-Budget .............................................................................................................. ¥207 ¥356 ¥429 ¥482 ¥510 ¥531 ¥551 ¥570 ¥585 ¥601 

Subtotal .......................................................................................................... ¥682 ¥1,181 ¥1,441 ¥1,637 ¥1,748 ¥1,867 ¥1,958 ¥2,035 ¥2,115 ¥2,188 

Permanent Extension of the EGTRRA Saver’s Credit ...................................................... 0 ¥481 ¥1,428 ¥1,318 ¥1,238 ¥1,210 ¥1,181 ¥1,093 ¥1,009 ¥943 

Changing Combined Insurance Rules ............................................................................. 0 ¥63 ¥159 ¥284 ¥502 ¥833 ¥1,200 ¥1,523 ¥1,852 ¥2,188 

Encouraging Automatic Enrollment ................................................................................. ¥50 ¥174 ¥358 ¥528 ¥655 ¥749 ¥818 ¥875 ¥927 ¥979 

Tax-free Distributions for Public Safety Officers ............................................................ ¥185 ¥246 ¥279 ¥317 ¥344 ¥371 ¥437 ¥470 ¥505 ¥542 

Other Provisions ............................................................................................................... ¥61 ¥93 ¥102 ¥116 ¥139 ¥155 ¥153 ¥146 ¥156 ¥185 

Total Changes in Revenue: 

On-Budget ...................................................................................................... 52 816 ¥1,454 ¥5,063 ¥6,576 ¥8,732 ¥10,567 ¥10,961 ¥11,761 ¥12,760 

Off-Budget ..................................................................................................... ¥207 ¥356 ¥429 ¥482 ¥510 ¥531 ¥551 ¥570 ¥585 ¥601 

Total ...................................................................................................... ¥155 460 ¥1,883 ¥5,545 ¥7,086 ¥9,263 ¥11,118 ¥11,531 ¥12,346 ¥13,361 

Notes.

—EGTRRA = Economic Growth and Tax Relief Reconciliation Act of 2001. Revenue components may not sum to totals because of rounding. 

Source: Joint Committee on Taxation. 

173 

• Changing the rules for health flexible spending accounts 

(FSAs). Under current law, employees may participate in taxpreferred FSAs, and any balance remaining in the accounts at 

the end of the year reverts to the employer. This legislation 

would allow employees to carry to the next year up to $500 in 

unused amounts in their FSAs. JCT estimates that this carry 

over would reduce revenues by $6.7 billion over the 2006–2010 

period and by $16.9 billion over the 2006–2015 period. Of that decline, $4.8 billion over the 2006–2015 period would be a reduction in receipts from Social Security taxes. • Permanently extending a credit for contributions to certain 

retirement savings accounts. This ‘‘saver’s credit’’ was enacted 

in EGTRRA and is set to expire at the end of 2006. The nonrefundable credit is available to taxpayers with incomes below 

certain thresholds who make contributions to qualified retirement plans, such as 401(k)s and IRAs. JCT estimates that 

making this credit permanent would reduce revenues by $4.5 

billion over the 2006–2010 period and by $9.9 billion over the 

2006–2015 period. • Changing the rules about combinations of life and longterm care insurance. Currently, long-term care insurance benefits are tax free, but distributions from annuities that are used 

to pay for such insurance are not. The bill would allow annuities to include riders for long-term care insurance policies, and 

withdrawals from these new annuity combinations would be 

tax-free if used for long-term care. It would also modify the 

rules for policies containing both life insurance and long-term 

care coverage. This provision, JCT estimates, would decrease 

revenues by $1.0 billion over the 2006–2010 period and by $8.6 

billion over the 2006–2015 period. • Making it easier for firms to offer automatic enrollment. 

Currently employees must elect to participate in defined-contribution pension plans. In order to encourage employers to 

offer automatic participation in such plans, this bill would create safe harbors from nondiscrimination testing under certain 

circumstances. As a result employees would make more pre-tax 

contributions to those plans and employers would make larger 

tax deductible matching contributions. JCT estimates that this 

provision would reduce revenues by $1.8 billion over the 2006–

2010 period and by $6.1 billion over the 2006–2015 period. 

• Allowing certain public safety officers to withdraw limited 

amounts from governmental retirement plans tax-free. Under 

current law, amounts withdrawn from retirement plans are 

taxable if the contributions were made on a pre-tax basis. This 

bill would allow certain public safety officers to withdraw up 

to $5,000 per year tax-free if the amounts are used to pay directly for premiums for health and long-term care insurance. 

JCT estimates that this provision would decrease revenues by 

$1.4 billion over the 2006–2010 period and by $3.7 billion over 

the 2006–2015 period. 

Several other provisions would affect revenues. These include 

changing funding rules for multiemployer defined-benefit plans, 

changing IRA eligibility for the disabled, allowing rollovers by nonspouse beneficiaries, allowing distributions during working retirement, changing benefit accrual standards, and altering distribution 

174 

and contribution rules for guardsmen, public safety employees, and 

those receiving combat zone compensation. In sum, these provisions would reduce revenues by $510 million over the 2006–2010 

period and by $1.3 billion over the 2006–2015 period, JCT estimates. 

Long-term effects on direct spending: Pursuant to section 407 of 

H. Con. Res. 95 (the Concurrent Resolution on the Budget, Fiscal 

Year 2006), CBO estimates that enacting H.R. 2830 would not 

cause an increase in direct spending greater than $5 billion in any 

of the 10-year periods between 2016 and 2055. During the four decades following 2015, reductions in outlays due to higher premium 

receipts would be larger than increases in outlays resulting from 

changes to transfers from the nonbudgetary fund and additional 

benefit payments. 

Estimated impact on state, local, and tribal governments: CBO 

and JCT have reviewed the provisions of H.R. 2830 and determined 

they contain no intergovernmental mandates as defined in UMRA. 

State, local, and tribal governments are exempt from the provisions 

of ERISA that the bill would amend, and the remaining provisions 

of the bill contain no intergovernmental mandates and would not 

affect the budgets of state, local, or tribal governments. 

Estimated impact on the private sector: Some of the bill’s 

changes to ERISA would impose mandates on sponsors and administrators of single-employer and multiemployer private-pension 

plans. CBO estimates that the direct cost to affected entities of the 

mandates in the bill, less the direct savings resulting from those 

mandates, would exceed the annual threshold specified in UMRA 

($123 million in 2005, adjusted annually for inflation) in 2009 and 

thereafter. Most of the cost would result from the increase in premiums paid to the PBGC. JCT has determined that the tax provisions in the bill contain no private-sector mandates. 

Premiums 

The bill would increase the premiums that sponsors of single-employer plans are required to pay to the PBGC. CBO estimates that 

the additional premiums would total $3.1 billion over the 2006–

2010 period. 

Disclosures 

Title II would require multiemployer plans to provide certain information to participants and beneficiaries when a plan enters into 

‘‘endangered’’ or ‘‘critical’’ status. Title V would require single-employer plans to provide certain information to participants and 

beneficiaries when one or more plans sponsored by the employer 

are in ‘‘at risk’’ status. Both single-employer and multiemployer 

plans would be required to provide annual funding notices to all 

participants and beneficiaries within 90 days of the end of the 

plan-year. CBO estimates that the direct cost of those new requirements would be less than $30 million annually. 

Funding rules 

Title I would make several changes to the funding rules in 

ERISA for single-employer, defined-benefit pension plans. Changes 

in the discount rate plans are required to use to value future liabilities would decrease the contributions sponsors would be required 

175 

to make to their pension plans. Several other changes in funding 

rules would increase the amount of annual contributions that they 

would be required to make. Title II would change the funding rules 

in ERISA for multiemployer defined-benefit pension plans such 

that some sponsors would be required to increase the amount of 

annual contributions that they make to their plans. 

The net effect of those changes would be to decrease the total 

amount of required pension contributions for sponsors of single-employer plans in the early years, and increase total required contributions in later years. The changes in funding rules would not 

change the liabilities that plans’ sponsors have to current and future pension recipients, however. They would only affect the timing 

of the sponsors’ contributions. Because we have little basis for estimating the costs or benefits to sponsors of changes in the amounts 

contributed to their pension plans (for example, the cost of borrowing additional funds or of using funds that would otherwise be 

available for other purposes), CBO cannot estimate the direct cost 

or savings from those provisions. 

Lump-sum distributions 

Title III would change the rules in ERISA used for determining 

the amounts of lump-sum distributions to plans’ participants. A 

segmented interest rate based on corporate bond yields and an updated mortality table would be phased in for use in such calculations. Although the updated mortality table would cause a shortterm increase in the amount of distributions, the substitution of 

the segmented interest rate for the 30-year Treasury rate would 

decrease that cost in most cases. Taken together, CBO estimates 

that these changes would likely have the net effect of reducing 

plans’ costs. 

Previous CBO estimate: On September 26, 2005, CBO transmitted a cost estimate for H.R. 2830, as ordered reported by the 

House Committee on Education and the Workforce on June 30, 

2005. The pension provisions of the two versions of the bill are 

similar in many ways, but there are several significant differences. 

Rather than beginning the shift to the segmented bond rate in 

plan-year 2006, as in the Education and Workforce version of the 

bill, the Ways and Means Committee’s version would extend the 

single corporate bond rate for one more year and begin the transition to the segmented bond rate in 2007. The latter version also includes a new premium on sponsors of plans that terminate and are 

taken over by the PBGC. The Ways and Means bill also includes 

numerous tax provisions affecting retirement savings and health 

care spending that are not in the earlier version of the bill. 

The Education and the Workforce Committee’s version of H.R. 

2830 would increase federal budget deficits by an estimated $6.5 

billion over the 2006–2015 period. CBO and JCT estimate that this 

version of the bill would increase deficits by $71.5 billion over the 

10-year period. 

Estimate prepared by: Federal Spending: Craig Meklir. Federal 

Revenues: Emily Schlect. Impact on State, Local, and Tribal Governments: Leo Lex. Impact on the Private Sector: Peter Richmond. 

Estimate approved by: Robert A. Sunshine, Assistant Director for 

Budget Analysis; G. Thomas Woodward, Assistant Director for Tax 

Analysis. 

176 

D. MACROECONOMIC IMPACT ANALYSIS

In compliance with clause 3(h)(2) of rule XIII of the Rules of the 

House of Representatives, the following statement is made by the 

staff of Joint Committee on Taxation with respect to the provisions 

of the bill amending the Internal Revenue Code of 1986: the effects 

of the bill on economic activity are so small as to be incalculable 

within the context of a model of the aggregate economy. 

V. OTHER MATTERS TO BE DISCUSSED UNDER THE 

RULES OF THE HOUSE 

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

With respect to clause 3(c)(1) of rule XIII of the Rules of the 

House of Representatives (relating to oversight findings), the Committee advises that it was a result of the Committee’s oversight review concerning Americans’ need for retirement security and the 

need for pension reforms that the Committee concluded that it is 

appropriate and timely to enact the provisions included in the bill 

as reported. 

B. STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

With respect to clause 3(c)(4) of rule XIII of the Rules of the 

House of Representatives, the Committee advises that the bill contains no measure that authorizes funding, so no statement of general performance goals and objectives for which any measure authorizes funding is required. 

C. CONSTITUTIONAL AUTHORITY STATEMENT

With respect to clause 3(d)(1) of the rule XIII of the Rules of the 

House of Representatives (relating to Constitutional Authority), the 

Committee states that the Committee’s action in reporting this bill 

is derived from Article I of the Constitution, Section 8 (‘‘The Congress shall have Power To lay and collect Taxes, Duties, Imposts 

and Excises . . . ’’), and from the 16th Amendment to the Constitution. 

D. INFORMATION RELATING TO UNFUNDED MANDATES

This information is provided in accordance with section 423 of 

the Unfunded Mandates Act of 1995 (Pub. L. No. 104–4). 

The Committee has determined that the revenue provisions of 

the bill do not contain Federal mandates on the private sector. The 

Committee has determined that the revenue provision of the bill do 

not impose a Federal intergovernmental mandate on State, local, or 

tribal governments. With respect to the non-revenue provisions of 

the bill, see the CBO letter in part IV.C., above. 

E. APPLICABILITY OF HOUSE RULE XXI 5(b) 

Rule XXI 5(b) of the Rules of the House of Representatives provides, in part, that ‘‘A bill or joint resolution, amendment, or conference report carrying a Federal income tax rate increase may not 

be considered as passed or agreed to unless so determined by a 

vote of not less than three-fifths of the Members voting, a quorum 

being present.’’ The Committee has carefully reviewed the proviVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00176 Fmt 6659 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
177 

sions of the bill, and states that the provisions of the bill do not 

involve any Federal income tax rate increases within the meaning 

of the rule. 

F. TAX COMPLEXITY ANALYSIS

Section 4022(b) of the Internal Revenue Service Reform and Restructuring Act of 1998 (the ‘‘IRS Reform Act’’) requires the Joint 

Committee on Taxation (in consultation with the Internal Revenue 

Service and the Department of the Treasury) to provide a tax complexity analysis. The complexity analysis is required for all legislation reported by the Senate Committee on Finance, the House 

Committee on Ways and Means, or any committee of conference if 

the legislation includes a provision that directly or indirectly 

amends the Internal Revenue Code (the ‘‘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 Code and that have ‘‘widespread applicability’’ to individuals or small businesses. 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS 

REPORTED 

Pursuant to the terms of the referral of the bill to the Committee, the Committee adopted an amendment striking those provisions which were referred to the Committee and inserting new text. 

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the provisions of the bill referred to the Committee, as reported, are 

shown as follows (existing law proposed to be omitted is enclosed 

in black brackets, new matter is printed in italic, existing law in 

which no change is proposed is shown in roman): 

INTERNAL REVENUE CODE OF 1986 

* * * * * * * 

SUBTITLE A—INCOME TAXES 

* * * * * * * 

CHAPTER 1—NORMAL TAXES AND SURTAXES 

* * * * * * * 

Subchapter A—Determination of Tax Liability 

* * * * * * * 

PART IV—CREDITS AGAINST TAX 

* * * * * * * 

178 

Subpart A—Nonrefundable Personal Credits 

* * * * * * * 

SEC 25B. ELECTIVE DEFERRALS AND IRA CONTRIBUTIONS BY CERTAIN INDIVIDUALS. 

(a) * * * 

* * * * * * * 

ø(h) TERMINATION.—This section shall not apply to taxable years 

beginning after December 31, 2006.¿ 

(h) VOLUNTARY DEPOSIT INTO QUALIFIED ACCOUNT.—

(1) IN GENERAL.—So much of any overpayment under section 

6401(b) as does not exceed the amount allowed as a tax credit 

under subsection (a) shall, at the election of the taxpayer, be 

paid on behalf of the individual taxpayer to an applicable retirement plan designated by the individual, except that in the 

case of a joint return, each spouse shall be entitled to designate 

an applicable retirement plan with respect to payments attributable to such spouse. 

(2) APPLICABLE RETIREMENT PLAN.—For purposes of this subsection, the term ‘‘applicable retirement plan’’ means any eligible retirement plan (as defined in section 402(c)(8)(B)) that 

elects to accept deposits under this subsection. 

* * * * * * * 

Subchapter B—Computation of Taxable Income 

* * * * * * * 

PART II—ITEMS SPECIFICALLY INCLUDED IN GROSS 

INCOME 

* * * * * * * 

SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE 

INSURANCE CONTRACTS. 

(a) * * * 

* * * * * * * 

(e) AMOUNTS NOT RECEIVED AS ANNUITIES.— (1) * * * 

* * * * * * * 

(11) SPECIAL RULES FOR CERTAIN COMBINATION CONTRACTS

PROVIDING LONG-TERM CARE INSURANCE.—Notwithstanding 

paragraphs (2), (5)(C), and (10), in the case of any charge 

against the cash value of an annuity contract or the cash surrender value of a life insurance contract made as payment for 

coverage under a qualified long-term care insurance contract 

which is part of or a rider on such annuity or life insurance 

contract—

(A) the investment in the contract shall be reduced (but 

not below zero) by such charge, and 

(B) such charge shall not be includible in gross income. 

ø(11)¿ (12) ANTI-ABUSE RULES.—

(A) * * * 

* * * * * * * 

179 

(t) 10-PERCENT ADDITIONAL TAX ON EARLY DISTRIBUTIONS FROM

QUALIFIED RETIREMENT PLANS.— (1) * * * 

(2) SUBSECTION NOT TO APPLY TO CERTAIN DISTRIBUTIONS.— Except as provided in paragraphs (3) and (4), paragraph (1) 

shall not apply to any of the following distributions: 

(A) * * * 

* * * * * * * 

(G) DISTRIBUTIONS FROM RETIREMENT PLANS TO INDIVID- UALS CALLED TO ACTIVE DUTY.— (i) IN GENERAL.—Any qualified reservist distribution. 

(ii) AMOUNT DISTRIBUTED MAY BE REPAID.—Any individual who receives a qualified reservist distribution 

may, at any time during the 2-year period beginning 

on the day after the end of the active duty period, make 

one or more contributions to an individual retirement 

plan of such individual in an aggregate amount not to 

exceed the amount of such distribution. The dollar limitations otherwise applicable to contributions to individual retirement plans shall not apply to any contribution made pursuant to the preceding sentence. No 

deduction shall be allowed for any contribution pursuant to this clause. 

(iii) QUALIFIED RESERVIST DISTRIBUTION.—For purposes of this subparagraph, the term ‘‘qualified reservist distribution’’ means any distribution to an individual if—

(I) such distribution is from an individual retirement plan, or from amounts attributable to employer contributions made pursuant to elective deferrals described in subparagraph (A) or (C) of section 402(g)(3) or section 501(c)(18)(D)(iii), 

(II) such individual was (by reason of being a 

member of a reserve component (as defined in section 101 of title 37, United States Code)), ordered 

or called to active duty for a period in excess of 

179 days or for an indefinite period, and 

(III) such distribution is made during the period 

beginning on the date of such order or call and 

ending at the close of the active duty period. 

(iv) APPLICATION OF SUBPARAGRAPH.—This subparagraph applies to individuals ordered or called to active 

duty after September 11, 2001, and before September 

12, 2007. In no event shall the 2-year period referred 

to in clause (ii) end before the date which is 2-years 

after the date of the enactment of this subparagraph. 

(H) DROP DISTRIBUTIONS TO QUALIFIED PUBLIC SAFETY

EMPLOYEES IN GOVERNMENTAL PLANS.— (i) IN GENERAL.—Distributions to an individual who 

is a qualified public safety employee from a governmental plan within the meaning of section 414(d) to 

the extent such distributions are attributable to a 

DROP benefit. 

(ii) DEFINITIONS.—For purposes of this subparagraph—

180 

(I) DROP BENEFIT.—The term ‘‘DROP benefit’’

means a feature of a governmental plan which is 

a defined benefit plan and under which an employee elects to receive credits to an account (including a notional account) in the plan which are 

not in excess of the plan benefits (payable in the 

form of an annuity) that would have been provided 

if the employee had retired under the plan at a 

specified earlier retirement date and which are in 

lieu of increases in the employee’s accrued pension 

benefit based on years of service after the effective 

date of the DROP election. 

(II) QUALIFIED PUBLIC SAFETY EMPLOYEE.—The 

term ‘‘qualified public safety employee’’ means any 

employee of any police department or fire department organized and operated by a State or political subdivision of a State if the employee provides 

police protection, firefighting services, or emergency medical services for any area within the jurisdiction of such State or political subdivision 

and if the employee was eligible to retire on or before the date of such election and receive immediate retirement benefits. 

* * * * * * * 

PART III—ITEMS SPECIFICALLY EXCLUDED FROM 

GROSS INCOME 

* * * * * * * 

SEC. 125. CAFETERIA PLANS. 

(a) * * * 

* * * * * * * 

(h) CONTRIBUTIONS OF CERTAIN UNUSED HEALTH BENEFITS.—

(1) IN GENERAL.—For purposes of this title, a plan or other 

arrangement shall not fail to be treated as a cafeteria plan solely because qualified benefits under such plan include a health 

flexible spending arrangement under which not more than $500 

of unused health benefits may be—

(A) carried forward to the succeeding plan year of such 

health flexible spending arrangement, or 

(B) to the extent permitted by section 106(d), contributed 

by the employer to a health savings account (as defined in 

section 223(d)) maintained for the benefit of the employee. 

(2) HEALTH FLEXIBLE SPENDING ARRANGEMENT.—For purposes of this subsection, the term ‘‘health flexible spending arrangement’’ means a flexible spending arrangement (as defined 

in section 106(c)) that is a qualified benefit and only permits reimbursement for expenses for medical care (as defined in section 

213(d)(1), without regard to subparagraphs (C) and (D) thereof). 

(3) UNUSED HEALTH BENEFITS.—For purposes of this subsection, with respect to an employee, the term ‘‘unused health 

benefits’’ means the excess of—

181 

(A) the maximum amount of reimbursement allowable to 

the employee for a plan year under a health flexible spending arrangement, over 

(B) the actual amount of reimbursement for such year 

under such arrangement. 

ø(h)¿ (i) CROSS REFERENCE.—For reporting and recordkeeping requirements, see section 6039D. 

ø(i)¿ (j) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section. 

* * * * * * * 

PART VII—ADDITIONAL ITEMIZED DEDUCTIONS FOR 

INDIVIDUALS 

* * * * * * * 

SEC. 219. RETIREMENT SAVINGS. 

(a) * * * 

* * * * * * * 

(f) OTHER DEFINITIONS AND SPECIAL RULES.—

(1) * * * 

* * * * * * * 

(7) SPECIAL RULE FOR COMPENSATION EARNED BY MEMBERS

OF THE ARMED FORCES FOR SERVICE IN A COMBAT ZONE.—For 

purposes of subsections (b)(1)(B) and (c), the amount of compensation includible in an individual’s gross income shall be 

determined without regard to section 112. 

(8) SPECIAL RULE FOR CERTAIN DISABLED INDIVIDUALS.—In 

the case of an individual—

(A) who is disabled (within the meaning of section 

72(m)(7)), and 

(B) who has not attained the applicable age (as defined 

in section 401(a)(9)(H)) before the close of the taxable year, 

subparagraph (B) of subsection (b)(1) shall not apply. 

ø(7)¿ (9) ELECTION NOT TO DEDUCT CONTRIBUTIONS.—For 

election not to deduct contributions to individual retirement 

plans, see section 408(o)(2)(B)(ii). 

* * * * * * * 

Subchapter D—Deferred Compensation, Etc. 

PART IlPENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC. 

* * * * * * * 

PART IIIlRULES RELATING TO MINIMUM FUNDING STANDARDS AND BENEFIT

LIMITATIONS

* * * * * * * 

PART I—PENSION, PROFIT-SHARING, STOCK BONUS 

PLANS, ETC. 

* * * * * * * 

182 

Subpart A—General Rule 

* * * * * * * 

SEC. 401. QUALIFIED PENSION, PROFIT-SHARING, AND STOCK BONUS 

PLANS. 

(a) REQUIREMENTS FOR QUALIFICATION.—A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit 

of his employees or their beneficiaries shall constitute a qualified 

trust under this section— (1) * * * 

* * * * * * * 

ø(29) SECURITY REQUIRED UPON ADOPTION OF PLAN AMEND- MENT RESULTING IN SIGNIFICANT UNDERFUNDING.— ø(A) IN GENERAL.—If— ø(i) a defined benefit plan (other than a multiemployer plan) to which the requirements of section 412 

apply adopts an amendment an effect of which is to increase current liability under the plan for a plan year, 

and 

ø(ii) the funded current liability percentage of the 

plan for the plan year in which the amendment takes 

effect is less than 60 percent, including the amount of 

the unfunded current liability under the plan attributable to the plan amendment, 

the trust of which such plan is a part shall not constitute 

a qualified trust under this subsection unless such amendment does not take effect until the contributing sponsor (or 

any member of the controlled group of the contributing 

sponsor) provides security to the plan. 

ø(B) FORM OF SECURITY.—The security required under 

subparagraph (A) shall consist of— ø(i) a bond issued by a corporate surety company 

that is an acceptable surety for purposes of section 412 

of the Employee Retirement Income Security Act of 

1974, 

ø(ii) cash, or United States obligations which mature 

in 3 years or less, held in escrow by a bank or similar 

financial institution, or 

ø(iii) such other form of security as is satisfactory to 

the Secretary and the parties involved. 

ø(C) AMOUNT OF SECURITY.—The security shall be in an 

amount equal to the excess of—

ø(i) the lesser of—

ø(I) the amount of additional plan assets which 

would be necessary to increase the funded current 

liability percentage under the plan to 60 percent, 

including the amount of the unfunded current liability under the plan attributable to the plan 

amendment, or 

ø(II) the amount of the increase in current liability under the plan attributable to the plan 

amendment and any other plan amendments 

adopted after December 22, 1987, and before such 

plan amendment, over 

183 

ø(ii) $10,000,000. 

ø(D) RELEASE OF SECURITY.—The security shall be released (and any amounts thereunder shall be refunded together with any interest accrued thereon) at the end of the 

first plan year which ends after the provision of the security and for which the funded current liability percentage 

under the plan is not less than 60 percent. The Secretary 

may prescribe regulations for partial releases of the security by reason of increases in the funded current liability 

percentage. 

ø(E) DEFINITIONS.—For purposes of this paragraph, the 

terms ‘‘current liability’’, ‘‘funded current liability percentage’’, and ‘‘unfunded current liability’’ shall have the 

meanings given such terms by section 412(l), except that 

in computing unfunded current liability there shall not be 

taken into account any unamortized portion of the unfunded old liability amount as of the close of the plan 

year.¿ 

(29) BENEFIT LIMITATIONS ON PLANS IN AT-RISK STATUS.—In 

the case of a defined benefit plan (other than a multiemployer 

plan) to which the requirements of section 412 apply, the trust 

of which the plan is a part shall not constitute a qualified trust 

under this subsection unless the plan meets the requirements of 

sections 436 and 437. 

* * * * * * * 

(32) TREATMENT OF FAILURE TO MAKE CERTAIN PAYMENTS IF

PLAN HAS LIQUIDITY SHORTFALL.—

(A) IN GENERAL.—A trust forming part of a pension plan 

to which section ø412(m)(5)¿ 430(j)(4) applies shall not be 

treated as failing to constitute a qualified trust under this 

section merely because such plan ceases to make any payment described in subparagraph (B) during any period 

that such plan has a liquidity shortfall (as defined in section ø412(m)(5)¿ 430(j)(4)). 

* * * * * * * 

(C) PERIOD OF SHORTFALL.—For purposes of this paragraph, a plan has a liquidity shortfall during the period 

that there is an underpayment of an installment under 

øsection 412(m) by reason of paragraph (5)(A) thereof¿ section 430(j)(3) by reason of section 430(j)(4)(A). 

(33) PROHIBITION ON BENEFIT INCREASES WHILE SPONSOR IS

IN BANKRUPTCY.—

(A) * * * 

(B) EXCEPTIONS.—This paragraph shall not apply to any 

plan amendment if—

(i) the plan, were such amendment to take effect, 

would have a øfunded current liability percentage (as 

defined in section 412(l)(8))¿ funding target attainment 

percentage (as defined in section 430(d)(2)) of 100 percent or more, 

* * * * * * * 

184 

(iii) such amendment only repeals an amendment 

described in øsubsection 412(c)(8)¿ section 412(d)(2), or 

* * * * * * * 

(D) EMPLOYER.—For purposes of this paragraph, the 

term ‘‘employer’’ means the employer referred to in øsection 412(c)(11) (without regard to subparagraph (B) thereof)¿ section 412(b) (without regard to paragraph (2) thereof). 

* * * * * * * 

(35) DISTRIBUTIONS DURING WORKING RETIREMENT.—A trust 

forming part of a pension plan shall not be treated as failing 

to constitute a qualified trust under this section solely because 

a distribution is made from such trust to an employee who has 

attained age 62 and who is not separated from employment at 

the time of such distribution. 

* * * * * * * 

(k) CASH OR DEFERRED ARRANGEMENTS.—

(1) * * * 

(2) QUALIFIED CASH OR DEFERRED ARRANGEMENT.—A qualified cash or deferred arrangement is any arrangement which 

is part of a profit-sharing or stock bonus plan, a pre-ERISA 

money purchase plan, or a rural cooperative plan which meets 

the requirements of subsection (a)—

(A) * * * 

(B) under which amounts held by the trust which are attributable to employer contributions made pursuant to the 

employee’s election—

(i) may not be distributable to participants or other 

beneficiaries earlier than—

(I) * * * 

* * * * * * * 

(III) in the case of a profit-sharing or stock 

bonus plan, the attainment of age 591⁄2, øor¿ 

(IV) in the case of contributions to a profit-sharing or stock bonus plan to which section 402(e)(3) 

applies, upon hardship of the employee, øand¿ or 

(V) in the case of a qualified reservist distribution (as defined in section 72(t)(2)(G)(iii)), the date 

on which a period referred to in subclause (III) of 

such section begins, and 

* * * * * * * 

(8) ARRANGEMENT NOT DISQUALIFIED IF EXCESS CONTRIBUTIONS DISTRIBUTED.—

(A) * * * 

* * * * * * * 

(E) TREATMENT OF MATCHING CONTRIBUTIONS FORFEITED

BY REASON OF EXCESS DEFERRAL OR CONTRIBUTION OR ERRONEOUS AUTOMATIC CONTRIBUTION.—For purposes of 

paragraph (2)(C), a matching contribution (within the 

meaning of subsection (m)) shall not be treated as forfeitable merely because such contribution is forfeitable if the 

contribution to which the matching contribution relates is 

185 

treated as an excess contribution under subparagraph (B), 

an excess deferral under section 402(g)(2)(A), an erroneous 

automatic contribution under section 414(w), or an excess 

aggregate contribution under section 401(m)(6)(B). 

* * * * * * * 

(13) ALTERNATIVE METHOD FOR AUTOMATIC CONTRIBUTION

ARRANGEMENTS TO MEET NONDISCRIMINATION REQUIRE- MENTS.—

(A) IN GENERAL.—A qualified automatic contribution arrangement shall be treated as meeting the requirements of 

paragraph (3)(A)(ii). 

(B) QUALIFIED AUTOMATIC CONTRIBUTION ARRANGE- MENT.—For purposes of this paragraph, the term ‘‘qualified 

automatic contribution arrangement’’ means any cash or 

deferred arrangement which meets the requirements of subparagraphs (C) through (F). 

(C) AUTOMATIC DEFERRAL.— (i) IN GENERAL.—The requirements of this subparagraph are met if, under the arrangement, each employee eligible to participate in the arrangement is 

treated as having elected to have the employer make 

elective contributions in an amount equal to a qualified 

percentage of compensation. 

(ii) ELECTION OUT.—The election treated as having 

been made under clause (i) shall cease to apply with respect to any employee if such employee makes an affirmative election— (I) to not have such contributions made, or 

(II) to make elective contributions at a level specified in such affirmative election. 

(iii) QUALIFIED PERCENTAGE.—For purposes of this 

subparagraph, the term ‘‘qualified percentage’’ means, 

with respect to any employee, any percentage determined under the arrangement if such percentage is applied uniformly, does not exceed 10 percent, and is at 

least—

(I) 3 percent during the period ending on the last 

day of the first plan year which begins after the 

date on which the first elective contribution described in clause (i) is made with respect to such 

employee, 

(II) 4 percent during the first plan year following 

the plan year described in subclause (I), 

(III) 5 percent during the second plan year following the plan year described in subclause (I), 

and 

(IV) 6 percent during any subsequent plan year. 

(iv) AUTOMATIC DEFERRAL FOR CURRENT EMPLOYEES

NOT REQUIRED.—Clause (i) shall be applied without 

taking into account any employee who was eligible to 

participate in the arrangement (or a predecessor arrangement) immediately before the date on which such 

arrangement becomes a qualified automatic contribution arrangement (determined after application of this 

clause). 

186 

(D) PARTICIPATION.—

(i) IN GENERAL.—An arrangement meets the requirements of this subparagraph for any year if, during the 

plan year or the preceding plan year, elective contributions are made on behalf of at least 70 percent of the 

employees eligible to participate in the arrangement 

other than—

(I) highly compensated employees, and 

(II) at the election of the plan administrator, employees described in subparagraph (C)(iv). 

(ii) FIRST PLAN YEAR.—An arrangement (other than 

a successor arrangement) shall be treated as meeting 

the requirements of this subparagraph with respect to 

the first plan year with respect to which such arrangement is a qualified automatic contribution arrangement (determined without regard to this subparagraph). 

(E) MATCHING OR NONELECTIVE CONTRIBUTIONS.—

(i) IN GENERAL.—The requirements of this subparagraph are met if, under the arrangement, the employer—

(I) makes matching contributions on behalf of 

each employee who is not a highly compensated 

employee in an amount equal to 50 percent of the 

elective contributions of the employee to the extent 

such elective contributions do not exceed 6 percent 

of compensation, or 

(II) is required, without regard to whether the 

employee makes an elective contribution or employee contribution, to make a contribution to a defined contribution plan on behalf of each employee 

who is not a highly compensated employee and 

who is eligible to participate in the arrangement in 

an amount equal to at least 2 percent of the employee’s compensation. 

(ii) APPLICATION OF RULES FOR MATCHING CONTRIBUTIONS.—The rules of clauses (ii) and (iii) of paragraph 

(12)(B) shall apply for purposes of clause (i)(I). 

(iii) WITHDRAWAL AND VESTING RESTRICTIONS.—An 

arrangement shall not be treated as meeting the requirements of clause (i) unless, with respect to employer contributions (including matching contributions) 

taken into account in determining whether the requirements of clause (i) are met—

(I) any employee who has completed at least 2 

years of service (within the meaning of section 

411(a)) has a nonforfeitable right to 100 percent of 

the employee’s accrued benefit derived from such 

employer contributions, and 

(II) the requirements of subparagraph (B) of 

paragraph (2) are met with respect to all such employer contributions. 

(iv) APPLICATION OF CERTAIN OTHER RULES.—The 

rules of subparagraphs (E)(ii) and (F) of paragraph 

187 

(12) shall apply for purposes of subclauses (I) and (II) 

of clause (i). 

(F) NOTICE REQUIREMENTS.— (i) IN GENERAL.—The requirements of this subparagraph are met if, within a reasonable period before 

each plan year, each employee eligible to participate in 

the arrangement for such year receives written notice of 

the employee’s rights and obligations under the arrangement which— (I) is sufficiently accurate and comprehensive to 

apprise the employee of such rights and obligations, and 

(II) is written in a manner calculated to be understood by the average employee to whom the arrangement applies. 

(ii) TIMING AND CONTENT REQUIREMENTS.—A notice 

shall not be treated as meeting the requirements of 

clause (i) with respect to an employee unless—

(I) the notice explains the employee’s right under 

the arrangement to elect not to have elective contributions made on the employee’s behalf (or to 

elect to have such contributions made at a different 

percentage), 

(II) in the case of an arrangement under which 

the employee may elect among 2 or more investment options, the notice explains how contributions 

made under the arrangement will be invested in 

the absence of any investment election by the employee, and 

(III) the employee has a reasonable period of 

time after receipt of the notice described in subclauses (I) and (II) and before the first elective contribution is made to make either such election. 

* * * * * * * 

(m) NONDISCRIMINATION TEST FOR MATCHING CONTRIBUTIONS

AND EMPLOYEE CONTRIBUTIONS.—

(1) * * * 

* * * * * * * 

(12) ALTERNATIVE METHOD FOR AUTOMATIC CONTRIBUTION

ARRANGEMENTS.—A defined contribution plan shall be treated 

as meeting the requirements of paragraph (2) with respect to 

matching contributions if the plan—

(A) is a qualified automatic contribution arrangement (as 

defined in subsection (k)(13)), and 

(B) meets the requirements of paragraph (11)(B). 

ø(12)¿ (13) CROSS REFERENCE.— For excise tax on certain excess contributions, see section 4979. 

* * * * * * * 

SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES’ TRUST. 

(a) * * * 

* * * * * * * 

(c) RULES APPLICABLE TO ROLLOVERS FROM EXEMPT TRUSTS.—

188 

(1) * * * 

* * * * * * * 

(11) DISTRIBUTIONS TO INHERITED INDIVIDUAL RETIREMENT

PLAN OF NONSPOUSE BENEFICIARY.— (A) IN GENERAL.—If, with respect to any portion of a distribution from an eligible retirement plan of a deceased employee, a direct trustee-to-trustee transfer is made to an individual retirement plan described in clause (i) or (ii) of 

paragraph (8)(B) established for the purposes of receiving 

the distribution on behalf of an individual who is a designated beneficiary (as defined by section 401(a)(9)(E)) of 

the employee and who is not the surviving spouse of the employee—

(i) the transfer shall be treated as an eligible rollover 

distribution for purposes of this subsection, 

(ii) the individual retirement plan shall be treated as 

an inherited individual retirement account or individual retirement annuity (within the meaning of section 408(d)(3)(C)) for purposes of this title, and 

(iii) section 401(a)(9)(B) (other than clause (iv) thereof) shall apply to such plan. 

(B) CERTAIN TRUSTS TREATED AS BENEFICIARIES.—For 

purposes of this paragraph, to the extent provided in rules 

prescribed by the Secretary, a trust maintained for the benefit of one or more designated beneficiaries shall be treated 

in the same manner as a trust designated beneficiary. 

* * * * * * * 

(l) DISTRIBUTIONS FROM GOVERNMENTAL PLANS FOR HEALTH AND

LONG-TERM CARE INSURANCE.— (1) IN GENERAL.—In the case of an employee who is an eligible retired public safety officer who makes the election described 

in paragraph (6) with respect to any taxable year of such employee, gross income of such employee for such taxable year does 

not include any distribution from an eligible retirement plan to 

the extent that the aggregate amount of such distributions does 

not exceed the amount paid by such employee for qualified 

health insurance premiums of the employee, his spouse, or dependents (as defined in section 152) for such taxable year. 

(2) LIMITATION.—The amount which may be excluded from 

gross income for the taxable year by reason of paragraph (1) 

shall not exceed $5,000. 

(3) DISTRIBUTIONS MUST OTHERWISE BE INCLUDIBLE.—

(A) IN GENERAL.—An amount shall be treated as a distribution for purposes of paragraph (1) only to the extent 

that such amount would be includible in gross income 

without regard to paragraph (1). 

(B) APPLICATION OF SECTION 72.—Notwithstanding section 72, in determining the extent to which an amount is 

treated as a distribution for purposes of subparagraph (A), 

the aggregate amounts distributed from an eligible retirement plan in a taxable year (up to the amount excluded 

under paragraph (1)) shall be treated as includible in gross 

income (without regard to subparagraph (A)) to the extent 

that such amount does not exceed the aggregate amount 

189 

which would have been so includible if all amounts distributed from all eligible retirement plans were treated as 1 

contract for purposes of determining the inclusion of such 

distribution under section 72. Proper adjustments shall be 

made in applying section 72 to other distributions in such 

taxable year and subsequent taxable years. 

(4) DEFINITIONS.—For purposes of this subsection— (A) ELIGIBLE RETIREMENT PLAN.—For purposes of paragraph (1), the term ‘‘eligible retirement plan’’ means a governmental plan (within the meaning of section 414(d)) 

which is described in clause (iii), (iv), (v), or (vi) of subsection (c)(8)(B). 

(B) ELIGIBLE RETIRED PUBLIC SAFETY OFFICER.—The 

term ‘‘eligible retired public safety officer’’ means an individual who, by reason of disability or attainment of normal 

retirement age, is separated from service as a public safety 

officer with the employer who maintains the eligible retirement plan from which distributions subject to paragraph 

(1) are made. 

(C) PUBLIC SAFETY OFFICER.—The term ‘‘public safety officer’’ shall have the same meaning given such term by section 1204(8)(A) of the Omnibus Crime Control and Safe 

Streets Act of 1968 (42 U.S.C. 3796b(8)(A)). 

(D) QUALIFIED HEALTH INSURANCE PREMIUMS.—The term ‘‘qualified health insurance premiums’’ means premiums 

for coverage for the eligible retired public safety officer, his 

spouse, and dependents, by an accident or health insurance 

plan or qualified long-term care insurance contract (as defined in section 7702B(b)). 

(5) SPECIAL RULES.—For purposes of this subsection—

(A) DIRECT PAYMENT TO INSURER REQUIRED.—Paragraph 

(1) shall only apply to a distribution if payment of the premiums is made directly to the provider of the accident or 

health insurance plan or qualified long-term care insurance 

contract by deduction from a distribution from the eligible 

retirement plan. 

(B) RELATED PLANS TREATED AS 1.—All eligible retirement plans of an employer shall be treated as a single plan. 

(6) ELECTION DESCRIBED.— (A) IN GENERAL.—For purposes of paragraph (1), an election is described in this paragraph if the election is made 

by an employee after separation from service with respect to 

amounts not distributed from an eligible retirement plan to 

have amounts from such plan distributed in order to pay 

for qualified health insurance premiums. 

(B) SPECIAL RULE.—A plan shall not be treated as violating the requirements of section 401, or as engaging in a 

prohibited transaction for purposes of section 503(b), merely 

because it provides for an election with respect to amounts 

that are otherwise distributable under the plan or merely 

because of a distribution made pursuant to an election described in subparagraph (A). 

(7) COORDINATION WITH MEDICAL EXPENSE DEDUCTION.—The 

amounts excluded from gross income under paragraph (1) shall 

not be taken into account under section 213. 

190 

(8) COORDINATION WITH DEDUCTION FOR HEALTH INSURANCE

COSTS OF SELF-EMPLOYED INDIVIDUALS.—The amounts excluded 

from gross income under paragraph (1) shall not be taken into 

account under section 162(l). 

* * * * * * * 

SEC. 403. TAXATION OF EMPLOYEE ANNUITIES. 

(a) TAXABILITY OF BENEFICIARY UNDER A QUALIFIED ANNUITY

PLAN.—

(1) * * * 

(2) SPECIAL RULE FOR HEALTH AND LONG-TERM CARE INSURANCE.—To the extent provided in section 402(l), paragraph (1) 

shall not apply to the amount distributed under the contract 

which is otherwise includible in gross income under this subsection. 

* * * * * * * 

(4) ROLLOVER AMOUNTS.—

(A) * * * 

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

paragraphs (2) through (7) and (11) and (9) of section 

402(c) and section 402(f) shall apply for purposes of subparagraph (A). 

* * * * * * * 

(b) TAXABILITY OF BENEFICIARY UNDER ANNUITY PURCHASED BY

SECTION 501(C)(3) ORGANIZATION OR PUBLIC SCHOOL.—

(1) * * * 

(2) SPECIAL RULE FOR HEALTH AND LONG-TERM CARE INSURANCE.—To the extent provided in section 402(l), paragraph (1) 

shall not apply to the amount distributed under the contract 

which is otherwise includible in gross income under this subsection. 

* * * * * * * 

(7) CUSTODIAL ACCOUNTS FOR REGULATED INVESTMENT COMPANY STOCK.—

(A) AMOUNTS PAID TREATED AS CONTRIBUTIONS.—For 

purposes of this title, amounts paid by an employer described in paragraph (1)(A) to a custodial account which 

satisfies the requirements of section 401(f)(2) shall be 

treated as amounts contributed by him for an annuity contract for his employee if—

(i) * * * 

(ii) under the custodial account no such amounts 

may be paid or made available to any distributee (unless such amount is a distribution to which section 

72(t)(2)(G) applies) before the employee dies, attains 

age 591⁄2, has a severance from employment, becomes 

disabled (within the meaning of section 72(m)(7)), or in 

the case of contributions made pursuant to a salary reduction agreement (within the meaning of section 

3121(a)(5)(D), encounters financial hardship. 

* * * * * * * 

(8) ROLLOVER AMOUNTS.—

(A) * * * 

191 

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

paragraphs (2) through (7) øand (9)¿, (9), and (11) of section 402(c) and section 402(f) shall apply for purposes of 

subparagraph (A), except that section 402(f) shall be applied to the payor in lieu of the plan administrator. 

* * * * * * * 

(11) REQUIREMENT THAT DISTRIBUTIONS NOT BEGIN BEFORE

AGE 591⁄2, SEVERANCE FROM EMPLOYMENT, DEATH, OR DISABILITY.—This subsection shall not apply to any annuity contract unless under such contract distributions attributable to 

contributions made pursuant to a salary reduction agreement 

(within the meaning of section 402(g)(3)(C)) may be paid only—

(A) when the employee attains age 591⁄2, has a severance 

from employment, dies, or becomes disabled (within the 

meaning of section 72(m)(7)), øor¿ 

(B) in the case of hardshipø.¿, or 

(C) for distributions to which section 72(t)(2)(G) applies. 

Such contract may not provide for the distribution of any income attributable to such contributions in the case of hardship. 

* * * * * * * 

SEC. 404. DEDUCTION FOR CONTRIBUTIONS OF AN EMPLOYER TO AN 

EMPLOYEES’ TRUST OR ANNUITY PLAN AND COMPENSATION UNDER A DEFERRED-PAYMENT PLAN. 

(a) GENERAL RULE.—If contributions are paid by an employer to 

or under a stock bonus, pension, profit-sharing, or annuity plan, or 

if compensation is paid or accrued on account of any employee 

under a plan deferring the receipt of such compensation, such contributions or compensation shall not be deductible under this chapter; but, if they would otherwise be deductible, they shall be deductible under this section, subject, however, to the following limitations as to the amounts deductible in any year: 

(1) PENSION TRUSTS.—

(A) IN GENERAL.—In the taxable year when paid, if the 

contributions are paid into a pension trust (other than a 

trust to which paragraph (3) applies), and if such taxable 

year ends within or with a taxable year of the trust for 

which the trust is exempt under section 501(a), in the case 

of a defined benefit plan other than a multiemployer plan, 

in an amount determined under subsection (o), and in the 

case of any other plan in an amount determined as follows: 

(i) * * * 

* * * * * * * 

In determining the amount deductible in such year under 

the foregoing limitations the funding method and the actuarial assumptions used shall be those used for such year 

under øsection 412¿ section 431, and the maximum 

amount deductible for such year shall be an amount equal 

to the full funding limitation for such year determined 

under øsection 412¿ section 431. 

(B) SPECIAL RULE IN CASE OF CERTAIN AMENDMENTS.— øIn the case of a plan¿ In the case of a multiemployer plan 

which the Secretary of Labor finds to be collectively bargained which makes an election under this subparagraph 

192 

(in such manner and at such time as may be provided 

under regulations prescribed by the Secretary), if the full 

funding limitation determined under øsection 412(c)(7)¿ 

section 431(c)(6) for such year is zero, if as a result of any 

plan amendment applying to such plan year, the amount 

determined under øsection 412(c)(7)(B)¿ section 

431(c)(6)(D) exceeds the amount determined under øsection 412(c)(7)(A)¿ section 431(c)(6)(A), and if the funding 

method and the actuarial assumptions used are those used 

for such year under øsection 412¿ section 431, the maximum amount deductible in such year under the limitations of this paragraph shall be an amount equal to the 

lesser of—

(i) the full funding limitation for such year determined by applying øsection 412(c)(7)¿ section 431(c)(6) 

but increasing the amount referred to in subparagraph 

(A) thereof by the decrease in the present value of all 

unamortized liabilities resulting from such amendment, or 

* * * * * * * 

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

ø(i) IN GENERAL.—In the case of any defined benefit 

plan, except as provided in regulations, the maximum 

amount deductible under the limitations of this paragraph shall not be less than the unfunded current liability determined under section 412(l). 

ø(ii) PLANS WITH 100 OR LESS PARTICIPANTS.—For 

purposes of this subparagraph, in the case of a plan 

which has 100 or less participants for the plan year, 

unfunded current liability shall not include the liability attributable to benefit increases for highly compensated employees (as defined in section 414(q)) resulting from a plan amendment which is made or becomes effective, whichever is later, within the last 2 

years. 

ø(iii) RULE FOR DETERMINING NUMBER OF PARTICIPANTS.—For purposes of determining the number of 

plan participants, all defined benefit plans maintained 

by the same employer (or any member of such employer’s controlled group (within the meaning of section 

412(l)(8)(C))) shall be treated as one plan, but only employees of such member or employer shall be taken 

into account. 

ø(iv) SPECIAL RULE FOR TERMINATING PLANS.—In the 

case of a plan which, subject to section 4041 of the 

Employee Retirement Income Security Act of 1974, 

terminates during the plan year, clause (i) shall be applied by substituting for unfunded current liability the 

amount required to make the plan sufficient for benefit liabilities (within the meaning of section 4041(d) of 

such Act).¿ 

(D) MINIMUM DEDUCTION FOR MULTIEMPLOYER PLANS.—

In the case of a defined benefit plan which is a multiemployer plan, except as provided in regulations, the maxVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00192 Fmt 6659 Sfmt 6603 E:\HR\OC\HR232P2.XXX HR232P2
193 

imum amount deductible under the limitations of this 

paragraph shall not be less than the excess (if any) of— (i) 140 percent of the current liability of the plan determined under section 431(c)(6)(D), over 

(ii) the value of the plan’s assets determined under 

section 431(c)(2). 

* * * * * * * 

ø(F) ELECTION TO DISREGARD MODIFIED INTEREST RATE.— An employer may elect to disregard subsections 

(b)(5)(B)(ii)(II) and (l)(7)(C)(i)(IV) of section 412 solely for 

purposes of determining the interest rate used in calculating the maximum amount of the deduction allowable 

under this paragraph.¿ 

* * * * * * * 

(7) LIMITATION ON DEDUCTIONS WHERE COMBINATION OF DEFINED CONTRIBUTION PLAN AND DEFINED BENEFIT PLAN.—

(A) IN GENERAL.—If amounts are deductible under the 

foregoing paragraphs of this subsection (other than paragraph (5)) in connection with 1 or more defined contribution plans and 1 or more defined benefit plans or in connection with trusts or plans described in 2 or more of such 

paragraphs, the total amount deductible in a taxable year 

under such plans shall not exceed the greater of—

(i) * * * 

(ii) the amount of contributions made to or under 

the defined benefit plans to the extent such contributions do not exceed the amount of employer contributions necessary to satisfy the minimum funding standard provided by section 412 with respect to any such 

defined benefit plans øfor the plan year which ends 

with or within such taxable year (or for any prior plan 

year).¿ which are multiemployer plans for the plan 

year which ends with or within such taxable year (or 

for any prior plan year) and the maximum amount of 

employer contributions allowable under subsection (o) 

with respect to any such defined benefit plans which 

are not multiemployer plans for the plan year. 

A defined contribution plan which is a pension plan shall 

not be treated as failing to provide definitely determinable 

benefits merely by limiting employer contributions to 

amounts deductible under this section. For purposes of 

clause (ii), if paragraph (1)(D) applies to a defined benefit 

plan for any plan year, the amount necessary to satisfy the 

minimum funding standard provided by section 412 with 

respect to such plan for such plan year shall not be less 

than the unfunded current liability of such plan under 

øsection 412(l)¿ paragraph (1)(D)(ii). 

* * * * * * * 

(C) PARAGRAPH NOT TO APPLY IN CERTAIN CASES.—

(i) * * * 

* * * * * * * 

(iii) LIMITATION.—In the case of employer contributions to 1 or more defined contribution plans, this 

194 

paragraph shall only apply to the extent that such contributions exceed 6 percent of the compensation otherwise paid or accrued during the taxable year to the 

beneficiaries under such plans. For purposes of this 

clause, amounts carried over from preceding taxable 

years under subparagraph (B) shall be treated as employer contributions to 1 or more defined contributions 

to the extent attributable to employer contributions to 

such plans in such preceding taxable years. 

ø(D) SECTION 412(i) PLANS.—For purposes of this paragraph, any plan described in section 412(i) shall be treated 

as a defined benefit plan.¿ 

(D) INSURANCE CONTRACT PLANS.—For purposes of this 

paragraph, a plan described in section 412(e)(3) shall be 

treated as a defined benefit plan. 

* * * * * * * 

(o) DEDUCTION LIMIT FOR SINGLE-EMPLOYER PLANS.—For purposes of subsection (a)(1)(A)—

(1) IN GENERAL.—In the case of a defined benefit plan to 

which subsection (a)(1)(A) applies (other than a multiemployer 

plan), the amount determined under this subsection for any taxable year shall be equal to the amount determined under paragraph (2) with respect to each plan year ending with or within 

the taxable year. 

(2) DETERMINATION OF AMOUNT.—The amount determined 

under this paragraph for any plan year shall be equal to the 

excess (if any) of—

(A) the greater of—

(i) the sum of—

(I) 150 percent of the funding target applicable 

to the plan for such plan year, determined under 

section 430, plus 

(II) the target normal cost applicable to the plan 

for such plan year, determined under section 

430(b), or 

(ii) in the case of a plan that is not in an at-risk status (as determined under 430(i)), the sum of—

(I) the funding target which would be applicable 

to the plan for such plan year if such plan were in 

an at-risk status, determined under section 430(d) 

(with regard to section 430(i)), plus 

(II) the target normal cost which would be applicable to the plan for such plan year if such plan 

were in an at-risk status, determined under section 

430(d) (with regard to section 430(i)), over 

(B) the value of the plan assets (determined under section 

430(g)). 

(3) SPECIAL RULE FOR TERMINATING PLANS.—In the case of a 

plan which, subject to section 4041 of the Employee Retirement 

Income Security Act of 1974, terminates during the plan year, 

the amount determined under paragraph (2) shall not be less 

than the amount required to make the plan sufficient for benefit 

liabilities (within the meaning of section 4041(d) of such Act). 

195 

(4) DEFINITIONS.—Any term used in this subsection which is 

also used in section 430 shall have the same meaning given 

such term by section 430. 

SEC. 404A. DEDUCTION FOR CERTAIN FOREIGN DEFERRED COMPENSATION PLANS. 

(a) * * * 

* * * * * * * 

(g) OTHER SPECIAL RULES.—

(1) * * * 

* * * * * * * 

(3) ACTUARIAL ASSUMPTIONS MUST BE REASONABLE; FULL

FUNDING.—

(A) IN GENERAL.—Except as provided in subparagraph 

(B), principles similar to those set forth in øparagraphs (3) 

and (7) of section 412(c)¿ sections 430(h)(1) and 431(c)(3) 

and (6) shall apply for purposes of this section. 

* * * * * * * 

SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED COMPENSATION UNDER NONQUALIFIED DEFERRED COMPENSATION 

PLANS. 

(a) * * * 

(b) RULES RELATING TO FUNDING.—

(1) * * * 

* * * * * * * 

(3) EMPLOYER’S DEFINED BENEFIT PLAN IN AT-RISK STATUS.—

If—

(A) during any period in which a defined benefit plan to 

which section 412 applies is in an at-risk status (as defined 

in section 430(i)(3)), assets are set aside (directly or indirectly) in a trust (or other arrangement determined by the 

Secretary), or transferred to such a trust or other arrangement, for purposes of paying deferred compensation under 

a nonqualified deferred compensation plan of the employer 

maintaining the defined benefit plan, or 

(B) a nonqualified deferred compensation plan of the employer provides that assets will become restricted to the provision of benefits under the plan in connection with such 

at-risk status (or other similar financial measure determined by the Secretary) of the defined benefit plan, or assets are so restricted, 

such assets shall for purposes of section 83 be treated as property transferred in connection with the performance of services 

whether or not such assets are available to satisfy claims of 

general creditors. Subparagraph (A) shall not apply with respect to any assets which are so set aside before the defined benefit plan is in at-risk status. 

ø(3)¿ (4) INCOME INCLUSION FOR OFFSHORE TRUSTS AND EMPLOYER’S FINANCIAL HEALTH.—For each taxable year that assets treated as transferred under this subsection remain set 

aside in a trust or other arrangement subject to øparagraph (1) 

or (2)¿ paragraph (1), (2), or (3), any increase in value in, or 

earnings with respect to, such assets shall be treated as an adVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00195 Fmt 6659 Sfmt 6601 E:\HR\OC\HR232P2.XXX HR232P2
196 

ditional transfer of property under this subsection (to the extent not previously included in income). 

ø(4)¿ (5) INTEREST ON TAX LIABILITY PAYABLE WITH RESPECT

TO TRANSFERRED PROPERTY.— (A) IN GENERAL.—If amounts are required to be included 

in gross income by reason of øparagraph (1) or (2)¿ paragraph (1), (2), or (3) for a taxable year, the tax imposed by 

this chapter for such taxable year shall be increased by the 

sum of—

(i) * * * 

* * * * * * * 

(B) INTEREST.—For purposes of subparagraph (A), the 

interest determined under this subparagraph for any taxable year is the amount of interest at the underpayment 

rate plus 1 percentage point on the underpayments that 

would have occurred had the amounts so required to be included in gross income by øparagraph (1) or (2)¿ paragraph (1), (2), or (3) been includible in gross income for the 

taxable year in which first deferred or, if later, the first 

taxable year in which such amounts are not subject to a 

substantial risk of forfeiture. 

* * * * * * * 

SUBPART B—SPECIAL RULES 

SEC. 411. MINIMUM VESTING STANDARDS. 

(a) GENERAL RULE.—A trust shall not constitute a qualified trust 

under section 401(a) unless the plan of which such trust is a part 

provides that an employee’s right to his normal retirement benefit 

is nonforfeitable upon the attainment of normal retirement age (as 

defined in paragraph (8)) and in addition satisfies the requirements 

of paragraphs (1), (2), and (11) of this subsection and the requirements of subsection (b)(3), and also satisfies, in the case of a defined benefit plan, the requirements of subsection (b)(1) and, in the 

case of a defined contribution plan, the requirements of subsection 

(b)(2). 

(1) * * * 

* * * * * * * 

(3) CERTAIN PERMITTED FORFEITURES, SUSPENSIONS, ETC.—

For purposes of this subsection—

(A) * * * 

* * * * * * * 

(C) EFFECT OF RETROACTIVE PLAN AMENDMENTS.—A 

right to an accrued benefit derived from employer contributions shall not be treated as forfeitable solely because 

plan amendments may be given retroactive application as 

provided in øsection 412(c)(8)¿ section 412(d)(2). 

* * * * * * * 

(G) TREATMENT OF MATCHING CONTRIBUTIONS FORFEITED

BY REASON OF EXCESS DEFERRAL OR CONTRIBUTION OR ERRONEOUS AUTOMATIC CONTRIBUTION.—A matching contribution (within the meaning of section 401(m)) shall not 

197 

be treated as forfeitable merely because such contribution 

is forfeitable if the contribution to which the matching contribution relates is treated as an excess contribution under 

section 401(k)(8)(B), an excess deferral under section 

402(g)(2)(A), an erroneous automatic contribution under 

section 414(w), or an excess aggregate contribution under 

section 401(m)(6)(B). 

* * * * * * * 

(13) DETERMINATIONS OF ACCRUED BENEFIT AS BALANCE OF

BENEFIT ACCOUNT.—

(A) IN GENERAL.—A defined benefit plan under which the 

accrued benefit payable under the plan upon distribution 

(or any portion thereof) is expressed as the balance of a hypothetical account maintained for the participant shall not 

be treated as failing to meet the requirements of subsection 

(a)(2) and section 417(e) solely because of the amount actually made available for such distribution under the terms 

of the plan, in any case in which the applicable interest 

rate that would be used under the terms of the plan to 

project the amount of the participant’s account balance to 

normal retirement age is not greater than a market rate of 

return. 

(B) REGULATIONS.—The Secretary may provide by regulation for rules governing the calculation of a market rate of 

return for purposes of subparagraph (A) and for permissible methods of crediting interest to the account (including 

variable interest rates) resulting in effective rates of return 

meeting the requirements of subparagraph (A). 

(b) ACCRUED BENEFIT REQUIREMENTS.—

(1) DEFINED BENEFIT PLANS.—

(A) * * * 

* * * * * * * 

(F) CERTAIN INSURED DEFINED BENEFIT PLANS.—Notwithstanding subparagraphs (A), (B), and (C), a defined benefit 

plan satisfies the requirements of this paragraph if such 

plan—

(i) * * * 

(ii) satisfies the requirements of øparagraphs (2) and 

(3) of section 412(i)¿ subparagraphs (B) and (C) of section 412(e)(3) (relating to certain insurance contract 

plans), but only if an employee’s accrued benefit as of 

any applicable date is not less than the cash surrender 

value his insurance contracts would have on such applicable date if the requirements of øparagraphs (4), 

(5), and (6) of section 412(i)¿ subparagraphs (D), (E), 

and (F) of section 412(e)(3) were satisfied. 

* * * * * * * 

(H) CONTINUED ACCRUAL BEYOND NORMAL RETIREMENT

AGE.—

(i) * * * 

* * * * * * * 

(vi) COMPARISON TO SIMILARLY SITUATED YOUNGER

INDIVIDUAL.—

198 

(I) IN GENERAL.—A plan shall not be treated as 

failing to meet the requirements of clause (i) if a 

participant’s entire accrued benefit, as determined 

as of any date under the formula for determining 

benefits as set forth in the text of the plan documents, would be equal to or greater than that of 

any similarly situated, younger individual. 

(II) SIMILARLY SITUATED.—For purposes of this 

clause, an individual is similarly situated to a 

participant if such individual is identical to such 

participant in every respect (including period of 

service, compensation, position, date of hire, work 

history, and any other respect) except for age. 

(III) DISREGARD OF SUBSIDIZED EARLY RETIREMENT BENEFITS.—In determining the entire accrued benefit for purposes of this clause, the subsidized portion of any early retirement benefit (including any early retirement subsidy that is fully 

or partially included or reflected in an employee’s 

opening balance or other transition benefits) shall 

be disregarded. 

(vii) INTEREST ON HYPOTHETICAL ACCOUNTS.—A plan 

under which the accrued benefit payable under the 

plan upon distribution (or any portion thereof) is expressed as the balance of a hypothetical account maintained for the participant shall not be treated as failing 

to meet the requirements of clause (i) solely because interest accruing on such balance is taken into account. 

(viii) CERTAIN OFFSETS PERMITTED.—A plan shall 

not be treated as failing to meet the requirements of 

this subparagraph solely because the plan provides allowable offsets against those benefits under the plan 

which are attributable to employer contributions, based 

on benefits which are provided under title II of the Social Security Act, the Railroad Retirement Act of 1974, 

another plan described in section 401(a)maintained by 

the same employer, or under any retirement program 

for officers or employees of the Federal Government or 

of the government of any State or political subdivision 

thereof. For purposes of this clause, allowable offsets 

based on such benefits consist of offsets equal to all or 

part of the actual benefit payment amounts, reasonable 

projections or estimations of such benefit payment 

amounts, or actuarial equivalents of such actual benefit payment amounts, projections, or estimations (determined on the basis of reasonable actuarial assumptions). 

(ix) PERMITTED DISPARITIES IN PLAN CONTRIBUTIONS

OR BENEFITS.—A plan shall not be treated as failing to 

meet the requirements of this subparagraph solely because the plan provides a disparity in contributions or 

benefits with respect to which the requirements of section 401(l) are met. 

(x) PRE-RETIREMENT INDEXING PERMITTED.—

199 

(I) IN GENERAL.—A plan shall not be treated as 

failing to meet the requirements of this subparagraph solely because the plan provides for pre-retirement indexing of accrued benefits under the 

plan. 

(II) PRE-RETIREMENT INDEXING.—For purposes 

of this clause, the term ‘‘pre-retirement indexing’’ means, in connection with an accrued benefit, the 

periodic adjustment of the accrued benefit by 

means of the application of a recognized index or 

methodology so as to protect the economic value of 

the benefit against inflation prior to distribution. 

* * * * * * * 

(d) SPECIAL RULES.— (1) * * * 

* * * * * * * 

(6) ACCRUED BENEFIT NOT TO BE DECREASED BY AMEND- MENT.—

(A) IN GENERAL.—A plan shall be treated as not satisfying the requirements of this section if the accrued benefit 

of a participant is decreased by an amendment of the plan, 

other than an amendment described in øsection 412(c)(8)¿ 

section 412(d)(2), or section 4281 of the Employee Retirement Income Security Act of 1974. 

* * * * * * * 

SEC. 412. MINIMUM FUNDING STANDARDS. 

(a) * * * 

(b) FUNDING STANDARD ACCOUNT.— (1) * * * 

* * * * * * * 

(5) INTEREST.— (A) * * * 

(B) REQUIRED CHANGE OF INTEREST RATE.—For purposes 

of determining a plan’s current liability and for purposes 

of determining a plan’s required contribution under section 

412(l) for any plan year— (i) * * * 

(ii) PERMISSIBLE RANGE.—For purposes of this subparagraph— (I) * * * 

(II) SPECIAL RULE FOR YEARS 2004 øAND 2005¿, 2005, AND 2006.—In the case of plan years beginning after December 31, 2003, and before øJanuary 1, 2006¿ January 1, 2007, the term ‘‘permissible range’’ means a rate of interest which is not 

above, and not more than 10 percent below, the 

weighted average of the rates of interest on 

amounts invested conservatively in long-term investment grade corporate bonds during the 4-year 

period ending on the last day before the beginning 

of the plan year. Such rates shall be determined 

by the Secretary on the basis of 2 or more indices 

that are selected periodically by the Secretary and 

200 

that are in the top 3 quality levels available. The 

Secretary shall make the permissible range, and 

the indices and methodology used to determine 

the average rate, publicly available. 

* * * * * * * 

(l) ADDITIONAL FUNDING REQUIREMENTS FOR PLANS WHICH ARE

NOT MULTIEMPLOYER PLANS.—

(1) * * * 

* * * * * * * 

(7) CURRENT LIABILITY.—For purposes of this subsection—

(A) * * * 

* * * * * * * 

(C) INTEREST RATE AND MORTALITY ASSUMPTIONS USED.—

Effective for plan years beginning after December 31, 

1994—

(i) INTEREST RATE.—

(I) * * * 

* * * * * * * 

(IV) SPECIAL RULE FOR 2004 øAND 2005¿, 2005, 

AND 2006.—For plan years beginning in 2004 øor 

2005¿, 2005, or 2006, notwithstanding subclause 

(I), the rate of interest used to determine current 

liability under this subsection shall be the rate of 

interest under subsection (b)(5). 

* * * * * * * 

[Section 111(a) of H.R. 2830 amends section 412 to read as follows. Subsection (b) provides that the amendment shall apply to plan years beginning after December 31, 2006.] 

øSEC. 412. MINIMUM FUNDING STANDARDS. 

ø(a) GENERAL RULE.—Except as provided in subsection (h), this 

section applies to a plan if, for any plan year beginning on or after 

the effective date of this section for such plan—

ø(1) such plan included a trust which qualified (or was determined by the Secretary to have qualified) under section 401(a), 

or 

ø(2) such plan satisfied (or was determined by the Secretary 

to have satisfied) the requirements of section 403(a). 

A plan to which this section applies shall have satisfied the minimum funding standard for such plan for a plan year if as of the 

end of such plan year, the plan does not have an accumulated funding deficiency. For purposes of this section and section 4971, the 

term ‘‘accumulated funding deficiency’’ means for any plan the excess of the total charges to the funding standard account for all 

plan years (beginning with the first plan year to which this section 

applies) over the total credits to such account for such years or, if 

less, the excess of the total charges to the alternative minimum 

funding standard account for such plan years over the total credits 

to such account for such years. In any plan year in which a multiemployer plan is in reorganization, the accumulated funding deficiency of the plan shall be determined under section 418B. 

ø(b) FUNDING STANDARD ACCOUNT.—

201 

ø(1) ACCOUNT REQUIRED.—Each plan to which this section 

applies shall establish and maintain a funding standard account. Such account shall be credited and charged solely as 

provided in this section. 

ø(2) CHARGES TO ACCOUNT.—For a plan year, the funding 

standard account shall be charged with the sum of— ø(A) the normal cost of the plan for the plan year, 

ø(B) the amounts necessary to amortize in equal annual 

installments (until fully amortized)— ø(i) in the case of a plan in existence on January 1, 

1974, the unfunded past service liability under the 

plan on thefirst day of the first plan year to which this 

section applies, over a period of 40 plan years, 

ø(ii) in the case of a plan which comes into existence 

after January 1, 1974, the unfunded past service 

liabilityunder the plan on the first day of the first plan 

year to which this section applies, over a period of 30 

plan years, 

ø(iii) separately, with respect to each plan year, the 

net increase (if any) in unfunded past service liability 

under theplan arising from plan amendments adopted 

in such year, over a period of 30 plan years, 

ø(iv) separately, with respect to each plan year, the 

net experience loss (if any) under the plan, over a period of 5 plan years (15 plan years in the case of a 

multiemployer plan), and 

ø(v) separately, with respect to each plan year, the 

net loss (if any) resulting from changes in actuarial assumptions used under the plan, over a period of 10 

plan years (30 plan years in the case of a multiemployer plan), 

ø(C) the amount necessary to amortize each waived 

funding deficiency (within the meaning of subsection 

(d)(3)) for each prior plan year in equal annual installments (until fully amortized) over a period of 5 plan years 

(15 plan years in the case of a multiemployer plan), 

ø(D) the amount necessary to amortize in equal annual 

installments (until fully amortized) over a period of 5 plan 

years any amount credited to the funding standard account under paragraph (3)(D), and 

ø(E) the amount necessary to amortize in equal annual 

installments (until fully amortized) over a period of 20 

years the contributions which would be required to be 

made under the plan but for the provisions of subsection 

(c)(7)(A)(i)(I). 

For additional requirements in the case of plans other than multiemployer plans, see subsection (l). 

ø(3) CREDITS TO ACCOUNT.—For a plan year, the funding 

standard account shall be credited with the sum of—

ø(A) the amount considered contributed by the employer 

to or under the plan for the plan year, 

ø(B) the amount necessary to amortize in equal annual 

installments (until fully amortized)—

ø(i) separately, with respect to each plan year, the 

net decrease (if any) in unfunded past service liability 

202 

under the plan arising from plan amendments adopted 

in such year, over a period of 30 plan years, 

ø(ii) separately, with respect to each plan year, the 

net experience gain (if any) under the plan, over a period of 5 plan years (15 plan years in the case of a 

multiemployer plan), and 

ø(iii) separately, with respect to each plan year, the 

net gain (if any) resulting from changes in actuarial 

assumptions used under the plan, over a period of 10 

plan years (30 plan years in the case of a multiemployer plan), 

ø(C) the amount of the waived funding deficiency (within 

the meaning of subsection (d)(3)) for the plan year, and 

ø(D) in the case of a plan year for which the accumulated funding deficiency is determined under the funding 

standard account if such plan year follows a plan year for 

which such deficiency was determined under the alternative minimum funding standard, the excess (if any) of 

any debit balance in the funding standard account (determined without regard to this subparagraph) over any debit 

balance in the alternative minimum funding standard account. 

ø(4) COMBINING AND OFFSETTING AMOUNTS TO BE AMOR- TIZED.—Under regulations prescribed by the Secretary, 

amounts required to be amortized under paragraph (2) or paragraph (3), as the case may be— ø(A) may be combined into one amount under such paragraph to be amortized over a period determined on the 

basis of the remaining amortization period for all items entering into such combined amount, and 

ø(B) may be offset against amounts required to be amortized under the other such paragraph, with the resulting 

amount to be amortized over a period determined on the 

basis of the remaining amortization periods for all items 

entering into whichever of the two amounts being offset is 

the greater. 

ø(5) INTEREST.— ø(A) IN GENERAL.—The funding standard account (and 

items therein) shall be charged or credited (as determined 

under regulations prescribed by the Secretary) with interest at the appropriate rate consistent with the rate or 

rates of interest used under the plan to determine costs. 

ø(B) REQUIRED CHANGE OF INTEREST RATE.—For purposes of determining a plan’s current liability and for purposes of determining a plan’s required contribution under 

section 412(l) for any plan year—

ø(i) IN GENERAL.—If any rate of interest used under 

the plan to determine cost is not within the permissible range, the plan shall establish a new rate of interest within the permissible range. 

ø(ii) PERMISSIBLE RANGE.—For purposes of this subparagraph— ø(I) IN GENERAL.—Except as provided in subclause (II) or (III), the term ‘‘permissible range’’

means a rate of interest which is not more than 

203 

10 percent above, and not more than 10 percent 

below, the weighted average of the rates of interest on 30-year Treasury securities during the 4- 

year period ending on the last day before the beginning of the plan year. 

ø(II) SPECIAL RULE FOR YEARS 2004 AND 2005.— In the case of plan years beginning after December 31, 2003, and before January 1, 2006, the 

term ‘‘permissible range’’ means a rate of interest 

which is not above, and not more than 10 percent 

below, the weighted average of the rates of interest on amounts invested conservatively in longterm investment grade corporate bonds during the 

4-year period ending on the last day before the beginning of the plan year. Such rates shall be determined by the Secretary on the basis of 2 or 

more indices that are selected periodically by the 

Secretary and that are in the top 3 quality levels 

available. The Secretary shall make the permissible range, and the indices and methodology used 

to determine the average rate, publicly available. 

ø(III) SECRETARIAL AUTHORITY.—If the Secretary finds that the lowest rate of interest permissible under subclause (I) or (II) is unreasonably high, the Secretary may prescribe a lower 

rate of interest, except that such rate may not be 

less than 80 percent of the average rate determined under such subclause. 

ø(iii) ASSUMPTIONS.—Notwithstanding subsection 

(c)(3)(A)(i), the interest rate used under the plan shall 

be—

ø(I) determined without taking into account the 

experience of the plan and reasonable expectations, but 

ø(II) consistent with the assumptions which reflect the purchase rates which would be used by 

insurance companies to satisfy the liabilities 

under the plan. 

ø(6) CERTAIN AMORTIZATION CHARGES AND CREDITS.—In the 

case of a plan which, immediately before the date of the enactment of the Multiemployer Pension Plan Amendments Act of 

1980, was a multiemployer plan (within the meaning of section 

414(f) as in effect immediately before such date)— ø(A) any amount described in paragraph (2)(B)(ii), 

(2)(B)(iii), or (3)(B)(i) of this subsection which arose in a 

plan year beginning before such date shall be amortized in 

equal annual installments (until fully amortized) over 40 

plan years, beginning with the plan year in which the 

amount arose; 

ø(B) any amount described in paragraph (2)(B)(iv) or 

(3)(B)(ii) of this subsection which arose in a plan year beginning before such date shall be amortized in equal annual installments (until fully amortized) over 20 plan 

years, beginning with the plan year in which the amount 

arose; 

204 

ø(C) any change in past service liability which arises 

during the period of 3 plan years beginning on or after 

such date, and results from a plan amendment adopted before such date, shall be amortized in equal annual installments (until fully amortized) over 40 plan years, beginning 

with the plan year in which the change arises; and 

ø(D) any change in past service liability which arises 

during the period of 2 plan years beginning on or after 

such date, and results from the changing of a group of participants from one benefit level to another benefit level 

under a schedule of plan benefits which— ø(i) was adopted before such date, and 

ø(ii) was effective for any plan participant before the 

beginning of the first plan year beginning on or after 

such date, shall be amortized in equal annual installments (until fully amortized) over 40 plan years, beginning with the plan year in which the change arises. 

ø(7) SPECIAL RULES FOR MULTIEMPLOYER PLANS.—For purposes of this section— ø(A) WITHDRAWAL LIABILITY.—Any amount received by a 

multiemployer plan in payment of all or part of an employer’s withdrawal liability under part 1 of subtitle E of title 

IV of the Employee Retirement Income Security Act of 

1974 shall be considered an amount contributed by the employer to or under the plan. The Secretary may prescribe 

by regulation additional charges and credits to a multiemployer plan’s funding standard account to the extent necessary to prevent withdrawal liability payments from 

being unduly reflected as advance funding for plan liabilities. 

ø(B) ADJUSTMENTS WHEN A MULTIEMPLOYER PLAN

LEAVES REORGANIZATION.—If a multiemployer plan is not 

in reorganization in the plan year but was in reorganization in the immediately preceding plan year, any balance 

in the funding standard account at the close of such immediately preceding plan year— ø(i) shall be eliminated by an offsetting credit or 

charge (as the case may be), but 

ø(ii) shall be taken into account in subsequent plan 

years by being amortized in equal annual installments 

(until fully amortized) over 30 plan years. 

The preceding sentence shall not apply to the extent of any 

accumulated funding deficiency under section 418B(a) as of 

the end of the last plan year that the plan was in reorganization. 

ø(C) PLAN PAYMENTS TO SUPPLEMENTAL PROGRAM OR

WITHDRAWAL LIABILITY PAYMENT FUND.—Any amount paid 

by a plan during a plan year to the Pension Benefit Guaranty Corporation pursuant to section 4222 of such Act or 

to a fund exempt under section 501(c)(22) pursuant to section 4223 of such Act shall reduce the amount of contributions considered received by the plan for the plan year. 

ø(D) INTERIM WITHDRAWAL LIABILITY PAYMENTS.—Any 

amount paid by an employer pending a final determination 

of the employer’s withdrawal liability under part 1 of subVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00204 Fmt 6659 Sfmt 6601 E:\HR\OC\HR232P2.XXX HR232P2
205 

title E of title IV of such Act and subsequently refunded 

to the employer by the plan shall be charged to the funding standard account in accordance with regulations prescribed by the Secretary. 

ø(E) For purposes of the full funding limitation under 

subsection (c)(7), unless otherwise provided by the plan, 

the accrued liability under a multiemployer plan shall not 

include benefits which are not nonforfeitable under the 

plan after the termination of the plan (taking into consideration section 411(d)(3)). 

ø(F) ELECTION FOR DEFERRAL OF CHARGE FOR PORTION

OF NET EXPERIENCE LOSS.—

ø(i) IN GENERAL.—With respect to the net experience 

loss of an eligible multiemployer plan for the first plan 

year beginning after December 31, 2001, the plan 

sponsor may elect to defer up to 80 percent of the 

amount otherwise required to be charged under paragraph (2)(B)(iv) for any plan year beginning after June 

30, 2003, and before July 1, 2005, to any plan year selected by the plan from either of the 2 immediately 

succeeding plan years. 

ø(ii) INTEREST.—For the plan year to which a charge 

is deferred pursuant to an election under clause (i), 

the funding standard account shall be charged with interest on the deferred charge for the period of deferral 

at the rate determined under subsection (d) for multiemployer plans. 

ø(iii) RESTRICTIONS ON BENEFIT INCREASE.—No 

amendment which increases the liabilities of the plan 

by reason of any increase in benefits, any change in 

the accrual of benefits, or any change in the rate at 

which benefits become nonforfeitable under the plan 

shall beadopted during any period for which a charge 

is deferred pursuant to an election under clause (i), 

unless—

ø(I) the plan’s enrolled actuary certifies (in such 

form and manner prescribed by the Secretary) 

that the amendment provides for an increase in 

annual contributions which will exceed the increase in annual charges to the funding standard 

account attributable to such amendment, or 

ø(II) the amendment is required by a collective 

bargaining agreement which is in effect on the 

date of enactment of this subparagraph. 

If a plan is amended during any such plan year in violation of the preceding sentence, any election under 

this paragraph shall not apply to any such plan year 

ending on or after the date on which such amendment 

is adopted. 

ø(iv) ELIGIBLE MULTIEMPLOYER PLAN.—For purposes 

of this subparagraph, the term ‘‘eligible multiemployer 

plan’’ means a multiemployer plan—

ø(I) which had a net investment loss for the 

first plan year beginning after December 31, 2001, 

206 

of at least 10 percent of the average fair market 

value of the plan assets during the plan year, and 

ø(II) with respect to which the plan’s enrolled 

actuary certifies (not taking into account the application of this subparagraph), on the basis of the 

actuarial assumptions used for the last plan year 

ending before the date of the enactment of this 

subparagraph, that the plan is projected to have 

an accumulated funding deficiency (within the 

meaning of subsection (a)) for any plan year beginning after June 30, 2003, and before July 1, 

2006. 

For purposes of subclause (I), a plan’s net investment 

loss shall be determined on the basis of the actual loss 

and not under any actuarial method used under subsection (c)(2). 

ø(v) EXCEPTION TO TREATMENT OF ELIGIBLE MULTI- EMPLOYER PLAN.—In no event shall a plan be treated 

as an eligible multiemployer plan under clause (iv) 

if— ø(I) for any taxable year beginning during the 

10-year period preceding the first plan year for 

which an election is made under clause (i), any 

employer required to contribute to the plan failed 

to timely pay any excise tax imposed under section 4971 with respect to the plan, 

ø(II) for any plan year beginning after June 30, 

1993, and before the first plan year for which an 

election is made under clause (i), the average contribution required to be made by all employers to 

the plan does not exceed 10 cents per hour or no 

employer is required to make contributions to the 

plan, or 

ø(III) with respect to any of the plan years beginning after June 30, 1993, and before the first 

plan year for which an election is made under 

clause (i), a waiver was granted under section 

412(d) or section 303 of the Employee Retirement 

Income Security Act of 1974 with respect to the 

plan or an extension of an amortization period 

was granted under subsection (e) or section 304 of 

such Act with respect to the plan. 

ø(vi) ELECTION.—An election under this subparagraph shall be made at such time and in such manner 

as the Secretary may prescribe. 

ø(c) SPECIAL RULES.—

ø(1) DETERMINATIONS TO BE MADE UNDER FUNDING METH- OD.—For purposes of this section, normal costs, accrued liability, past service liabilities, and experience gains and losses 

shall be determined under the funding method used to determine costs under the plan. 

ø(2) VALUATION OF ASSETS.— ø(A) IN GENERAL.—For purposes of this section, the 

value of the plan’s assets shall be determined on the basis 

of any reasonable actuarial method of valuation which 

207 

takes into account fair market value and which is permitted under regulations prescribed by the Secretary. 

ø(B) ELECTION WITH RESPECT TO BONDS.—The value of a 

bond or other evidence of indebtedness which is not in default as to principal or interest may, at the election of the 

plan administrator, be determined on an amortized basis 

running from initial cost at purchase to par value at maturity or earliest call date. Any election under this subparagraph shall be made at such time and in such manner as 

the Secretary shall by regulations provide, shall apply to 

all such evidences of indebtedness, and may be revoked 

only with the consent of the Secretary. In the case of a 

plan other than a multiemployer plan, this subparagraph 

shall not apply, but the Secretary may by regulations provide that the value of any dedicated bond portfolio of such 

plan shall be determined by using the interest rate under 

subsection (b)(5). 

ø(3) ACTUARIAL ASSUMPTIONS MUST BE REASONABLE.—For 

purposes of this section, all costs, liabilities, rates of interest, 

and other factors under the plan shall be determined on the 

basis of actuarial assumptions and methods—

ø(A) in the case of—

ø(i) a plan other than a multiemployer plan, each of 

which is reasonable (taking into account the experience of the plan and reasonable expectations) or 

which, in the aggregate, result in a total contribution 

equivalent to that which would be determined if each 

such assumption and method were reasonable, or 

ø(ii) a multiemployer plan, which, in the aggregate, 

are reasonable (taking into account the experiences of 

the plan and reasonable expectations), and 

ø(B) which, in combination, offer the actuary’s best estimate of anticipated experience under the plan. 

ø(4) TREATMENT OF CERTAIN CHANGES AS EXPERIENCE GAIN

OR LOSS.—For purposes of this section, if—

ø(A) a change in benefits under the Social Security Act 

or in other retirement benefits created under Federal or 

State law, or 

ø(B) a change in the definition of the term ‘‘wages’’

under section 3121, or a change in the amount of such 

wages taken into account under regulations prescribed for 

purposes of section 401(a)(5), results in an increase or decrease in accrued liability under a plan, such increase or 

decrease shall be treated as an experience loss or gain. 

ø(5) CHANGE IN FUNDING METHOD OR IN PLAN YEAR REQUIRES

APPROVAL.—

ø(A) IN GENERAL.—If the funding method for a plan is 

changed, the new funding method shall become the funding method used to determine costs and liabilities under 

the plan only if the change is approved by the Secretary. 

If the plan year for a plan is changed, the new plan year 

shall become the plan year for the plan only if the change 

is approved by the Secretary. 

208 

ø(B) APPROVAL REQUIRED FOR CERTAIN CHANGES IN ASSUMPTIONS BY CERTAIN SINGLE-EMPLOYER PLANS SUBJECT

TO ADDITIONAL FUNDING REQUIREMENT.—

ø(i) IN GENERAL.—No actuarial assumption (other 

than the assumptions described in subsection (l)(7)(C)) 

used to determine thecurrent liability for a plan to 

which this subparagraph applies may be changed 

without the approval of the Secretary. 

ø(ii) PLANS TO WHICH SUBPARAGRAPH APPLIES.—This 

subparagraph shall apply to a plan only if—

ø(I) the plan is a defined benefit plan (other 

than a multiemployer plan) to which title IV of 

the Employee Retirement Income Security Act of 

1974 applies; 

ø(II) the aggregate unfunded vested benefits as 

of the close of the preceding plan year (as determined under section 4006(a)(3)(E)(iii) of the Employee Retirement Income Security Act of 1974) of 

such plan and all other plans maintained by the 

contributing sponsors (as defined in section 

4001(a)(13) of such Act) and members of such 

sponsors’ controlled groups (as defined in section 

4001(a)(14) of such Act) which are covered by title 

IV of such Act (disregarding plans with no unfunded vested benefits) exceed $50,000,000; and 

ø(III) the change in assumptions (determined 

after taking into account any changes in interest 

rate and mortality table) results in a decrease in 

the unfunded current liability of the plan for the 

current plan year that exceeds $50,000,000, or 

that exceeds $5,000,000 and that is 5 percent or 

more of the current liability of the plan before 

such change. 

ø(6) FULL FUNDING.—If, as of the close of a plan year, a plan 

would (without regard to this paragraph) have an accumulated 

funding deficiency (determined without regard to the alternative minimum funding standard account permitted under 

subsection (g)) in excess of the full funding limitation—

ø(A) the funding standard account shall be credited with 

the amount of such excess, and 

ø(B) all amounts described in paragraphs (2)(B), (C), and 

(D) and (3)(B) of subsection (b) which are required to be 

amortized shall be considered fully amortized for purposes 

of such paragraphs. 

ø(7) FULL-FUNDING LIMITATION.—

ø(A) IN GENERAL.—For purposes of paragraph (6), the 

term ‘‘full-funding limitation’’ means the excess (if any) 

of—

ø(i) the lesser of—

ø(I) in the case of plan years beginning before 

January 1, 2004, the applicable percentage of current liability (including the expected increase in 

current liability due to benefits accruing during 

the plan year), or 

209 

ø(II) the accrued liability (including normal 

cost) under the plan (determined under the entry 

age normal funding method if such accrued liability cannot be directly calculated under the funding 

method used for the plan), over 

ø(ii) the lesser of—

ø(I) the fair market value of the plan’s assets, or 

ø(II) the value of such assets determined under 

paragraph (2). 

ø(B) CURRENT LIABILITY.—For purposes of subparagraph 

(D) and subclause (I) of subparagraph (A)(i), the term ‘‘current liability’’ has the meaning given such term by subsection (l)(7) (without regard to subparagraphs (C) and (D) 

thereof) and using the rate of interest used under subsection (b)(5)(B). 

ø(C) SPECIAL RULE FOR PARAGRAPH (6)(B).—For purposes 

of paragraph (6)(B), subparagraph (A)(i) shall be applied 

without regard to subclause (I) thereof. 

ø(D) REGULATORY AUTHORITY.—The Secretary may by 

regulations provide—

ø(i) for adjustments to the percentage contained in 

subparagraph (A)(i) to take into account the respective 

ages or lengths of service of the participants, and 

ø(ii) alternative methods based on factors other than 

current liability for the determination of the amount 

taken into account under subparagraph (A)(i). 

ø(iii) [Stricken] 

ø(E) MINIMUM AMOUNT.—

ø(i) IN GENERAL.—In no event shall the full-funding 

limitation determined under subparagraph (A) be less 

than the excess (if any) of—

ø(I) 90 percent of the current liability of the 

plan (including the expected increase in current liability due to benefits accruing during the plan 

year), over 

ø(II) the value of the plan’s assets determined 

under paragraph (2). 

ø(ii) CURRENT LIABILITY: ASSETS.—For purposes of 

clause (i)—

ø(I) the term ‘‘current liability’’ has the meaning 

given such term by subsection (l)(7) (without regard to subparagraph (D) thereof), and 

ø(II) assets shall not be reduced by any credit 

balance in the funding standard account. 

ø(F) APPLICABLE PERCENTAGE.—For purposes of subparagraph (A)(i)(I), the applicable percentage shall be determined in accordance with the following table: 

øIn the case of any plan The applicable

year beginning in: percentage is: 

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

2003 ....................................................................................................... 170.

ø(8) CERTAIN RETROACTIVE PLAN AMENDMENTS.—For purposes of this section, any amendment applying to a plan year 

which—

210 

ø(A) is adopted after the close of such plan year but no 

later than 2 and one-half months after the close of the 

plan year (or, in the case of a multiemployer plan, no later 

than 2 years after the close of such plan year), 

ø(B) does not reduce the accrued benefit of any participant determined as of the beginning of the first plan year 

to which the amendment applies, and 

ø(C) does not reduce the accrued benefit of any participant determined as of the time of adoption except to the 

extent required by the circumstances, shall, at the election 

of the plan administrator, be deemed to have been made 

on the first day of such plan year. 

No amendment described in this paragraph which reduces the 

accrued benefits of any participant shall take effect unless the 

plan administrator files a notice with the Secretary of Labor 

notifying him of such amendment and the Secretary of Labor 

has approved such amendment, or within 90 days after the 

date on which such notice was filed, failed to disapprove such 

amendment. No amendment described in this subsection shall 

be approved by the Secretary of Labor unless he determines 

that such amendment is necessary because of a substantial 

business hardship (as determined under subsection (d)(2)) and 

that a waiver under subsection (d)(1) is unavailable or inadequate. 

ø(9) ANNUAL VALUATION.—

ø(A) IN GENERAL.—For purposes of this section, a determination of experience gains and losses and a valuation of 

the plan’s liability shall be made not less frequently than 

once every year, except that such determination shall be 

made more frequently to the extent required in particular 

cases under regulations prescribed by the Secretary. 

ø(B) VALUATION DATE.—

ø(i) CURRENT YEAR.—Except as provided in clause 

(ii), the valuation referred to in subparagraph (A) shall 

be made as of a date within the plan year to which the 

valuation refers or within one month prior to the beginning of such year. 

ø(ii) USE OF PRIOR YEAR VALUATION.—The valuation 

referred to in subparagraph (A) may be made as of a 

date within the plan year prior to the year to which 

the valuation refers if, as of such date, the value of the 

assets of the plan are not less than 100 percent of the 

plan’s current liability (as defined in paragraph 

(7)(B)). 

ø(iii) ADJUSTMENTS.—Information under clause (ii) 

shall, in accordance with regulations, be actuarially 

adjusted to reflect significant differences in participants. 

ø(iv) LIMITATION.—A change in funding method to 

use a prior year valuation, as provided in clause (ii), 

may not be made unless as of the valuation date within the prior plan year, the value of the assets of the 

plan are not less than 125 percent of the plan’s current liability (as defined in paragraph (7)(B)). 

211 

ø(10) TIME WHEN CERTAIN CONTRIBUTIONS DEEMED MADE.— For purposes of this section— ø(A) DEFINED BENEFIT PLANS OTHER THAN MULTIEM- PLOYER PLANS.—In the case of a defined benefit plan other 

than a multiemployer plan, any contributions for a plan 

year made by an employer during the period— ø(i) beginning on the day after the last day of such 

plan year, and 

ø(ii) ending on the day which is 8-1/2 months after 

the close of the plan year, shall be deemed to have 

been made on such last day. 

ø(B) OTHER PLANS.—In the case of a plan not described 

in subparagraph (A), any contributions for a plan year 

made by an employer after the last day of such plan year, 

but not later than two and one-half months after such day, 

shall be deemed to have been made on such last day. For 

purposes of this subparagraph, such two and one-half 

month period may be extended for not more than six 

months under regulations prescribed by the Secretary. 

ø(11) LIABILITY FOR CONTRIBUTIONS.—

ø(A) IN GENERAL.—Except as provided in subparagraph 

(B), the amount of any contribution required by this section and any required installments under subsection (m) 

shall be paid by the employer responsible for contributing 

to or under the plan the amount described in subsection 

(b)(3)(A). 

ø(B) JOINT AND SEVERAL LIABILITY WHERE EMPLOYER

MEMBER OF CONTROLLED GROUP.— ø(i) IN GENERAL.—In the case of a plan other than 

a multiemployer plan, if the employer referred to in 

subparagraph (A) is a member of a controlled group, 

each member of such group shall be jointly and severally liable for payment of such contribution or required 

installment. 

ø(ii) CONTROLLED GROUP.—For purposes of clause 

(i), the term ‘‘controlled group’’ means any group treated as a single employer under subsection (b), (c), (m), 

or (o) of section 414. 

ø(12) ANTICIPATION OF BENEFIT INCREASES EFFECTIVE IN THE

FUTURE.—In determining projected benefits, the funding method of a collectively bargained plan described in section 413(a) 

(other than a multiemployer plan) shall anticipate benefit increases scheduled to take effect during the term of the collective bargaining agreement applicable to the plan. 

ø(d) VARIANCE FROM MINIMUM FUNDING STANDARD.—

ø(1) WAIVER IN CASE OF BUSINESS HARDSHIP.—If an employer 

or in the case of a multiemployer plan, 10 percent or more of 

the number of employers contributing to or under the plan, are 

unable to satisfy the minimum funding standard for a plan 

year without temporary substantial business hardship (substantial business hardship in the case of a multiemployer plan) 

and if application of the standard would be adverse to the interests of plan participants in the aggregate, the Secretary 

may waive the requirements of subsection (a) for such year 

with respect to all or any portion of the minimum funding 

212 

standard other than the portion thereof determined under subsection (b)(2)(C). The Secretary shall not waive the minimum 

funding standard with respect to a plan for more than 3 of any 

15 (5 of any 15 in the case of a multiemployer plan) consecutive plan years. The interest rate used for purposes of computing the amortization charge described in subsection 

(b)(2)(C) for any plan year shall be— ø(A) in the case of a plan other than a multiemployer 

plan, the greater of (i) 150 percent of the Federal mid-term 

rate (as in effect under section 1274 for the 1st month of 

such plan year), or (ii) the rate of interest used under the 

plan in determining costs, (including adjustments under 

subsection (b)(5)(B)), and 

ø(B) in the case of a multiemployer plan, the rate determined under section 6621(b). 

ø(2) DETERMINATION OF BUSINESS HARDSHIP.—For purposes 

of this section, the factors taken into account in determining 

temporary substantial business hardship (substantial business 

hardship in the case of a multiemployer plan) shall include 

(but shall not be limited to) whether or not—

ø(A) the employer is operating at an economic loss, 

ø(B) there is substantial unemployment or underemployment in the trade or business and in the industry concerned, 

ø(C) the sales and profits of the industry concerned are 

depressed or declining, and 

ø(D) it is reasonable to expect that the plan will be continued only if the waiver is granted. 

ø(3) WAIVED FUNDING DEFICIENCY.—For purposes of this section, the term ‘‘waived funding deficiency’’ means the portion 

of the minimum funding standard (determined without regard 

to subsection (b)(3)(C)) for a plan year waived by the Secretary 

and not satisfied by employer contributions. 

ø(4) APPLICATION MUST BE SUBMITTED BEFORE DATE 2-1/2

MONTHS AFTER CLOSE OF YEAR.—In the case of a plan other 

than a multiemployer plan, no waiver may be granted under 

this subsection with respect to any plan for any plan year unless an application therefor is submitted to the Secretary not 

later than the 15th day of the 3rd month beginning after the 

close of such plan year. 

ø(5) SPECIAL RULE IF EMPLOYER IS MEMBER OF CONTROLLED

GROUP.—

ø(A) IN GENERAL.—In the case of a plan other than a 

multiemployer plan, if an employer is a member of a controlled group, the temporary substantial business hardship 

requirements of paragraph (1) shall be treated as met only 

if such requirements are met—

ø(i) with respect to such employer, and 

ø(ii) with respect to the controlled group of which 

such employer is a member (determined by treating all 

members of such group as a single employer). 

The Secretary may provide that an analysis of a trade or 

business or industry of a member need not be conducted 

if the Secretary determines such analysis is not necessary 

because the taking into account of such member would not 

213 

significantly affect the determination under this subsection. 

ø(B) CONTROLLED GROUP.—For purposes of subparagraph (A), the term ‘‘controlled group’’ means any group 

treated as a single employer under subsection (b), (c), (m), 

or (o) of section 414. 

ø(e) EXTENSION OF AMORTIZATION PERIODS.—The period of years 

required to amortize any unfunded liability (described in any 

clause of subsection (b)(2)(B)) of any plan may be extended by the 

Secretary of Labor for a period of time (not in excess of 10 years) 

if he determines that such extension would carry out the purposes 

of the Employee Retirement Income Security Act of 1974 and would 

provide adequate protection for participants under the plan and 

their beneficiaries and if he determines that the failure to permit 

such extension would—

ø(1) result in—

ø(A) a substantial risk to the voluntary continuation of 

the plan, or 

ø(B) a substantial curtailment of pension benefit levels 

or employee compensation, and 

ø(2) be adverse to the interests of plan participants in the 

aggregate. 

In the case of a plan other than a multiemployer plan, the interest 

rate applicable for any plan year under any arrangement entered 

into by the Secretary in connection with an extension granted 

under this subsection shall be the greater of (A) 150 percent of the 

Federal mid-term rate (as in effect under section 1274 for the 1st 

month of such plan year), or 

ø(B) the rate of interest used under the plan in determining costs. In the case of a multiemployer plan, such 

rate shall be the rate determined under section 6621(b). 

ø(f) REQUIREMENTS RELATING TO WAIVERS AND EXTENSIONS.—

ø(1) BENEFITS MAY NOT BE INCREASED DURING WAIVER OR EXTENSION PERIOD.—No amendment of the plan which increases 

the liabilities of the plan by reason of any increase in benefits, 

any change in the accrual of benefits, or any change in the rate 

at which benefits become nonforfeitable under the plan shall be 

adopted if a waiver under subsection (d)(1) or an extension of 

time under subsection (e) is in effect with respect to the plan, 

or if a plan amendment described in subsection (c)(8) has been 

made at any time in the preceding 12 months (24 months for 

multiemployer plans). If a plan is amended in violation of the 

preceding sentence, any such waiver or extension of time shall 

not apply to any plan year ending on or after the date on 

which such amendment is adopted. 

ø(2) EXCEPTION.—Paragraph (1) shall not apply to any plan 

amendment which—

ø(A) the Secretary of Labor determines to be reasonable 

and which provides for only de minimis increases in the liabilities of the plan. 

ø(B) only repeals an amendment described in subsection 

(c)(8), or 

ø(C) is required as a condition of qualification under this 

part. 

214 

ø(3) SECURITY FOR WAIVERS AND EXTENSIONS; CONSULTATIONS.—

ø(A) SECURITY MAY BE REQUIRED.—

ø(i) IN GENERAL.—Except as provided in subparagraph (C), the Secretary may require an employer 

maintaining a defined benefit plan which is a singleemployer plan (within the meaning of section 

4001(a)(15) of the Employee Retirement Income Security Act of 1974) to provide security to such plan as a 

condition for granting or modifying a waiver under 

subsection (d) or an extension under subsection (e). 

ø(ii) SPECIAL RULES.—Any security provided under 

clause (i) may be perfected and enforced only by the 

Pension Benefit Guaranty Corporation, or at the direction of the Corporation, by a contributing sponsor 

(within the meaning of section 4001(a)(13) of such 

Act), or a member of such sponsor’s controlled group 

(within the meaning of section 4001(a)(14) of such 

Act). 

ø(B) CONSULTATION WITH THE PENSION BENEFIT GUARANTY CORPORATION.—Except as provided in subparagraph 

(C), the Secretary shall, before granting or modifying a 

waiver under subsection (d) or an extension under subsection (e) with respect to a plan described in subparagraph (A)(i)—

ø(i) provide the Pension Benefit Guaranty Corporation with—

ø(I) notice of the completed application for any 

waiver, extension, or modification, and 

ø(II) an opportunity to comment on such application within 30 days after receipt of such notice, 

and 

ø(ii) consider—

ø(I) any comments of the Corporation under 

clause (i)(II), and 

ø(II) any views of any employee organization 

(within the meaning of section 3(4) of the Employee Retirement Income Security Act of 1974) 

representing participants in the plan which are 

submitted in writing to the Secretary in connection with such application. 

Information provided to the corporation under this subparagraph shall be considered tax return information 

andsubject to the safeguarding and reporting requirements 

of section 6103(p). 

ø(C) EXCEPTION FOR CERTAIN WAIVERS AND EXTENSIONS.—

ø(i) IN GENERAL.—The preceding provisions of this 

paragraph shall not apply to any plan with respect to 

which the sum of—

ø(I) the outstanding balance of the accumulated 

funding deficiencies (within the meaning of subsection (a) and section 302(a) of such Act) of the 

plan, 

215 

ø(II) the outstanding balance of the amount of 

waived funding deficiencies of the plan waived 

under subsection (d) or section 303 of such Act, 

and 

ø(III) the outstanding balance of the amount of 

decreases in the minimum funding standard allowed under subsection (e) or section 304 of such 

Act, is less than $1,000,000. 

ø(ii) ACCUMULATED FUNDING DEFICIENCIES.—For 

purposes of clause (i)(I), accumulated funding deficiencies shall include any increase in such amount 

which would result if all applications for waivers of 

the minimum funding standard under subsection (d) 

or section 303 of such Act and for extensions of the 

amortization period under subsection (e) or section 304 

of such Act which are pending with respect to such 

plan were denied. 

ø(4) ADDITIONAL REQUIREMENTS.—

ø(A) ADVANCE NOTICE.—The Secretary shall, before 

granting a waiver under subsection (d) or an extension 

under subsection (e), require each applicant to provide evidence satisfactory to the Secretary that the applicant has 

provided notice of the filing of the application for such 

waiver or extension to each employee organization representing employees covered by the affected plan, and each 

participant, beneficiary, and alternate payee (within the 

meaning of section 414(p)(8)). Such notice shall include a 

description of the extent to which the plan is funded for 

benefits which are guaranteed under title IV of such Act 

and for benefit liabilities. 

ø(B) CONSIDERATION OF RELEVANT INFORMATION.—The 

Secretary shall consider any relevant information provided 

by a person to whom notice was given under subparagraph 

(A). 

ø(g) ALTERNATIVE MINIMUM FUNDING STANDARD.—

ø(1) IN GENERAL.—A plan which uses a funding method that 

requires contributions in all years not less than those required 

under the entry age normal funding method may maintain an 

alternative minimum funding standard account for any plan 

year. Such account shall be credited and charged solely as provided in this subsection. 

ø(2) CHARGES AND CREDITS TO ACCOUNT.—For a plan year 

the alternative minimum funding standard account shall be—

ø(A) charged with the sum of—

ø(i) the lesser of normal cost under the funding 

method used under the plan or normal cost determined under the unit credit method, 

ø(ii) the excess, if any, of the present value of accrued benefits under the plan over the fair market 

value of the assets, and 

ø(iii) an amount equal to the excess (if any) of credits to the alternative minimum standard account for 

all prior plan years over charges to such account for 

all such years, and 

216 

ø(B) credited with the amount considered contributed by 

the employer to or under the plan for the plan year. 

ø(3) SPECIAL RULES.—The alternative minimum funding 

standard account (and items therein) shall be charged or credited with interest in the manner provided under subsection 

(b)(5) with respect to the funding standard account. 

ø(h) EXCEPTIONS.—This section shall not apply to—

ø(1) any profit-sharing or stock bonus plan, 

ø(2) any insurance contract plan described in subsection (i), 

ø(3) any governmental plan (within the meaning of section 

414(d)), 

ø(4) any church plan (within the meaning of section 414(e)) 

with respect to which the election provided by section 410(d) 

has not been made, 

ø(5) any plan which has not, at any time after September 2, 

1974, provided for employer contributions, or 

ø(6) any plan established and maintained by a society, order, 

or association described in section 501(c)(8) or (9), if no part of 

the contributions to or under such plan are made by employers 

of participants in such plan. 

No plan described in paragraph (3), (4), or (6) shall be treated as 

a qualified plan for purposes of section 401(a) unless such plan 

meets the requirements of section 401(a)(7) as in effect on September 1, 1974. 

ø(i) CERTAIN INSURANCE CONTRACT PLANS.—A plan is described 

in this subsection if—

ø(1) the plan is funded exclusively by the purchase of individual insurance contracts. 

ø(2) such contracts provide for level annual premium payments to be paid extending not later than the retirement age 

for each individual participating in the plan, and commencing 

with the date the individual became a participant in the plan 

(or, in the case of an increase in benefits, commencing at the 

time such increase becomes effective), 

ø(3) benefits provided by the plan are equal to the benefits 

provided under each contract at normal retirement age under 

the plan and are guaranteed by an insurance carrier (licensed 

under the laws of a State to do business with the plan) to the 

extent premiums have been paid, 

ø(4) premiums payable for the plan year, and all prior plan 

years, under such contracts have been paid before lapse or 

there is reinstatement of the policy, 

ø(5) no rights under such contracts have been subject to a security interest at any time during the plan year, and 

ø(6) no policy loans are outstanding at any time during the 

plan year. 

A plan funded exclusively by the purchase of group insurance contracts which is determined under regulations prescribed by the Secretary to have the same characteristics as contracts described in 

the preceding sentence shall be treated as a plan described in this 

subsection. 

ø(j) CERTAIN TERMINATED MULTIEMPLOYER PLANS.—This section 

applies with respect to a terminated multiemployer plan to which 

section 4021 of the Employee Retirement Income Security Act of 

217 

1974 applies, until the last day of the plan year in which the plan 

terminates, within the meaning of section 4041A(a)(2) of that Act. 

ø(k) FINANCIAL ASSISTANCE.—Any amount of any financial assistance from the Pension Benefit Guaranty Corporation to any plan, 

and any repayment of such amount, shall be taken into account 

under this section in such manner as determined by the Secretary. 

ø(l) ADDITIONAL FUNDING REQUIREMENTS FOR PLANS WHICH ARE

NOT MULTIEMPLOYER PLANS.— ø(1) IN GENERAL.—In the case of a defined benefit plan 

(other than a multiemployer plan) to which this subsection applies under paragraph (9) for any plan year, the amount 

charged to the funding standard account for such plan year 

shall be increased by the sum of— ø(A) the excess (if any) of— ø(i) the deficit reduction contribution determined 

under paragraph (2) for such plan year, over 

ø(ii) the sum of the charges for such plan year under 

subsection (b)(2), reduced by the sum of the credits for 

such plan year under subparagraph (B) of subsection 

(b)(3), plus 

ø(B) the unpredictable contingent event amount (if any) 

for such plan year. 

Such increase shall not exceed the amount which, after taking 

into account charges (other than the additional charge under 

this subsection) and credits under subsection (b), is necessary 

to increase the funded current liability percentage (taking into 

account the expected increase in current liability due to benefits accruing during the plan year) to 100 percent. 

ø(2) DEFICIT REDUCTION CONTRIBUTION.—For purposes of 

paragraph (1), the deficit reduction contribution determined 

under this paragraph for any plan year is the sum of—

ø(A) the unfunded old liability amount, 

ø(B) the unfunded new liability amount, 

ø(C) the expected increase in current liability due to 

benefits accruing during the plan year, and 

ø(D) the aggregate of the unfunded mortality increase 

amounts. 

ø(3) UNFUNDED OLD LIABILITY AMOUNT.—For purposes of this 

subsection— ø(A) IN GENERAL.—The unfunded old liability amount 

with respect to any plan for any plan year is the amount 

necessary to amortize the unfunded old liability under the 

plan in equal annual installments over a period of 18 plan 

years (beginning with the 1st plan year beginning after 

December 31, 1988). 

ø(B) UNFUNDED OLD LIABILITY.—The term ‘‘unfunded old 

liability’’ means the unfunded current liability of the plan 

as of the beginning of the 1st plan year beginning after 

December 31, 1987 (determined without regard to any plan 

amendment increasingliabilities adopted after October 16, 

1987). 

ø(C) SPECIAL RULES FOR BENEFIT INCREASES UNDER EX- ISTING COLLECTIVE BARGAINING AGREEMENTS.—

ø(i) IN GENERAL.—In the case of a plan maintained 

pursuant to 1 or more collective bargaining agreeVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00217 Fmt 6659 Sfmt 6601 E:\HR\OC\HR232P2.XXX HR232P2
218 

ments between employee representatives and the employer ratified before October 29, 1987, the unfunded 

old liability amount with respect to such plan for any 

plan year shall be increased by the amount necessary 

to amortize the unfunded existing benefit increase liability in equal annual installments over a period of 

18 plan years beginning with—

ø(I) the plan year in which the benefit increase 

with respect to such liability occurs, or 

ø(II) if the taxpayer elects, the 1st plan year beginning after December 31, 1988. 

ø(ii) UNFUNDED EXISTING BENEFIT INCREASE LIABILITIES.—For purposes of clause (i), the unfunded existing benefit increase liability means, with respect to 

any benefit increase under the agreements described 

in clause (i) which takes effect during or after the 1st 

plan year beginning after December 31, 1987, the unfunded current liability determined—

ø(I) by taking into account only liabilities attributable to such benefit increase, and 

ø(II) by reducing (but not below zero) the 

amount determined under paragraph (8)(A)(ii) by 

the current liability determined without regard to 

such benefit increase. 

ø(iii) EXTENSIONS, MODIFICATIONS, ETC. NOT TAKEN

INTO ACCOUNT.—For purposes of this subparagraph, 

any extension, amendment, or other modification of an 

agreement after October 28, 1987, shall not be taken 

into account. 

ø(D) SPECIAL RULE FOR REQUIRED CHANGES IN ACTUARIAL

ASSUMPTIONS.—

ø(i) IN GENERAL.—The unfunded old liability amount 

with respect to any plan for any plan year shall be increased by the amount necessary to amortize the 

amount of additional unfunded old liability under the 

plan in equal annual installments over a period of 12 

plan years (beginning with the first plan year beginning after December 31, 1994). 

ø(ii) ADDITIONAL UNFUNDED OLD LIABILITY.—For 

purposes of clause (i), the term ‘‘additional unfunded 

old liability’’ means the amount (if any) by which—

ø(I) the current liability of the plan as of the beginning of the first plan year beginning after December 31, 1994, valued using the assumptions required by paragraph (7)(C) as in effect for plan 

years beginning after December 31, 1994, exceeds 

ø(II) the current liability of the plan as of the 

beginning of such first plan year, valued using the 

same assumptions used under subclause (I) (other 

than the assumptions required by paragraph 

(7)(C)), using the prior interest rate, and using 

such mortality assumptions as were used to determine current liability for the first plan year beginning after December 31, 1992. 

219 

ø(iii) PRIOR INTEREST RATE.—For purposes of clause 

(ii), the term ‘‘prior interest rate’’ means the rate of interest that is the same percentage of the weighted average under subsection (b)(5)(B)(ii)(I) for the first plan 

year beginning after December 31, 1994, as the rate of 

interest used by the plan to determine current liability 

for the first plan year beginning after December 31, 

1992, is of the weighted average under subsection 

(b)(5)(B)(ii)(I) for such first plan year beginning after 

December 31, 1992. 

ø(E) OPTIONAL RULE FOR ADDITIONAL UNFUNDED OLD LIABILITY.—

ø(i) IN GENERAL.—If an employer makes an election 

under clause (ii), the additional unfunded old liability 

for purposes of subparagraph (D) shall be the amount 

(if any) by which—

ø(I) the unfunded current liability of the plan as 

of the beginning of the first plan year beginning 

after December 31, 1994, valued using the assumptions required by paragraph (7)(C) as in effect for plan years beginning after December 31, 

1994, exceeds 

ø(II) the unamortized portion of the unfunded 

old liability under the plan as of the beginning of 

the first plan year beginning after December 31, 

1994. 

ø(ii) ELECTION.—

ø(I) An employer may irrevocably elect to apply 

the provisions of this subparagraph as of the beginning of the firstplan year beginning after December 31, 1994. 

ø(II) If an election is made under this clause, 

the increase under paragraph (1) for any plan 

year beginning after December 31, 1994, and before January 1, 2002, to which this subsection applies (without regard to this subclause) shall not 

be less than the increase that would be required 

under paragraph (1) if the provisions of this title 

as in effect for the last plan year beginning before 

January 1, 1995, had remained in effect. 

ø(4) UNFUNDED NEW LIABILITY AMOUNT.—For purposes of 

this subsection—

ø(A) IN GENERAL.—The unfunded new liability amount 

with respect to any plan for any plan year is the applicable 

percentage of the unfunded new liability. 

ø(B) UNFUNDED NEW LIABILITY.—The term ‘‘unfunded 

new liability’’ means the unfunded current liability of the 

plan for the plan year determined without regard to—

ø(i) the unamortized portion of the unfunded old liability, the unamortized portion of the additional unfunded old liability, the unamortized portion of each 

unfunded mortality increase, and the unamortized 

portion of the unfunded existing benefit increase liability, and 

220 

ø(ii) the liability with respect to any unpredictable 

contingent event benefits (without regard to whether 

the event has occurred). 

ø(C) APPLICABLE PERCENTAGE.—The term ‘‘applicable 

percentage’’ means, with respect to any plan year, 30 percent, reduced by the product of— ø(i) .40 multiplied by 

ø(ii) the number of percentage points (if any) by 

which the funded current liability percentage exceeds 

60 percent. 

ø(5) UNPREDICTABLE CONTINGENT EVENT AMOUNT.— ø(A) IN GENERAL.—The unpredictable contingent event 

amount with respect to a plan for any plan year is an 

amount equal to the greatest of— ø(i) the applicable percentage of the product of— ø(I) 100 percent, reduced (but not below zero) by 

the funded current liability percentage for the 

plan year, multiplied by 

ø(II) the amount of unpredictable contingent 

event benefits paid during the plan year, including (except as provided by the Secretary) any payment for the purchase of an annuity contract for 

a participant or beneficiary with respect to such 

benefits, 

ø(ii) the amount which would be determined for the 

plan year if the unpredictable contingent event benefit 

liabilities were amortized in equal annual installments 

over 7 plan years (beginning with the plan year in 

which such event occurs), or 

ø(iii) the additional amount that would be determined under paragraph (4)(A) if the unpredictable 

contingent event benefit liabilities were included in 

unfunded new liability notwithstanding paragraph 

(4)(B)(ii). 

ø(B) APPLICABLE PERCENTAGE.—

øIn the case of plan years The applicable

beginning in: percentage is: 

1989 and 1990 ...................................................................................... 5

1991 ....................................................................................................... 10

1992 ....................................................................................................... 15

1993 ....................................................................................................... 20

1994 ....................................................................................................... 30

1995 ....................................................................................................... 40

1996 ....................................................................................................... 50

1997 ....................................................................................................... 60

1998 ....................................................................................................... 70

1999 ....................................................................................................... 80

2000 ....................................................................................................... 90

2001 and thereafter ............................................................................. 100.

ø(C) PARAGRAPH NOT TO APPLY TO EXISTING BENEFITS.—

This paragraph shall not apply to unpredictable contingent 

event benefits (and liabilities attributable thereto) for 

which the event occurred before the first plan year beginning after December 31, 1988. 

ø(D) SPECIAL RULE FOR FIRST YEAR OF AMORTIZATION.—

Unless the employer elects otherwise, the amount determined under subparagraph (A) for the plan year in which 

221 

the event occurs shall be equal to 150 percent of the 

amount determined under subparagraph (A)(i). The 

amountunder subparagraph (A)(ii) for subsequent plan 

years in the amortization period shall be adjusted in the 

manner provided by the Secretary to reflect the application 

of this subparagraph. 

ø(E) LIMITATION.—The present value of the amounts described in subparagraph (A) with respect to any one event 

shall not exceed the unpredictable contingent event benefit 

liabilities attributable to that event. 

ø(6) SPECIAL RULES FOR SMALL PLANS.— ø(A) PLANS WITH 100 OR FEWER PARTICIPANTS.—This subsection shall not apply to any plan for any plan year if on 

each day during the preceding plan year such plan had no 

more than 100 participants. 

ø(B) PLANS WITH MORE THAN 100 BUT NOT MORE THAN 150

PARTICIPANTS.—In the case of a plan to which subparagraph (A) does not apply and which on each day during 

the preceding plan year had no more than 150 participants, the amount of the increase under paragraph (1) for 

such plan year shall be equal to the product of—

ø(i) such increase determined without regard to this 

subparagraph, multiplied by 

ø(ii) 2 percent for the highest number of participants 

in excess of 100 on any such day. 

ø(C) AGGREGATION OF PLANS.—For purposes of this paragraph, all defined benefit plans maintained by the same 

employer (or any member of such employer’s controlled 

group) shall be treated as 1 plan, but only employees of 

such employer or member shall be taken into account. 

ø(7) CURRENT LIABILITY.—For purposes of this subsection— ø(A) IN GENERAL.—The term ‘‘current liability’’ means all 

liabilities to employees and their beneficiaries under the 

plan. 

ø(B) TREATMENT OF UNPREDICTABLE CONTINGENT EVENT

BENEFITS.— ø(i) IN GENERAL.—For purposes of subparagraph (A), 

any unpredictable contingent event benefit shall not 

be taken into account until the event on which the 

benefit is contingent occurs. 

ø(ii) UNPREDICTABLE CONTINGENT EVENT BENEFIT.—

The term ‘‘unpredictable contingent event benefit’’

means any benefit contingent on an event other 

than—

ø(I) age, service, compensation, death, or disability, or 

ø(II) an event which is reasonably and reliably 

predictable (as determined by the Secretary). 

ø(C) INTEREST RATE AND MORTALITY ASSUMPTIONS

USED.—Effective for plan years beginning after December 

31, 1994—

ø(i) INTEREST RATE.— ø(I) IN GENERAL.—The rate of interest used to 

determine current liability under this subsection 

shall be the rate of interest used under subsection 

222 

(b)(5), except that the highest rate in the permissible range under subparagraph (B)(ii) thereof 

shall not exceed the specified percentage under 

subclause (II) of the weighted average referred to 

in such subparagraph. 

ø(II) SPECIFIED PERCENTAGE.—For purposes of 

subclause (I), the specified percentage shall be determined as follows: 

øIn the case of plan years The specified

beginning in calendar year: percentage is: 

1995 ....................................................................................................... 109

1996 ....................................................................................................... 108

1997 ....................................................................................................... 107

1998 ....................................................................................................... 106

1999 and thereafter ............................................................................. 105.

ø(III) SPECIAL RULE FOR 2002 AND 2003.—For a 

plan year beginning in 2002 or 2003, notwithstanding subclause (I), in the case that the rate of 

interest used under subsection (b)(5) exceeds the 

highest rate permitted under subclause (I), the 

rate of interest used to determine current liability 

under this subsection may exceed the rate of interest otherwise permitted under subclause (I); except that such rate of interest shall not exceed 120 

percent of the weighted average referred to in subsection (b)(5)(B)(ii). 

ø(IV) SPECIAL RULE FOR 2004 AND 2005.—For 

plan years beginning in 2004 or 2005, notwithstanding subclause (I), the rate of interest used to 

determine current liability under this subsection 

shall be the rate of interest under subsection 

(b)(5). 

ø(ii) MORTALITY TABLES.—

ø(I) COMMISSIONERS’ STANDARD TABLE.—In the 

case of plan years beginning before the first plan 

year to which the first tables prescribed under 

subclause 

ø(II) apply, the mortality table used in determining current liability under this subsection 

shall be the table prescribed by the Secretary 

which is based on the prevailing commissioners’

standard table (described in section 807(d)(5)(A)) 

used to determine reserves for group annuity contracts issued on January 1, 1993. 

ø(II) SECRETARIAL AUTHORITY.—The Secretary 

may by regulation prescribe for plan years beginning after December 31, 1999, mortality tables to 

be used in determining current liability under this 

subsection. Such tables shall be based upon the 

actual experience of pension plans and projected 

trends in such experience. In prescribing such tables, the Secretary shall take into account results 

of available independent studies of mortality of individuals covered by pension plans. 

223 

ø(III) PERIODIC REVIEW.—The Secretary shall 

periodically (at least every 5 years) review any tables in effect under this subsection and shall, to 

the extent the Secretary determines necessary, by 

regulation update the tables to reflect the actual 

experience of pension plans and projected trends 

in such experience. 

ø(iii) SEPARATE MORTALITY TABLES FOR THE DISABLED.—Notwithstanding clause (ii)—

ø(I) IN GENERAL.—In the case of plan years beginning after December 31, 1995, the Secretary 

shall establish mortality tables which may be used 

(in lieu of the tables under clause (ii)) to determine current liability under this subsection for individuals who are entitled to benefits under the 

plan on account of disability. The Secretary shall 

establish separate tables for individuals whose 

disabilities occur in plan years beginning before 

January 1, 1995, and for individuals whose disabilities occur in plan years beginning on or after 

such date. 

ø(II) SPECIAL RULE FOR DISABILITIES OCCURRING

AFTER 1994.—In the case of disabilities occurring 

in plan years beginning after December 31, 1994, 

the tables under subclause 

ø(I) shall apply only with respect to individuals 

described in such subclause who are disabled 

within the meaning of title II of the Social Security Act and the regulations thereunder. 

ø(III) PLAN YEARS BEGINNING IN 1995.—In the 

case of any plan year beginning in 1995, a plan 

may use its own mortality assumptions for individuals who are entitled to benefits under the 

plan on account of disability. 

ø(D) CERTAIN SERVICE DISREGARDED.—

ø(i) IN GENERAL.—In the case of a participant to 

whom this subparagraph applies, only the applicable 

percentage of the years of service before such individual became a participant shall be taken into account in computing the current liability of the plan. 

ø(ii) APPLICABLE PERCENTAGE.—For purposes of this 

subparagraph, the applicable percentage shall be determined as follows: 

øIf the years of The applicable

participation are: percentage is: 

11 ........................................................................................................... 20

12 ........................................................................................................... 40

13 ........................................................................................................... 60

14 ........................................................................................................... 80

15 or more ............................................................................................. 100.

ø(iii) PARTICIPANTS TO WHOM SUBPARAGRAPH APPLIES.—This subparagraph shall apply to any participant who, at the time of becoming a participant—

ø(I) has not accrued any other benefit under any 

defined benefit plan (whether or not terminated) 

224 

maintained by the employer or a member of the 

same controlled group of which the employer is a 

member, 

ø(II) who first becomes a participant under the 

plan in a plan year beginning after December 31, 

1987, and 

ø(III) has years of service greater than the minimum years of service necessary for eligibility to 

participate in the plan. 

ø(iv) ELECTION.—An employer may elect not to have 

this subparagraph apply. Such an election, once made, 

may be revoked only with the consent of the Secretary. 

ø(8) OTHER DEFINITIONS.—For purposes of this subsection—

ø(A) UNFUNDED CURRENT LIABILITY.—The term ‘‘unfunded current liability’’ means, with respect to any plan 

year, the excess (if any) of—

ø(i) the current liability under the plan, over 

ø(ii) value of the plan’s assets determined under 

subsection (c)(2). 

ø(B) FUNDED CURRENT LIABILITY PERCENTAGE.—The 

term ‘‘funded current liability percentage’’ means, with respect to any plan year, the percentage which—

ø(i) the amount determined under subparagraph 

(A)(ii), is of 

ø(ii) the current liability under the plan. 

ø(C) CONTROLLED GROUP.—The term ‘‘controlled group’’ means any group treated as a single employer under subsections (b), (c), (m), and (o) of section 414. 

ø(D) ADJUSTMENTS TO PREVENT OMISSIONS AND DUPLICATIONS.—The Secretary shall provide such adjustments in 

the unfunded old liability amount, the unfunded new liability amount, the unpredictable contingent event 

amount, the current payment amount, and any other 

charges or credits under this section as are necessary to 

avoid duplication or omission of any factors in the determination of such amounts, charges, or credits. 

ø(E) DEDUCTION FOR CREDIT BALANCES.—For purposes of 

this subsection, the amount determined under subparagraph (A)(ii) shall be reduced by any credit balance in the 

funding standard account. The Secretary may provide for 

such reduction for purposes of any other provision which 

references this subsection. 

ø(9) APPLICABILITY OF SUBSECTION.—

ø(A) IN GENERAL.—Except as provided in paragraph 

(6)(A), this subsection shall apply to a plan for any plan 

year if its funded current liability percentage for such year 

is less than 90 percent. 

ø(B) EXCEPTION FOR CERTAIN PLANS AT LEAST 80 PERCENT FUNDED.—Subparagraph (A) shall not apply to a plan 

for a plan year if— ø(i) the funded current liability percentage for the 

plan year is at least 80 percent, and 

ø(ii) such percentage for each of the 2 immediately 

preceding plan years (or each of the 2d and 3d immediately preceding plan years) is at least 90 percent. 

225 

ø(C) FUNDED CURRENT LIABILITY PERCENTAGE.—For purposes of subparagraphs (A) and (B), the term ‘‘funded current liability percentage’’ has the meaning given such term 

by paragraph (8)(B), except that such percentage shall be 

determined for any plan year— ø(i) without regard to paragraph (8)(E), and 

ø(ii) by using the rate of interest which is the highest rate allowable for the plan year under paragraph 

(7)(C). 

ø(D) TRANSITION RULES.—For purposes of this paragraph: 

ø(i) FUNDED PERCENTAGE FOR YEARS BEFORE 1995.—

The funded current liability percentage for any plan 

year beginning before January 1, 1995, shall be treated as not less than 90 percent only if for such plan 

year the plan met one of the following requirements 

(as in effect for such year): 

ø(I) The full-funding limitation under subsection 

(c)(7) for the plan was zero. 

ø(II) The plan had no additional funding requirement under this subsection (or would have 

had no such requirement if its funded current liability percentage had been determined under 

subparagraph (C)). 

ø(III) The plan’s additional funding requirement 

under this subsection did not exceed the lesser of 

0.5 percent of current liability or $5,000,000. 

ø(ii) SPECIAL RULE FOR 1995 AND 1996.—For purposes 

of determining whether subparagraph (B) applies to 

any plan year beginning in 1995 or 1996, a plan shall 

be treated as meeting the requirements of subparagraph (B)(ii) if the plan met the requirements of clause 

(i) of this subparagraph for any two of the plan years 

beginning in 1992, 1993, and 1994 (whether or not 

consecutive). 

ø(10) UNFUNDED MORTALITY INCREASE AMOUNT.— ø(A) IN GENERAL.—The unfunded mortality increase 

amount with respect to each unfunded mortality increase 

is the amount necessary to amortize such increase in equal 

annual installments over a period of 10 plan years (beginning with the first plan year for which a plan uses any 

new mortality table issued under paragraph (7)(C)(ii)(II) or 

(III)). 

ø(B) UNFUNDED MORTALITY INCREASE.—For purposes of 

subparagraph (A), the term ‘‘unfunded mortality increase’’

means an amount equal to the excess of—

ø(i) the current liability of the plan for the first plan 

year for which a plan uses any new mortality table 

issued under paragraph (7)(C)(ii)(II) or (III), over 

ø(ii) the current liability of the plan for such plan 

year which would have been determined if the mortality table in effect for the preceding plan year had 

been used. 

ø(11) PHASE-IN OF INCREASES IN FUNDING REQUIRED BY RETIREMENT PROTECTION ACT OF 1994.—

226 

ø(A) IN GENERAL.—For any applicable plan year, at the 

election of the employer, the increase under paragraph (1) 

shall not exceed the greater of—

ø(i) the increase that would be required under paragraph (1) if the provisions of this title as in effect for 

plan years beginning before January 1, 1995, had remained in effect, or 

ø(ii) the amount which, after taking into account 

charges (other than the additional charge under this 

subsection) and credits under subsection (b), is necessary to increase the funded current liability percentage (taking into account the expected increase in current liability due to benefits accruing during the plan 

year) for the applicable plan year to a percentage 

equal to the sum of the initial funded current liability 

percentage of the plan plus the applicable number of 

percentage points for such applicable plan year. 

ø(B) APPLICABLE NUMBER OF PERCENTAGE POINTS.—

ø(i) INITIAL FUNDED CURRENT LIABILITY PERCENTAGE

OF 75 PERCENT OR LESS.—Except as provided in clause 

(ii), for plans with an initial funded current liability 

percentage of 75 percent or less, the applicable number of percentage points for the applicable plan year 

is: 

øIn the case of applicable The applicable number

plan years beginning in: of percentage points is: 

1995 ....................................................................................................... 3

1996 ....................................................................................................... 6

1997 ....................................................................................................... 9

1998 ....................................................................................................... 12

1999 ....................................................................................................... 15

2000 ....................................................................................................... 19

2001 ....................................................................................................... 24.

ø(ii) OTHER CASES.—In the case of a plan to which 

this clause applies, the applicable number of percentage points for any such applicable plan year is the 

sum of—

ø(I) 2 percentage points; 

ø(II) the applicable number of percentage points 

(if any) under this clause for the preceding applicable plan year; 

ø(III) the product of .10 multiplied by the excess 

(if any) of (a) 85 percentage points over (b) the 

sum of the initial funded current liability percentage and the number determined under subclause 

(II); 

ø(IV) for applicable plan years beginning in 

2000, 1 percentage point; and 

ø(V) for applicable plan years beginning in 

2001, 2 percentage points. 

ø(iii) PLANS TO WHICH CLAUSE (II) APPLIES.— ø(I) IN GENERAL.—Clause (ii) shall apply to a 

plan for an applicable plan year if the initial funded current liability percentage of such plan is 

more than 75 percent. 

227 

ø(II) PLANS INITIALLY UNDER CLAUSE (I).—In the 

case of a plan which (but for this subclause) has 

an initial funded current liability percentage of 75 

percent or less, clause (ii) (and not clause (i)) shall 

apply to such plan with respect to applicable plan 

years beginning after the first applicable plan 

year for which the sum of the initial funded current liability percentage and the applicable number of percentage points (determined under clause 

(i)) exceeds 75 percent. For purposes of applying 

clause (ii) to such a plan, the initial funded current liability percentage of such plan shall be 

treated as being the sum referred to in the preceding sentence. 

ø(C) DEFINITIONS.—For purposes of this paragraph: 

ø(i) The term ‘‘applicable plan year’’ means a plan 

year beginning after December 31, 1994, and before 

January 1, 2002. 

ø(ii) The term ‘‘initial funded current liability percentage’’ means the funded current liability percentage 

as of the first day of the first plan year beginning after 

December 31, 1994. 

ø(12) ELECTION FOR CERTAIN PLANS.— ø(A) IN GENERAL.—In the case of a defined benefit plan 

established and maintained by an applicable employer, if 

this subsection did not apply to the plan for the plan year 

beginning in 2000 (determined without regard to paragraph (6)), then, at the election of the employer, the increased amount under paragraph (1) for any applicable 

plan year shall be the greater of— ø(i) 20 percent of the increased amount under paragraph (1) determined without regard to this paragraph, or 

ø(ii) the increased amount which would be determined under paragraph (1) if the deficit reduction contribution under paragraph (2) for the applicable plan 

year were determined without regard to subparagraphs (A), (B), and (D) of paragraph (2). 

ø(B) RESTRICTIONS ON BENEFIT INCREASES.—No amendment which increases the liabilities of the plan by reason 

of any increase in benefits, any change in the accrual of 

benefits, or any change in the rate at which benefits become nonforfeitable under the plan shall be adopted during any applicable plan year, unless— ø(i) the plan’s enrolled actuary certifies (in such 

form and manner prescribed by the Secretary) that the 

amendment provides for an increase in annual contributions which will exceed the increase in annual 

charges to the funding standard account attributable 

to such amendment, or 

ø(ii) the amendment is required by a collective bargaining agreement which is in effect on the date of enactment of this subparagraph. 

If a plan is amended during any applicable plan year in 

violation of the preceding sentence, any election under this 

228 

paragraph shall not apply to any applicable plan year ending on or after the date on which such amendment is 

adopted. 

ø(C) APPLICABLE EMPLOYER.—For purposes of this paragraph, the term ‘‘applicable employer’’ means an employer 

which is—

ø(i) a commercial passenger airline, 

ø(ii) primarily engaged in the production or manufacture of a steel mill product or the processing of iron 

ore pellets, or 

ø(iii) an organization described in section 501(c)(5) 

and which established the plan to which this paragraph applies on June 30, 1955. 

ø(D) APPLICABLE PLAN YEAR.—For purposes of this paragraph—

ø(i) IN GENERAL.—The term ‘‘applicable plan year’’

means any plan year beginning after December 27, 

2003, and before December 28, 2005, for which the employer elects the application of this paragraph. 

ø(ii) LIMITATION ON NUMBER OF YEARS WHICH MAY

BE ELECTED.—An election may not be made under this 

paragraph with respect to more than 2 plan years. 

ø(E) ELECTION.—An election under this paragraph shall 

be made at such time and in such manner as the Secretary 

may prescribe. 

ø(m) QUARTERLY CONTRIBUTIONS REQUIRED.—

ø(1) IN GENERAL.—If a defined benefit plan (other than a 

multiemployer plan) which has a funded current liability percentage (as defined in subsection (l)(8)) for the preceding plan 

year of less than 100 percent fails to pay the full amount of 

a required installment for the plan year, then the rate of interest charged to the funding standard account under subsection 

(b)(5) with respect to the amount of the underpayment for the 

period of the underpayment shall be equal to the greater of—

ø(A) 175 percent of the Federal mid-term rate (as in effect under section 1274 for the 1st month of such plan 

year), or 

ø(B) the rate of interest used under the plan in determining costs (including adjustments under subsection 

(b)(5)(B)). 

ø(2) AMOUNT OF UNDERPAYMENT, PERIOD OF UNDERPAYMENT.—For purposes of paragraph (1)—

ø(A) AMOUNT.—The amount of the underpayment shall 

be the excess of—

ø(i) the required installment, over 

ø(ii) the amount (if any) of the installment contributed to or under the plan on or before the due date for 

the installment. 

ø(B) PERIOD OF UNDERPAYMENT.—The period for which 

interest is charged under this subsection with regard to 

any portion of the underpayment shall run from the due 

date for the installment to the date on which such portion 

is contributed to or under the plan (determined without regard to subsection (c)(10)). 

229 

ø(C) ORDER OF CREDITING CONTRIBUTIONS.—For purposes of subparagraph (A)(ii), contributions shall be credited against unpaid required installments in the order in 

which such installments are required to be paid. 

ø(3) NUMBER OF REQUIRED INSTALLMENTS; DUE DATES.—For 

purposes of this subsection— ø(A) PAYABLE IN 4 INSTALLMENTS.—There shall be 4 required installments for each plan year. 

ø(B) TIME FOR PAYMENT OF INSTALLMENTS.—

øIn the case of the following The due

required installments: date is: 

1st .......................................................................................................... April 15

2nd ........................................................................................................ July 15

3rd ......................................................................................................... October 15

4th ......................................................................................................... January 15 of the following year.

ø(4) AMOUNT OF REQUIRED INSTALLMENT.—For purposes of 

this subsection— ø(A) IN GENERAL.—The amount of any required installment shall be the applicable percentage of the required annual payment. 

ø(B) REQUIRED ANNUAL PAYMENT.—For purposes of subparagraph (A), the term ‘‘required annual payment’’ means 

the lesser of—

ø(i) 90 percent of the amount required to be contributed to or under the plan by the employer for the plan 

year under section 412 (without regard to any waiver 

under subsection (c) thereof), or 

ø(ii) 100 percent of the amount so required for the 

preceding plan year. 

Clause (ii) shall not apply if the preceding plan year was 

not a year of 12 months. 

ø(C) APPLICABLE PERCENTAGE.—For purposes of subparagraph (A), the applicable percentage shall be determined in accordance with the following table: 

øFor plan years The applicable

beginning in: percentage is: 

1989 ....................................................................................................... 6.25

1990 ....................................................................................................... 12.5

1991 .......................................................................................................18.75

1992 and thereafter ............................................................................. 25.

ø(D) SPECIAL RULES FOR UNPREDICTABLE CONTINGENT

EVENT BENEFITS.—In the case of a plan to which subsection (1) applies for any calendar year and which has 

any unpredictable contingent event benefit liabilities—

ø(i) LIABILITIES NOT TAKEN INTO ACCOUNT.—Such liabilities shall not be taken into account in computing 

the required annual payment under subparagraph (B). 

ø(ii) INCREASE IN INSTALLMENTS.—Each required installment shall be increased by the greatest of—

ø(I) the unfunded percentage of the amount of 

benefits described in subsection (l)(5)(A)(i) paid 

during the 3-month period preceding the month in 

which the due date for such installment occurs, 

ø(II) 25 percent of the amount determined 

under subsection (l)(5)(A)(ii) for the plan year, or 

230 

ø(III) 25 percent of the amount determined 

under subsection (l)(5)(A)(iii) for the plan year. 

ø(iii) UNFUNDED PERCENTAGE.—For purposes of 

clause (ii)(I), the term ‘‘unfunded percentage’’ means 

the percentage determined undersubsection 

(l)(5)(A)(i)(I) for the plan year. 

ø(iv) LIMITATION ON INCREASE.—In no event shall 

the increases under clause (ii) exceed the amount necessary to increase the funded current liability percentage (within the meaning of subsection (l)(8)(B)) for the 

plan year to 100 percent. 

ø(5) LIQUIDITY REQUIREMENT.—

ø(A) IN GENERAL.—A plan to which this paragraph applies shall be treated as failing to pay the full amount of 

any required installment to the extent that the value of 

the liquid assets paid in such installment is less than the 

liquidity shortfall (whether or not such liquidity shortfall 

exceeds the amount of such installment required to be paid 

but for this paragraph). 

ø(B) PLANS TO WHICH PARAGRAPH APPLIES.—This paragraph shall apply to a defined benefit plan (other than a 

multiemployer plan or a plan described in subsection 

(l)(6)(A)) which—

ø(i) is required to pay installments under this subsection for a plan year, and 

ø(ii) has a liquidity shortfall for any quarter during 

such plan year. 

ø(C) PERIOD OF UNDERPAYMENT.—For purposes of paragraph (1), any portion of an installment that is treated as 

not paid under subparagraph (A) shall continue to be 

treated as unpaid until the close of the quarter in which 

the due date for such installment occurs. 

ø(D) LIMITATION ON INCREASE.—If the amount of any required installment is increased by reason of subparagraph 

(A), in no event shall such increase exceed the amount 

which, when added to prior installments for the plan year, 

is necessary to increase the funded current liability percentage (taking into account the expected increase in current liability due to benefits accruing during the plan year) 

to 100 percent. 

ø(E) DEFINITIONS.—For purposes of this paragraph: 

ø(i) LIQUIDITY SHORTFALL.—The term ‘‘liquidity 

shortfall’’ means, with respect to any required installment, an amount equal to the excess (as of the last 

day of the quarter for which such installment is made) 

of the base amount with respect to such quarter over 

the value (as of such last day) of the plan’s liquid assets. 

ø(ii) BASE AMOUNT.—

ø(I) IN GENERAL.—The term ‘‘base amount’’

means, with respect to any quarter, an amount 

equal to 3 times the sum of the adjusted disbursements from the plan for the 12 months ending on 

the last day of such quarter. 

231 

ø(II) SPECIAL RULE.—If the amount determined 

under subclause (I) exceeds an amount equal to 2 

times the sum of the adjusted disbursements from 

the plan for the 36 months ending on the last day 

of the quarter and an enrolled actuary certifies to 

the satisfaction of the Secretary that such excess 

is the result of nonrecurring circumstances, the 

base amount with respect to such quarter shall be 

determined without regard to amounts related to 

those nonrecurring circumstances. 

ø(iii) DISBURSEMENTS FROM THE PLAN.—The term ‘‘disbursements from the plan’’ means all disbursements from the trust, including purchases of annuities, payments of single sums and other benefits, and 

administrative expenses. 

ø(iv) ADJUSTED DISBURSEMENTS.—The term ‘‘adjusted disbursements’’ means disbursements from the 

plan reduced by the product of—

ø(I) the plan’s funded current liability percentage (as defined in subsection (l)(8)) for the plan 

year, and 

ø(II) the sum of the purchases of annuities, payments of single sums, and such other disbursements as the Secretary shall provide in regulations. 

ø(v) LIQUID ASSETS.—The term ‘‘liquid assets’’ means 

cash, marketable securities and such other assets as 

specified by the Secretary in regulations. 

ø(vi) QUARTER.—The term ‘‘quarter’’ means, with respect to any required installment, the 3-month period 

preceding the month inwhich the due date for such installment occurs. 

ø(F) REGULATIONS.—The Secretary may prescribe such 

regulations as are necessary to carry out this paragraph. 

ø(6) FISCAL YEARS AND SHORT YEARS.— ø(A) FISCAL YEARS.—In applying this subsection to a 

plan year beginning on any date other than January 1, 

there shall be substituted for the months specified in this 

subsection, the months which correspond thereto. 

ø(B) SHORT PLAN YEAR.—This subsection shall be applied 

to plan years of less than 12 months in accordance with 

regulations prescribed by the Secretary. 

ø(7) SPECIAL RULE FOR 2002.—In any case in which the interest rate used to determine current liability is determined 

under subsection (l)(7)(C)(i)(III), for purposes of applying paragraphs (1) and (4)(B)(ii) for plan years beginning in 2002, the 

current liability for the preceding plan year shall be redetermined using 120 percent as the specified percentage determined under subsection (l)(7)(C)(i)(II). 

ø(n) IMPOSITION OF LIEN WHERE FAILURE TO MAKE REQUIRED

CONTRIBUTIONS.— ø(1) IN GENERAL.—In the case of a plan to which this section 

applies, if— ø(A) any person fails to make a required installment 

under subsection (m) or any other payment required under 

232 

this section before the due date for such installment or 

other payment, and 

ø(B) the unpaid balance of such installment or other 

payment (including interest), when added to the aggregate 

unpaid balance of all preceding such installments or other 

payments for which payment was not made before the due 

date (including interest), exceeds $1,000,000, then there 

shall be a lien in favor of the plan in the amount determined under paragraph (3) upon all property and rights to 

property, whether real or personal, belonging to such person and any other person who is a member of the same 

controlled group of which such person is a member. 

ø(2) PLANS TO WHICH SUBSECTION APPLIES.—This subsection 

shall apply to a defined benefit plan (other than a multiemployer plan) for any plan year for which the funded current liability percentage (within the meaning of subsection (l)(8)(B)) 

of such plan is less than 100 percent. This subsection shall not 

apply to any plan to which section 4021 of the Employee Retirement Income Security Act of 1974 does not apply (as such 

section is in effect on the date of the enactment of the Retirement Protection Act of 1994). 

ø(3) AMOUNT OF LIEN.—For purposes of paragraph (1), the 

amount of the lien shall be equal to the aggregate unpaid balance of required installments and other payments required 

under this section (including interest)—

ø(A) for plan years beginning after 1987, and 

ø(B) for which payment has not been made before the 

due date. 

ø(4) NOTICE OF FAILURE; LIEN.—

ø(A) NOTICE OF FAILURE.—A person committing a failure 

described in paragraph (1) shall notify the Pension Benefit 

Guaranty Corporation of such failure within 10 days of the 

due date for the required installment or other payment. 

ø(B) PERIOD OF LIEN.—The lien imposed by paragraph 

(1) shall arise on the due date for the required installment 

or other payment and shall continue until the last day of 

the first plan year in which the plan ceases to be described 

in paragraph (1)(B). 

Such lien shall continue to run without regard to whether 

such plan continues to be described in paragraph (2) during the period referred to in the preceding sentence. 

ø(C) CERTAIN RULES TO APPLY.—Any amount with respect to which a lien is imposed under paragraph (1) shall 

be treated as taxes due and owing the United States and 

rules similar to the rules of subsections (c), (d), and (e) of 

section 4068 of the Employee Retirement Income Security 

Act of 1974 shall apply with respect to a lien imposed by 

subsection (a) and the amount with respect to such lien. 

ø(5) ENFORCEMENT.—Any lien created under paragraph (1) 

may be perfected and enforced only by the Pension Benefit 

Guaranty Corporation, or at the direction of the Pension Benefit Guaranty Corporation, by the contributing sponsor (or any 

member of the controlled group of the contributing sponsor). 

ø(6) DEFINITIONS.—For purposes of this subsection—

233 

ø(A) DUE DATE; REQUIRED INSTALLMENT.—The terms ‘‘due date’’ and ‘‘required installment’’ have the meanings 

given such terms by subsection (m), except that in the case 

of a payment other than a required installment, the due 

date shall be the date such payment isrequired to be made 

under this section. 

ø(B) CONTROLLED GROUP.—The term ‘‘controlled group’’ means any group treated as a single employer under subsections (b), (c), (m), and (o) of section 414.¿ 

SEC. 412. MINIMUM FUNDING STANDARDS. 

(a) REQUIREMENT TO MEET MINIMUM FUNDING STANDARD.— (1) IN GENERAL.—A plan to which this section applies shall 

satisfy the minimum funding standard applicable to the plan 

for any plan year. 

(2) MINIMUM FUNDING STANDARD.—For purposes of paragraph (1), a plan shall be treated as satisfying the minimum 

funding standard for a plan year if— (A) in the case of a defined benefit plan which is not a 

multiemployer plan, the employer makes contributions to or 

under the plan for the plan year which, in the aggregate, 

are not less than the minimum required contribution determined under section 430 for the plan for the plan year, 

(B) in the case of a money purchase plan which is not a 

multiemployer plan, the employer makes contributions to or 

under the plan for the plan year which are required under 

the terms of the plan, and 

(C) in the case of a multiemployer plan, the employers 

make contributions to or under the plan for any plan year 

which, in the aggregate, are sufficient to ensure that the 

plan does not have an accumulated funding deficiency 

under section 431 as of the end of the plan year. 

(b) LIABILITY FOR CONTRIBUTIONS.— (1) IN GENERAL.—Except as provided in paragraph (2), the 

amount of any contribution required by this section (including 

any required installments under paragraphs (3) and (4) of section 430(j)) shall be paid by the employer responsible for making contributions to or under the plan. 

(2) JOINT AND SEVERAL LIABILITY WHERE EMPLOYER MEMBER

OF CONTROLLED GROUP.—In the case of a defined benefit plan 

which is not a multiemployer plan, if the employer referred to 

in paragraph (1) is a member of a controlled group, each member of such group shall be jointly and severally liable for payment of such contributions. 

(c) VARIANCE FROM MINIMUM FUNDING STANDARDS.—

(1) WAIVER IN CASE OF BUSINESS HARDSHIP.—

(A) IN GENERAL.—If—

(i) an employer is (or in the case of a multiemployer 

plan, 10 percent or more of the number of employers 

contributing to or under the plan is) unable to satisfy 

the minimum funding standard for a plan year without temporary substantial business hardship (substantial business hardship in the case of a multiemployer 

plan), and 

(ii) application of the standard would be adverse to 

the interests of plan participants in the aggregate, 

234 

the Secretary may, subject to subparagraph (C), waive the 

requirements of subsection (a) for such year with respect to 

all or any portion of the minimum funding standard. The 

Secretary shall not waive the minimum funding standard 

with respect to a plan for more than 3 of any 15 (5 of any 

15 in the case of a multiemployer plan) consecutive plan 

years. 

(B) EFFECTS OF WAIVER.—If a waiver is granted under 

subparagraph (A) for any plan year— (i) in the case of a defined benefit plan which is not 

a multiemployer plan, the minimum required contribution under section 430 for the plan year shall be reduced by the amount of the waived funding deficiency 

and such amount shall be amortized as required under 

section 430(e), and 

(ii) in the case of a multiemployer plan, the funding 

standard account shall be credited under section 

431(b)(3)(C) with the amount of the waived funding deficiency and such amount shall be amortized as required under section 431(b)(2)(C). 

(C) WAIVER OF AMORTIZED PORTION NOT ALLOWED.—The 

Secretary may not waive under subparagraph (A) any portion of the minimum funding standard under subsection (a) 

for a plan year which is attributable to any waived funding 

deficiency for any preceding plan year. 

(2) DETERMINATION OF BUSINESS HARDSHIP.—For purposes of 

this subsection, the factors taken into account in determining 

temporary substantial business hardship (substantial business 

hardship in the case of a multiemployer plan) shall include (but 

shall not be limited to) whether or not— (A) the employer is operating at an economic loss, 

(B) there is substantial unemployment or underemployment in the trade or business and in the industry concerned, 

(C) the sales and profits of the industry concerned are depressed or declining, and 

(D) it is reasonable to expect that the plan will be continued only if the waiver is granted. 

(3) WAIVED FUNDING DEFICIENCY.—For purposes of this section and part III of this subchapter, the term ‘‘waived funding 

deficiency’’ means the portion of the minimum funding standard under subsection (a) (determined without regard to the 

waiver) for a plan year waived by the Secretary and not satisfied by employer contributions. 

(4) SECURITY FOR WAIVERS FOR SINGLE-EMPLOYER PLANS, 

CONSULTATIONS.—

(A) SECURITY MAY BE REQUIRED.—

(i) IN GENERAL.—Except as provided in subparagraph (C), the Secretary may require an employer 

maintaining a defined benefit plan which is not a multiemployer plan to provide security to such plan as a 

condition for granting or modifying a waiver under 

paragraph (1). 

(ii) SPECIAL RULES.—Any security provided under 

clause (i) may be perfected and enforced only by the 

235 

Pension Benefit Guaranty Corporation, or at the direction of the Corporation, by a contributing sponsor 

(within the meaning of section 4001(a)(13) of the Employee Retirement Income Security Act of 1974), or a 

member of such sponsor’s controlled group (within the 

meaning of section 4001(a)(14) of such Act). 

(B) CONSULTATION WITH THE PENSION BENEFIT GUARANTY CORPORATION.—Except as provided in subparagraph 

(C), the Secretary shall, before granting or modifying a 

waiver under this subsection with respect to a plan described in subparagraph (A)(i)—

(i) provide the Pension Benefit Guaranty Corporation 

with—

(I) notice of the completed application for any 

waiver or modification, and 

(II) an opportunity to comment on such application within 30 days after receipt of such notice, 

and 

(ii) consider—

(I) any comments of the Corporation under 

clause (i)(II), and 

(II) any views of any employee organization 

(within the meaning of section 3(4) of the Employee 

Retirement Income Security Act of 1974) representing participants in the plan which are submitted in writing to the Secretary in connection 

with such application. 

Information provided to the Corporation under this subparagraph shall be considered tax return information and 

subject to the safeguarding and reporting requirements of 

section 6103(p). 

(C) EXCEPTION FOR CERTAIN WAIVERS.—

(i) IN GENERAL.—The preceding provisions of this 

paragraph shall not apply to any plan with respect to 

which the sum of—

(I) the aggregate unpaid minimum required contribution (within the meaning of section 4971(c)(4)) 

for the plan year and all preceding plan years, and 

(II) the present value of all waiver amortization 

installments determined for the plan year and succeeding plan years under section 430(e)(2), 

is less than $1,000,000. 

(ii) TREATMENT OF WAIVERS FOR WHICH APPLICATIONS ARE PENDING.—The amount described in clause 

(i)(I) shall include any increase in such amount which 

would result if all applications for waivers of the minimum funding standard under this subsection which 

are pending with respect to such plan were denied. 

(5) SPECIAL RULES FOR SINGLE-EMPLOYER PLANS.—

(A) APPLICATION MUST BE SUBMITTED BEFORE DATE 21⁄2

MONTHS AFTER CLOSE OF YEAR.—In the case of a defined 

benefit plan which is not a multiemployer plan, no waiver 

may be granted under this subsection with respect to any 

plan for any plan year unless an application therefor is 

236 

submitted to the Secretary not later than the 15th day of 

the 3rd month beginning after the close of such plan year. 

(B) SPECIAL RULE IF EMPLOYER IS MEMBER OF CON- TROLLED GROUP.—In the case of a defined benefit plan 

which is not a multiemployer plan, if an employer is a 

member of a controlled group, the temporary substantial 

business hardship requirements of paragraph (1) shall be 

treated as met only if such requirements are met— (i) with respect to such employer, and 

(ii) with respect to the controlled group of which such 

employer is a member (determined by treating all members of such group as a single employer). 

The Secretary may provide that an analysis of a trade or 

business or industry of a member need not be conducted if 

the Secretary determines such analysis is not necessary because the taking into account of such member would not 

significantly affect the determination under this paragraph. 

(6) ADVANCE NOTICE.— (A) IN GENERAL.—The Secretary shall, before granting a 

waiver under this subsection, require each applicant to provide evidence satisfactory to the Secretary that the applicant has provided notice of the filing of the application for 

such waiver to to each affected party (as defined in section 

4001(a)(21) of the Employee Retirement Income Security 

Act of 1974). Such notice shall include a description of the 

extent to which the plan is funded for benefits which are 

guaranteed under title IV and for benefit liabilities. 

(B) CONSIDERATION OF RELEVANT INFORMATION.—The 

Secretary shall consider any relevant information provided 

by a person to whom notice was given under subparagraph 

(A). 

(7) RESTRICTION ON PLAN AMENDMENTS.—

(A) IN GENERAL.—No amendment of a plan which increases the liabilities of the plan by reason of any increase 

in benefits, any change in the accrual of benefits, or any 

change in the rate at which benefits become nonforfeitable 

under the plan shall be adopted if a waiver under this subsection or an extension of time under section 431(d) is in effect with respect to the plan, or if a plan amendment described in subsection (d)(2) has been made at any time in 

the preceding 12 months (24 months in the case of a multiemployer plan). If a plan is amended in violation of the 

preceding sentence, any such waiver, or extension of time, 

shall not apply to any plan year ending on or after the date 

on which such amendment is adopted. 

(B) EXCEPTION.—Paragraph (1) shall not apply to any 

plan amendment which—

(i) the Secretary determines to be reasonable and 

which provides for only de minimis increases in the liabilities of the plan, 

(ii) only repeals an amendment described in subsection (d)(2), or 

(iii) is required as a condition of qualification under 

part I of subchapter D, of chapter 1. 

(d) MISCELLANEOUS RULES.—

237 

(1) CHANGE IN METHOD OR YEAR.—If the funding method, the 

valuation date, or a plan year for a plan is changed, the change 

shall take effect only if approved by the Secretary. 

(2) CERTAIN RETROACTIVE PLAN AMENDMENTS.—For purposes 

of this section, any amendment applying to a plan year which— (A) is adopted after the close of such plan year but no 

later than 21⁄2 months after the close of the plan year (or, 

in the case of a multiemployer plan, no later than 2 years 

after the close of such plan year), 

(B) does not reduce the accrued benefit of any participant 

determined as of the beginning of the first plan year to 

which the amendment applies, and 

(C) does not reduce the accrued benefit of any participant 

determined as of the time of adoption except to the extent 

required by the circumstances, 

shall, at the election of the plan administrator, be deemed to 

have been made on the first day of such plan year. No amendment described in this paragraph which reduces the accrued 

benefits of any participant shall take effect unless the plan administrator files a notice with the Secretary notifying him of 

such amendment and the Secretary has approved such amendment, or within 90 days after the date on which such notice was 

filed, failed to disapprove such amendment. No amendment described in this subsection shall be approved by the Secretary 

unless the Secretary determines that such amendment is necessary because of a substantial business hardship (as determined under subsection (c)(2)) and that a waiver under subsection (c) (or, in the case of a multiemployer plan, any extension of the amortization period under section 431(d)) is unavailable or inadequate. 

(3) CONTROLLED GROUP.—For purposes of this section, the 

term ‘‘controlled group’’ means any group treated as a single 

employer under subsection (b), (c), (m), or (o) of section 414. 

(e) PLANS TO WHICH SECTION APPLIES.—

(1) IN GENERAL.—Except as provided in paragraph (2), this 

section applies to a plan if, for any plan year beginning after 

December 31, 2006— (A) such plan included a trust which qualified (or was 

determined by the Secretary to have qualified) under section 401(a), or 

(B) such plan satisfied (or was determined by the Secretary to have satisfied) the requirements of section 403(a). 

(2) EXCEPTIONS.—This section shall not apply to—

(A) any profit-sharing or stock bonus plan, 

(B) any insurance contract plan described in paragraph 

(3), 

(C) any governmental plan (within the meaning of section 

414(d)), 

(D) any church plan (within the meaning of section 

414(e)) with respect to which the election provided by section 410(d) has not been made, 

(E) any plan which has not, at any time after September 

2, 1974, provided for employer contributions, or 

(F) any plan established and maintained by a society, 

order, or association described in section 501(c)(8) or (9), if 

238 

no part of the contributions to or under such plan are made 

by employers of participants in such plan. 

No plan described in subparagraph (C), (D), or (F) shall be 

treated as a qualified plan for purposes of section 401(a) unless 

such plan meets the requirements of section 401(a)(7) as in effect on September 1, 1974. 

(3) CERTAIN INSURANCE CONTRACT PLANS.—A plan is described in this paragraph if— (A) the plan is funded exclusively by the purchase of individual insurance contracts, 

(B) such contracts provide for level annual premium payments to be paid extending not later than the retirement 

age for each individual participating in the plan, and commencing with the date the individual became a participant 

in the plan (or, in the case of an increase in benefits, commencing at the time such increase becomes effective), 

(C) benefits provided by the plan are equal to the benefits 

provided under each contract at normal retirement age 

under the plan and are guaranteed by an insurance carrier 

(licensed under the laws of a State to do business with the 

plan) to the extent premiums have been paid, 

(D) premiums payable for the plan year, and all prior 

plan years, under such contracts have been paid before 

lapse or there is reinstatement of the policy, 

(E) no rights under such contracts have been subject to 

a security interest at any time during the plan year, and 

(F) no policy loans are outstanding at any time during 

the plan year. 

A plan funded exclusively by the purchase of group insurance 

contracts which is determined under regulations prescribed by 

the Secretary to have the same characteristics as contracts described in the preceding sentence shall be treated as a plan described in this paragraph. 

* * * * * * * 

SEC. 414. DEFINITIONS AND SPECIAL RULES. 

(a) * * * 

* * * * * * * 

(l) MERGER AND CONSOLIDATIONS OF PLANS OR TRANSFERS OF

PLAN ASSETS.—

(1) * * * 

(2) ALLOCATION OF ASSETS IN PLAN SPIN-OFFS, ETC.—

(A) * * * 

(B) APPLICABLE PERCENTAGE.—For purposes of subparagraph (A), the term ‘‘applicable percentage’’ means, with 

respect to each of the plans described in clauses (i) and (ii) 

of subparagraph (A), the percentage determined by dividing— (i) the excess (if any) of— ø(I) the amount determined under section 

412(c)(7)(A)(i) with respect to the plan, over¿ 

(I) the amount determined under section 

431(c)(6)(A)(i) in the case of a multiemployer plan 

(and the sum of the target liability amount and 

239 

target normal cost determined under section 430 in 

the case of any other plan), over 

* * * * * * * 

(w) AUTOMATIC CONTRIBUTION ARRANGEMENTS.— (1) IN GENERAL.—No tax shall be imposed under section 72(t) 

on a distribution from an applicable employer plan to the employee with respect to whom such contribution relates if such 

distribution does not exceed the erroneous automatic contribution amount and is made not later than the 1st April 15 following the close of the taxable year in which such contribution 

was made. 

(2) ERRONEOUS AUTOMATIC CONTRIBUTION AMOUNT.—For 

purposes of this subsection— (A) IN GENERAL.—The term ‘‘erroneous automatic contribution amount’’ means the lesser of— (i) the amount of automatic contributions made during the applicable period which the employee elects in 

a notice to the plan administrator to treat as an erroneous automatic contribution amount for purposes of 

this subsection, or 

(ii) $500. 

(B) AUTOMATIC CONTRIBUTION.—The term ‘‘automatic 

contribution’’ means contributions which, under the terms 

of the plan— (i) the employee can elect to be made as contributions 

under the plan on behalf of the employee, or to the employee directly in cash, and 

(ii) which are made on behalf of the employee under 

the plan pursuant to a plan provision treating the employee as having elected to have the employer make 

such contributions on behalf of the employee until the 

employee affirmatively elects not to have such contribution made or affirmatively elects to make contributions 

as a specified level. 

(3) APPLICABLE EMPLOYER PLAN.—For purposes of this subsection, the term ‘‘applicable employer plan’’ means—

(A) an employees’ trust described in section 401(a) which 

is exempt from tax under section 501(a), and 

(B) a plan under which amounts are contributed by an 

individual’s employer for an annuity contract described in 

section 403(b). 

(4) APPLICABLE PERIOD.—For purposes of this subsection, the 

term ‘‘applicable period’’ means, with respect to any employee, 

the three month period that begins on the first date that an 

automatic contribution described in paragraph (2)(B) is made 

with respect to such employee. 

SEC. 415. LIMITATIONS ON BENEFITS AND CONTRIBUTIONS UNDER 

QUALIFIED PLANS. 

(a) * * * 

(b) LIMITATION FOR DEFINED BENEFIT PLANS.—

(1) * * * 

(2) ANNUAL BENEFIT.—

(A) * * * 

* * * * * * * 

240 

(E) LIMITATION ON CERTAIN ASSUMPTIONS.— (i) * * * 

ø(ii) For purposes of adjusting any benefit under 

subparagraph (B) for any form of benefit subject to 

section 417(e)(3), the applicable interest rate (as defined in section 417(e)(3)) shall be substituted for ‘‘5 

percent’’ in clause (i), except that in the case of plan 

years beginning in 2004 or 2005, ‘‘5.5 percent’’ shall be 

substituted for ‘‘5 percent’’ in clause (i).¿ 

(ii) For purposes of adjusting any benefit under subparagraph (B) for any form of benefit subject to section 

417(e)(3), the interest rate assumption shall not be less 

than the greater of— (I) 5.5 percent, 

(II) the rate that provides a benefit of not more 

than 105 percent of the benefit that would be provided if the applicable interest rate (as defined in 

section 417(e)(3)) were the interest rate assumption, or 

(III) the rate specified under the plan. 

* * * * * * * 

SEC. 416. SPECIAL RULES FOR TOP-HEAVY PLANS. 

(a) * * * 

* * * * * * * 

(g) TOP-HEAVY PLAN DEFINED.—For purposes of this section— (1) * * * 

* * * * * * * 

(4) OTHER SPECIAL RULES.—For purposes of this subsection—

(A) * * * 

* * * * * * * 

(H) CASH OR DEFERRED ARRANGEMENTS USING ALTER- NATIVE METHODS OF MEETING NONDISCRIMINATION REQUIREMENTS.—The term ‘‘top-heavy plan’’ shall not include 

a plan which consists solely of— (i) a cash or deferred arrangement which meets the 

requirements of section 401(k)(12) or 401(k)(13), and 

(ii) matching contributions with respect to which the 

requirements of section 401(m)(11) or 401(m)(12) are 

met. 

* * * * * * * 

SEC. 417. DEFINITIONS AND SPECIAL RULES FOR PURPOSES OF MINIMUM SURVIVOR ANNUITY REQUIREMENTS. 

(a) * * * 

* * * * * * * 

(e) RESTRICTIONS ON CASH-OUTS.—

(1) * * * 

* * * * * * * 

(3) DETERMINATION OF PRESENT VALUE.— (A) IN GENERAL.—

(i) * * * 

ø(ii) DEFINITIONS.—For purposes of clause (i)—

241 

ø(I) APPLICABLE MORTALITY TABLE.—The term ‘‘applicable mortality table’’ means the table prescribed by the Secretary. Such table shall be 

based on the prevailing commissioners’ standard 

table (described in section 807(d)(5)(A)) used to determine reserves for group annuity contracts 

issued on the date as of which present value is 

being determined (without regard to any other 

subparagraph of section 807(d)(5)). 

ø(II) APPLICABLE INTEREST RATE.—The term ‘‘applicable interest rate’’ means the annual rate 

of interest on 30-year Treasury securities for the 

month before the date of distribution or such 

other time as the Secretary may by regulations 

prescribe.¿ 

(ii) For purposes of clause (i), the term ‘‘applicable 

mortality table’’ means a mortality table, modified as 

appropriate by the Secretary, based on the mortality 

table specified for the plan year under section 

430(h)(3). 

(iii) For purposes of clause (i), the term ‘‘applicable 

interest rate’’ means the adjusted first, second, and 

third segment rates applied under rules similar to the 

rules of section 430(h)(2)(C) for the month before the 

date of the distribution or such other time as the Secretary may by regulations prescribe. 

(iv) For purposes of clause (iii), the adjusted first, 

second, and third segment rates are the first, second, 

and third segment rates which would be determined 

under section 430(h)(2)(C) if— (I) section 430(h)(2)(D)(i) were applied by substituting ‘‘the yields’’ for ‘‘a 3-year weighted average of yields’’, (II) section 430(h)(2)(G)(i)(II) were applied by 

substituting ‘‘section 417(e)(3)(A)(ii)(II)’’ for ‘‘section 

412(b)(5)(B)(ii)(II)’’, and 

(III) the applicable percentage under section 

430(h)(2)(G) were determined in accordance with 

the following table: 

In the case of plan years The applicable

beginning in: percentage is: 

2007 ....................................................................................................... 20 percent

2008 ....................................................................................................... 40 percent

2009 ....................................................................................................... 60 percent

2010 ....................................................................................................... 80 percent.

* * * * * * * 

Subpart C—Special Rules for Multiemployer Plans 

* * * * * * * 

SEC. 418. REORGANIZATION STATUS. 

(a) * * * 

(b) REORGANIZATION INDEX.—For purposes of this subpart—

(1) * * * 

242 

(2) NET CHARGE TO FUNDING STANDARD ACCOUNT.—The net 

charge to the funding standard account for any plan year is the 

excess (if any) of—

(A) the charges to the funding standard account for such 

year under øsection 412(b)(2)¿ section 431(b)(2), over 

(B) the credits to the funding standard account under 

øsection 412(b)(3)(B)¿ section 431(b)(3)(B). 

* * * * * * * 

SEC. 418B. MINIMUM CONTRIBUTION REQUIREMENT. 

(a) * * * 

* * * * * * * 

(d) LIMITATION ON REQUIRED INCREASES IN RATE OF EMPLOYER

CONTRIBUTIONS.—

(1) IN GENERAL.—Under regulations prescribed by the Secretary, the minimum contribution requirement applicable to 

any plan for any plan year which is determined under subsection (b) (without regard to subsection (b)(2)) shall not exceed 

an amount which is equal to the sum of—

(A) * * * 

(B) if for the plan year a change in benefits is first required to be considered in computing the charges under 

øsection 412(b)(2)(A) or (B)¿ section 431(b)(2)(A) or (B), the 

sum of—

(i) * * * 

* * * * * * * 

(e) CERTAIN RETROACTIVE PLAN AMENDMENTS.—In determining 

the minimum contribution requirement with respect to a plan for 

a plan year under subsection (b), the vested benefits charge may 

be adjusted to reflect a plan amendment reducing benefits under 

øsection 412(c)(8)¿ section 412(d)(2). 

* * * * * * * 

(g) ACTUARIAL ASSUMPTIONS MUST BE REASONABLE.—For purposes of making any determination under this subpart, the requirements of øsection 412(c)(3)¿ section 431(c)(3) shall apply. 

* * * * * * * 

SEC. 418D. ADJUSTMENTS IN ACCRUED BENEFITS. 

(a) ADJUSTMENTS IN ACCRUED BENEFITS.—

(1) * * * 

(2) ADJUSTMENT OF VESTED BENEFITS CHARGE.—In determining the minimum contribution requirement with respect to 

a plan for a plan year under section 418B(b), the vested benefits charge may be adjusted to reflect a plan amendment reducing benefits under this section or øsection 412(c)(8)¿ section 

412(d)(2), but only if the amendment is adopted and effective 

no later than 2-1/2 months after the end of the plan year, or 

within such extended period as the Secretary may prescribe by 

regulations under øsection 412(c)(10)¿ section 431(c)(8). 

* * * * * * * 

243 

SEC. 418E. INSOLVENT PLANS. 

(a) * * * 

* * * * * * * 

(d) PLAN SPONSOR DETERMINATION.—

(1) TRIENNIAL TEST.—As of the end of the first plan year in 

which a plan is in reorganization, and at least every 3 plan 

years thereafter (unless the plan is no longer in reorganization), the plan sponsor shall compare the value of plan assets 

(determined in accordance with section 418B(b)(3)(B)(ii)) for 

that plan year with the total amount of benefit payments made 

under the plan for that plan year. Unless the plan sponsor determines that the value of plan assets exceeds 3 times the total 

amount of benefit payments, the plan sponsor shall determine 

whether the plan will be insolvent in any of the next ø3 plan 

years¿ 5 plan years. If the plan sponsor makes such a determination that the plan will be insolvent in any of the next 5 

plan years, the plan sponsor shall make the comparison under 

this paragraph at least annually until the plan sponsor makes 

a determination that the plan will not be insolvent in any of the 

next 5 plan years. 

* * * * * * * 

Subpart E—Transfer of Excess Pension Assets to Retiree 

Health Accounts 

* * * * * * * 

SEC. 420. TRANSFERS OF EXCESS PENSION ASSETS TO RETIREE 

HEALTH ACCOUNTS. 

(a) * * * 

* * * * * * * 

(e) DEFINITION AND SPECIAL RULES.—For purposes of this section— (1) * * * 

ø(2) EXCESS PENSION ASSETS.—The term ‘‘excess pension assets’’ means the excess (if any) of—

ø(A) the amount determined under section 

412(c)(7)(A)(ii), over 

ø(B) the greater of—

ø(i) the amount determined under section 

412(c)(7)(A)(i), or 

ø(ii) 125 percent of current liability (as defined in 

section 412(c)(7)(B)). 

The determination under this paragraph shall be made as of 

the most recent valuation date of the plan preceding the qualified transfer.¿ 

(2) EXCESS PENSION ASSETS.—The term ‘‘excess pension assets’’ means the excess (if any) of—

(A) the lesser of—

(i) the fair market value of the plan’s assets (reduced 

by the pre-funding balance and the funding standard 

carryover balance, as determined under section 430(f)), 

or 

(ii) the value of plan assets as determined under section 430(g)(3) (reduced by the pre-funding balance and 

244 

the funding standard carryover balance, as determined 

under section 430(f)), over 

(B) 125 percent of the sum of the target liability amount 

and the target normal cost determined under section 430 

for such plan year. 

* * * * * * * 

ø(4) COORDINATION WITH SECTION 412.—In the case of a 

qualified transfer to a health benefits account—

ø(A) any assets transferred in a plan year on or before 

the valuation date for such year (and any income allocable 

thereto) shall, for purposes of section 412, be treated as assets in the plan as of the valuation date for such year, and 

ø(B) the plan shall be treated as having a net experience 

loss under section 412(b)(2)(B)(iv) in an amount equal to 

the amount of such transfer (reduced by any amounts 

transferred back to the pension plan under subsection 

(c)(1)(B)) and for which amortization charges begin for the 

first plan year after the plan year in which such transfer 

occurs, except that such section shall be applied to such 

amount by substituting ‘‘10 plan years’’ for ‘‘5 plan years’’.¿ 

(4) COORDINATION WITH SECTION 430.—In the case of a qualified transfer, any assets so transferred shall not, for purposes 

of this section, be treated as assets in the plan. 

* * * * * * * 

PART III—RULES RELATING TO MINIMUM 

FUNDING STANDARDS AND BENEFIT LIMITATIONS 

Subpart A. Minimum funding standards for pension plans. 

Subpart B. Benefit limitations under single-employer plans. 

Subpart A—Minimum Funding Standards for 

Pension Plans 

Sec. 430. Minimum funding standards for single-employer defined benefit pension 

plans. 

Sec. 431. Minimum funding standards for multiemployer plans. 

Sec. 432. Additional funding rules for multiemployer plans in endangered status or 

critical status. 

SEC. 430. MINIMUM FUNDING STANDARDS FOR SINGLE-EMPLOYER DEFINED BENEFIT PENSION PLANS. 

(a) MINIMUM REQUIRED CONTRIBUTION.—For purposes of this section and section 412(a)(2)(A), except as provided in subsection (f), 

the term ‘‘minimum required contribution’’ means, with respect to 

any plan year of a defined benefit plan which is not a multiemployer plan—

(1) in any case in which the value of plan assets of the plan 

(as reduced under subsection (f)(4)(B)) is less than the funding 

target of the plan for the plan year, the sum of—

(A) the target normal cost of the plan for the plan year, 

(B) the shortfall amortization charge (if any) for the plan 

for the plan year determined under subsection (c), and 

245 

(C) the waiver amortization charge (if any) for the plan 

for the plan year as determined under subsection (e); 

(2) in any case in which the value of plan assets of the plan 

(as reduced under subsection (f)(4)(B)) exceeds the funding target of the plan for the plan year, the target normal cost of the 

plan for the plan year reduced by such excess; or 

(3) in any other case, the target normal cost of the plan for 

the plan year. 

(b) TARGET NORMAL COST.—For purposes of this section, except as 

provided in subsection (i)(2) with respect to plans in at-risk status, 

the term ‘‘target normal cost’’ means, for any plan year, the present 

value of all benefits which are expected to accrue or to be earned 

under the plan during the plan year. For purposes of this subsection, if any benefit attributable to services performed in a preceding plan year is increased by reason of any increase in compensation during the current plan year, the increase in such benefit 

shall be treated as having accrued during the current plan year. 

(c) SHORTFALL AMORTIZATION CHARGE.— (1) IN GENERAL.—For purposes of this section, the shortfall 

amortization charge for a plan for any plan year is the aggregate total of the shortfall amortization installments for such 

plan year with respect to the shortfall amortization bases for 

such plan year and each of the 6 preceding plan years. 

(2) SHORTFALL AMORTIZATION INSTALLMENT.—The plan sponsor shall determine, with respect to the shortfall amortization 

base of the plan for any plan year, the amounts necessary to 

amortize such shortfall amortization base, in level annual installments over a period of 7 plan years beginning with such 

plan year. For purposes of paragraph (1), the annual installment of such amortization for each plan year in such 7-planyear period is the shortfall amortization installment for such 

plan year with respect to such shortfall amortization base. In 

determining any shortfall amortization installment under this 

paragraph, the plan sponsor shall use the segment rates determined under subparagraph (C) of subsection (h)(2), applied 

under rules similar to the rules of subparagraph (B) of subsection (h)(2). 

(3) SHORTFALL AMORTIZATION BASE.—For purposes of this 

section, the shortfall amortization base of a plan for a plan year 

is the excess (if any) of— (A) the funding shortfall of such plan for such plan year, 

over 

(B) the sum of— (i) the present value (determined using the segment 

rates determined under subparagraph (C) of subsection 

(h)(2), applied under rules similar to the rules of subparagraph (B) of subsection (h)(2)) of the aggregate 

total of the shortfall amortization installments, for 

such plan year and the 5 succeeding plan years, which 

have been determined with respect to the shortfall amortization bases of the plan for each of the 6 plan years 

preceding such plan year, and 

(ii) the present value (as so determined) of the aggregate total of the waiver amortization installments for 

such plan year and the 5 succeeding plan years, which 

246 

have been determined with respect to the waiver amortization bases of the plan for each of the 5 plan years 

preceding such plan year. 

In any case in which the value of plan assets of the plan 

(as reduced under subsection (f)(4)(A)) is equal to or greater 

than the funding target of the plan for the plan year, the 

shortfall amortization base of the plan for such plan year 

shall be zero. 

(4) FUNDING SHORTFALL.—

(A) IN GENERAL.—For purposes of this section, except as 

provided in subparagraph (B), the funding shortfall of a 

plan for any plan year is the excess (if any) of—

(i) the funding target of the plan for the plan year, 

over 

(ii) the value of plan assets of the plan (as reduced 

under subsection (f)(4)(B)) for the plan year which are 

held by the plan on the valuation date. 

(B) TRANSITION RULE.—

(i) IN GENERAL.—For purposes of paragraph (3), in 

the case of a non-deficit reduction plan, subparagraph 

(A) shall be applied to plan years beginning after 2006 

and before 2011 by substituting for the amount described in subparagraph (A)(i) the applicable percentage of the funding target of the plan for the plan year 

determined under the following table: 

In the case of a plan year The applicable

beginning in calendar year: percentage is: 

2007 ....................................................................................................... 92 percent

2008 ....................................................................................................... 94 percent

2009 ....................................................................................................... 96 percent

2010 ....................................................................................................... 98 percent.

(ii) NON-DEFICIT REDUCTION PLAN.—For purposes of 

clause (i), the term ‘‘non-deficit reduction plan’’ means 

any plan—

(I) to which section 412 (as in effect on the day 

before the date of the enactment of the Pension 

Protection Act of 2005) applied for the plan year 

beginning in 2006, and 

(II) to which subsection (l) of such section (as so 

in effect) did not apply for such plan year. 

(5) EARLY DEEMED AMORTIZATION UPON ATTAINMENT OF

FUNDING TARGET.—In any case in which the funding shortfall 

of a plan for a plan year is zero, for purposes of determining 

the shortfall amortization charge for such plan year and succeeding plan years, the shortfall amortization bases for all preceding plan years (and all shortfall amortization installments 

determined with respect to such bases) shall be reduced to zero. 

(d) RULES RELATING TO FUNDING TARGET.—For purposes of this 

section—

(1) FUNDING TARGET.—Except as provided in subsection (i)(1) 

with respect to plans in at-risk status, the funding target of a 

plan for a plan year is the present value of all liabilities to participants and their beneficiaries under the plan for the plan 

year. 

247 

(2) FUNDING TARGET ATTAINMENT PERCENTAGE.—The ‘‘funding target attainment percentage’’ of a plan for a plan year is 

the ratio (expressed as a percentage) which—

(A) the value of plan assets for the plan year (as reduced 

under subsection (f)(4)(B)), bears to 

(B) the funding target of the plan for the plan year (determined without regard to subsection (i)(1)). 

(e) WAIVER AMORTIZATION CHARGE.—

(1) DETERMINATION OF WAIVER AMORTIZATION CHARGE.—The 

waiver amortization charge (if any) for a plan for any plan year 

is the aggregate total of the waiver amortization installments 

for such plan year with respect to the waiver amortization bases 

for each of the 5 preceding plan years. 

(2) WAIVER AMORTIZATION INSTALLMENT.—The plan sponsor 

shall determine, with respect to the waiver amortization base of 

the plan for any plan year, the amounts necessary to amortize 

such waiver amortization base, in level annual installments 

over a period of 5 plan years beginning with the succeeding 

plan year. For purposes of paragraph (1), the annual installment of such amortization for each plan year in such 5-plan 

year period is the waiver amortization installment for such plan 

year with respect to such waiver amortization base. 

(3) INTEREST RATE.—In determining any waiver amortization 

installment under this subsection, the plan sponsor shall use 

the segment rates determined under subparagraph (C) of subsection (h)(2), applied under rules similar to the rules of subparagraph (B) of subsection (h)(2). 

(4) WAIVER AMORTIZATION BASE.—The waiver amortization 

base of a plan for a plan year is the amount of the waived funding deficiency (if any) for such plan year under section 412(c). 

(5) EARLY DEEMED AMORTIZATION UPON ATTAINMENT OF

FUNDING TARGET.—In any case in which the funding shortfall 

of a plan for a plan year is zero, for purposes of determining 

the waiver amortization charge for such plan year and succeeding plan years, the waiver amortization base for all preceding plan years shall be reduced to zero. 

(f) REDUCTION OF MINIMUM REQUIRED CONTRIBUTION BY PREFUNDING BALANCE AND FUNDING STANDARD CARRYOVER BALANCE.—

(1) ELECTION TO MAINTAIN BALANCES.—

(A) PRE-FUNDING BALANCE.—The plan sponsor of a defined benefit plan which is not a multiemployer plan may 

elect to maintain a pre-funding balance. 

(B) FUNDING STANDARD CARRYOVER BALANCE.—

(i) IN GENERAL.—In the case of a defined benefit plan 

(other than a multiemployer plan) described in clause 

(ii), the plan sponsor may elect to maintain a funding 

standard carryover balance, until such balance is reduced to zero. 

(ii) PLANS MAINTAINING FUNDING STANDARD ACCOUNT IN 2006.—A plan is described in this clause if 

the plan—

(I) was in effect for a plan year beginning in 

2006, and 

248 

(II) had a positive balance in the funding standard account under section 412(b) as in effect for 

such plan year and determined as of the end of 

such plan year. 

(2) APPLICATION OF BALANCES.—A pre-funding balance and a 

funding standard carryover balance maintained pursuant to 

this paragraph— (A) shall be available for crediting against the minimum 

required contribution, pursuant to an election under paragraph (3), 

(B) shall be applied as a reduction in the amount treated 

as the value of plan assets for purposes of this section, to 

the extent provided in paragraph (4), and 

(C) may be reduced at any time, pursuant to an election 

under paragraph (5). 

(3) ELECTION TO APPLY BALANCES AGAINST MINIMUM REQUIRED CONTRIBUTION.—

(A) IN GENERAL.—Except as provided in subparagraphs 

(B) and (C), in the case of any plan year in which the plan 

sponsor elects to credit against the minimum required contribution for the current plan year all or a portion of the 

pre-funding balance or the funding standard carryover balance for the current plan year (not in excess of such minimum required contribution), the minimum required contribution for the plan year shall be reduced by the amount 

so credited by the plan sponsor. For purposes of the preceding sentence, the minimum required contribution shall 

be determined after taking into account any waiver under 

section 412(c). 

(B) COORDINATION WITH FUNDING STANDARD CARRYOVER

BALANCE.—To the extent that any plan has a funding 

standard carryover balance greater than zero, no amount of 

the pre-funding balance of such plan may be credited under 

this paragraph in reducing the minimum required contribution. 

(C) LIMITATION FOR UNDERFUNDED PLANS.—The preceding provisions of this paragraph shall not apply for any 

plan year if the ratio (expressed as a percentage) which— (i) the value of plan assets for the preceding plan 

year (as reduced under paragraph (4)(C)), bears to 

(ii) the funding target of the plan for the preceding 

plan year (determined without regard to subsection 

(i)(1)), 

is less than 80 percent. 

(4) EFFECT OF BALANCES ON AMOUNTS TREATED AS VALUE OF

PLAN ASSETS.—In the case of any plan maintaining a pre-funding balance or a funding standard carryover balance pursuant 

to this subsection, the amount treated as the value of plan assets shall be deemed to be such amount, reduced as provided in 

the following subparagraphs: 

(A) APPLICABILITY OF SHORTFALL AMORTIZATION BASE.— For purposes of subsection (c)(3), the value of plan assets is 

deemed to be such amount, reduced by the amount of the 

pre-funding balance, but only if an election under paragraph (2) applying any portion of the pre-funding balance 

249 

in reducing the minimum required contribution is in effect 

for the plan year. 

(B) DETERMINATION OF EXCESS ASSETS, FUNDING SHORTFALL, AND FUNDING TARGET ATTAINMENT PERCENTAGE.—

For purposes of subsections (a), (c)(4)(A)(ii), and (d)(2)(A), 

the value of plan assets is deemed to be such amount, reduced by the amount of the pre-funding balance and the 

funding standard carryover balance. 

(C) AVAILABILITY OF BALANCES IN PLAN YEAR FOR CREDITING AGAINST MINIMUM REQUIRED CONTRIBUTION.—For 

purposes of paragraph (3)(C)(i) of this subsection, the value 

of plan assets is deemed to be such amount, reduced by the 

amount of the pre-funding balance. 

(5) ELECTION TO REDUCE BALANCE PRIOR TO DETERMINATIONS

OF VALUE OF PLAN ASSETS AND CREDITING AGAINST MINIMUM

REQUIRED CONTRIBUTION.—

(A) IN GENERAL.—The plan sponsor may elect to reduce 

by any amount the balance of the pre-funding balance and 

the funding standard carryover balance for any plan year 

(but not below zero). Such reduction shall be effective prior 

to any determination of the value of plan assets for such 

plan year under this section and application of the balance 

in reducing the minimum required contribution for such 

plan for such plan year pursuant to an election under paragraph (2). 

(B) COORDINATION BETWEEN PRE-FUNDING BALANCE AND

FUNDING STANDARD CARRYOVER BALANCE.—To the extent 

that any plan has a funding standard carryover balance 

greater than zero, no election may be made under subparagraph (A) with respect to the pre-funding balance. 

(6) PRE-FUNDING BALANCE.—

(A) IN GENERAL.—A pre-funding balance maintained by 

a plan shall consist of a beginning balance of zero, increased and decreased to the extent provided in subparagraphs (B) and (C), and adjusted further as provided in 

paragraph (8). 

(B) INCREASES.—As of the valuation date for each plan 

year beginning after 2007, the pre-funding balance of a 

plan shall be increased by the amount elected by the plan 

sponsor for the plan year. Such amount shall not exceed the 

excess (if any) of—

(i) the aggregate total of employer contributions to 

the plan for the preceding plan year, over 

(ii) the minimum required contribution for such preceding plan year (increased by interest on any portion 

of such minimum required contribution remaining unpaid as of the valuation date for the current plan year, 

at the effective interest rate for the plan for the preceding plan year, for the period beginning with the 

first day of such preceding plan year and ending on the 

date that payment of such portion is made). 

(C) DECREASES.—As of the valuation date for each plan 

year after 2007, the pre-funding balance of a plan shall be 

decreased (but not below zero) by the sum of—

250 

(i) the amount of such balance credited under paragraph (2) (if any) in reducing the minimum required 

contribution of the plan for the preceding plan year, 

and 

(ii) any reduction in such balance elected under 

paragraph (5). 

(7) FUNDING STANDARD CARRYOVER BALANCE.— (A) IN GENERAL.—A funding standard carryover balance 

maintained by a plan shall consist of a beginning balance 

determined under subparagraph (B), decreased to the extent provided in subparagraph (C), and adjusted further as 

provided in paragraph (8). 

(B) BEGINNING BALANCE.—The beginning balance of the 

funding standard carryover balance shall be the positive 

balance described in paragraph (1)(B)(ii)(II). 

(C) DECREASES.—As of the valuation date for each plan 

year after 2007, the funding standard carryover balance of 

a plan shall be decreased (but not below zero) by the sum 

of—

(i) the amount of such balance credited under paragraph (2) (if any) in reducing the minimum required 

contribution of the plan for the preceding plan year, 

and 

(ii) any reduction in such balance elected under 

paragraph (5). 

(8) ADJUSTMENTS TO BALANCES.—In determining the prefunding balance or the funding standard carryover balance of 

a plan as of the valuation date (before applying any increase or 

decrease under paragraph (6) or (7)), the plan sponsor shall, in 

accordance with regulations which shall be prescribed by the 

Secretary, adjust such balance so as to reflect the rate of net 

gain or loss (determined, notwithstanding subsection (g)(3), on 

the basis of fair market value) experienced by all plan assets for 

the period beginning with the valuation date for the preceding 

plan year and ending with the date preceding the valuation 

date for the current plan year, properly taking into account, in 

accordance with such regulations, all contributions, distributions, and other plan payments made during such period. 

(9) ELECTIONS.—Elections under this subsection shall be 

made at such times, and in such form and manner, as shall be 

prescribed in regulations of the Secretary. 

(g) VALUATION OF PLAN ASSETS AND LIABILITIES.—

(1) TIMING OF DETERMINATIONS.—Except as otherwise provided under this subsection, all determinations under this section for a plan year shall be made as of the valuation date of 

the plan for such plan year. 

(2) VALUATION DATE.—For purposes of this section—

(A) IN GENERAL.—Except as provided in subparagraph 

(B), the valuation date of a plan for any plan year shall be 

the first day of the plan year. 

(B) EXCEPTION FOR SMALL PLANS.—If, on each day during the preceding plan year, a plan had 500 or fewer participants, the plan may designate any day during the plan 

year as its valuation date for such plan year and succeeding plan years. For purposes of this subparagraph, all 

251 

defined benefit plans (other than multiemployer plans) 

maintained by the same employer (or any member of such 

employer’s controlled group) shall be treated as 1 plan, but 

only participants with respect to such employer or member 

shall be taken into account. 

(C) APPLICATION OF CERTAIN RULES IN DETERMINATION

OF PLAN SIZE.—For purposes of this paragraph— (i) PLANS NOT IN EXISTENCE IN PRECEDING YEAR.—In 

the case of the first plan year of any plan, subparagraph (B) shall apply to such plan by taking into account the number of participants that the plan is reasonably expected to have on days during such first plan 

year. 

(ii) PREDECESSORS.—Any reference in subparagraph 

(B) to an employer shall include a reference to any 

predecessor of such employer. 

(3) AUTHORIZATION OF USE OF ACTUARIAL VALUE.—For purposes of this section, the value of plan assets shall be determined on the basis of any reasonable actuarial method of valuation which takes into account fair market value and which is 

permitted under regulations prescribed by the Secretary, except 

that—

(A) any such method providing for averaging of fair market values may not provide for averaging of such values 

over more than the 3 most recent plan years (including the 

current plan year), and 

(B) any such method may not result in a determination 

of the value of plan assets which, at any time, is lower than 

90 percent or greater than 110 percent of the fair market 

value of such assets at such time. 

(4) ACCOUNTING FOR CONTRIBUTION RECEIPTS.—For purposes 

of this section— (A) CONTRIBUTIONS FOR PRIOR PLAN YEARS TAKEN INTO

ACCOUNT.—For purposes of determining the value of plan 

assets for any current plan year, in any case in which a 

contribution properly allocable to amounts owed for a preceding plan year is made on or after the valuation date of 

the plan for such current plan year, such contribution shall 

be taken into account, except that any such contribution 

made during any such current plan year beginning after 

2007 shall be taken into account only in an amount equal 

to its present value (determined using the effective rate of 

interest for the plan for the preceding plan year) as of the 

valuation date of the plan for such current plan year. 

(B) CONTRIBUTIONS FOR CURRENT PLAN YEAR DISREGARDED.—For purposes of determining the value of plan 

assets for any current plan year, contributions which are 

properly allocable to amounts owed for such plan year shall 

not be taken into account, and, in the case of any such contribution made before the valuation date of the plan for 

such plan year, such value of plan assets shall be reduced 

for interest on such amount determined using the effective 

rate of interest of the plan for the current plan year for the 

period beginning when such payment was made and ending on the valuation date of the plan. 

252 

(5) ACCOUNTING FOR PLAN LIABILITIES.—For purposes of this 

section—

(A) LIABILITIES TAKEN INTO ACCOUNT FOR CURRENT PLAN

YEAR.—In determining the value of liabilities under a plan 

for a plan year, liabilities shall be taken into account to the 

extent attributable to benefits (including any early retirement or similar benefit) accrued or earned as of the beginning of the plan year. 

(B) ACCRUALS DURING CURRENT PLAN YEAR DIS- REGARDED.—For purposes of subparagraph (A), benefits accrued or earned during such plan year shall not be taken 

into account, irrespective of whether the valuation date of 

the plan for such plan year is later than the first day of 

such plan year. 

(h) ACTUARIAL ASSUMPTIONS AND METHODS.—

(1) IN GENERAL.—Subject to this subsection, the determination of any present value or other computation under this section shall be made on the basis of actuarial assumptions and 

methods—

(A) each of which is reasonable (taking into account the 

experience of the plan and reasonable expectations), and 

(B) which, in combination, offer the actuary’s best estimate of anticipated experience under the plan. 

(2) INTEREST RATES.— (A) EFFECTIVE INTEREST RATE.—For purposes of this section, the term ‘‘effective interest rate’’ means, with respect to 

any plan for any plan year, the single rate of interest 

which, if used to determine the present value of the plan’s 

liabilities referred to in subsection (d)(1), would result in 

an amount equal to the funding target of the plan for such 

plan year. 

(B) INTEREST RATES FOR DETERMINING FUNDING TARGET.—For purposes of determining the funding target of a 

plan for any plan year, the interest rate used in determining the present value of the liabilities of the plan shall 

be— (i) in the case of liabilities reasonably determined to 

be payable during the 5-year period beginning on the 

first day of the plan year, the first segment rate with 

respect to the applicable month, 

(ii) in the case of liabilities reasonably determined to 

be payable during the 15-year period beginning at the 

end of the period described in clause (i), the second segment rate with respect to the applicable month, and 

(iii) in the case of liabilities reasonably determined to 

be payable after the period described in clause (ii), the 

third segment rate with respect to the applicable 

month. 

(C) SEGMENT RATES.—For purposes of this paragraph— (i) FIRST SEGMENT RATE.—The term ‘‘first segment 

rate’’ means, with respect to any month, the single rate 

of interest which shall be determined by the Secretary 

for such month on the basis of the corporate bond yield 

curve for such month, taking into account only that 

portion of such yield curve which is based on bonds 

253 

maturing during the 5-year period commencing with 

such month. 

(ii) SECOND SEGMENT RATE.—The term ‘‘second segment rate’’ means, with respect to any month, the single rate of interest which shall be determined by the 

Secretary for such month on the basis of the corporate 

bond yield curve for such month, taking into account 

only that portion of such yield curve which is based on 

bonds maturing during the 15-year period beginning at 

the end of the period described in clause (i). 

(iii) THIRD SEGMENT RATE.—The term ‘‘third segment 

rate’’ means, with respect to any month, the single rate 

of interest which shall be determined by the Secretary 

for such month on the basis of the corporate bond yield 

curve for such month, taking into account only that 

portion of such yield curve which is based on bonds 

maturing during periods beginning after the period described in clause (ii). 

(D) CORPORATE BOND YIELD CURVE.—For purposes of this 

paragraph—

(i) IN GENERAL.—The term ‘‘corporate bond yield 

curve’’ means, with respect to any month, a yield curve 

which is prescribed by the Secretary for such month 

and which reflects a 3-year weighted average of yields 

on investment grade corporate bonds with varying maturities. 

(ii) 3-YEAR WEIGHTED AVERAGE.—The term ‘‘3-year 

weighted average’’ means an average determined by 

using a methodology under which the most recent year 

is weighted 50 percent, the year preceding such year is 

weighted 35 percent, and the second year preceding 

such year is weighted 15 percent. 

(E) APPLICABLE MONTH.—For purposes of this paragraph, 

the term ‘‘applicable month’’ means, with respect to any 

plan for any plan year, the month which includes the valuation date of such plan for such plan year or, at the election 

of the plan sponsor, any of the 4 months which precede 

such month. Any election made under this subparagraph 

shall apply to the plan year for which the election is made 

and all succeeding plan years, unless the election is revoked 

with the consent of the Secretary. 

(F) PUBLICATION REQUIREMENTS.—The Secretary shall 

publish for each month the corporate bond yield curve (and 

the corporate bond yield curve reflecting the modification 

described in section 417(e)(3)(A)(iv)(I)) for such month and 

each of the rates determined under subparagraph (B) for 

such month. The Secretary shall also publish a description 

of the methodology used to determine such yield curve and 

such rates which is sufficiently detailed to enable plans to 

make reasonable projections regarding the yield curve and 

such rates for future months based on the plan’s projection 

of future interest rates. 

(G) TRANSITION RULE.—

(i) IN GENERAL.—Notwithstanding the preceding provisions of this paragraph, for plan years beginning in 

254 

2007 or 2008, the first, second, or third segment rate 

for a plan with respect to any month shall be equal to 

the sum of—

(I) the product of such rate for such month determined without regard to this subparagraph, multiplied by the applicable percentage, and 

(II) the product of the rate determined under the 

rules of section 412(b)(5)(B)(ii)(II) (as in effect for 

plan years beginning in 2006), multiplied by a percentage equal to 100 percent minus the applicable 

percentage. 

(ii) APPLICABLE PERCENTAGE.—For purposes of 

clause (i), the applicable percentage is 331⁄3 percent for 

plan years beginning in 2007 and 662⁄3 percent for 

plan years beginning in 2008. 

(iii) NEW PLANS INELIGIBLE.—Clause (i) shall not 

apply to any plan if the first plan year of the plan begins after December 31, 2006. 

(3) MORTALITY TABLE.—

(A) IN GENERAL.—Except as provided in subparagraph 

(C), the mortality table used in determining any present 

value or making any computation under this section shall 

be the RP–2000 Combined Mortality Table, using Scale AA, 

as published by the Society of Actuaries, as in effect on the 

date of the enactment of the Pension Protection Act of 2005 

and as revised from time to time under subparagraph (B). 

(B) PERIODIC REVISION.—The Secretary shall (at least 

every 10 years) make revisions in any table in effect under 

subparagraph (A) to reflect the actual experience of pension 

plans and projected trends in such experience. 

(C) SUBSTITUTE MORTALITY TABLE.—

(i) IN GENERAL.—Upon request by the plan sponsor 

and approval by the Secretary for a period not to exceed 10 years, a mortality table which meets the requirements of clause (ii) shall be used in determining 

any present value or making any computation under 

this section. A mortality table described in this clause 

shall cease to be in effect if the plan actuary determines 

at any time that such table does not meet the requirements of subclauses (I) and (II) of clause (ii). 

(ii) REQUIREMENTS.—A mortality table meets the requirements of this clause if the Secretary determines 

that—

(I) such table reflects the actual experience of the 

pension plan and projected trends in such experience, and 

(II) such table is significantly different from the 

table described in subparagraph (A). 

(iii) DEADLINE FOR DISPOSITION OF APPLICATION.—

Any mortality table submitted to the Secretary for approval under this subparagraph shall be treated as in 

effect for the succeeding plan year unless the Secretary, 

during the 180-day period beginning on the date of 

such submission, disapproves of such table and proVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00254 Fmt 6659 Sfmt 6603 E:\HR\OC\HR232P2.XXX HR232P2
255 

vides the reasons that such table fails to meet the requirements of clause (ii). 

(D) TRANSITION RULE.—Under regulations of the Secretary, any difference in assumptions as set forth in the 

mortality table specified in subparagraph (A) and assumptions as set forth in the mortality table described in section 

412(l)(7)(C)(ii) (as in effect for plan years beginning in 

2006) shall be phased in ratably over the first period of 5 

plan years beginning in or after 2007 so as to be fully effective for the fifth plan year. The preceding sentence shall not 

apply to any plan if the first plan year of the plan begins 

after December 31, 2006. 

(4) PROBABILITY OF BENEFIT PAYMENTS IN THE FORM OF LUMP

SUMS OR OTHER OPTIONAL FORMS.—For purposes of determining any present value or making any computation under 

this section, there shall be taken into account—

(A) the probability that future benefit payments under the 

plan will be made in the form of optional forms of benefits 

provided under the plan (including lump sum distributions, determined on the basis of the plan’s experience and 

other related assumptions), and 

(B) any difference in the present value of such future benefit payments resulting from the use of actuarial assumptions, in determining benefit payments in any such optional 

form of benefits, which are different from those specified in 

this subsection. 

(5) APPROVAL OF LARGE CHANGES IN ACTUARIAL ASSUMP- TIONS.—

(A) IN GENERAL.—No actuarial assumption used to determine the funding target for a plan to which this paragraph 

applies may be changed without the approval of the Secretary. 

(B) PLANS TO WHICH PARAGRAPH APPLIES.—This paragraph shall apply to a plan only if— (i) the plan is a defined benefit plan (other than a 

multiemployer plan) to which title IV of the Employee 

Retirement Income Security Act of 1974 applies, 

(ii) the aggregate unfunded vested benefits as of the 

close of the preceding plan year (as determined under 

section 4006(a)(3)(E)(iii) of the Employee Retirement 

Income Security Act of 1974) of such plan and all other 

plans maintained by the contributing sponsors (as defined in section 4001(a)(13) of such Act) and members 

of such sponsors’ controlled groups (as defined in section 4001(a)(14) of such Act) which are covered by title 

IV (disregarding plans with no unfunded vested benefits) exceed $50,000,000, and 

(iii) the change in assumptions (determined after taking into account any changes in interest rate and mortality table) results in a decrease in the funding shortfall of the plan for the current plan year that exceeds 

$50,000,000, or that exceeds $5,000,000 and that is 5 

percent or more of the funding target of the plan before 

such change. 

(i) SPECIAL RULES FOR AT-RISK PLANS.—

256 

(1) FUNDING TARGET FOR PLANS IN AT-RISK STATUS.—

(A) IN GENERAL.—In any case in which a plan is in atrisk status for a plan year, the funding target of the plan 

for the plan year is the sum of—

(i) the present value of all liabilities to participants 

and their beneficiaries under the plan for the plan 

year, as determined by using, in addition to the actuarial assumptions described in subsection (g), the supplemental actuarial assumptions described in subparagraph (B), plus 

(ii) a loading factor determined under subparagraph 

(C). 

(B) SUPPLEMENTAL ACTUARIAL ASSUMPTIONS.—The actuarial assumptions used in determining the valuation of the 

funding target shall include, in addition to the actuarial 

assumptions described in subsection (h), an assumption 

that all participants will elect benefits at such times and in 

such forms as will result in the highest present value of liabilities under subparagraph (A)(i). 

(C) LOADING FACTOR.—The loading factor applied with 

respect to a plan under this paragraph for any plan year 

is the sum of—

(i) $700, times the number of participants in the 

plan, plus 

(ii) 4 percent of the funding target (determined without regard to this paragraph) of the plan for the plan 

year. 

(2) TARGET NORMAL COST OF AT-RISK PLANS.—In any case in 

which a plan is in at-risk status for a plan year, the target normal cost of the plan for such plan year shall be the sum of—

(A) the present value of all benefits which are expected to 

accrue or be earned under the plan during the plan year, 

determined under the actuarial assumptions used under 

paragraph (1), plus 

(B) the loading factor under paragraph (1)(C), excluding 

the portion of the loading factor described in paragraph 

(1)(C)(i). 

(3) DETERMINATION OF AT-RISK STATUS.—For purposes of this 

subsection, a plan is in ‘‘at-risk status’’ for a plan year if the 

funding target attainment percentage of the plan for the preceding plan year was less than 60 percent. 

(4) TRANSITION BETWEEN APPLICABLE FUNDING TARGETS AND

BETWEEN APPLICABLE TARGET NORMAL COSTS.—

(A) IN GENERAL.—In any case in which a plan which is 

in at-risk status for a plan year has been in such status for 

a consecutive period of fewer than 5 plan years, the applicable amount of the funding target and of the target normal cost shall be, in lieu of the amount determined without 

regard to this paragraph, the sum of—

(i) the amount determined under this section without 

regard to this subsection, plus 

(ii) the transition percentage for such plan year of 

the excess of the amount determined under this subsection (without regard to this paragraph) over the 

257 

amount determined under this section without regard 

to this subsection. 

(B) TRANSITION PERCENTAGE.—For purposes of this paragraph, the ‘‘transition percentage’’ for a plan year is the 

product derived by multiplying— (i) 20 percent, by 

(ii) the number of plan years during the period described in subparagraph (A). 

(j) PAYMENT OF MINIMUM REQUIRED CONTRIBUTIONS.— (1) IN GENERAL.—For purposes of this section, the due date 

for any payment of any minimum required contribution for any 

plan year shall be 81⁄2 months after the close of the plan year. 

(2) INTEREST.—Any payment required under paragraph (1) 

for a plan year that is made on a date other than the valuation 

date for such plan year shall be adjusted for interest accruing 

for the period between the valuation date and the payment date, 

at the effective rate of interest for the plan for such plan year. 

(3) ACCELERATED QUARTERLY CONTRIBUTION SCHEDULE FOR

UNDERFUNDED PLANS.—

(A) INTEREST PENALTY FOR FAILURE TO MEET ACCELER- ATED QUARTERLY PAYMENT SCHEDULE.—In any case in 

which the plan has a funding shortfall for the preceding 

plan year, if the required installment is not paid in full, 

then the minimum required contribution for the plan year 

(as increased under paragraph (2)) shall be further increased by an amount equal to the interest on the amount 

of the underpayment for the period of the underpayment, 

using an interest rate equal to the excess of— (i) 175 percent of the Federal mid-term rate (as in effect under section 1274 for the 1st month of such plan 

year), over 

(ii) the effective rate of interest for the plan for the 

plan year. 

(B) AMOUNT OF UNDERPAYMENT, PERIOD OF UNDERPAYMENT.—For purposes of subparagraph (A)— (i) AMOUNT.—The amount of the underpayment shall 

be the excess of— (I) the required installment, over 

(II) the amount (if any) of the installment contributed to or under the plan on or before the due 

date for the installment. 

(ii) PERIOD OF UNDERPAYMENT.—The period for 

which any interest is charged under this paragraph 

with respect to any portion of the underpayment shall 

run from the due date for the installment to the date 

on which such portion is contributed to or under the 

plan. 

(iii) ORDER OF CREDITING CONTRIBUTIONS.—For purposes of clause (i)(II), contributions shall be credited 

against unpaid required installments in the order in 

which such installments are required to be paid. 

(C) NUMBER OF REQUIRED INSTALLMENTS; DUE DATES.— For purposes of this paragraph— (i) PAYABLE IN 4 INSTALLMENTS.—There shall be 4 

required installments for each plan year. 

258 

(ii) TIME FOR PAYMENT OF INSTALLMENTS.—The due 

dates for required installments are set forth in the following table: 

In the case of the following The due

required installment: date is: 

1st .......................................................................................................... April 15

2nd ........................................................................................................ July 15

3rd ......................................................................................................... October 15

4th ......................................................................................................... January 15 of the following year. 

(D) AMOUNT OF REQUIRED INSTALLMENT.—For purposes 

of this paragraph—

(i) IN GENERAL.—The amount of any required installment shall be 25 percent of the required annual payment. 

(ii) REQUIRED ANNUAL PAYMENT.—For purposes of 

clause (i), the term ‘‘required annual payment’’ means 

the lesser of—

(I) 90 percent of the minimum required contribution (without regard to any waiver under section 

412(c)) to the plan for the plan year under this section, or 

(II) in the case of a plan year beginning after 

2007, 100 percent of the minimum required contribution (without regard to any waiver under section 412(c)) to the plan for the preceding plan year. 

Subclause (II) shall not apply if the preceding plan 

year referred to in such clause was not a year of 12 

months. 

(E) FISCAL YEARS AND SHORT YEARS.—

(i) FISCAL YEARS.—In applying this paragraph to a 

plan year beginning on any date other than January 1, 

there shall be substituted for the months specified in 

this paragraph, the months which correspond thereto. 

(ii) SHORT PLAN YEAR.—This subparagraph shall be 

applied to plan years of less than 12 months in accordance with regulations prescribed by the Secretary. 

(4) LIQUIDITY REQUIREMENT IN CONNECTION WITH QUARTERLY

CONTRIBUTIONS.— (A) IN GENERAL.—A plan to which this paragraph applies shall be treated as failing to pay the full amount of 

any required installment under paragraph (3) to the extent 

that the value of the liquid assets paid in such installment 

is less than the liquidity shortfall (whether or not such liquidity shortfall exceeds the amount of such installment required to be paid but for this paragraph). 

(B) PLANS TO WHICH PARAGRAPH APPLIES.—This paragraph shall apply to a plan (other than a plan that would 

be described in subsection (f)(2)(B) if ‘‘100’’ were substituted 

for ‘‘500’’ therein) which— (i) is required to pay installments under paragraph 

(3) for a plan year, and 

(ii) has a liquidity shortfall for any quarter during 

such plan year. 

(C) PERIOD OF UNDERPAYMENT.—For purposes of paragraph (3)(A), any portion of an installment that is treated 

259 

as not paid under subparagraph (A) shall continue to be 

treated as unpaid until the close of the quarter in which the 

due date for such installment occurs. 

(D) LIMITATION ON INCREASE.—If the amount of any required installment is increased by reason of subparagraph 

(A), in no event shall such increase exceed the amount 

which, when added to prior installments for the plan year, 

is necessary to increase the funding target attainment percentage of the plan for the plan year (taking into account 

the expected increase in funding target due to benefits accruing or earned during the plan year) to 100 percent. 

(E) DEFINITIONS.—For purposes of this subparagraph: 

(i) LIQUIDITY SHORTFALL.—The term ‘‘liquidity shortfall’’ means, with respect to any required installment, 

an amount equal to the excess (as of the last day of the 

quarter for which such installment is made) of—

(I) the base amount with respect to such quarter, 

over 

(II) the value (as of such last day) of the plan’s 

liquid assets. 

(ii) BASE AMOUNT.— (I) IN GENERAL.—The term ‘‘base amount’’ means, with respect to any quarter, an amount 

equal to 3 times the sum of the adjusted disbursements from the plan for the 12 months ending on 

the last day of such quarter. 

(II) SPECIAL RULE.—If the amount determined 

under subclause (I) exceeds an amount equal to 2 

times the sum of the adjusted disbursements from 

the plan for the 36 months ending on the last day 

of the quarter and an enrolled actuary certifies to 

the satisfaction of the Secretary that such excess is 

the result of nonrecurring circumstances, the base 

amount with respect to such quarter shall be determined without regard to amounts related to those 

nonrecurring circumstances. 

(iii) DISBURSEMENTS FROM THE PLAN.—The term ‘‘disbursements from the plan’’ means all disbursements from the trust, including purchases of annuities, 

payments of single sums and other benefits, and administrative expenses. 

(iv) ADJUSTED DISBURSEMENTS.—The term ‘‘adjusted 

disbursements’’ means disbursements from the plan reduced by the product of—

(I) the plan’s funding target attainment percentage for the plan year, and 

(II) the sum of the purchases of annuities, payments of single sums, and such other disbursements as the Secretary shall provide in regulations. 

(v) LIQUID ASSETS.—The term ‘‘liquid assets’’ means 

cash, marketable securities, and such other assets as 

specified by the Secretary in regulations. 

(vi) QUARTER.—The term ‘‘quarter’’ means, with respect to any required installment, the 3-month period 

260 

preceding the month in which the due date for such installment occurs. 

(F) REGULATIONS.—The Secretary may prescribe such 

regulations as are necessary to carry out this paragraph. 

(k) IMPOSITION OF LIEN WHERE FAILURE TO MAKE REQUIRED

CONTRIBUTIONS.—

(1) IN GENERAL.—In the case of a plan to which this subsection applies, if—

(A) any person fails to make a contribution payment required by section 412 and this section before the due date 

for such payment, and 

(B) the unpaid balance of such payment (including interest), when added to the aggregate unpaid balance of all 

preceding such payments for which payment was not made 

before the due date (including interest), exceeds $1,000,000, 

then there shall be a lien in favor of the plan in the amount 

determined under paragraph (3) upon all property and rights 

to property, whether real or personal, belonging to such person 

and any other person who is a member of the same controlled 

group of which such person is a member. 

(2) PLANS TO WHICH SUBSECTION APPLIES.—This subsection 

shall apply to a defined benefit plan (other than a multiemployer plan) for any plan year for which the funding target attainment percentage (as defined in subsection (d)(2)) of such 

plan is less than 100 percent. This subsection shall not apply 

to any plan to which section 4021 of the Employee Retirement 

Income Security Act of 1974 does not apply (as such section is 

in effect on the date of the enactment of the Pension Protection 

Act of 2005). 

(3) AMOUNT OF LIEN.—For purposes of paragraph (1), the 

amount of the lien shall be equal to the aggregate unpaid balance of contribution payments required under this section and 

section 412 for which payment has not been made before the 

due date. 

(4) NOTICE OF FAILURE; LIEN.—

(A) NOTICE OF FAILURE.—A person committing a failure 

described in paragraph (1) shall notify the Pension Benefit 

Guaranty Corporation of such failure within 10 days of the 

due date for the required contribution payment. 

(B) PERIOD OF LIEN.—The lien imposed by paragraph (1) 

shall arise on the due date for the required contribution 

payment and shall continue until the last day of the first 

plan year in which the plan ceases to be described in paragraph (1)(B). Such lien shall continue to run without regard to whether such plan continues to be described in 

paragraph (2) during the period referred to in the preceding sentence. 

(C) CERTAIN RULES TO APPLY.—Any amount with respect 

to which a lien is imposed under paragraph (1) shall be 

treated as taxes due and owing the United States and rules 

similar to the rules of subsections (c), (d), and (e) of section 

4068 of the Employee Retirement Income Security Act of 

1974 shall apply with respect to a lien imposed by subsection (a) and the amount with respect to such lien. 

261 

(5) ENFORCEMENT.—Any lien created under paragraph (1) 

may be perfected and enforced only by the Pension Benefit 

Guaranty Corporation, or at the direction of the Pension Benefit 

Guaranty Corporation, by the contributing sponsor (or any 

member of the controlled group of the contributing sponsor). 

(6) DEFINITIONS.—For purposes of this subsection—

(A) CONTRIBUTION PAYMENT.—The term ‘‘contribution 

payment’’ means, in connection with a plan, a contribution 

payment required to be made to the plan, including any required installment under paragraphs (3) and (4) of subsection (i). 

(B) DUE DATE; REQUIRED INSTALLMENT.—The terms ‘‘due 

date’’ and ‘‘required installment’’ have the meanings given 

such terms by subsection (j), except that in the case of a 

payment other than a required installment, the due date 

shall be the date such payment is required to be made 

under section 430. 

(C) CONTROLLED GROUP.—The term ‘‘controlled group’’

means any group treated as a single employer under subsections (b), (c), (m), and (o) of section 414. 

(l) QUALIFIED TRANSFERS TO HEALTH BENEFIT ACCOUNTS.—In 

the case of a qualified transfer (as defined in section 420), any assets so transferred shall not, for purposes of this section, be treated 

as assets in the plan. 

SEC. 431. MINIMUM FUNDING STANDARDS FOR MULTIEMPLOYER 

PLANS. 

(a) IN GENERAL.—For purposes of section 412, the accumulated 

funding deficiency of a multiemployer plan for any plan year is—

(1) except as provided in paragraph (2), the amount, determined as of the end of the plan year, equal to the excess (if any) 

of the total charges to the funding standard account of the plan 

for all plan years (beginning with the first plan year for which 

section 412 applies to the plan) over the total credits to such account for such years, and 

(2) if the multiemployer plan is in reorganization for any 

plan year, the accumulated funding deficiency of the plan determined under section 418B. 

(b) FUNDING STANDARD ACCOUNT.—

(1) ACCOUNT REQUIRED.—Each multiemployer plan to which 

section 412 applies shall establish and maintain a funding 

standard account. Such account shall be credited and charged 

solely as provided in this section. 

(2) CHARGES TO ACCOUNT.—For a plan year, the funding 

standard account shall be charged with the sum of—

(A) the normal cost of the plan for the plan year, 

(B) the amounts necessary to amortize in equal annual 

installments (until fully amortized)—

(i) in the case of a plan in existence on January 1, 

1974, the unfunded past service liability under the 

plan on the first day of the first plan year to which section 412 applies, over a period of 40 plan years, 

(ii) in the case of a plan which comes into existence 

after January 1, 1974, the unfunded past service liability under the plan on the first day of the first plan year 

262 

to which section 412 applies, over a period of 15 plan 

years, 

(iii) separately, with respect to each plan year, the 

net increase (if any) in unfunded past service liability 

under the plan arising from plan amendments adopted 

in such year, over a period of 15 plan years, 

(iv) separately, with respect to each plan year, the net 

experience loss (if any) under the plan, over a period of 

15 plan years, and 

(v) separately, with respect to each plan year, the net 

loss (if any) resulting from changes in actuarial assumptions used under the plan, over a period of 15 

plan years, 

(C) the amount necessary to amortize each waived funding deficiency (within the meaning of section 412(c)(3)) for 

each prior plan year in equal annual installments (until 

fully amortized) over a period of 15 plan years, 

(D) the amount necessary to amortize in equal annual installments (until fully amortized) over a period of 5 plan 

years any amount credited to the funding standard account 

under section 412(b)(3)(D) (as in effect on the day before the 

date of the enactment of the Pension Protection Act of 

2005), and 

(E) the amount necessary to amortize in equal annual installments (until fully amortized) over a period of 20 years 

the contributions which would be required to be made 

under the plan but for the provisions of section 

412(c)(7)(A)(i)(I) (as in effect on the day before the date of 

the enactment of the Pension Protection Act of 2005). 

(3) CREDITS TO ACCOUNT.—For a plan year, the funding 

standard account shall be credited with the sum of—

(A) the amount considered contributed by the employer to 

or under the plan for the plan year, 

(B) the amount necessary to amortize in equal annual installments (until fully amortized)— (i) separately, with respect to each plan year, the net 

decrease (if any) in unfunded past service liability 

under the plan arising from plan amendments adopted 

in such year, over a period of 15 plan years, 

(ii) separately, with respect to each plan year, the net 

experience gain (if any) under the plan, over a period 

of 15 plan years, and 

(iii) separately, with respect to each plan year, the 

net gain (if any) resulting from changes in actuarial 

assumptions used under the plan, over a period of 15 

plan years, 

(C) the amount of the waived funding deficiency (within 

the meaning of section 412(c)(3)) for the plan year, and 

(D) in the case of a plan year for which the accumulated 

funding deficiency is determined under the funding standard account if such plan year follows a plan year for which 

such deficiency was determined under the alternative minimum funding standard under section 412(g) (as in effect 

on the day before the date of the enactment of the Pension 

Protection Act of 2005), the excess (if any) of any debit balVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00262 Fmt 6659 Sfmt 6603 E:\HR\OC\HR232P2.XXX HR232P2
263 

ance in the funding standard account (determined without 

regard to this subparagraph) over any debit balance in the 

alternative minimum funding standard account. 

(4) SPECIAL RULE FOR AMOUNTS FIRST AMORTIZED TO PLAN

YEARS BEFORE 2007.—In the case of any amount amortized 

under section 412(b) (as in effect on the day before the date of 

the enactment of the Pension Protection Act of 2005) over any 

period beginning with a plan year beginning before 2007, in 

lieu of the amortization described in paragraphs (2)(B) and 

(3)(B), such amount shall continue to be amortized under such 

section as so in effect. 

(5) COMBINING AND OFFSETTING AMOUNTS TO BE AMORTIZED.—Under regulations prescribed by the Secretary, amounts 

required to be amortized under paragraph (2) or paragraph (3), 

as the case may be—

(A) may be combined into one amount under such paragraph to be amortized over a period determined on the 

basis of the remaining amortization period for all items entering into such combined amount, and 

(B) may be offset against amounts required to be amortized under the other such paragraph, with the resulting 

amount to be amortized over a period determined on the 

basis of the remaining amortization periods for all items 

entering into whichever of the two amounts being offset is 

the greater. 

(6) INTEREST.—Except as provided in subsection (c)(9), the 

funding standard account (and items therein) shall be charged 

or credited (as determined under regulations prescribed by the 

Secretary) with interest at the appropriate rate consistent with 

the rate or rates of interest used under the plan to determine 

costs. 

(7) CERTAIN AMORTIZATION CHARGES AND CREDITS.—In the 

case of a plan which, immediately before the date of the enactment of the Multiemployer Pension Plan Amendments Act of 

1980, was a multiemployer plan (within the meaning of section 

414(f) as in effect immediately before such date)—

(A) any amount described in paragraph (2)(B)(ii), 

(2)(B)(iii), or (3)(B)(i) of this subsection which arose in a 

plan year beginning before such date shall be amortized in 

equal annual installments (until fully amortized) over 40 

plan years, beginning with the plan year in which the 

amount arose, 

(B) any amount described in paragraph (2)(B)(iv) or 

(3)(B)(ii) of this subsection which arose in a plan year beginning before such date shall be amortized in equal annual installments (until fully amortized) over 20 plan 

years, beginning with the plan year in which the amount 

arose, 

(C) any change in past service liability which arises during the period of 3 plan years beginning on or after such 

date, and results from a plan amendment adopted before 

such date, shall be amortized in equal annual installments 

(until fully amortized) over 40 plan years, beginning with 

the plan year in which the change arises, and 

264 

(D) any change in past service liability which arises during the period of 2 plan years beginning on or after such 

date, and results from the changing of a group of participants from one benefit level to another benefit level under 

a schedule of plan benefits which—

(i) was adopted before such date, and 

(ii) was effective for any plan participant before the 

beginning of the first plan year beginning on or after 

such date, 

shall be amortized in equal annual installments (until fully 

amortized) over 40 plan years, beginning with the plan 

year in which the change arises. 

(8) SPECIAL RULES RELATING TO CHARGES AND CREDITS TO

FUNDING STANDARD ACCOUNT.—For purposes of this section—

(A) WITHDRAWAL LIABILITY.—Any amount received by a 

multiemployer plan in payment of all or part of an employer’s withdrawal liability under part 1 of subtitle E of title 

IV of the Employee Retirement Income Security Act of 1974 

shall be considered an amount contributed by the employer 

to or under the plan. The Secretary may prescribe by regulation additional charges and credits to a multiemployer 

plan’s funding standard account to the extent necessary to 

prevent withdrawal liability payments from being unduly 

reflected as advance funding for plan liabilities. 

(B) ADJUSTMENTS WHEN A MULTIEMPLOYER PLAN LEAVES

REORGANIZATION.—If a multiemployer plan is not in reorganization in the plan year but was in reorganization in 

the immediately preceding plan year, any balance in the 

funding standard account at the close of such immediately 

preceding plan year—

(i) shall be eliminated by an offsetting credit or 

charge (as the case may be), but 

(ii) shall be taken into account in subsequent plan 

years by being amortized in equal annual installments 

(until fully amortized) over 30 plan years. 

The preceding sentence shall not apply to the extent of any 

accumulated funding deficiency under section 418B(a) as of 

the end of the last plan year that the plan was in reorganization. 

(C) PLAN PAYMENTS TO SUPPLEMENTAL PROGRAM OR

WITHDRAWAL LIABILITY PAYMENT FUND.—Any amount paid 

by a plan during a plan year to the Pension Benefit Guaranty Corporation pursuant to section 4222 of the Employee 

Retirement Income Security Act of 1974 or to a fund exempt 

under section 501(c)(22) pursuant to section 4223 of such 

Act shall reduce the amount of contributions considered received by the plan for the plan year. 

(D) INTERIM WITHDRAWAL LIABILITY PAYMENTS.—Any 

amount paid by an employer pending a final determination 

of the employer’s withdrawal liability under part 1 of subtitle E of title IV of such Act and subsequently refunded to 

the employer by the plan shall be charged to the funding 

standard account in accordance with regulations prescribed 

by the Secretary. 

265 

(E) ELECTION FOR DEFERRAL OF CHARGE FOR PORTION OF

NET EXPERIENCE LOSS.—If an election is in effect under section 412(b)(7)(F) (as in effect on the day before the date of 

the enactment of the Pension Protection Act of 2005) for any 

plan year, the funding standard account shall be charged 

in the plan year to which the portion of the net experience 

loss deferred by such election was deferred with the amount 

so deferred (and paragraph (2)(B)(iv) shall not apply to the 

amount so charged). 

(F) FINANCIAL ASSISTANCE.—Any amount of any financial assistance from the Pension Benefit Guaranty Corporation to any plan, and any repayment of such amount, shall 

be taken into account under this section and section 412 in 

such manner as is determined by the Secretary. 

(G) SHORT-TERM BENEFITS.—To the extent that any plan 

amendment increases the unfunded past service liability 

under the plan by reason of an increase in benefits which 

are payable under the plan during a period that does not 

exceed 14 years, paragraph (2)(B)(iii) shall be applied separately with respect to such increase in unfunded past service liability by substituting the number of years of the period during which such benefits are payable for ‘‘15’’. 

(c) ADDITIONAL RULES.—

(1) DETERMINATIONS TO BE MADE UNDER FUNDING METHOD.—

For purposes of this section, normal costs, accrued liability, 

past service liabilities, and experience gains and losses shall be 

determined under the funding method used to determine costs 

under the plan. 

(2) VALUATION OF ASSETS.—

(A) IN GENERAL.—For purposes of this section, the value 

of the plan’s assets shall be determined on the basis of any 

reasonable actuarial method of valuation which takes into 

account fair market value and which is permitted under 

regulations prescribed by the Secretary. 

(B) ELECTION WITH RESPECT TO BONDS.—The value of a 

bond or other evidence of indebtedness which is not in default as to principal or interest may, at the election of the 

plan administrator, be determined on an amortized basis 

running from initial cost at purchase to par value at maturity or earliest call date. Any election under this subparagraph shall be made at such time and in such manner as 

the Secretary shall by regulations provide, shall apply to 

all such evidences of indebtedness, and may be revoked 

only with the consent of the Secretary. 

(3) ACTUARIAL ASSUMPTIONS MUST BE REASONABLE.—For 

purposes of this section, all costs, liabilities, rates of interest, 

and other factors under the plan shall be determined on the 

basis of actuarial assumptions and methods—

(A) each of which is reasonable (taking into account the 

experience of the plan and reasonable expectations), and 

(B) which, in combination, offer the actuary’s best estimate of anticipated experience under the plan. 

(4) TREATMENT OF CERTAIN CHANGES AS EXPERIENCE GAIN OR

LOSS.—For purposes of this section, if—

266 

(A) a change in benefits under the Social Security Act or 

in other retirement benefits created under Federal or State 

law, or 

(B) a change in the definition of the term ‘‘wages’’ under 

section 3121, or a change in the amount of such wages 

taken into account under regulations prescribed for purposes of section 401(a)(5), 

results in an increase or decrease in accrued liability under a 

plan, such increase or decrease shall be treated as an experience 

loss or gain. 

(5) FULL FUNDING.—If, as of the close of a plan year, a plan 

would (without regard to this paragraph) have an accumulated 

funding deficiency in excess of the full funding limitation—

(A) the funding standard account shall be credited with 

the amount of such excess, and 

(B) all amounts described in subparagraphs (B), (C), and 

(D) of subsection (b)(2) and subparagraph (B) of subsection 

(b)(3) which are required to be amortized shall be considered fully amortized for purposes of such subparagraphs. 

(6) FULL-FUNDING LIMITATION.—

(A) IN GENERAL.—For purposes of paragraph (5), the 

term ‘‘full-funding limitation’’ means the excess (if any) of—

(i) the accrued liability (including normal cost) 

under the plan (determined under the entry age normal 

funding method if such accrued liability cannot be directly calculated under the funding method used for 

the plan), over 

(ii) the lesser of—

(I) the fair market value of the plan’s assets, or 

(II) the value of such assets determined under 

paragraph (2). 

(B) MINIMUM AMOUNT.—

(i) IN GENERAL.—In no event shall the full-funding 

limitation determined under subparagraph (A) be less 

than the excess (if any) of—

(I) 90 percent of the current liability of the plan 

(including the expected increase in current liability 

due to benefits accruing during the plan year), over 

(II) the value of the plan’s assets determined 

under paragraph (2). 

(ii) ASSETS.—For purposes of clause (i), assets shall 

not be reduced by any credit balance in the funding 

standard account. 

(C) FULL FUNDING LIMITATION.—For purposes of this 

paragraph, unless otherwise provided by the plan, the accrued liability under a multiemployer plan shall not include benefits which are not nonforfeitable under the plan 

after the termination of the plan (taking into consideration 

section 411(d)(3)). 

(D) CURRENT LIABILITY.—For purposes of this paragraph—

(i) IN GENERAL.—The term ‘‘current liability’’ means 

all liabilities to employees and their beneficiaries under 

the plan. 

267 

(ii) TREATMENT OF UNPREDICTABLE CONTINGENT

EVENT BENEFITS.—For purposes of clause (i), any benefit contingent on an event other than— (I) age, service, compensation, death, or disability, or 

(II) an event which is reasonably and reliably 

predictable (as determined by the Secretary), 

shall not be taken into account until the event on 

which the benefit is contingent occurs. 

(iii) INTEREST RATE USED.—The rate of interest used 

to determine current liability under this paragraph 

shall be the rate of interest determined under subparagraph (E). 

(iv) MORTALITY TABLES.—

(I) COMMISSIONERS’ STANDARD TABLE.—In the 

case of plan years beginning before the first plan 

year to which the first tables prescribed under subclause (II) apply, the mortality table used in determining current liability under this paragraph 

shall be the table prescribed by the Secretary 

which is based on the prevailing commissioners’

standard table (described in section 807(d)(5)(A)) 

used to determine reserves for group annuity contracts issued on January 1, 1993. 

(II) SECRETARIAL AUTHORITY.—The Secretary 

may by regulation prescribe for plan years beginning after December 31, 1999, mortality tables to 

be used in determining current liability under this 

subsection. Such tables shall be based upon the actual experience of pension plans and projected 

trends in such experience. In prescribing such tables, the Secretary shall take into account results 

of available independent studies of mortality of individuals covered by pension plans. 

(v) SEPARATE MORTALITY TABLES FOR THE DIS- ABLED.—Notwithstanding clause (iv)— (I) IN GENERAL.—In the case of plan years beginning after December 31, 1995, the Secretary shall 

establish mortality tables which may be used (in 

lieu of the tables under clause (iv)) to determine 

current liability under this subsection for individuals who are entitled to benefits under the plan on 

account of disability. The Secretary shall establish 

separate tables for individuals whose disabilities 

occur in plan years beginning before January 1, 

1995, and for individuals whose disabilities occur 

in plan years beginning on or after such date. 

(II) SPECIAL RULE FOR DISABILITIES OCCURRING

AFTER 1994.—In the case of disabilities occurring in 

plan years beginning after December 31, 1994, the 

tables under subclause (I) shall apply only with respect to individuals described in such subclause 

who are disabled within the meaning of title II of 

the Social Security Act and the regulations thereunder. 

268 

(vi) PERIODIC REVIEW.—The Secretary shall periodically (at least every 5 years) review any tables in effect 

under this subparagraph and shall, to the extent the 

Secretary determines necessary, by regulation update 

the tables to reflect the actual experience of pension 

plans and projected trends in such experience. 

(E) REQUIRED CHANGE OF INTEREST RATE.—For purposes 

of determining a plan’s current liability for purposes of this 

paragraph— (i) IN GENERAL.—If any rate of interest used under 

the plan under subsection (b)(6) to determine cost is not 

within the permissible range, the plan shall establish 

a new rate of interest within the permissible range. 

(ii) PERMISSIBLE RANGE.—For purposes of this subparagraph—

(I) IN GENERAL.—Except as provided in subclause (II), the term ‘‘permissible range’’ means a 

rate of interest which is not more than 5 percent 

above, and not more than 10 percent below, the 

weighted average of the rates of interest on 30-year 

Treasury securities during the 4-year period ending on the last day before the beginning of the plan 

year. 

(II) SECRETARIAL AUTHORITY.—If the Secretary 

finds that the lowest rate of interest permissible 

under subclause (I) is unreasonably high, the Secretary may prescribe a lower rate of interest, except 

that such rate may not be less than 80 percent of 

the average rate determined under such subclause. 

(iii) ASSUMPTIONS.—Notwithstanding paragraph 

(3)(A), the interest rate used under the plan shall be—

(I) determined without taking into account the 

experience of the plan and reasonable expectations, 

but 

(II) consistent with the assumptions which reflect the purchase rates which would be used by insurance companies to satisfy the liabilities under 

the plan. 

(7) ANNUAL VALUATION.— (A) IN GENERAL.—For purposes of this section, a determination of experience gains and losses and a valuation of 

the plan’s liability shall be made not less frequently than 

once every year, except that such determination shall be 

made more frequently to the extent required in particular 

cases under regulations prescribed by the Secretary. 

(B) VALUATION DATE.—

(i) CURRENT YEAR.—Except as provided in clause (ii), 

the valuation referred to in subparagraph (A) shall be 

made as of a date within the plan year to which the 

valuation refers or within one month prior to the beginning of such year. 

(ii) USE OF PRIOR YEAR VALUATION.—The valuation 

referred to in subparagraph (A) may be made as of a 

date within the plan year prior to the year to which the 

valuation refers if, as of such date, the value of the asVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00268 Fmt 6659 Sfmt 6603 E:\HR\OC\HR232P2.XXX HR232P2
269 

sets of the plan are not less than 100 percent of the 

plan’s current liability (as defined in paragraph (6)(D) 

without regard to clause (iv) thereof). 

(iii) ADJUSTMENTS.—Information under clause (ii) 

shall, in accordance with regulations, be actuarially 

adjusted to reflect significant differences in participants. 

(iv) LIMITATION.—A change in funding method to use 

a prior year valuation, as provided in clause (ii), may 

not be made unless as of the valuation date within the 

prior plan year, the value of the assets of the plan are 

not less than 125 percent of the plan’s current liability 

(as defined in paragraph (6)(D) without regard to 

clause (iv) thereof). 

(8) TIME WHEN CERTAIN CONTRIBUTIONS DEEMED MADE.—For 

purposes of this section, any contributions for a plan year made 

by an employer after the last day of such plan year, but not 

later than two and one-half months after such day, shall be 

deemed to have been made on such last day. For purposes of 

this subparagraph, such two and one-half month period may be 

extended for not more than six months under regulations prescribed by the Secretary. 

(9) INTEREST RULE FOR WAIVERS AND EXTENSIONS.—The interest rate applicable for any plan year for purposes of computing the amortization charge described in subsection (b)(2)(C) 

and in connection with an extension granted under subsection 

(d) shall be the greater of—

(A) 150 percent of the Federal mid-term rate (as in effect 

under section 1274 for the 1st month of such plan year), or 

(B) the rate of interest used under the plan for determining costs. 

(d) EXTENSION OF AMORTIZATION PERIODS FOR MULTIEMPLOYER

PLANS.—In the case of a multiemployer plan—

(1) EXTENSION.—The period of years required to amortize any 

unfunded liability (described in any clause of subsection 

(b)(2)(B)) of any multiemployer plan shall be extended by the 

Secretary for a period of time (not in excess of 5 years) if the 

Secretary determines that—

(A) absent the extension, the plan would have an accumulated funding deficiency in any of the next 10 plan 

years, 

(B) the plan sponsor has adopted a plan to improve the 

plan’s funding status, and 

(C) taking into account the extension, the plan is projected to have sufficient assets to timely pay its expected 

benefit liabilities and other anticipated expenditures 

(2) ADDITIONAL EXTENSION.—The period of years required to 

amortize any unfunded liability (described in any clause of subsection (b)(2)(B)) of any multiemployer plan may be extended (in 

addition to any extension under paragraph (1)) by the Secretary 

for a period of time (not in excess of 5 years) if the Secretary 

determines that such extension would carry out the purposes of 

the Employee Retirement Income Security Act of 1974 and 

would provide adequate protection for participants under the 

270 

plan and their beneficiaries and if the Secretary determines 

that the failure to permit such extension would—

(A) result in—

(i) a substantial risk to the voluntary continuation of 

the plan, or 

(ii) a substantial curtailment of pension benefit levels 

or employee compensation, and 

(B) be adverse to the interests of plan participants in the 

aggregate. 

(3) ADVANCE NOTICE.—

(A) IN GENERAL.—The Secretary shall, before granting an 

extension under this section, require each applicant to provide evidence satisfactory to the Secretary that the applicant has provided notice of the filing of the application for 

such extension to each affected party (as defined in section 

4001(a)(21) of the Employee Retirement Income Security 

Act of 1974) with respect to the affected plan. Such notice 

shall include a description of the extent to which the plan 

is funded for benefits which are guaranteed under title IV 

of such Act and for benefit liabilities. 

(B) CONSIDERATION OF RELEVANT INFORMATION.—The 

Secretary shall consider any relevant information provided 

by a person to whom notice was given under paragraph (1). 

SEC. 432. ADDITIONAL FUNDING RULES FOR MULTIEMPLOYER PLANS 

IN ENDANGERED STATUS OR CRITICAL STATUS. 

(a) ANNUAL CERTIFICATION BY PLAN ACTUARY.—

(1) IN GENERAL.—During the 90-day period beginning on first 

day of each plan year of a multiemployer plan, the plan actuary 

shall certify to the Secretary whether or not the plan is in endangered status for such plan year and whether or not the plan 

is in critical status for such plan year. 

(2) ACTUARIAL PROJECTIONS OF ASSETS AND LIABILITIES.—

(A) IN GENERAL.—In making the determinations under 

paragraph (1), the plan actuary shall make projections 

under subsections (b)(2) and (c)(2) for the current and succeeding plan years, using reasonable actuarial assumptions 

and methods, of the current value of the assets of the plan 

and the present value of all liabilities to participants and 

beneficiaries under the plan for the current plan year as of 

the beginning of such year, as based on the actuarial statement prepared for the preceding plan year under section 

103(d) of the Employee Retirement Income Security Act of 

1974. 

(B) DETERMINATIONS OF FUTURE CONTRIBUTIONS.—Any 

such actuarial projection of plan assets shall assume—

(i) reasonably anticipated employer and employee 

contributions for the current and succeeding plan 

years, assuming that the terms of the one or more collective bargaining agreements pursuant to which the 

plan is maintained for the current plan year continue 

in effect for succeeding plan years, or 

(ii) that employer and employee contributions for the 

most recent plan year will continue indefinitely, but 

only if the plan actuary determines there have been no 

271 

significant demographic changes that would make continued application of such terms unreasonable. 

(3) PRESUMED STATUS IN ABSENCE OF TIMELY ACTUARIAL CER- TIFICATION.—If certification under this subsection is not made 

before the end of the 90-day period specified in paragraph (1), 

the plan shall be presumed to be in critical status for such plan 

year until such time as the plan actuary makes a contrary certification. 

(4) NOTICE.—In any case in which a multiemployer plan is 

certified to be in endangered status under paragraph (1) or enters into critical status, the plan sponsor shall, not later than 

30 days after the date of the certification or entry, provide notification of the endangered or critical status to the participants 

and beneficiaries, the bargaining parties, the Pension Benefit 

Guaranty Corporation, the Secretary of the Treasury, and the 

Secretary of Labor. 

(b) FUNDING RULES FOR MULTIEMPLOYER PLANS IN ENDANGERED

STATUS.—

(1) IN GENERAL.—In any case in which a multiemployer plan 

is in endangered status for a plan year and no funding improvement plan under this subsection with respect to such multiemployer plan is in effect for the plan year, the plan sponsor 

shall, in accordance with this subsection, amend the multiemployer plan to include a funding improvement plan upon approval thereof by the bargaining parties under this subsection. 

The amendment shall be adopted not later than 240 days after 

the date on which the plan is certified to be in endangered status under subsection (a)(1). 

(2) ENDANGERED STATUS.—A multiemployer plan is in endangered status for a plan year if, as determined by the plan actuary under subsection (a)—

(A) the plan’s funded percentage for such plan year is less 

than 80 percent, or 

(B) the plan has an accumulated funding deficiency for 

such plan year under section 431 or is projected to have 

such an accumulated funding deficiency for any of the 6 

succeeding plan years, taking into account any extension of 

amortization periods under section 431(d). 

(3) FUNDING IMPROVEMENT PLAN.— (A) BENCHMARKS.—A funding improvement plan shall 

consist of amendments to the plan formulated to provide, 

under reasonable actuarial assumptions, for the attainment, during the funding improvement period under the 

funding improvement plan, of the following benchmarks: 

(i) INCREASE IN FUNDED PERCENTAGE.—An increase 

in the plan’s funded percentage such that—

(I) the difference between 100 percent and the 

plan’s funded percentage for the last year of the 

funding improvement period, is not more than 

(II) 2⁄3 of the difference between 100 percent and 

the plan’s funded percentage for the first year of 

the funding improvement period. 

(ii) AVOIDANCE OF ACCUMULATED FUNDING DEFICIENCIES.—No accumulated funding deficiency for any 

plan year during the funding improvement period (takVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00271 Fmt 6659 Sfmt 6603 E:\HR\OC\HR232P2.XXX HR232P2
272 

ing into account any extension of amortization periods 

under section 431(d)). 

(B) FUNDING IMPROVEMENT PERIOD.—The funding improvement period for any funding improvement plan adopted pursuant to this subsection is the 10-year period beginning on the earlier of—

(i) the second anniversary of the date of the adoption 

of the funding improvement plan, or 

(ii) the first day of the first plan year of the multiemployer plan following the plan year in which occurs the 

first date after the day of the certification as of which 

collective bargaining agreements covering on the day of 

such certification at least 75 percent of active participants in such multiemployer plan have expired. 

(C) SPECIAL RULES FOR CERTAIN SERIOUSLY UNDERFUNDED PLANS.—

(i) In the case of a plan in which the funded percentage of a plan for the plan year is 70 percent or less, 

subparagraph (A)(i)(II) shall be applied by substituting 

‘‘4⁄5’’ for ‘‘2⁄3’’ and subparagraph (B) shall be applied by 

substituting ‘‘the 15-year period’’ for ‘‘the 10-year period’’. 

(ii) In the case of a plan in which the funded percentage of a plan for the plan year is more than 70 percent 

but less than 80 percent, and—

(I) the plan actuary certifies within 30 days after 

certification under subsection (a)(1) that the plan 

is not able to attain the increase described in subparagraph (A)(i) over the period described in subparagraph (B), and 

(II) the plan year is prior to the day described in 

subparagraph (B)(ii), 

subparagraph (A)(i)(II) shall be applied by substituting 

‘‘4⁄5’’ for ‘‘2⁄3’’ and subparagraph (B) shall be applied by 

substituting ‘‘the 15-year period’’ for ‘‘the 10-year period’’. 

(iii) For any plan year following the year described 

in clause (ii)(II), subparagraph (A)(i)(II) and subparagraph (B) shall apply, except that for each plan year 

ending after such date for which the plan actuary certifies (at the time of the annual certification under subsection (a)(1) for such plan year) that the plan is not 

able to attain the increase described in subparagraph 

(A)(i) over the period described in subparagraph (B), 

subparagraph (B) shall be applied by substituting ‘‘the 

15-year period’’ for ‘‘the 10-year period’’. 

(D) REPORTING.—A summary of any funding improvement plan or modification thereto adopted during any plan 

year, together with annual updates regarding the funding 

ratio of the plan, shall be included in the annual report for 

such plan year under section 104(a) of the Employee Retirement Income Security Act of 1974 and in the summary annual report described in section 104(b)(3) of such Act. 

(4) DEVELOPMENT OF FUNDING IMPROVEMENT PLAN.—

273 

(A) ACTIONS BY PLAN SPONSOR PENDING APPROVAL.— Pending the approval of a funding improvement plan 

under this paragraph, the plan sponsor shall take all reasonable actions, consistent with the terms of the plan and 

applicable law, necessary to ensure— (i) an increase in the plan’s funded percentage, and 

(ii) postponement of an accumulated funding deficiency for at least 1 additional plan year. 

Such actions include applications for extensions of amortization periods under section 431(d), use of the shortfall 

funding method in making funding standard account computations, amendments to the plan’s benefit structure, reductions in future benefit accruals, and other reasonable 

actions consistent with the terms of the plan and applicable 

law. 

(B) RECOMMENDATIONS BY PLAN SPONSOR.—

(i) IN GENERAL.—During the period of 90 days following the date on which a multiemployer plan is certified to be in endangered status, the plan sponsor 

shall develop and provide to the bargaining parties alternative proposals for revised benefit structures, contribution structures, or both, which, if adopted as 

amendments to the plan, may be reasonably expected to 

meet the benchmarks described in paragraph (3)(A). 

Such proposals shall include—

(I) at least one proposal for reductions in the 

amount of future benefit accruals necessary to 

achieve the benchmarks, assuming no amendments 

increasing contributions under the plan (other 

than amendments increasing contributions necessary to achieve the benchmarks after amendments have reduced future benefit accruals to the 

maximum extent permitted by law), and 

(II) at least one proposal for increases in contributions under the plan necessary to achieve the 

benchmarks, assuming no amendments reducing 

future benefit accruals under the plan. 

(ii) REQUESTS BY BARGAINING PARTIES.—Upon the request of any bargaining party who— (I) employs at least 5 percent of the active participants, or 

(II) represents as an employee organization, for 

purposes of collective bargaining, at least 5 percent 

of the active participants, 

the plan sponsor shall provide all such parties information as to other combinations of increases in contributions and reductions in future benefit accruals 

which would result in achieving the benchmarks. 

(iii) OTHER INFORMATION.—The plan sponsor may, 

as it deems appropriate, prepare and provide the bargaining parties with additional information relating to 

contribution structures or benefit structures or other information relevant to the funding improvement plan. 

(5) MAINTENANCE OF CONTRIBUTIONS PENDING APPROVAL OF

FUNDING IMPROVEMENT PLAN.—Pending approval of a funding 

274 

improvement plan by the bargaining parties with respect to a 

multiemployer plan, the multiemployer plan may not be amended so as to provide— (A) a reduction in the level of contributions for participants who are not in pay status, 

(B) a suspension of contributions with respect to any period of service, or 

(C) any new direct or indirect exclusion of younger or 

newly hired employees from plan participation. 

(6) BENEFIT RESTRICTIONS PENDING APPROVAL OF FUNDING

IMPROVEMENT PLAN.—Pending approval of a funding improvement plan by the bargaining parties with respect to a multiemployer plan— (A) RESTRICTIONS ON LUMP SUM AND SIMILAR DISTRIBUTIONS.—In any case in which the present value of a participant’s accrued benefit under the plan exceeds $5,000, such 

benefit may not be distributed as an immediate distribution 

or in any other accelerated form. 

(B) PROHIBITION ON BENEFIT INCREASES.—

(i) IN GENERAL.—No amendment of the plan which 

increases the liabilities of the plan by reason of any increase in benefits, any change in the accrual of benefits, or any change in the rate at which benefits become 

nonforfeitable under the plan may be adopted. 

(ii) EXCEPTION.—Clause (i) shall not apply to any 

plan amendment which is required as a condition of 

qualification under part I of subchapter D of chapter 

1 of subtitle A. 

(7) DEFAULT CRITICAL STATUS IF NO FUNDING IMPROVEMENT

PLAN ADOPTED.—If no plan amendment adopting a funding improvement plan has been adopted by the end of the 240-day period referred to in subsection (b)(1), the plan enters into critical 

status as of the first day of the succeeding plan year. 

(8) RESTRICTIONS UPON APPROVAL OF FUNDING IMPROVEMENT

PLAN.—Upon adoption of a funding improvement plan with respect to a multiemployer plan, the plan may not be amended— (A) so as to be inconsistent with the funding improvement 

plan, or 

(B) so as to increase future benefit accruals, unless the 

plan actuary certifies in advance that, after taking into account the proposed increase, the plan is reasonably expected 

to meet the the benchmarks described in paragraph (3)(A). 

(c) FUNDING RULES FOR MULTIEMPLOYER PLANS IN CRITICAL STATUS.—

(1) IN GENERAL.—In any case in which a multiemployer plan 

is in critical status for a plan year as described in paragraph 

(2) (or otherwise enters into critical status under this section) 

and no rehabilitation plan under this subsection with respect to 

such multiemployer plan is in effect for the plan year, the plan 

sponsor shall, in accordance with this subsection, amend the 

multiemployer plan to include a rehabilitation plan under this 

subsection. The amendment shall be adopted not later than 240 

days after the date on which the plan enters into critical status. 

(2) CRITICAL STATUS.—A multiemployer plan is in critical 

status for a plan year if—

275 

(A) the plan is in endangered status for the preceding 

plan year and the requirements of subsection (b)(1) were 

not met with respect to the plan for such preceding plan 

year, or 

(B) as determined by the plan actuary under subsection 

(a), the plan is described in paragraph (3). 

(3) CRITICALITY DESCRIPTION.—For purposes of paragraph 

(2)(B), a plan is described in this paragraph if the plan is described in at least one of the following subparagraphs: 

(A) A plan is described in this subparagraph if, as of the 

beginning of the current plan year— (i) the funded percentage of the plan is less than 65 

percent, and 

(ii) the sum of— (I) the market value of plan assets, plus 

(II) the present value of the reasonably anticipated employer and employee contributions for the 

current plan year and each of the 6 succeeding 

plan years, assuming that the terms of the one or 

more collective bargaining agreements pursuant to 

which the plan is maintained for the current plan 

year continue in effect for succeeding plan years, 

is less than the present value of all nonforfeitable benefits for all participants and beneficiaries projected to be 

payable under the plan during the current plan year 

and each of the 6 succeeding plan years (plus administrative expenses for such plan years). 

(B) A plan is described in this subparagraph if, as of the 

beginning of the current plan year, the sum of— (i) the market value of plan assets, plus 

(ii) the present value of the reasonably anticipated 

employer and employee contributions for the current 

plan year and each of the 4 succeeding plan years, assuming that the terms of the one or more collective bargaining agreements pursuant to which the plan is 

maintained for the current plan year remain in effect 

for succeeding plan years, 

is less than the present value of all nonforfeitable benefits 

for all participants and beneficiaries projected to be payable under the plan during the current plan year and each 

of the 4 succeeding plan years (plus administrative expenses for such plan years). 

(C) A plan is described in this subparagraph if—

(i) as of the beginning of the current plan year, the 

funded percentage of the plan is less than 65 percent, 

and 

(ii) the plan has an accumulated funding deficiency 

for the current plan year or is projected to have an accumulated funding deficiency for any of the 4 succeeding plan years, not taking into account any extension of amortization periods under section 431(d). 

(D) A plan is described in this subparagraph if—

(i)(I) the plan’s normal cost for the current plan year, 

plus interest (determined at the rate used for determining cost under the plan) for the current plan year 

276 

on the amount of unfunded benefit liabilities under the 

plan as of the last date of the preceding plan year, exceeds 

(II) the present value, as of the beginning of the current plan year, of the reasonably anticipated employer 

and employee contributions for the current plan year, 

(ii) the present value, as of the beginning of the current plan year, of nonforfeitable benefits of inactive 

participants is greater than the present value, as of the 

beginning of the current plan year, of nonforfeitable 

benefits of active participants, and 

(iii) the plan is projected to have an accumulated 

funding deficiency for the current plan year or any of 

the 4 succeeding plan years, not taking into account 

any extension of amortization periods under section 

431(d). 

(E) A plan is described in this subparagraph if— (i) the funded percentage of the plan is greater than 

65 percent for the current plan year, and 

(ii) the plan is projected to have an accumulated 

funding deficiency during any of the succeeding 3 plan 

years, not taking into account any extension of amortization periods under section 431(d). 

(4) REHABILITATION PLAN.— (A) IN GENERAL.—A rehabilitation plan shall consist of— (i) amendments to the plan providing (under reasonable actuarial assumptions) for measures, agreed to by 

the bargaining parties, to increase contributions, reduce plan expenditures (including plan mergers and 

consolidations), or reduce future benefit accruals, or to 

take any combination of such actions, determined necessary to cause the plan to cease, during the rehabilitation period, to be in critical status, or 

(ii) reasonable measures to forestall possible insolvency (within the meaning of section 418E) if the plan 

sponsor determines that, upon exhaustion of all reasonable measures, the plan would not cease during the rehabilitation period to be in critical status. 

(B) REHABILITATION PERIOD.—The rehabilitation period 

for any rehabilitation plan adopted pursuant to this subsection is the 10-year period beginning on the earlier of— (i) the second anniversary of the date of the adoption 

of the rehabilitation plan, or 

(ii) the first day of the first plan year of the multiemployer plan following the plan year in which occurs the 

first date, after the date of the plan’s entry into critical 

status, as of which collective bargaining agreements 

covering at least 75 percent of active participants in 

such multiemployer plan (determined as of such date of 

entry) have expired. 

(C) REPORTING.—A summary of any rehabilitation plan 

or modification thereto adopted during any plan year, together with annual updates regarding the funding ratio of 

the plan, shall be included in the annual report for such 

plan year under section 104(a) of the Employee Retirement 

277 

Income Security Act of 1974 and in the summary annual 

report described in section 104(b)(3). 

(5) DEVELOPMENT OF REHABILITATION PLAN.—

(A) PROPOSALS BY PLAN SPONSOR.—

(i) IN GENERAL.—Within 90 days after the date of 

entry into critical status (or the date as of which the 

requirements of subsection (b)(1) are not met with respect to the plan), the plan sponsor shall propose to all 

bargaining parties a range of alternative schedules of 

increases in contributions and reductions in future benefit accruals that would serve to carry out a rehabilitation plan under this subsection. 

(ii) PROPOSAL ASSUMING NO CONTRIBUTION INCREASES.—Such proposals shall include, as one of the 

proposed schedules, a schedule of those reductions in 

future benefit accruals that would be necessary to 

cause the plan to cease to be in critical status if there 

were no further increases in rates of contribution to the 

plan. 

(iii) PROPOSAL WHERE CONTRIBUTIONS ARE NECESSARY.—If the plan sponsor determines that the plan 

will not cease to be in critical status during the rehabilitation period unless the plan is amended to provide 

for an increase in contributions, the plan sponsor’s proposals shall include a schedule of those increases in 

contribution rates that would be necessary to cause the 

plan to cease to be in critical status if future benefit accruals were reduced to the maximum extent permitted 

by law. 

(B) REQUESTS FOR ADDITIONAL SCHEDULES.—Upon the 

request of any bargaining party who—

(i) employs at least 5 percent of the active participants, or 

(ii) represents as an employee organization, for purposes of collective bargaining, at least 5 percent of active participants, 

the plan sponsor shall include among the proposed schedules such schedules of increases in contributions and reductions in future benefit accruals as may be specified by the 

bargaining parties. 

(C) SUBSEQUENT AMENDMENTS.—Upon the adoption of a 

schedule of increases in contributions or reductions in future benefit accruals as part of the rehabilitation plan, the 

plan sponsor may amend the plan thereafter to update the 

schedule to adjust for any experience of the plan contrary 

to past actuarial assumptions, except that such an amendment may be made not more than once in any 3-year period. 

(D) ALLOCATION OF REDUCTIONS IN FUTURE BENEFIT ACCRUALS.—Any schedule containing reductions in future 

benefit accruals forming a part of a rehabilitation plan 

shall be applicable with respect to any group of active participants who are employed by any bargaining party (as an 

employer obligated to contribute under the plan) in proporVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00277 Fmt 6659 Sfmt 6603 E:\HR\OC\HR232P2.XXX HR232P2
278 

tion to the extent to which increases in contributions under 

such schedule apply to such bargaining party. 

(E) LIMITATION ON REDUCTION IN RATES OF FUTURE ACCRUALS.—Any schedule proposed under this paragraph 

shall not reduce the rate of future accruals below the lower 

of—

(i) a monthly benefit equal to 1 percent of the contributions required to be made with respect to a participant or the equivalent standard accrual rate for a participant or group of participants under the collective 

bargaining agreements in effect as of the first day of 

the plan year in which the plan enters critical status, 

or 

(ii) if lower, the accrual rate under the plan on such 

date. 

The equivalent standard accrual rate shall be determined 

by the trustees based on the standard or average contribution base units that they determine to be representative for 

active participants and such other factors as they determine 

to be relevant. 

(6) MAINTENANCE OF CONTRIBUTIONS AND RESTRICTIONS ON

BENEFITS PENDING ADOPTION OF REHABILITATION PLAN.—The 

rules of paragraphs (5) and (6) of subsection (b) shall apply for 

purposes of this subsection by substituting the term ‘‘rehabilitation plan’’ for ‘‘funding improvement plan’’. 

(7) RESTRICTIONS UPON APPROVAL OF REHABILITATION

PLAN.—Upon adoption of a rehabilitation plan with respect to 

a multiemployer plan, the plan may not be amended—

(A) so as to be inconsistent with the rehabilitation plan, 

or 

(B) so as to increase future benefit accruals, unless the 

plan actuary certifies in advance that, after taking into account the proposed increase, the plan is reasonably expected 

to cease to be in critical status. 

(8) IMPLEMENTATION OF DEFAULT SCHEDULE UPON FAILURE

TO ADOPT REHABILITATION PLAN.—If the plan is not amended by 

the end of the 240-day period after entry into critical status to 

include a rehabilitation plan, the plan sponsor shall amend the 

plan to implement the schedule required by paragraph 

(5)(A)(ii). 

(9) DEEMED WITHDRAWAL.—Upon the failure of any employer 

who has an obligation to contribute under the plan to make 

contributions in compliance with the schedule adopted under 

paragraph (4) as part of the rehabilitation plan, the failure of 

the employer may, at the discretion of the plan sponsor, be 

treated as a withdrawal by the employer from the plan under 

section 4203 of the Employee Retirement Income Security Act of 

1974 or a partial withdrawal by the employer under section 

4205 of such Act. 

(d) DEFINITIONS.—For purposes of this section—

(1) BARGAINING PARTY.—The term ‘‘bargaining party’’ means, 

in connection with a multiemployer plan—

(A) an employer who has an obligation to contribute 

under the plan, and 

279 

(B) an employee organization which, for purposes of collective bargaining, represents plan participants employed 

by such an employer. 

(2) FUNDED PERCENTAGE.—The term ‘‘funded percentage’’ means the percentage expressed as a ratio of which— (A) the numerator of which is the value of the plan’s assets, as determined under section 431(c)(2), and 

(B) the denominator of which is the accrued liability of 

the plan. 

(3) ACCUMULATED FUNDING DEFICIENCY.—The term ‘‘accumulated funding deficiency’’ has the meaning provided such term 

in section 431(a). 

(4) ACTIVE PARTICIPANT.—The term ‘‘active participant’’ means, in connection with a multiemployer plan, a participant 

who is in covered service under the plan. 

(5) INACTIVE PARTICIPANT.—The term ‘‘inactive participant’’ means, in connection with a multiemployer plan, a participant 

who—(A) is not in covered service under the plan, and 

(B) is in pay status under the plan or has a nonforfeitable right to benefits under the plan. 

(6) PAY STATUS.—A person is in ‘‘pay status’’ under a multiemployer plan if—

(A) at any time during the current plan year, such person 

is a participant or beneficiary under the plan and is paid 

an early, late, normal, or disability retirement benefit 

under the plan (or a death benefit under the plan related 

to a retirement benefit), or 

(B) to the extent provided in regulations of the Secretary, 

such person is entitled to such a benefit under the plan. 

(7) OBLIGATION TO CONTRIBUTE.—The term ‘‘obligation to 

contribute’’ has the meaning provided such term under section 

4212(a) of the Employee Retirement Income Security Act of 

1974. 

(8) ENTRY INTO CRITICAL STATUS.—A plan shall be treated as 

entering into critical status as of the date that such plan is certified to be in critical status under subsection (a)(1), is presumed to be in critical status under subsection (a)(3), or enters 

into critical status under subsection (b)(7). 

Subpart B—Benefit Limitations Under Singleemployer Plans 

Sec. 436. Prohibition of shutdown benefits and other unpredictable contingent event 

benefits. 

Sec. 437. Funding-based limits on benefits and benefit accruals under single-employer plans. 

SEC. 436. PROHIBITION OF SHUTDOWN BENEFITS AND OTHER UNPREDICTABLE CONTINGENT EVENT BENEFITS UNDER SINGLE-EMPLOYER PLANS. 

(a) IN GENERAL.—No pension plan which is defined benefit plan 

(other than a multiemployer plan) may provide benefits to which 

participants are entitled solely by reason of the occurrence of— (1) a plant shutdown, or 

(2) any other unpredictable contingent event. 

280 

(b) UNPREDICTABLE CONTINGENT EVENT.—For purposes of this 

subsection, the term ‘‘unpredictable contingent event’’ means an 

event other than— (1) attainment of any age, performance of any service, receipt 

or derivation of any compensation, or the occurrence of death or 

disability, or 

(2) an event which is reasonably and reliably predictable (as 

determined by the Secretary). 

SEC. 437. FUNDING-BASED LIMITS ON BENEFITS AND BENEFIT ACCRUALS UNDER SINGLE-EMPLOYER PLANS. 

(a) LIMITATIONS ON PLAN AMENDMENTS INCREASING LIABILITY

FOR BENEFITS.— (1) IN GENERAL.—No amendment to a defined benefit plan 

(other than a multiemployer plan) which has the effect of increasing liabilities of the plan by reason of increases in benefits, 

establishment of new benefits, changing the rate of benefit accrual, or changing the rate at which benefits become nonforfeitable to the plan may take effect during any plan year if the 

funding target attainment percentage as of the valuation date 

of the plan for such plan year is— (A) less than 80 percent, or 

(B) would be less than 80 percent taking into account 

such amendment. 

For purposes of this subparagraph, any increase in benefits 

under the plan by reason of an increase in the benefit rate provided under the plan or on the basis of an increase in compensation shall be treated as effected by plan amendment. 

(2) EXEMPTION.—Paragraph (1) shall cease to apply with respect to any plan year, effective as of the first date of the plan 

year (or if later, the effective date of the amendment), upon payment by the plan sponsor of a contribution (in addition to any 

minimum required contribution under section 430) equal to— (A) in the case of paragraph (1)(A), the amount of the increase in the funding target of the plan (under section 430) 

for the plan year attributable to the amendment, and 

(B) in the case of paragraph (1)(B), the amount sufficient 

to result in a funding target attainment percentage of 80 

percent. 

(b) FUNDING-BASED LIMITATION ON CERTAIN FORMS OF DISTRIBUTION.—

(1) IN GENERAL.—A defined benefit plan (other than a multiemployer plan) shall provide that, in any case in which the 

plan’s funding target attainment percentage as of the valuation 

date of the plan for a plan year is less than 80 percent, the plan 

may not after such date pay any payment described in section 

401(a)(32)(B). 

(2) EXCEPTION.—Paragraph (1) shall not apply to any plan 

for any plan year if the terms of such plan (as in effect for the 

period beginning on June 29, 2005, and ending with such plan 

year) provide for no benefit accruals with respect to any participant during such period. 

(c) LIMITATIONS ON BENEFIT ACCRUALS FOR PLANS WITH SEVERE

FUNDING SHORTFALLS.—A defined benefit plan (other than a multiemployer plan) shall provide that, in any case in which the plan’s 

funding target attainment percentage as of the valuation date of the 

281 

plan for a plan year is less than 60 percent, all future benefit accruals under the plan shall cease as of such date. 

(d) NEW PLANS.—Subsections (a) and (c) shall not apply to a plan 

for the first 5 plan years of the plan. For purposes of this subsection, 

the reference in this subsection to a plan shall include a reference 

to any predecessor plan. 

(e) PRESUMED UNDERFUNDING FOR PURPOSES OF BENEFIT LIMITA- TIONS BASED ON PRIOR YEAR’S FUNDING STATUS.— (1) PRESUMPTION OF CONTINUED UNDERFUNDING.—In any 

case in which a benefit limitation under subsection (a), (b), or 

(c) has been applied to a plan with respect to the plan year preceding the current plan year, the funding target attainment percentage of the plan as of the valuation date of the plan for the 

current plan year shall be presumed to be equal to the funding 

target attainment percentage of the plan as of the valuation 

date of the plan for the preceding plan year until the enrolled 

actuary of the plan certifies the actual funding target attainment percentage of the plan as of the valuation date of the plan 

for the current plan year. 

(2) PRESUMPTION OF UNDERFUNDING AFTER 10TH MONTH.—In 

any case in which no such certification is made with respect to 

the plan before the first day of the 10th month of the current 

plan year, for purposes of subsections (a), (b), and (c), the plan’s 

funding target attainment percentage shall be conclusively presumed to be less than 60 percent as of the first day of such 10th 

month, and such day shall be deemed, for purposes of such subsections, to be the valuation date of the plan for the current 

plan year. 

(3) PRESUMPTION OF UNDERFUNDING AFTER 4TH MONTH FOR

NEARLY UNDERFUNDED PLANS.—In any case in which—

(A) a benefit limitation under subsection (a), (b), or (c) 

did not apply to a plan with respect to the plan year preceding the current plan year, but the funding target attainment percentage of the plan for such preceding plan year 

was not more than 10 percentage points greater than the 

percentage which would have caused such subsection to 

apply to the plan with respect to such preceding plan year, 

and 

(B) as of the first day of the 4th month of the current 

plan year, the enrolled actuary of the plan has not certified 

the actual funding target attainment percentage of the plan 

as of the valuation date of the plan for the current plan 

year, 

until the enrolled actuary so certifies, such first day shall be 

deemed, for purposes of such subsection, to be the valuation 

date of the plan for the current plan year and the funding target attainment percentage of the plan as of such first day shall, 

for purposes of such subsection, be presumed to be equal to 10 

percentage points less than the funding target attainment percentage of the plan as of the valuation date of the plan for such 

preceding plan year. 

(f) RESTORATION BY PLAN AMENDMENT OF BENEFITS OR BENEFIT

ACCRUAL.—In any case in which a prohibition under subsection (b) 

of the payment of lump sum distributions or benefits in any other 

accelerated form or a cessation of benefit accruals under subsection 

282 

(c) is applied to a plan with respect to any plan year and such prohibition or cessation, as the case may be, ceases to apply to any subsequent plan year, the plan may provide for the resumption of such 

benefit payment or such benefit accrual only by means of the adoption of a plan amendment after the valuation date of the plan for 

such subsequent plan year. The preceding sentence shall not apply 

to a prohibition or cessation required by reason of subsection (e). 

(g) FUNDING TARGET ATTAINMENT PERCENTAGE.— (1) IN GENERAL.—For purposes of this section, the term ‘‘funding target attainment percentage’’ means, with respect to any 

plan for any plan year, the ratio (expressed as a percentage) 

which—

(A) the value of plan assets for the plan year (as determined under section 430(g)) reduced by the pre-funding 

balance and the funding standard carryover balance (within the meaning of section 430(f)), bears to 

(B) the funding target of the plan for the plan year (as 

determined under section 430(d)(1), but without regard to 

section 430(i)(1)). 

(2) APPLICATION TO PLANS WHICH ARE FULLY FUNDED WITH- OUT REGARD TO REDUCTIONS FOR FUNDING BALANCES.—In the 

case of a plan for any plan year, if the funding target attainment percentage is 100 percent or more (determined without regard to this paragraph and without regard to the reduction 

under paragraph (1)(A) for the pre-funding balance and the 

funding standard carryover balance), paragraph (1) shall be 

applied without regard to such reduction. 

* * * * * * * 

Subchapter E—Accounting Periods and Methods 

of Accounting 

* * * * * * * 

PART II—METHODS OF ACCOUNTING 

* * * * * * * 

Subpart B—Taxable Year for Which Items of Gross Income 

Included 

* * * * * * * 

SEC. 457. DEFERRED COMPENSATION PLANS OF STATE AND LOCAL 

GOVERNMENTS AND TAX-EXEMPT ORGANIZATIONS. 

(a) YEAR OF INCLUSION IN GROSS INCOME.— (1) * * * 

* * * * * * * 

(3) SPECIAL RULE FOR HEALTH AND LONG-TERM CARE INSUR- ANCE.—In the case of a plan of an eligible employer described 

in subsection (e)(1)(A), to the extent provided in section 402(l), 

paragraph (1) shall not apply to amounts otherwise includible 

in gross income under this subsection. 

* * * * * * * 

283 

(e) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of 

this section— (1) * * * 

* * * * * * * 

(16) ROLLOVER AMOUNTS.—

(A) * * * 

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

paragraphs (2) through (7) øand (9)¿, (9), and (11) of section 402(c) and section 402(f) shall apply for purposes of 

subparagraph (A). 

* * * * * * * 

Subchapter L—Insurance Companies 

* * * * * * * 

PART III—PROVISIONS OF GENERAL APPLICATION 

* * * * * * * 

SEC. 848. CAPITALIZATION OF CERTAIN POLICY ACQUISITION EXPENSES. 

(a) * * * 

* * * * * * * 

(e) CLASSIFICATION OF CONTRACTS.—For purposes of this section—

(1) * * * 

* * * * * * * 

(6) TREATMENT OF CERTAIN QUALIFIED LONG-TERM CARE INSURANCE CONTRACT ARRANGEMENTS.—An annuity or life insurance contract which includes a qualified long-term care insurance contract as a part of or a rider on such annuity or life insurance contract shall be treated as a specified insurance contract not described in subparagraph (A) or (B) of subsection 

(c)(1). 

* * * * * * * 

Subchapter O—Gain or Loss on Disposition of 

Property 

* * * * * * * 

PART III—COMMON NONTAXABLE EXCHANGES 

* * * * * * * 

SEC. 1035. CERTAIN EXCHANGES OF INSURANCE POLICIES. 

(a) GENERAL RULES.—No gain or loss shall be recognized on the 

exchange of—

(1) a contract of life insurance for another contract of life insurance or for an endowment or annuity øcontract;¿ contract or 

for a qualified long-term care insurance contract; or 

(2) a contract of endowment insurance (A) for another contract of endowment insurance which provides for regular payVerDate Aug 31 2005 20:34 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00283 Fmt 6659 Sfmt 6601 E:\HR\OC\HR232P2.XXX HR232P2
284 

ments beginning at a date not later than the date payments 

would have begun under the contract exchanged, or (B) for an 

annuity øcontract; or¿ contract, or (C) for a qualified long-term 

care insurance contract; 

(3) an annuity contract for an annuity øcontract.¿ contract or 

for a qualified long-term care insurance contract; or 

(4) a qualified long-term care insurance contract for a qualified long-term care insurance contract. 

(b) DEFINITIONS.—For the purpose of this section— (1) * * * 

(2) ANNUITY CONTRACT.—An annuity contract is a contract to 

which paragraph (1) applies but which may be payable during 

the life of the annuitant only in installments. For purposes of 

the preceding sentence, a contract shall not fail to be treated as 

an annuity contract solely because a qualified long-term care 

insurance contract is a part of or a rider on such contract. 

(3) LIFE INSURANCE CONTRACT.—A contract of life insurance 

is a contract to which paragraph (1) applies but which is not 

ordinarily payable in full during the life of the insured. For 

purposes of the preceding sentence, a contract shall not fail to 

be treated as a life insurance contract solely because a qualified 

long-term care insurance contract is a part of or a rider on such 

contract. 

* * * * * * * 

SUBTITLE D—MISCELLANEOUS EXCISE 

TAXES 

* * * * * * * 

CHAPTER 43—QUALIFIED PENSION, ETC., 

PLANS 

* * * * * * * 

SEC. 4971. TAXES ON FAILURE TO MEET MINIMUM FUNDING STANDARDS. 

ø(a) INITIAL TAX.—For each taxable year of an employer who 

maintains a plan to which section 412 applies, there is hereby imposed a tax of 10 percent (5 percent in the case of a multiemployer 

plan) on the amount of the accumulated funding deficiency under 

the plan, determined as of the end of the plan year ending with or 

within such taxable year. 

ø(b) ADDITIONAL TAX.—In any case in which an initial tax is imposed by subsection (a) on an accumulated funding deficiency and 

such accumulated funding deficiency is not corrected within the 

taxable period, there is hereby imposed a tax equal to 100 percent 

of such accumulated funding deficiency to the extent not corrected.¿ 

(a) INITIAL TAX.—If at any time during any taxable year an employer maintains a plan to which section 412 applies, there is hereby imposed for the taxable year a tax equal to— (1) in the case of a defined benefit plan which is not a multiemployer plan, 10 percent of the aggregate unpaid minimum reVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00284 Fmt 6659 Sfmt 6603 E:\HR\OC\HR232P2.XXX HR232P2
285 

quired contributions for all plan years remaining unpaid as of 

the end of any plan year ending with or within the taxable year, 

and 

(2) in the case of a multiemployer plan, 5 percent of the accumulated funding deficiency determined under section 431 as of 

the end of any plan year ending with or within the taxable year. 

(b) ADDITIONAL TAX.—If—

(1) a tax is imposed under subsection (a)(1) on any unpaid required minimum contribution and such amount remains unpaid as of the close of the taxable period, or 

(2) a tax is imposed under subsection (a)(2) on any accumulated funding deficiency and the accumulated funding deficiency is not corrected within the taxable period, 

there is hereby imposed a tax equal to 100 percent of the unpaid 

minimum required contribution or accumulated funding deficiency, 

whichever is applicable, to the extent not so paid or corrected. 

(c) DEFINITIONS.—For purposes of this section—

(1) ACCUMULATED FUNDING DEFICIENCY.—The term ‘‘accumulated funding deficiency’’ has the meaning given to such term 

by øthe last two sentences of section 412(a)¿ section 431. 

* * * * * * * 

(4) UNPAID MINIMUM REQUIRED CONTRIBUTION.—

(A) IN GENERAL.—The term ‘‘unpaid minimum required 

contribution’’ means, with respect to any plan year, any 

minimum required contribution under section 430 for the 

plan year which is not paid on or before the due date (as 

determined under section 430(j)(1)) for the plan year. 

(B) ORDERING RULE.—Any payment to or under a plan 

for any plan year shall be allocated first to unpaid minimum required contributions for all preceding plan years in 

the order in which such contributions became due and then 

to the minimum required contribution under section 430 for 

the plan year. 

* * * * * * * 

(e) LIABILITY FOR TAX.—

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

tax imposed by subsection (a), (b), or (f) shall be paid by the 

employer responsible for contributing to or under the plan the 

amount described in øsection 412(b)(3)(A)¿ section 412(a)(2). 

* * * * * * * 

(f) FAILURE TO PAY LIQUIDITY SHORTFALL.—

(1) IN GENERAL.—In the case of a plan to which øsection 

412(m)(5)¿ section 430(j)(4) applies, there is hereby imposed a 

tax of 10 percent of the excess (if any) of 

(A) the amount of the liquidity shortfall for any quarter, 

over 

(B) the amount of such shortfall which is paid by the required installment under øsection 412(m)¿ section 430(j)(3) 

for such quarter (but only if such installment is paid on or 

before the due date for such installment). 

* * * * * * * 

286 

SEC. 4972. TAX ON NONDEDUCTIBLE CONTRIBUTIONS TO QUALIFIED 

EMPLOYER PLANS. 

(a) * * * 

* * * * * * * 

(c) NONDEDUCTIBLE CONTRIBUTIONS.—For purposes of this section— (1) * * * 

* * * * * * * 

(6) EXCEPTIONS.—IN DETERMINING THE AMOUNT OF NON- DEDUCTIBLE CONTRIBUTIONS FOR ANY TAXABLE YEAR, THERE

SHALL NOT BE TAKEN INTO ACCOUNT— ø(A) so much of the contributions to 1 or more defined 

contribution plans which are not deductible when contributed solely because of section 404(a)(7) as does not exceed 

the greater of— ø(i) the amount of contributions not in excess of 6 

percent of compensation (within the meaning of section 404(a) and as adjusted under section 404(a)(12)) 

paid or accrued (during the taxable year for which the 

contributions were made) to beneficiaries under the 

plans, or 

ø(ii) the amount of contributions described in section 

401(m)(4)(A), or¿ 

(A) so much of the contributions to 1 or more defined contribution plans which are not deductible when contributed 

solely because of section 404(a)(7) as does not exceed the 

amount of contributions described in section 401(m)(4)(A), 

or 

(7) DEFINED BENEFIT PLAN EXCEPTION.—In determining the 

amount of nondeductible contributions for any taxable year, an 

employer may elect for such year not to take into account any 

contributions to a defined benefit plan øexcept to the extent 

that such contributions exceed the full-funding limitation (as 

defined in section 412(c)(7), determined without regard to subparagraph (A)(i)(I) thereof)¿ except, in the case of a multiemployer plan, to the extent that such contributions exceed the fullfunding limitation (as defined in section 431(c)(6)). For purposes of this paragraph, the deductible limits under section 

404(a)(7) shall first be applied to amounts contributed to defined contribution plans and then to amounts described in this 

paragraph. If an employer makes an election under this paragraph for a taxable year, paragraph (6) shall not apply to such 

employer for such taxable year. 

* * * * * * * 

SEC. 4975. TAX ON PROHIBITED TRANSACTIONS. 

(a) * * * 

* * * * * * * 

(d) EXEMPTIONS.—Except as provided in subsection (f)(6), the prohibitions provided in subsection (c) shall not apply to—

(1) * * * 

* * * * * * * 

287 

(15) a merger of multiemployer plans, or the transfer of assets or liabilities between multiemployer plans, determined by 

the Pension Benefit Guaranty Corporation to meet the requirements of section 4231 of such Act, but this paragraph shall not 

apply with respect to the application of subsection (c)(1) (E) or 

(F); øor¿ 

(16) a sale of stock held by a trust which constitutes an individual retirement account under section 408(a) to the individual for whose benefit such account is established if— (A) * * * 

* * * * * * * 

(F) the stock is sold in a single transaction for cash not 

later than 120 days after the S corporation election is 

madeø.¿; or 

(17) any transaction described in subsection (f)(8)(A) in connection with the provision of investment advice described in 

subsection (e)(3)(B)(i), in any case in which—

(A) the investment of assets of the plan is subject to the 

direction of plan participants or beneficiaries, 

(B) the advice is provided to the plan or a participant or 

beneficiary of the plan by a fiduciary adviser in connection 

with any sale, acquisition, or holding of a security or other 

property for purposes of investment of plan assets, and 

(C) the requirements of subsection (f)(8)(B) are met in 

connection with the provision of the advice. 

* * * * * * * 

(f) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of 

this section— (1) * * * 

* * * * * * * 

(8) PROVISIONS RELATING TO INVESTMENT ADVICE PROVIDED

BY FIDUCIARY ADVISERS.—

(A) TRANSACTIONS ALLOWABLE IN CONNECTION WITH INVESTMENT ADVICE PROVIDED BY FIDUCIARY ADVISERS.—The 

transactions referred to in subsection (d)(17), in connection 

with the provision of investment advice by a fiduciary adviser, are the following: 

(i) the provision of the advice to the plan, participant, or beneficiary; 

(ii) the sale, acquisition, or holding of a security or 

other property (including any lending of money or 

other extension of credit associated with the sale, acquisition, or holding of a security or other property) 

pursuant to the advice; and 

(iii) the direct or indirect receipt of fees or other compensation by the fiduciary adviser or an affiliate thereof (or any employee, agent, or registered representative 

of the fiduciary adviser or affiliate) in connection with 

the provision of the advice or in connection with a sale, 

acquisition, or holding of a security or other property 

pursuant to the advice. 

(B) REQUIREMENTS RELATING TO PROVISION OF INVESTMENT ADVICE BY FIDUCIARY ADVISERS.—The requirements of 

288 

this subparagraph (referred to in subsection (d)(17)(C)) are 

met in connection with the provision of investment advice 

referred to in subsection (e)(3)(B), provided to a plan or a 

participant or beneficiary of a plan by a fiduciary adviser 

with respect to the plan in connection with any sale, acquisition, or holding of a security or other property for purposes of investment of amounts held by the plan, if— (i) in the case of the initial provision of the advice 

with regard to the security or other property by the fiduciary adviser to the plan, participant, or beneficiary, 

the fiduciary adviser provides to the recipient of the advice, at a time reasonably contemporaneous with the 

initial provision of the advice, a written notification 

(which may consist of notification by means of electronic communication)— (I) of all fees or other compensation relating to 

the advice that the fiduciary adviser or any affiliate thereof is to receive (including compensation 

provided by any third party) in connection with 

the provision of the advice or in connection with 

the sale, acquisition, or holding of the security or 

other property, 

(II) of any material affiliation or contractual relationship of the fiduciary adviser or affiliates 

thereof in the security or other property, 

(III) of any limitation placed on the scope of the 

investment advice to be provided by the fiduciary 

adviser with respect to any such sale, acquisition, 

or holding of a security or other property, 

(IV) of the types of services provided by the fiduciary adviser in connection with the provision of 

investment advice by the fiduciary adviser, 

(V) that the adviser is acting as a fiduciary of 

the plan in connection with the provision of the advice, and 

(VI) that a recipient of the advice may separately 

arrange for the provision of advice by another adviser, that could have no material affiliation with 

and receive no fees or other compensation in connection with the security or other property, 

(ii) the fiduciary adviser provides appropriate disclosure, in connection with the sale, acquisition, or holding of the security or other property, in accordance with 

all applicable securities laws, 

(iii) the sale, acquisition, or holding occurs solely at 

the direction of the recipient of the advice, 

(iv) the compensation received by the fiduciary adviser and affiliates thereof in connection with the sale, 

acquisition, or holding of the security or other property 

is reasonable, and 

(v) the terms of the sale, acquisition, or holding of 

the security or other property are at least as favorable 

to the plan as an arm’s length transaction would be. 

(C) STANDARDS FOR PRESENTATION OF INFORMATION.—

The notification required to be provided to participants and 

289 

beneficiaries under subparagraph (B)(i) shall be written in 

a clear and conspicuous manner and in a manner calculated to be understood by the average plan participant 

and shall be sufficiently accurate and comprehensive to 

reasonably apprise such participants and beneficiaries of 

the information required to be provided in the notification. 

(D) EXEMPTION CONDITIONED ON MAKING REQUIRED INFORMATION AVAILABLE ANNUALLY, ON REQUEST, AND IN THE

EVENT OF MATERIAL CHANGE.—The requirements of subparagraph (B)(i) shall be deemed not to have been met in 

connection with the initial or any subsequent provision of 

advice described in subparagraph (B) to the plan, participant, or beneficiary if, at any time during the provision of 

advisory services to the plan, participant, or beneficiary, the 

fiduciary adviser fails to maintain the information described in subclauses (I) through (IV) of subparagraph 

(B)(i) in currently accurate form and in the manner required by subparagraph (C), or fails—

(i) to provide, without charge, such currently accurate information to the recipient of the advice no less 

than annually, 

(ii) to make such currently accurate information 

available, upon request and without charge, to the recipient of the advice, or 

(iii) in the event of a material change to the information described in subclauses (I) through (IV) of subparagraph (B)(i), to provide, without charge, such currently accurate information to the recipient of the advice at a time reasonably contemporaneous to the material change in information. 

(E) MAINTENANCE FOR 6 YEARS OF EVIDENCE OF COMPLIANCE.—A fiduciary adviser referred to in subparagraph (B) 

who has provided advice referred to in such subparagraph 

shall, for a period of not less than 6 years after the provision of the advice, maintain any records necessary for determining whether the requirements of the preceding provisions of this paragraph and of subsection (d)(17) have been 

met. A transaction prohibited under subsection (c)(1) shall 

not be considered to have occurred solely because the 

records are lost or destroyed prior to the end of the 6-year 

period due to circumstances beyond the control of the fiduciary adviser. 

(F) EXEMPTION FOR PLAN SPONSOR AND CERTAIN OTHER

FIDUCIARIES.—A plan sponsor or other person who is a fiduciary (other than a fiduciary adviser) shall not be treated 

as failing to meet the requirements of this section solely by 

reason of the provision of investment advice referred to in 

subsection (e)(3)(B) (or solely by reason of contracting for or 

otherwise arranging for the provision of the advice), if—

(i) the advice is provided by a fiduciary adviser pursuant to an arrangement between the plan sponsor or 

other fiduciary and the fiduciary adviser for the provision by the fiduciary adviser of investment advice referred to in such section, 

290 

(ii) the terms of the arrangement require compliance 

by the fiduciary adviser with the requirements of this 

paragraph, 

(iii) the terms of the arrangement include a written 

acknowledgment by the fiduciary adviser that the fiduciary adviser is a fiduciary of the plan with respect to 

the provision of the advice, and 

(iv) the requirements of part 4 of subtitle B of title 

I of the Employee Retirement Income Security Act of 

1974 are met in connection with the provision of such 

advice. 

(G) DEFINITIONS.—For purposes of this paragraph and 

subsection (d)(17)—

(i) FIDUCIARY ADVISER.—The term ‘‘fiduciary adviser’’ means, with respect to a plan, a person who is 

a fiduciary of the plan by reason of the provision of investment advice by the person to the plan or to a participant or beneficiary and who is—

(I) registered as an investment adviser under the 

Investment Advisers Act of 1940 (15 U.S.C. 80b–1 

et seq.) or under the laws of the State in which the 

fiduciary maintains its principal office and place 

of business, 

(II) a bank or similar financial institution referred to in subsection (d)(4) or a savings association (as defined in section 3(b)(1) of the Federal 

Deposit Insurance Act (12 U.S.C. 1813(b)(1))), but 

only if the advice is provided through a trust department of the bank or similar financial institution or savings association which is subject to periodic examination and review by Federal or State 

banking authorities, 

(III) an insurance company qualified to do business under the laws of a State, 

(IV) a person registered as a broker or dealer 

under the Securities Exchange Act of 1934 (15 

U.S.C. 78a et seq.), 

(V) an affiliate of a person described in any of 

subclauses (I) through (IV), or 

(VI) an employee, agent, or registered representative of a person described in any of subclauses (I) 

through (V) who satisfies the requirements of applicable insurance, banking, and securities laws 

relating to the provision of the advice. 

(ii) AFFILIATE.—The term ‘‘affiliate’’ of another entity 

means an affiliated person of the entity (as defined in 

section 2(a)(3) of the Investment Company Act of 1940 

(15 U.S.C. 80a–2(a)(3))). 

(iii) REGISTERED REPRESENTATIVE.—The term ‘‘registered representative’’ of another entity means a person 

described in section 3(a)(18) of the Securities Exchange 

Act of 1934 (15 U.S.C. 78c(a)(18)) (substituting the entity for the broker or dealer referred to in such section) 

or a person described in section 202(a)(17) of the Investment Advisers Act of 1940 (15 U.S.C. 80b–2(a)(17)) 

291 

(substituting the entity for the investment adviser referred to in such section). 

* * * * * * * 

SUBTITLE F—PROCEDURE AND 

ADMINISTRATION 

* * * * * * * 

CHAPTER 61—INFORMATION AND RETURNS 

* * * * * * * 

Subchapter A—Returns and Records 

* * * * * * * 

PART III—INFORMATIONAL RETURNS 

* * * * * * * 

Subpart B—Information Concerning Transactions with 

Other Persons 

Sec. 6041. Information at source. 

* * * * * * * 

Sec. 6050U. Charges or payments for qualified long-term care insurance contracts 

under combined arrangements. 

* * * * * * * 

SEC. 6050U. CHARGES OR PAYMENTS FOR QUALIFIED LONG-TERM 

CARE INSURANCE CONTRACTS UNDER COMBINED ARRANGEMENTS. 

(a) REQUIREMENT OF REPORTING.—Any person who makes a 

charge against the cash value of an annuity contract, or the cash 

surrender value of a life insurance contract, which is excludible 

from gross income under section 72(e)(11) shall make a return, according to the forms or regulations prescribed by the Secretary, setting forth—

(1) the amount of the aggregate of such charges against each 

such contract for the calendar year, 

(2) the amount of the reduction in the investment in each 

such contract by reason of such charges, and 

(3) the name, address, and TIN of the individual who is the 

holder of each such contract. 

(b) STATEMENTS TO BE FURNISHED TO PERSONS WITH RESPECT

TO WHOM INFORMATION IS REQUIRED.—Every person required to 

make a return under subsection (a) shall furnish to each individual 

whose name is required to be set forth in such return a written 

statement showing—

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

contact of the person making the payments, and 

(2) the information required to be shown on the return with 

respect to such individual. 

292 

The written statement required under the preceding sentence shall 

be furnished to the individual on or before January 31 of the year 

following the calendar year for which the return under subsection 

(a) was required to be made. 

* * * * * * * 

Subpart E—Registration of and Information Concerning 

Pensions Etc., Plans 

* * * * * * * 

SEC. 6059. PERIODIC REPORT OF ACTUARY. 

(a) * * * 

(b) ACTUARIAL REPORT.—The actuarial report of a plan required 

by subsection (a) shall be prepared and signed by an enrolled actuary (within the meaning of section 7701(a)(35)) and shall contain—

(1) * * * 

(2) a certification of the contribution necessary to reduce 

øthe accumulated funding deficiency (as defined in section 

412(a))¿ the minimum required contribution determined under 

section 430, or the accumulated funding deficiency determined 

under section 431, to zero, 

(3) a statement—

(A) * * * 

ø(B) the requirements of section 412(c) (relating to reasonable actuarial assumptions) have been complied with,¿ 

(B) the requirements for reasonable actuarial assumptions under section 430(h)(1) or 431(c)(3), whichever are applicable, have been complied with, 

* * * * * * * 

CHAPTER 79—DEFINITIONS 

* * * * * * * 

SEC. 7702. LIFE INSURANCE CONTRACT DEFINED. 

(a) * * * 

* * * * * * * 

(f) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes of 

this section—

(1) * * * 

* * * * * * * 

(5) QUALIFIED ADDITIONAL BENEFITS.—

(A) IN GENERAL.—The term ‘‘qualified additional benefits’’ means any—

(i) * * * 

(iv) disability waiver benefit, øor¿ 

(v) qualified long-term care insurance contract which 

is a part of or a rider on the contract, or 

ø(v)¿ (vi) other benefit prescribed under regulations. 

* * * * * * * 

293 

SEC. 7702B. TREATMENT OF QUALIFIED LONG-TERM CARE INSURANCE. 

(a) * * * 

* * * * * * * 

ø(e) TREATMENT OF COVERAGE PROVIDED AS PART OF A LIFE IN- SURANCE CONTRACT.—Except as otherwise provided in regulations 

prescribed by the Secretary, in the case of any long-term care insurance coverage (whether or not qualified) provided by a rider on 

or as part of a life insurance contract— ø(1) IN GENERAL.—This section shall apply as if the portion 

of the contract providing such coverage is a separate contract. 

ø(2) APPLICATION OF SECTION 7702.—Section 7702(c)(2) (relating to the guideline premium limitation) shall be applied by increasing the guideline premium limitation with respect to a life 

insurance contract, as of any date— ø(A) by the sum of any charges (but not premium payments) against the life insurance contract’s cash surrender 

value (within the meaning of section 7702(f)(2)(A) for such 

coverage made to that date under the contract, less 

ø(B) any such charges the imposition of which reduces 

the premiums paid for the contract (within the meaning of 

section 7702(f)(1). 

ø(3) APPLICATION OF SECTION 213.—No deduction shall be allowed under section 213(a) for charges against the life insurance contract’s cash surrender value described in paragraph 

(2), unless such charges are includible in income as a result of 

the application of section 72(e)(10) and the rider is a qualified 

long-term care insurance contract under subsection (b). 

ø(4) PORTION DEFINED.—For purposes of this subsection, the 

term ‘‘portion’’ means only the terms and benefits under a life 

insurance contract that are in addition to the terms and benefits under the contract without regard to long-term care insurance coverage.¿ 

(e) TREATMENT OF COVERAGE PROVIDED AS PART OF A LIFE INSURANCE OR ANNUITY CONTRACT.— (1) COVERAGE TREATED AS CONTRACT.—Except as otherwise 

provided in regulations prescribed by the Secretary, in the case 

of any long-term care insurance coverage (whether or not qualified) provided by a rider on or as part of a life insurance contract or an annuity contract, this title shall apply as if the portion of the contract providing such coverage is a separate contract. 

(2) DENIAL OF DEDUCTION UNDER SECTION 213.—No deduction shall be allowed under section 213(a) for any payment 

made for coverage under a qualified long-term care insurance 

contract if such payment is made as a charge against the cash 

value of an annuity contract or the cash surrender value of a 

life insurance contract. 

(3) APPLICATION OF SECTION 7702.—Section 7702(c)(2) (relating to the guideline premium limitation) shall be applied by increasing the guideline premium limitation with respect to the 

life insurance contract, as of any date— (A) by the sum of any charges (but not premium payments) against the life insurance contract’s cash surrender 

value (within the meaning of section 7702(f)(2)(A)) for covVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00293 Fmt 6659 Sfmt 6603 E:\HR\OC\HR232P2.XXX HR232P2
294 

erage under the qualified long-term care insurance contract 

made to that date under the life insurance contract, less 

(B) any such charges the imposition of which reduces the 

premiums paid for the life insurance contract (within the 

meaning of section 7702(f)(1)). 

(4) PORTION DEFINED.—For purposes of this subsection, the 

term ‘‘portion’’ means only the terms and benefits under a life 

insurance contract or annuity contract that are in addition to 

the terms and benefits under the contract without regard to 

long-term care insurance coverage. 

(5) ANNUITY CONTRACTS TO WHICH PARAGRAPH (1) DOES NOT

APPLY.—For purposes of this subsection, none of the following 

shall be treated as an annuity contract: 

(A) A trust described in section 401(a) which is exempt 

from tax under section 501(a). 

(B) A contract— (i) purchased by a trust described in subparagraph 

(A), 

(ii) purchased as part of a plan described in section 

403(a), 

(iii) described in section 403(b), 

(iv) provided for employees of a life insurance company under a plan described in section 818(a)(3), or 

(v) from an individual retirement account or an individual retirement annuity. 

(C) A contract purchased by an employer for the benefit 

of the employee (or the employee’s spouse). 

Any dividend described in section 404(k) which is received by 

a participant or beneficiary shall, for purposes of this paragraph, be treated as paid under a separate contract to which 

subparagraph (B)(i) applies. 

* * * * * * * 

SECTION 769 OF THE RETIREMENT PROTECTION ACT 

OF 1994 

SEC. 769. SPECIAL FUNDING RULES FOR CERTAIN PLANS. 

(a) * * * 

* * * * * * * 

(c) TRANSITION RULES FOR CERTAIN PLANS.— (1) * * * 

* * * * * * * 

(3) SPECIAL RULES.—In the case of plan years beginning in 

2004 øand 2005¿, 2005 and 2006, the following transition rules 

shall apply in lieu of the transition rules described in paragraph (2): 

(A) * * * 

* * * * * * * 

[Section 121(e)(1) of H.R. 2830 repeals section 769(c). Paragraph (2) of such 

subsection provides that the amendment shall take effect on December 

31, 2006.] 

ø(c) TRANSITION RULES FOR CERTAIN PLANS.—

295 

ø(1) IN GENERAL.—In the case of a plan that— ø(A) was not required to pay a variable rate premium for 

the plan year beginning in 1996; 

ø(B) has not, in any plan year beginning after 1995 and 

before 2009, merged with another plan (other than a plan 

sponsored by an employer that was in 1996 within the controlled group of the plan sponsor); and 

ø(C) is sponsored by a company that is engaged primarily in the interurban or interstate passenger bus service, 

except as provided in paragraph (3), the transition rules described in paragraph (2) shall apply for any plan year beginning after 1996 and before 2010. 

ø(2) TRANSITION RULES.—The transition rules described in 

this paragraph are as follows: 

ø(A) For purposes of section 412(l)(9)(A) of the Internal 

Revenue Code of 1986 and section 302(d)(9)(A) of the Employee Retirement Income Security Act of 1974—

ø(i) the funded current liability percentage for any 

plan year beginning after 1996 and before 2005 shall 

be treated as not less than 90 percent if for such plan 

year the funded current liability percentage is at least 

85 percent, and 

ø(ii) the funded current liability percentage for any 

plan year beginning after 2004 and before 2010 shall 

be treated as not less than 90 percent if for such plan 

year the funded current liability percentage satisfies 

the minimum percentage determined according to the 

following table: 

øIn the case of a plan year beginning in: The minimum percentage is: 

2005 ............................................................................. 86 percent

2006 ............................................................................. 87 percent

2007 ............................................................................. 88 percent

2008 ............................................................................. 89 percent

2009 and thereafter ................................................... 90 percent. 

ø(B) Sections 412(c)(7)(E)(i)(I) of such Code and 

302(c)(7)(E)(i)(I) of such Act shall be applied— ø(i) by substituting ‘‘85 percent’’ for ‘‘90 percent’’ for 

plan years beginning after 1996 and before 2005, and 

ø(ii) by substituting the minimum percentage specified in the table contained in subparagraph (A)(ii) for 

‘‘90 percent’’ for plan years beginning after 2004 and 

before 2010. 

ø(C) In the event the funded current liability percentage 

of a plan is less than 85 percent for any plan year beginning after 1996 and before 2005, the transition rules under 

subparagraphs (A) and (B) shall continue to apply to the 

plan if contributions for such a plan year are made to the 

plan in an amount equal to the lesser of—

ø(i) the amount necessary to result in a funded current liability percentage of 85 percent, or 

ø(ii) the greater of—

296 

ø(I) 2 percent of the plan’s current liability as of 

the beginning of such plan year, or 

ø(II) the amount necessary to result in a funded 

current liability percentage of 80 percent as of the 

end of such plan year. 

For the plan year beginning in 2005 and for each of the 

3 succeeding plan years, the transition rules under subparagraphs (A) and (B) shall continue to apply to the plan 

for such plan year only if contributions to the plan for such 

plan year equal at least the expected increase in current 

liability due to benefits accruing during such plan year. 

ø(3) SPECIAL RULES.—In the case of plan years beginning in 

2004 and 2005, the following transition rules shall apply in 

lieu of the transition rules described in paragraph (2): 

ø(A) For purposes of section 412(l)(9)(A) of the Internal 

Revenue Code of 1986 and section 302(d)(9)(A) of the Employee Retirement Income Security Act of 1974, the funded 

current liability percentage for any plan year shall be 

treated as not less than 90 percent. 

ø(B) For purposes of section 412(m) of the Internal Revenue Code of 1986 and section 302(e) of the Employee Retirement Income Security Act of 1974, the funded current 

liability percentage for any plan year shall be treated as 

not less than 100 percent. 

ø(C) For purposes of determining unfunded vested benefits under section 4006(a)(3)(E)(iii) of the Employee Retirement Income Security Act of 1974, the mortality table 

shall be the mortality table used by the plan.¿ 

* * * * * * * 

EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 

1974 

* * * * * * * 

TITLE IV—PLAN TERMINATION INSURANCE 

SUBTITLE A—PENSION BENEFIT GUARANTY CORPORATION

* * * * * * * 

PREMIUM RATES

SEC. 4006. (a)(1) * * * 

* * * * * * * 

(3)(A) Except as provided in subparagraph (C), the annual premium rate payable to the corporation by all plans for basic benefits 

guaranteed under this title is—

ø(i) in the case of a single-employer plan, for plan years beginning after December 31, 1990, an amount equal to the sum 

of $19 plus the additional premium (if any) determined under 

subparagraph (E) for each individual who is a participant in 

such plan during the plan year;¿ 

(i) in the case of a single-employer plan, an amount equal 

to—

297 

(I) for plan years beginning after December 31, 1990, and before January 1, 2006, $19, or 

(II) for plan years beginning after December 31, 2005, the 

amount determined under subparagraph (F), 

plus the additional premium (if any) determined under subparagraph (E) for each individual who is a participant in such 

plan during the plan year; 

* * * * * * * 

(E)(i) * * * 

* * * * * * * 

(iii) For purposes of clause (ii)— (I) * * * 

* * * * * * * 

(V) In the case of plan years beginning after December 31, 

2003, and before January 1, ø2006¿ 2007, the annual yield 

taken into account under subclause (II) shall be the annual 

rate of interest determined by the Secretary of the Treasury on 

amounts invested conservatively in long-term investment grade 

corporate bonds for the month preceding the month in which 

the plan year begins. For purposes of the preceding sentence, 

the Secretary of the Treasury shall determine such rate of interest on the basis of 2 or more indices that are selected periodically by the Secretary of the Treasury and that are in the 

top 3 quality levels available. The Secretary of the Treasury 

shall make the permissible range, and the indices and methodology used to determine the rate, publicly available. 

[Section 401(c)(2) of H.R. 2830 repeals clauses (iii)-(iv) of section 

4006(a)(3)(E) and inserts a new clause (iii). Subsection (d)(3) provides 

that the amendment shall take effect on December 31, 2006.] 

ø(iii) For purposes of clause (ii)— ø(I) Except as provided in subclause (II) or (III), the term ‘‘unfunded vested benefits’’ means the amount which would be 

the unfunded current liability (within the meaning of section 

302(d)(8)(A)) if only vested benefits were taken into account. 

ø(II) The interest rate used in valuing vested benefits for 

purposes of subclause (I) shall be equal to the applicable percentage of the annual yield on 30-year Treasury securities for 

the month preceding the month in which the plan year begins. 

For purposes of this subclause, the applicable percentage is 80 

percent for plan years beginning before July 1, 1997, 85 percent for plan years beginning after June 30, 1997, and before 

the 1st plan year to which the first tables prescribed under section 302(d)(7)(C)(ii)(II) apply, and 100 percent for such 1st plan 

year and subsequent plan years. 

ø(III) In the case of any plan year for which the applicable percentage under subclause (II) is 100 percent, the 

value of the plan’s assets used in determining unfunded 

current liability under subclause (I) shall be their fair market value. 

ø(IV) In the case of plan years beginning after December 

31, 2001, and before January 1, 2004, subclause (II) shall 

be applied by substituting ‘‘100 percent’’ for ‘‘85 percent’’. Subclause (III) shall be applied for such years without reVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00297 Fmt 6659 Sfmt 6601 E:\HR\OC\HR232P2.XXX HR232P2
298 

gard to the preceding sentence. Any reference to this 

clause or this subparagraph by any other sections or subsections (other than sections 4005, 4010, 4011, and 4043) 

shall be treated as a reference to this clause or this subparagraph without regard to this subclause. 

ø(V) In the case of plan years beginning after December 31, 

2003, and before January 1, 2006, the annual yield taken into 

account under subclause (II) shall be the annual rate of interest determined by the Secretary of the Treasury on amounts 

invested conservatively in long-term investment grade corporate bonds for the month preceding the month in which the 

plan year begins. For purposes of the preceding sentence, the 

Secretary of the Treasury shall determine such rate of interest 

on the basis of 2 or more indices that are selected periodically 

by the Secretary of the Treasury and that are in the top 3 

quality levels available. The Secretary of the Treasury shall 

make the permissible range, and the indices and methodology 

used to determine the rate, publicly available. 

ø(iv) No premium shall be determined under this subparagraph 

for any plan year if, as of the close of the preceding plan year, contributions to the plan for the preceding plan year were not less 

than the full funding limitation for the preceding plan year under 

section 412(c)(7) of the Internal Revenue Code of 1986.¿ 

(iii)(I) For purposes of clause (ii), except as provided in subclause 

(II), the term ‘‘unfunded vested benefits’’ means, for a plan year, the 

amount which would be the plan’s funding shortfall (as defined in 

section 303(c)(4)), if the value of plan assets of the plan were equal 

to the fair market value of such assets and only vested benefits were 

taken into account. 

(II) The interest rate used in valuing vested benefits for purposes 

of subclause (I) shall be equal to the first, second, or third segment 

rate which would be determined under section 303(h)(2)(C) if section 

303(h)(2)(D)(i) were applied by substituting ‘‘the yields’’ for ‘‘the 3- 

year weighted average of yields’’, as applicable under rules similar 

to the rules under section 303(h)(2)(B). 

(F)(i) Except as otherwise provided in this subparagraph, for purposes of determining the annual premium rate payable to the corporation by a single-employer plan for basic benefits guaranteed 

under this title, the amount determined under this subparagraph is 

the greater of $30 or the adjusted amount determined under clause 

(ii). 

(ii) For plan years beginning after 2006, the adjusted amount determined under this clause is the product derived by multiplying 

$30 by the ratio of—

(I) the national average wage index (as defined in section 

209(k)(1) of the Social Security Act) for the first of the 2 calendar years preceding the calendar year in which the plan year 

begins, to 

(II) the national average wage index (as so defined) for 2004, 

with such product, if not a multiple of $1, being rounded to the next 

higher multiple of $1 where such product is a multiple of $0.50 but 

not of $1, and to the nearest multiple of $1 in any other case. 

(iii) For purposes of determining the annual premium rate payable to the corporation by a single-employer plan for basic benefits 

299 

guaranteed under this title for any plan year beginning after 2005 

and before 2010— (I) except as provided in subclause (II), the premium amount 

referred to in subparagraph (A)(i)(II) for any such plan year is 

the amount set forth in connection with such plan year in the 

following table: 

If the plan year begins in: The amount is: 

2006 ................................................................................ $21.20 

2007 ................................................................................ $23.40 

2008 ................................................................................ $25.60 

2009 ................................................................................ $27.80; or 

(II) if the plan’s funding target attainment percentage for the 

plan year preceding the current plan year was less than 80 percent, the premium amount referred to in subparagraph (A)(i)(II) 

for such current plan year is the amount set forth in connection 

with such current plan year in the following table: 

If the plan year begins in: The amount is:

2006 ................................................................................ $22.67

2007 ................................................................................ $26.33

2008 or 2009 .................................................................. the amount provided 

under clause (i). 

(iv) For purposes of this subparagraph, the term ‘‘funding target 

attainment percentage’’ has the meaning provided such term in section 303(d)(2). 

* * * * * * * 

(7) PREMIUM RATE FOR CERTAIN TERMINATED SINGLE-EMPLOYER

PLANS.—

(A) IN GENERAL.—If there is a termination of a single-employer plan under clause (ii) or (iii) of section 4041(c)(2)(B) or 

section 4042, there shall be payable to the corporation, with respect to each applicable 12-month period, a premium at a rate 

equal to $1,250 multiplied by the number of individuals who 

were participants in the plan immediately before the termination date. Such premium shall be in addition to any other 

premium under this section. 

(B) SPECIAL RULE FOR PLANS TERMINATED IN BANKRUPTCY

REORGANIZATION.—If the plan is terminated under 

4041(c)(2)(B)(ii) or under section 4042 and, as of the termination date, a person who is (as of such date) a contributing 

sponsor of the plan or a member of such sponsor’s controlled 

group has filed or has had filed against such person a petition 

seeking reorganization in a case under title 11 of the United 

States Code, or under any similar law of a State or a political 

subdivision of a State (or a case described in section 

4041(c)(2)(B)(i) filed by or against such person has been converted, as of such date, to such a case in which reorganization 

is sought), subparagraph (A) shall not apply to such plan until 

the date of the discharge of such person in such case. 

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(C) APPLICABLE 12-MONTH PERIOD.—For purposes of subparagraph (A)—

(i) IN GENERAL.—The term ‘‘applicable 12-month period’’

means—

(I) the 12-month period beginning with the first 

month following the month in which the termination 

date occurs, and 

(II) each of the first two 12-month periods immediately following the period described in subclause (I). 

(ii) PLANS TERMINATED IN BANKRUPTCY REORGANIZATION.—In any case in which the requirements of subparagraph (B) are met in connection with the termination of the 

plan with respect to 1 or more persons described in such 

subparagraph, the 12-month period described in clause 

(i)(I) shall be the 12-month period beginning with the first 

month following the month which includes the earliest date 

as of which each such person is discharged in the case described in such clause in connection with such person. 

(D) COORDINATION WITH SECTION 4007.—

(i) Notwithstanding section 4007—

(I) premiums under this paragraph shall be due 

within 30 days after the beginning of any applicable 

12-month period, and 

(II) the designated payor shall be the person who is 

the contributing sponsor as of immediately before the 

termination date. 

(ii) The fifth sentence of section 4007(a) shall not apply 

in connection with premiums determined under this paragraph. 

* * * * * * * 

SEC. 4010. AUTHORITY TO REQUIRE CERTAIN INFORMATION. 

(a) * * * 

(b) PERSONS REQUIRED TO PROVIDE INFORMATION.—The persons 

covered by subsection (a) are each contributing sponsor, and each 

member of a contributing sponsor’s controlled group, of a single-employer plan covered by this title, if—

ø(1) the aggregate unfunded vested benefits at the end of the 

preceding plan year (as determined under section 

4006(a)(3)(E)(iii)) of plans maintained by the contributing sponsor and the members of its controlled group exceed $50,000,000 

(disregarding plans with no unfunded vested benefits);¿ 

(1) the aggregate funding target attainment percentage of the 

plan (as defined in subsection (d)(2)) is less than 60 percent; 

(2)(A) the aggregate funding target attainment percentage of 

the plan (as defined in subsection (d)(2)) is less than 75 percent, 

and 

(B) the plan sponsor is in an industry with respect to which 

the corporation determines that there is substantial unemployment or underemployment and the sales and profits are depressed or declining; 

ø(2)¿ (3) the conditions for imposition of a lien described in 

section 302(f)(1)(A) and (B) of this Act or section 412(n)(1)(A) 

and (B) of the Internal Revenue Code of 1986 have been met 

301 

with respect to any plan maintained by the contributing sponsor or any member of its controlled group; or 

ø(3)¿ (4) minimum funding waivers in excess of $1,000,000 

have been granted with respect to any plan maintained by the 

contributing sponsor or any member of its controlled group, 

and any portion thereof is still outstanding. 

* * * * * * * 

(d) NOTICE TO PARTICIPANTS AND BENEFICIARIES.— (1) IN GENERAL.—Not later than 90 days after the submission 

by any person to the corporation of information or documentary 

material with respect to any plan pursuant to subsection (a), 

such person shall provide notice of such submission to each participant and beneficiary under the plan (and under all plans 

maintained by members of the controlled group of each contributing sponsor of the plan). Such notice shall also set forth— (A) the number of single-employer plans covered by this 

title which are in at-risk status and are maintained by contributing sponsors of such plan (and by members of their 

controlled groups) with respect to which the funding target 

attainment percentage for the preceding plan year of each 

plan is less than 60 percent; 

(B) the value of the assets of each of the plans described 

in subparagraph (A) for the plan year, the funding target 

for each of such plans for the plan year, and the funding 

target attainment percentage of each of such plans for the 

plan year; and 

(C) taking into account all single-employer plans maintained by the contributing sponsor and the members of its 

controlled group as of the end of such plan year— (i) the aggregate total of the values of plan assets of 

such plans as of the end of such plan year, 

(ii) the aggregate total of the funding targets of such 

plans, as of the end of such plan year, taking into account only benefits to which participants and beneficiaries have a nonforfeitable right, and 

(iii) the aggregate funding targets attainment percentage with respect to the contributing sponsor for the 

preceding plan year. 

(2) DEFINITIONS.—For purposes of this subsection— (A) VALUE OF PLAN ASSETS.—The term ‘‘value of plan assets’’ means the value of plan assets, as determined under 

section 303(g)(3). 

(B) FUNDING TARGET.—The term ‘‘funding target’’ has the 

meaning provided under section 303(d)(1). 

(C) FUNDING TARGET ATTAINMENT PERCENTAGE.—The 

term ‘‘funding target attainment percentage’’ has the meaning provided in section 303(d)(2). 

(D) AGGREGATE FUNDING TARGETS ATTAINMENT PERCENT- AGE.—The term ‘‘aggregate funding targets attainment percentage’’ with respect to a contributing sponsor for a plan 

year is the percentage, taking into account all plans maintained by the contributing sponsor and the members of its 

controlled group as of the end of such plan year, which 

(i) the aggregate total of the values of plan assets, as 

of the end of such plan year, of such plans, is of 

302 

(ii) the aggregate total of the funding targets of such 

plans, as of the end of such plan year, taking into account only benefits to which participants and beneficiaries have a nonforfeitable right. 

(E) AT-RISK STATUS.—The term ‘‘at-risk status’’ has the 

meaning provided in section 303(i)(3). 

(3) COMPLIANCE.— (A) IN GENERAL.—Any notice required to be provided 

under paragraph (1) may be provided in written, electronic, 

or other appropriate form to the extent such form is reasonably accessible to individuals to whom the information is 

required to be provided. 

(B) LIMITATIONS.—In no case shall a participant or beneficiary be entitled under this subsection to receive more 

than one notice described in paragraph (1) during any one 

12-month period. The person required to provide such notice may make a reasonable charge to cover copying, mailing, and other costs of furnishing such notice pursuant to 

paragraph (1). The corporation may by regulations prescribe the maximum amount which will constitute a reasonable charge under the preceding sentence. 

(4) NOTICE TO CONGRESS.—Concurrent with the provision of 

any notice under paragraph (1), such person shall provide such 

notice to the Committee on Education and the Workforce and 

the Committee on Ways and Means of the House of Representatives and the Committee on Health, Education, Labor, and Pensions and the Committee on Finance of the Senate, which shall 

be treated as materials provided in executive session. 

* * * * * * * 

(303) 

VII. DISSENTING VIEWS 

We recognize that legislation to strengthen the defined benefit 

retirement system is in order. Millions of American workers rely on 

those pension benefits. We should ensure that the pension promises 

made to those workers are kept. However, we cannot support the 

legislation reported by the Committee, and the reasons for our opposition can be stated quite simply. 

THE COMMITTEE BILL WOULD ENDANGER THE RETIREMENT

SECURITY OF MILLIONS OF AMERICANS

The Committee bill contains a large number of technical changes 

to the funding rules applicable to defined benefit pension plans. 

These changes would have the effect of changing how the liabilities 

under the pension plan are valued, how the assets of the plan are 

invested, when the required contributions are made to the plan, 

and the accounting for those contributions. These changes are very 

technical and difficult to understand. We believe that these 

changes would result in lower pension benefits for millions of 

Americans. We believe that many companies would either freeze or 

terminate their plans because of these changes. 

We are not alone in reaching that conclusion. The Committee on 

Investment of Employees Benefits Assets (an association of the 

Chief Investment Officers of many of the nation’s largest corporate 

pension plans) concluded that proposals similar to those reported 

by the Committee would ‘‘have long-term consequences for current 

and future workers, with the potential to damage the retirement 

security of millions of Americans.’’ According to a survey of their 

members (representing pension plans covering 5 million participants), it would be likely or highly likely that approximately 60% 

of those pension plans would reduce benefits to current or future 

workers if the Committee bill became law. These are not plans of 

financially troubled companies where the managers expect the plan 

to be terminated because of business conditions. These are adequately-funded ongoing plans that will reduce benefits if the Committee bill becomes law. 

The first rule for any effective legislation is ‘‘do not harm’’. The 

Committee bill fails to meet this standard. 

THE COMMITTEE BILL WILL DO LITTLE TO STOP COMPANIES FROM

DUMPING THEIR PENSION PLANS IN BANKRUPTCY

We have seen a large number of companies use the bankruptcy 

laws to dump their pension liabilities on the Pension Benefit Guaranty Corporation (PBGC). The PBGC is at present juggling a 

record 350 plans in bankruptcy. A Wall Street stock analyst stated 

‘‘bankruptcy has become a management tool these days’’. As a result, the PBGC faces large unfunded liabilities and a current deficit 

304 

of more than $23 billion. Also, millions of Americans have seen 

their pension benefits being reduced in bankruptcy. 

Unless the Congress acts, there could be rush to the bottom as 

companies figure out how to use bankruptcy to shed their pension 

obligations. Companies who have successfully used the bankruptcy 

process to rid themselves of pension liabilities have emerged with 

cost advantages over their competitors who have not so used the 

bankruptcy system. As a result, if this bill becomes law, there 

would be increasing pressure on other companies to seek these 

cost-cutting measures in bankruptcy. 

The Committee bill does little in this area to curb this practice. 

Congressman McDermott offered a substitute that would have 

taken steps to reduce the incentives for bankruptcy filings. The 

substitute was defeated by unanimous vote of the Republican Members of the Committee 

THE COMMITTEE BILL WORSENS PBGC’S LIABILITIES

The PBGC, in a series of briefings with lawmakers, has consistently maintained that it would be better off under current law than 

the Committee bill. 

The purpose of this legislation should be to strengthen the security of pensions and reduce future terminations of employer provided pension plans. Even the Administration officials that were 

present during the Committee markup conceded that the bill did 

not meet that goal. These officials stated that their analysis concluded that the Committee bill would not affect the number of 

plans that would be terminated in the future nor the unfunded liabilities that would be shifted to the PBGC. Therefore, we can conclude that the bill would not make worker’s pensions more secure. 

THE COMMITTEE BILL IS ANOTHER UNAFFORDABLE TAX CUT

The Committee bill would cost $70 billion over the next 10 years. 

Only approximately $5 billion of that revenue cost is attributable 

to the provisions that relate to defined benefit pension plans. This 

demonstrates that the bill is not about securing the pension benefits of workers within the defined benefit system. 

During the markup there was no response to Congressman Levin’s question of how the bill would be paid for. In fact, the Committee bill is another unfunded tax cut, the cost of which will be 

met by borrowing, largely from foreign investors. 

THE COMMITTEE BILL PREVENTS ACTION ON ISSUES REQUIRING

IMMEDIATE ACTION

Congress has permitted companies to use a corporate bond rate 

rather than the 30-year Treasury Bond rate, on a temporary basis, 

to calculate their pension liabilities. That temporary relief was required given the fact that the Treasury Department had stopped 

issuing 30-year bonds. The temporary relief terminates at the end 

of this calendar year, and everyone concedes that it should be extended. 

Rather than immediately act on this issue, the Republican majority has decided to hold it hostage to force action on their overreaching pension legislation. The Republican majority on the ComVerDate Aug 31 2005 17:43 Dec 08, 2005 Jkt 049006 PO 00000 Frm 00304 Fmt 6604 Sfmt 6602 E:\HR\OC\HR232P2.XXX HR232P2
305 

mittee unanimously rejected the substitute offered by Mr. 

McDermott that would have permitted prompt action on this issue. 

CONCLUSION

We believe there is still an opportunity to do the right thing for 

American workers. We are willing to work in a bipartisan manner 

to pass legislation that would protect the security of our pension 

system and the more than 34 million workers it serves. 

CHARLES B. RANGEL. 

JIM MCDERMOTT. 

RAHM EMANUEL. 

WM. J. JEFFERSON. 

STEPHANIE TUBBS JONES. 

XAVIER BECERRA. 

BEN CARDIN. 

SANDER LEVIN. 

JOHN B. LARSON. 

JOHN LEWIS. 

EARL POMEROY. 

PETE STARK. 

MIKE THOMPSON. 

RICHARD E. NEAL. 

JOHN TANNER. 

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