49–010 

Calendar No. 276 

109TH CONGRESS REPORT " ! SENATE 1st Session 109–174 

NATIONAL EMPLOYEE SAVINGS AND TRUST EQUITY 

GUARANTEE ACT 

NOVEMBER 2, 2005.—Ordered to be printed 

Mr. GRASSLEY, from the Committee on Finance, 

submitted the following 

R E P O R T 

[To accompany S. 1953] 

The Committee on Finance, having considered an original bill (S. 

1953) to amend the Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 to protect the retirement security of American workers by ensuring that pension 

benefits are funded and that pension assets are adequately diversified and by providing workers with adequate access to, and information about, their pension plans, and for other purposes, reports 

favorably thereon and recommends that the bill do pass. 

CONTENTS 

Page 

I. LEGISLATIVE BACKGROUND ..................................................................... 4 

II. EXPLANATION OF THE BILL ...................................................................... 6 

TITLE I—DIVERSIFICATION RIGHTS AND OTHER DEFINED CONTRIBUTION PARTICIPANT PROTECTIONS ........................................... 6 

A. Defined Contribution Plans Required to Provide Employees with 

Freedom to Invest Their Plan Assets (sec. 101 of the bill, new 

sec. 401(a)(35) of the Code, and new sec. 204(j) of ERISA) ............ 6 

B. Notice of Freedom to Divest Employer Securities or Real Property 

(secs. 102 and 205 of the bill, new sec. 4980H of the Code, 

and new sec. 101(j) of ERISA) ........................................................... 14 

C. Periodic Pension Benefit Statements for Defined Contribution 

Plans (secs. 103 and 205 of the bill, new sec. 4980I of the Code, 

and sec. 105(a) of ERISA) .................................................................. 16 

D. Periodic Pension Benefit Statements for Defined Benefit Pension 

Plans (sec. 103 of the bill, new sec. 4980I of the Code, and 

secs. 105(a) and 502(c)(1) of ERISA) ................................................. 20 

E. Notice to Participants and Beneficiaries of Blackout Periods (secs. 

104 and 205 of the bill, new sec. 4980J of the Code, and sec. 

101(i) of ERISA) ................................................................................. 23 

2 

F. Additional IRA Contributions for Certain Employees (sec. 105 

of the bill and secs. 25B and 219 of the Code) ................................. 27 

TITLE II—PROVIDING INVESTMENT ADVICE AND INVESTMENT 

EDUCATION TO PLAN PARTICIPANTS ................................................. 29 

A. Investment Education Requirements for Defined Contribution 

Plan Participants (secs. 201 and 205 of the bill, new sec. 4980I 

of the Code, and secs. 104 and 502 of ERISA) ................................. 29 

B. Information Relating to Investment in Employer Securities (secs. 

202 and 205 of the bill, new sec. 4980H of the Code, and secs. 

101 and 502 of ERISA) ...................................................................... 32 

C. Safe Harbor for Independent Investment Advice Provided to Plan 

Participants (sec. 203 of the bill and new sec. 404(e) of ERISA) ... 34 

D. Treatment of Employer-Provided Qualified Retirement Planning 

Services (sec. 204 of the bill and sec. 132 of the Code) ................... 36 

TITLE III—IMPROVEMENTS IN FUNDING RULES FOR SINGLE-EMPLOYER DEFINED BENEFIT PENSION PLANS ................................... 38 

A. Minimum Funding Rules for Single-Employer Defined Benefit 

Pension Plans (secs. 301–302, 305, 311–312, 314, and 321 of 

the bill, sec. 412 of the Code, new secs. 430 and 431 of the 

Code, secs. 302–308 of ERISA) ......................................................... 38 

B. Limitations on Benefit Improvements and Distributions by SingleEmployer Plans that are Underfunded or Maintained by Financially Weak Employers (secs. 303, 313, and 402 of the bill, new 

sec. 436 of the Code, and new sec. 305 of ERISA) ........................... 56 

C. Increase in Deduction Limits for Single-Employer Plans (secs. 

304, 322, and 323 of the bill and secs. 404 and 4972 of the 

Code) ................................................................................................... 64 

D. Replacement of 30-Year Treasury Rate for Calculating LumpSum Distributions (sec. 331 of the bill, sec. 417(e) of the Code, 

and sec. 205(g) of ERISA) .................................................................. 67 

E. Interest Rate Assumption for Applying Benefit Limitations to 

Lump-Sum Distributions (sec. 332 of the bill and sec. 415 of 

the Code) ............................................................................................. 69 

F. Restrictions on Funding of Nonqualified Deferred Compensation 

Plan When Employer’s Defined Benefit Pension Plan is Underfunded (sec. 333 of the bill, secs. 409A and 4980I of the Code, 

new sec. 306 of ERISA, and sec. 502(g) of ERISA) .......................... 71 

G. Special Funding Rules for Plans Maintained by Commercial Airlines that are Amended to Cease Future Benefit Accruals (sec. 

334 of the bill) .................................................................................... 74 

H. Modification of Pension Funding Requirements for Plans Subject 

to Current Transition Rule (sec. 335 of the bill and sec. 769 

of the Retirement Protection Act of 1994, as amended by the 

Pension Funding Equity Act of 2004) ............................................... 82 

I. Treatment of Cash Balance and Other Hybrid Defined Benefit 

Pension Plans (sec. 341 of the bill, secs. 411 and 417 of the 

Code, and secs. 204 and 205 of ERISA) ........................................... 84 

J. Defined Benefit Pension Plan Benefits Provided in Combination 

with a Qualified Cash-or-Deferred Arrangement (sec. 342 of the 

bill, new sec. 414(x) of the Code, and new sec. 210(e) of ERISA) .. 92 

K. Studies (secs. 451 and 452 of the bill) ............................................... 99 

1. Study on revitalizing the defined benefit plans .......................... 99 

2. Study on floor-offset ESOPs ......................................................... 100 

TITLE IV—DISCLOSURE AND BENEFIT STATEMENT REQUIREMENTS FOR SINGLE-EMPLOYER DEFINED BENEFIT PENSION 

PLANS ........................................................................................................... 102 

A. Actuarial Reports and Summary Annual Reports (sec. 401 of the 

bill, sec. 6059 and new sec. 4980K of the Code, and secs. 103, 

104, 502, 4010 and 4011 of ERISA) .................................................. 102 

TITLE V—IMPROVEMENTS IN FUNDING RULES FOR MULTIEMPLOYER DEFINED BENEFIT PLANS ...................................................... 105 

A. Increase in Deduction Limits (secs. 322 and 501 of the bill and 

sec. 404 of the Code) .......................................................................... 105 

B. Multiemployer Plan Funding Notice (sec. 502 of the bill and new 

sec. 4980L of the Code) ...................................................................... 107 

C. Permit Qualified Transfers of Excess Pension Assets to Retiree 

Health Accounts by Multiemployer Plan (sec. 503 of the bill, 

sec. 420 of the Code and secs. 101, 403 and 408 of ERISA) ........... 108 

3 

TITLE VI—IMPROVEMENTS IN PBGC GUARANTEE PROVISIONS ..... 110 

A. Increases in PBGC Premiums for Single-Employer Plans (sec. 

601 of the bill and sec. 4006 of ERISA) ............................................ 110 

B. Rules Relating to Bankruptcy of Employer (secs. 403 and 602 

of the bill and secs. 4022 and 4044 of ERISA) ................................. 113 

C. Limitation on PBGC Guarantee of Shutdown and Other Benefits 

(sec. 603 of the bill and sec. 4022 of ERISA) ................................... 115 

D. PBGC Premiums for Small and New Plans (secs. 604 and 605 

of the bill and sec. 4006 of ERISA) ................................................... 117 

E. Authorization for PBGC to Pay Interest on Premium Overpayment Refunds (sec. 606 of the bill and sec. 4007(b) of ERISA) ...... 118 

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

607 of the bill and secs. 4021, 4022, 4043, and 4044 of ERISA) .... 119 

G. Acceleration of PBGC Computation of Benefits Attributable to 

Recoveries from Employers (sec. 608 of the bill and secs. 4022(c) 

and 4062(c) of ERISA) ....................................................................... 120 

TITLE VII—SPOUSAL PENSION PROTECTION ....................................... 121 

A. Study of Spousal Consent for Distributions from Defined Contribution Plans (sec. 701 of the bill) ................................................. 121 

B. Division of Pension Benefits Upon Divorce (sec. 702 of the bill) ..... 123 

C. Protection of Rights of Former Spouses under the Railroad Retirement System (secs. 703 and 704 of the bill and secs. 2 and 

5 of the Railroad Retirement Act of 1974) ....................................... 125 

D. Modifications of Joint and Survivor Annuity Requirements (sec. 

705 of the bill and secs. 401 and 417 of the Code and sec. 

205 of ERISA) ..................................................................................... 126 

TITLE VIII—IMPROVEMENTS IN PORTABILITY AND DISTRIBUTION RULES ................................................................................................ 128 

A. Purchase of Permissive Service Credit (sec. 801 of the bill and 

secs. 403(b)(13), 415(n)(3), and 457(e)(17) of the Code) .................. 128 

B. Rollover of After-Tax Amounts in Annuity Contracts (sec. 802 

of the bill and sec. 402(c)(2) of the Code) ......................................... 130 

C. Application of Minimum Distribution Rules to Governmental 

Plans (sec. 803 of the bill) ................................................................. 131 

D. Waiver of 10-Percent Early Withdrawal Tax on Certain Distributions from Pension Plans for Public Safety Employees (sec. 804 

of the bill and sec. 72(t) of the Code) ................................................ 132 

E. Rollovers by Nonspouse Beneficiaries of Certain Retirement Plan 

Distributions (sec. 805 of the bill and secs. 402, 403(a)(4), 

403(b)(8), and 457(e)(16) of the Code) ............................................... 133 

F. Faster Vesting of Employer Nonelective Contributions (sec. 806 

of the bill, sec. 411 of the Code, and sec. 203 of ERISA) ................ 135 

G. Allow Direct Rollovers from Retirement Plans to Roth IRAs (sec. 

807 of the bill and sec. 408A(e) of the Code) .................................... 136 

H. Elimination of Higher Early Withdrawal Tax on Certain SIMPLE 

Plan Distributions (sec. 808 of the bill and sec. 72(t) of the 

Code) ................................................................................................... 138 

I. SIMPLE Plan Portability (sec. 809 of the bill and secs. 402(c) 

and 408(d) of the Code) ...................................................................... 139 

J. Eligibility for Participation in Eligible Deferred Compensation 

Plans (sec. 810 of the bill) ................................................................. 140 

K. Benefit Transfers to the PBGC (sec. 811 of the bill, sec. 401(a)(31) 

of the Code, and sec. 4050 of ERISA) ............................................... 141 

L. Missing Participants (sec. 812 of the bill and sec. 4050 of ERISA) . 143 

TITLE IX—ADMINISTRATIVE PROVISIONS ............................................. 144 

A. Updating of Employee Plans Compliance Resolution System (sec. 

901 of the bill) .................................................................................... 144 

B. Extension to all Governmental Plans of Moratorium on Application of Certain Nondiscrimination Rules (sec. 902 of the bill, 

sec. 1505 of the Taxpayer Relief Act of 1997, and secs. 401(a) 

and 401(k) of the Code) ...................................................................... 146 

C. Notice and Consent Period Regarding Distributions (sec. 903 of 

the bill, sec. 417(a) of the Code, and sec. 205(c) of ERISA) ............ 147 

D. Pension Plan Reporting Simplification (sec. 904 of the bill) ............ 148 

4 

E. Voluntary Early Retirement Incentive and Employment Retention 

Plans Maintained by Local Educational Agencies and Other Entities (sec. 904 of the bill, secs. 457(e)(11) and 457(f) of the Code, 

sec. 3(2)(B) of ERISA, and sec. 4(l)(1) of the ADEA) ....................... 149 

F. No Reduction in Unemployment Compensation as a Result of 

Pension Rollovers (sec. 906 of the bill and sec. 3304(a)(15) of 

the Code) ............................................................................................. 152 

G. Withholding on Certain Distributions from Governmental Eligible 

Deferred Compensation Plans (sec. 907 of the bill and sec. 457 

of the Code) ......................................................................................... 153 

H. Defined Benefit Plans Maintained by Tribal Governments (sec. 

908 of the bill) .................................................................................... 154 

I. Treatment of Plan of Certain Nonprofit Organization as a Governmental Plan (sec. 909 of the bill) ...................................................... 154 

J. Provisions Relating to Plan Amendments (sec. 910 of the bill) ........ 155 

TITLE X—UNITED STATES TAX COURT MODERNIZATION ................ 157 

A. Tax Court Pension and Compensation ............................................... 157 

1. Judges of the Tax Court (secs. 1001–1007 and 1013 of the 

bill and secs. 7443, 7447, 7448, and 7472 of the Code) ........... 157 

2. Special trial judges of the Tax Court (secs. 1008–1013 of the 

bill and sec. 7448 and new secs. 7443A, 7443B, and 7443C 

of the Code) .................................................................................. 159 

B. Tax Court Procedure ........................................................................... 162 

1. Jurisdiction of Tax Court over collection due process cases 

(sec. 1021 of the bill and sec. 6330 of the Code) ....................... 162 

2. Authority for magistrate judges to hear and decide certain 

employment status cases (sec. 1022 of the bill and sec. 7443A 

of the Code) .................................................................................. 163 

3. Confirmation of Tax Court authority to apply doctrine of equitable recoupment (sec. 1023 of the bill and sec. 6214 of 

the Code) ...................................................................................... 164 

4. Tax Court filing fees (sec. 1024 of the bill and sec. 7451 

of the Code) .................................................................................. 165 

5. Appointment of Tax Court employees (sec. 1025 of the bill 

and sec. 7471(a) of the Code) ..................................................... 166 

6. Expanded use of practice fees (sec. 1026 of the bill and sec. 

7475 of the Code) ........................................................................ 168 

TITLE XI—OTHER PROVISIONS ................................................................. 168 

A. Transfer of Funds Attributable to Black Lung Trust Funds to 

Combined Benefit Fund (sec. 1101 of the bill and secs. 501(c)(21) 

and 9705 of the Code) ........................................................................ 168 

B. Tax Treatment of Company-Owned Life Insurance (‘‘COLI’’) (secs. 

1102 and 813 of the bill and new secs. 101(j) and 6039I of 

the Code) ............................................................................................. 170 

III. BUDGET EFFECTS OF THE BILL ............................................................... 175 

IV. VOTES OF THE COMMITTEE ...................................................................... 181 

V. REGULATORY IMPACT AND OTHER MATTERS ..................................... 181 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL AS REPORTED 183 

I. LEGISLATIVE BACKGROUND 

Overview 

The Senate Committee on Finance marked up an original bill, 

the ‘‘National Employee Savings and Trust Equity Guarantee Act 

of 2005’’ on July 26, 2005, and ordered the bill favorably reported 

by a voice vote. 

Hearings 

During the 109th Congress, the Committee held hearings on various topics relating to the provisions of the bill, as follows. 

The Committee held a hearing on June 30, 2005, on encouraging 

savings and investment. 

5 

1S. Rep. No. 108–266. The ‘‘National Employee Savings and Trust Equity Guarantee Act,’’ an 

original bill, was initially marked up by the Committee, and ordered favorably reported by voice 

vote, on September 17, 2003. On October 1, 2003, the Committee by unanimous consent recalled 

the bill and amended it to make the provision relating to company-owned life insurance 

(‘‘COLI’’) effective on the date of enactment and agreed to a further markup of the COLI and 

related provisions of the bill. On February 2, 2004, the Committee marked up a modification 

to the bill and ordered the bill favorably reported by voice vote. 

The Committee held a hearing on June 7, 2005, titled ‘‘Preventing the Next Pension Collapse: Lessons from the United Airlines Case.’’ 

On March 1, 2005, the Committee held a hearing on the financial 

status of the Pension Benefit Guaranty Corporation (‘‘PBGC’’) and 

the President’s defined benefit plan funding proposal. On February 

8, 2005, the Committee held a hearing on the revenue proposals in 

the President’s Fiscal Year 2006 Budget Proposal. 

In addition, on June 23, 2005, Senator Grassley, Chairman, and 

Senator Baucus, ranking member, sent letters to 36 companies requesting detailed information regarding their pension plans as part 

of an ongoing effort to understand the scope of pension underfunding and to assist in the crafting of comprehensive pension reform legislation that will help prevent dramatic underfunding in 

the future. 

Prior activity 

In general 

Many provisions of the bill are substantially similar or build on 

proposals previously considered by the Committee. 

Activity during the 108th Congress 

During the 108th Congress, the Committee reported S. 2424, the 

‘‘National Employee Savings and Trust Equity Guarantee Act’’ on 

May 14, 2004.1 The Committee held hearings on various topics relating to the provisions of the S. 2424 (108th Cong). 

The Committee held a hearing on April 8, 2003, on compensation-related issues addressed in the Joint Committee on Taxation 

staff investigation and report relating to Enron Corporation conducted at the request of Senators Baucus and Grassley. The Committee also held a hearing on March 11, 2003, on issues relating 

to the funding of defined benefit plans. 

The Committee held a hearing on company-owned life insurance 

on October 23, 2003. 

Activity during the 107th Congress 

During the 107th Congress, the Committee reported S. 1971, the 

‘‘National Employee Savings and Trust Equity Guarantee Act,’’ and 

held hearings on various topics relating to the provisions of S. 1971 

(107th Cong.). The Committee held a hearing on February 27, 

2002, regarding retirement security. The Committee held a hearing 

on April 18, 2002, regarding corporate governance and executive 

compensation. 

6 

2 All references to the ‘‘Code’’ are to the Internal Revenue Code. All section references and 

descriptions of present law refer to the Code unless otherwise indicated. 

II. EXPLANATION OF THE BILL 

TITLE I—DIVERSIFICATION RIGHTS AND OTHER DEFINED 

CONTRIBUTION PARTICIPANT PROTECTIONS 

A. DEFINED CONTRIBUTION PLANS REQUIRED TO PROVIDE

EMPLOYEES WITH FREEDOM TO INVEST THEIR PLAN ASSETS

(Sec. 101 of the bill, new sec. 401(a)(35) of the Code, and new sec. 

204(j) of ERISA) 

PRESENT LAW

In general 

Defined contribution plans may permit both employees and employers to make contributions to the plan. Under a qualified cash 

or deferred arrangement (commonly referred to as a ‘‘section 401(k) 

plan’’), employees may elect to make pretax contributions to a plan, 

referred to as elective deferrals. Employees may also be permitted 

to make after-tax contributions to a plan. In addition, a plan may 

provide for employer nonelective contributions or matching contributions. Nonelective contributions are employer contributions 

that are made without regard to whether the employee makes elective deferrals or after-tax contributions. Matching contributions are 

employer contributions that are made only if the employee makes 

elective deferrals or after-tax contributions. 

Under the Internal Revenue Code (the ‘‘Code’’),2 elective deferrals, after-tax employee contributions, and employer matching contributions are subject to special nondiscrimination tests. Certain 

employer nonelective contributions may be used to satisfy these 

special nondiscrimination tests. In addition, plans may satisfy the 

special nondiscrimination tests by meeting certain safe harbor contribution requirements. 

The Code requires employee stock ownership plans (‘‘ESOPs’’) to 

offer certain plan participants the right to diversify investments in 

employer securities. The Employee Retirement Income Security Act 

of 1974 (‘‘ERISA’’) limits the amount of employer securities and employer real property that can be acquired or held by certain employer-sponsored retirement plans. The extent to which the ERISA 

limits apply depends on the type of plan and the type of contribution involved. 

Diversification requirements applicable to ESOPs under the Code 

An ESOP is a defined contribution plan that is designated as an 

ESOP and is designed to invest primarily in qualifying employer 

securities and that meets certain other requirements under the 

Code. For purposes of ESOP investments, a ‘‘qualifying employer 

security’’ is defined as: (1) publicly traded common stock of the employer or a member of the same controlled group; (2) if there is no 

such publicly traded common stock, common stock of the employer 

(or member of the same controlled group) that has both voting 

power and dividend rights at least as great as any other class of 

common stock; or (3) noncallable preferred stock that is convertible 

into common stock described in (1) or (2) and that meets certain 

7 

3Such an ESOP design is sometimes referred to as a ‘‘KSOP.’’ 

4Sec. 401(a)(28). The present-law diversification requirements do not apply to employer securities held by an ESOP that were acquired before January 1, 1987. 5 IRS Notice 88–56, 1988–1 C.B. 540, Q&A–16. 

6 ERISA sec. 407. 

7 Certain additional requirements apply to employer stock held by a defined benefit pension 

plan or a money purchase pension plan (other than certain plans in existence before the enactment of ERISA). 

requirements. In some cases, an employer may design a class of 

preferred stock that meets these requirements and that is held only 

by the ESOP. 

An ESOP can be an entire plan or it can be a component of a 

larger defined contribution plan. An ESOP may provide for different types of contributions. For example, an ESOP may include 

a qualified cash or deferred arrangement that permits employees 

to make elective deferrals.3

Under the Code, ESOPs are subject to a requirement that a participant who has attained age 55 and who has at least 10 years of 

participation in the plan must be permitted to diversify the investment of the participant’s account in assets other than employer securities.4 The diversification requirement applies to a participant 

for six years, starting with the year in which the individual first 

meets the eligibility requirements (i.e., age 55 and 10 years of participation). The participant must be allowed to elect to diversify up 

to 25 percent of the participant’s account (50 percent in the sixth 

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

years. 

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

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

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

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

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

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

within 90 days of the election period to another qualified defined 

contribution plan of the employer providing investment options in 

accordance with (2).5

ERISA limits on investments in employer securities and real property 

ERISA imposes restrictions on the investment of retirement plan 

assets in employer securities or employer real property.6 A retirement plan may hold only a ‘‘qualifying’’ employer security and only 

‘‘qualifying’’ employer real property. 

Under ERISA, any stock issued by the employer or an affiliate 

of the employer is a qualifying employer security.7 Qualifying employer securities also include certain publicly traded partnership 

interests and certain marketable obligations (i.e., a bond, debenture, note, certificate or other evidence of indebtedness). Qualifying 

employer real property means parcels of employer real property: (1) 

if a substantial number of the parcels are dispersed geographically; 

(2) if each parcel of real property and the improvements thereon 

are suitable (or adaptable without excessive cost) for more than one 

use; (3) even if all of the real property is leased to one lessee (which 

8 

8The 10-percent limitation also applies to a defined contribution plan that is part of an arrangement under which benefits payable to a participant under a defined benefit pension plan 

are reduced by benefits under the defined contribution plan (i.e., a ‘‘floor-offset’’ arrangement). 9 Under ERISA, a defined contribution plan is generally referred to as an individual account 

plan. Plans that are not subject to the 10-percent limitation on the acquisition of employer securities and employer real property are referred to as ‘‘eligible individual account plans.’’ 

may be an employer, or an affiliate of an employer); and (4) if the 

acquisition and retention of such property generally comply with 

the fiduciary rules of ERISA (with certain specified exceptions). 

ERISA also prohibits defined benefit pension plans and money 

purchase pension plans (other than certain plans in existence before the enactment of ERISA) from acquiring employer securities or 

employer real property if, after the acquisition, more than 10 percent of the assets of the plan would be invested in employer securities and real property. Except as discussed below with respect to 

elective deferrals, this 10-percent limitation generally does not 

apply to defined contribution plans other than money purchase 

pension plans.8 In addition, a fiduciary generally is deemed not to 

violate the requirement that plan assets be diversified with respect 

to the acquisition or holding of employer securities or employer real 

property in a defined contribution plan.9

The 10-percent limitation on the acquisition of employer securities and real property applies separately to the portion of a plan 

consisting of elective deferrals (and earnings thereon) if any portion 

of an individual’s elective deferrals (or earnings thereon) are required to be invested in employer securities or real property pursuant to plan terms or the direction of a person other than the participant. This restriction does not apply if: (1) the amount of elective 

deferrals required to be invested in employer securities and real 

property does not exceed more than one percent of any employee’s 

compensation; (2) the fair market value of all defined contribution 

plans maintained by the employer is no more than 10 percent of 

the fair market value of all retirement plans of the employer; or (3) 

the plan is an ESOP. 

REASONS FOR CHANGE

Recent events have focused public attention on the investment of 

retirement plan assets in employer securities. The bankruptcies of 

several large publicly-traded companies, such as the Enron Corporation, have been accompanied by the loss of employees’ pension 

benefits because defined contribution plan assets were heavily invested in employer securities. In many cases, employees lost not 

only their jobs, but also their retirement savings, upsetting their 

plans for retirement. 

The Committee understands that employer securities are one 

possible investment for defined contribution plans. In some cases, 

the plan may offer employer securities as one of several investment 

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

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

matching contributions with respect to employee elective deferrals 

under a qualified cash or deferred arrangement are to be invested 

in employer securities. 

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

9 

10 Joint Committee on Taxation, Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations (JCS–3– 

03), February 2003. 11 Id. at Vol. I, 12–13, 39–40, 515–540. 12 Id. at Vol. I, 19, 39–40, 538–540. 

case of ESOPs. Thus, for example, present law provides that the 

dividends paid on employer securities held by an ESOP are deductible under certain circumstances and also allows an ESOP to borrow to acquire the employer securities. Present law recognizes that 

employer securities can be a profitable investment for employees as 

well as a corporate financing tool for employers. Employees who 

hold employer securities through a defined contribution plan often 

feel that they have a stake in the business, leading to increased 

profitability. 

On the other hand, the Committee recognizes that diversification 

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

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

may jeopardize retirement security. The Committee believes that 

participants should be provided with a greater opportunity to diversify plan investments in employer securities. 

In addition, at the request of the Committee, the staff of the 

Joint Committee on Taxation (‘‘Joint Committee staff’’) undertook 

an investigation relating to Enron Corporation and related entities, 

including a review of the compensation arrangements of Enron employees, e.g., qualified retirement plans, nonqualified deferred compensation arrangements, and other arrangements. The Joint Committee staff issued an official report of its investigation, including 

findings and recommendations resulting from its review of Enron’s 

pension plans and compensation arrangements.10 The Joint Committee staff’s findings support the Committee’s views regarding the 

need for greater diversification in the investment of defined contribution plan assets. The Joint Committee staff found that participants in Enron’s Savings Plan lost considerable amounts of retirement savings due to the high level of investment in Enron stock 

and that Enron’s plan is not alone in its high concentration of investment in employer stock.11 The Joint Committee staff recommended legislative changes to allow participants greater opportunities to invest their accounts in diversified investments, rather 

than in employer securities.12

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

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

their own investments. The Committee bill therefore requires certain defined contribution plans that hold employer securities that 

are publicly traded to permit plan participants to direct the plan 

to reinvest employer securities in other assets. The Committee bill 

generally requires diversification in accordance with the presentlaw rules regarding vesting. 

Recent issues relating to investments in employer securities have 

arisen in the context of publicly-traded companies. Although similar issues may arise with respect to investments in employer securities by retirement plans of privately-held companies, the ComVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00009 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
10 

13 Under ERISA, the diversification requirements apply to an ‘‘applicable individual account 

plan.’’ 14For this purpose, ‘‘controlled group of corporations’’ has the same meaning as under section 

1563(a), except that, in applying that section, 50 percent is substituted for 80 percent. 

mittee understands that such investments often play a different 

role than in the case of publicly-traded companies. For example, it 

is more common for an ESOP of a privately-held company to hold 

a controlling interest in the employer. In addition, because of the 

lack of a public market for the securities, diversification could put 

an undue financial strain on the employer. Thus, the diversification 

requirements in the bill apply only to defined contribution plans 

holding employer securities of publicly traded companies. 

The Committee believes that the current role of ESOPs should 

be preserved in order to encourage this form of ownership. Thus, 

the bill does not apply additional diversification requirements to 

‘‘stand alone’’ ESOPs, meaning ESOPs that do not hold elective deferrals and related contributions. Again, the Committee believes 

this strikes an appropriate balance between the principle of diversification and the goals served by ESOPs. 

Investment of defined contribution plan assets in employer real 

property may present similar issues as to adequate diversification, 

particularly if plan assets are also invested in employer securities. 

Accordingly, the diversification requirements apply to both employer securities and employer real property in the case of a plan 

that holds publicly traded employer securities. 

EXPLANATION OF PROVISION

In general 

Under the provision, in order to satisfy the plan qualification requirements of the Code and the vesting requirements of ERISA, 

certain defined contribution plans are required to provide diversification rights with respect to amounts invested in employer securities or employer real property. Such a plan is required to permit 

applicable individuals to direct that the portion of the individual’s 

account held in employer securities or employer real property be invested in alternative investments. Under the provision, an applicable individual includes: (1) any plan participant; and (2) any beneficiary who has an account under the plan with respect to which 

the beneficiary is entitled to exercise the rights of a participant. 

The time when the diversification requirements apply depends on 

the type of contributions invested in employer securities or employer real property. 

Plans subject to requirements 

The diversification requirements generally apply to an ‘‘applicable defined contribution plan,’’ 13 which means a defined contribution plan holding publicly-traded employer securities (i.e., securities issued by the employer or a member of the employer’s controlled group of corporations 14 that are readily tradable on an established securities market). 

For this purpose, a plan holding employer securities that are not 

publicly traded is generally treated as holding publicly-traded employer securities if the employer (or any member of the employer’s 

controlled group of corporations) has issued a class of stock that is 

11 

15For this purpose, ‘‘parent corporation’’ has the same meaning as under section 424(e), i.e., 

any corporation (other than the employer) in an unbroken chain of corporations ending with the 

employer if each corporation other than the employer owns stock possessing at least 50 percent 

of the total combined voting power of all classes of stock with voting rights or at least 50 percent 

of the total value of shares of all classes of stock in one of the other corporations in the chain. 16 An ESOP will not be treated as failing to be designed to invest primarily in qualifying employer securities merely because the plan provides diversification rights as required under the 

provision or greater diversification rights than required under the provision. 

a publicly-traded employer security. This treatment does not apply 

if neither the employer nor any parent corporation15 of the employer has issued any publicly-traded security or any special class 

of stock that grants particular rights to, or bears particular risks 

for, the holder or the issuer with respect to any member of the employer’s controlled group that has issued any publicly-traded employer security. For example, a controlled group that generally consists of corporations that have not issued publicly-traded securities, 

may include a member that has issued publicly-traded stock (the 

‘‘publicly-traded member’’). In the case of a plan maintained by an 

employer that is another member of the controlled group, the diversification requirements do not apply to the plan, provided that neither the employer nor a parent corporation of the employer has 

issued any publicly-traded security or any special class of stock 

that grants particular rights to, or bears particular risks for, the 

holder or issuer with respect to the member that has issued publicly-traded stock. The Secretary of the Treasury has the authority 

to provide other exceptions in regulations. For example, an exception may be appropriate if no stock of the employer maintaining 

the plan (including stock held in the plan) is publicly traded, but 

a member of the employer’s controlled group has issued a small 

amount of publicly-traded stock. 

The diversification requirements do not apply to an ESOP that: 

(1) does not hold contributions (or earnings thereon) that are subject to the special nondiscrimination tests that apply to elective deferrals, employee after-tax contributions, and matching contributions; and (2) is a separate plan from any other qualified retirement plan of the employer. Accordingly, an ESOP that holds elective deferrals, employee contributions, employer matching contributions, or nonelective employer contributions used to satisfy the special nondiscrimination tests (including the safe harbor methods of 

satisfying the tests) is subject to the diversification requirements 

under the provision. The diversification rights applicable under the 

provision are broader than those applicable under the Code’s 

present-law ESOP diversification rules. Thus, an ESOP that is subject to the new requirements is excepted from the present-law 

rules.16

The diversification requirements under the provision also do not 

apply to a one-participant retirement plan. A one-participant retirement plan is a plan that: (1) on the first day of the plan year, 

covers only one individual (or the individual and his or her spouse) 

and the individual owns 100 percent of the plan sponsor (i.e., the 

employer maintaining the plan), whether or not incorporated, or 

covered only one or more partners (or partners and their spouses) 

in the plan sponsor; (2) meets the minimum coverage requirements 

without being combined with any other plan that covers employees 

of the business; (3) does not provide benefits to anyone except the 

individuals (and spouses) described in (1); (4) does not cover a busiVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00011 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
12 

17 Under section 1372, a two-percent shareholder of an S corporation is treated as a partner 

for fringe benefit purposes. 18 Years of service is defined as under the rules relating to vesting (sec. 411(a)). 

ness that is a member of an affiliated service group, a controlled 

group of corporations, or a group of corporations under common 

control; and (5) does not cover a business that uses leased employees. It is intended that, for this purpose, a ‘‘partner’’ includes an 

owner of a business that is treated as a partnership for tax purposes. In addition, it includes a two-percent shareholder of an S 

corporation.17

Elective deferrals and after-tax employee contributions 

In the case of amounts attributable to elective deferrals under a 

qualified cash or deferred arrangement and employee after-tax contributions that are invested in employer securities or employer real 

property, any applicable individual must be permitted to direct 

that such amounts be invested in alternative investments. 

Other contributions 

In the case of amounts attributable to contributions other than 

elective deferrals and after-tax employees contributions (i.e., nonelective employer contributions and employer matching contributions) that are invested in employer securities or employer real 

property, an applicable individual who is a participant with three 

years of service,18 a beneficiary of such a participant, or a beneficiary of a deceased participant must be permitted to direct that 

such amounts be invested in alternative investments. 

The provision provides a transition rule for amounts attributable 

to these other contributions that are invested in employer securities or employer real property acquired before the first plan year 

for which the new diversification requirements apply. Under the 

transition rule, for the first three years for which the new diversification requirements apply to the plan, the applicable percentage 

of such amounts is subject to diversification as shown in Table 1, 

below. 

The applicable percentage applies separately to each class of employer security and to employer real property in an applicable individual’s account. The transition rule does not apply to plan participants who have three years of service and who have attained age 

55 by the beginning of the first plan year beginning after December 

31, 2005. 

TABLE 1.—APPLICABLE PERCENTAGE FOR EMPLOYER SECURITIES 

OR EMPLOYER REAL PROPERTY HELD ON EFFECTIVE DATE 

Plan year for which diversification applies Applicable percentage 

First year ................................................................................................................ 33 

Second year ............................................................................................................ 66 

Third year ............................................................................................................... 100 

The application of the transition rule is illustrated by the following example. Suppose that the account of a participant with at 

least three years of service held 120 shares of employer common 

stock contributed as matching contributions before the diversification requirements became effective. In the first year for which diversification applies, 33 percent (i.e., 40 shares) of that stock is 

subject to the diversification requirements. In the second year for 

which diversification applies, a total of 66 percent of 120 shares of 

13 

stock (i.e., 79 shares, or an additional 39 shares) is subject to the 

diversification requirements. In the third year for which diversification applies, 100 percent of the stock, or all 120 shares, is subject 

to the diversification requirements. In addition, in each year, employer stock in the account attributable to elective deferrals and 

employee after-tax contributions is fully subject to the diversification requirements, as is any new stock contributed to the account. 

Rules relating to the election of investment alternatives 

A plan subject to the diversification requirements is required to 

give applicable individuals a choice of at least three investment options, other than employer securities or employer real property, 

each of which is diversified and has materially different risk and 

return characteristics. It is intended that other investment options 

generally offered by the plan also must be available to applicable 

individuals. 

A plan does not fail to meet the diversification requirements 

merely because the plan limits the times when divestment and reinvestment can be made to periodic, reasonable opportunities that 

occur at least quarterly. It is intended that applicable individuals 

generally be given the opportunity to make investment changes 

with respect to employer securities or employer real property on 

the same basis as the opportunity to make other investment 

changes, except in unusual circumstances. Thus, in general, applicable individuals must be given the opportunity to request changes 

with respect to investments in employer securities or employer real 

property with the same frequency as the opportunity to make other 

investment changes and that such changes are implemented in the 

same timeframe as other investment changes, unless circumstances 

require different treatment. For example, in the case of a plan that 

provides diversification rights with respect to investments in employer real property, if the property must be sold in order to implement an applicable individual’s request to divest his or her account 

of employer real property, a longer period may be needed to implement the individual’s request than the time needed to implement 

other investment changes. Providing a longer period is permissible 

in those circumstances. 

Except as provided in regulations, a plan may not impose restrictions or conditions with respect to the investment of employer securities or employer real property that are not imposed on the investment of other plan assets (other than restrictions or conditions imposed by reason of the application of securities laws). For example, 

such a restriction or condition includes a provision under which a 

participant who divests his or her account of employer securities or 

employer real property receives less favorable treatment (such as 

a lower rate of employer contributions) than a participant whose 

account remains invested in employer securities or employer real 

property. On the other hand, such a restriction does not include the 

imposition of fees with respect to other investment options under 

the plan, merely because fees are not imposed with respect to investments in employer securities. 

EFFECTIVE DATE

The provision is generally effective for plan years beginning after 

December 31, 2005. In the case of a plan maintained pursuant to 

14 

one or more collective bargaining agreements, the provision is effective for plan years beginning after the earlier of (1) the later of December 31, 2006, or the date on which the last of such collective 

bargaining agreements terminates (determined without regard to 

any extension thereof after the date of enactment), or (2) December 

31, 2007. 

A special effective date applies with respect to employer matching and nonelective contributions (and earnings thereon) that are 

invested in employer securities that, as of September 17, 2003: (1) 

consist of preferred stock; and (2) are held within an ESOP, under 

the terms of which the value of the preferred stock is subject to a 

guaranteed minimum. Under the special rule, the diversification 

requirements apply to such preferred stock for plan years beginning after the earlier of (1) December 31, 2006; or (2) the first date 

as of which the actual value of the preferred stock equals or exceeds the guaranteed minimum. When the new diversification requirements become effective for the plan under the special rule, the 

applicable percentage of employer securities or employer real property held on the effective date that is subject to diversification is 

determined without regard to the special rule. For example, if, 

under the general effective date, the diversification requirements 

would first apply to the plan for the first plan year beginning after 

December 31, 2005, and, under the special rule, the diversification 

requirements first apply to the plan for the first plan year beginning after December 31, 2008, the applicable percentage for that 

year is 100 percent. 

B. NOTICE OF FREEDOM TO DIVEST EMPLOYER SECURITIES OR REAL

PROPERTY

(Secs. 102 and 205 of the bill, new sec. 4980H of the Code, and new 

sec. 101(j) of ERISA) 

PRESENT LAW

Under ERISA, a plan administrator is required to furnish participants with certain notices and information about the plan. This 

information includes, for example, a summary plan description that 

includes certain information, including administrative information 

about the plan, the plan’s requirements as to eligibility for participation and benefits, the plan’s vesting provisions, and the procedures for claiming benefits under the plan. Under ERISA, if a plan 

administrator fails or refuses to furnish to a participant information required to be provided to the participant within 30 days of 

the participant’s written request, the participant generally may 

bring a civil action to recover from the plan administrator $100 a 

day, within the court’s discretion, or other relief that the court 

deems proper. 

The Code contains a variety of notice requirements with respect 

to qualified plans. Such requirements are generally enforced by an 

excise tax. For example, in case of a failure to provide notice of a 

significant reduction in benefit accruals, an excise tax of $100 a 

day is generally imposed on the employer. If the employer exercised 

reasonable diligence in meeting the requirements, the excise tax 

with respect to a taxable year is limited to no more than $500,000. 

15 

REASONS FOR CHANGE

The bill provides participants with new rights to diversify the investment of their defined contribution plan accounts. After the new 

diversification requirements become effective, information about 

these rights will be provided to participants in accordance with 

present law, for example, as part of the summary plan description. 

However, under present law, such information is not required to be 

provided at the time the new diversification requirements become 

effective. Moreover, with respect to future participants, such information may be provided when an employee first becomes a participant in the plan, generally after one year of service, whereas, in 

some cases, a participant becomes eligible for diversification after 

three years of service. The Committee believes that participants 

should receive a specific notice of their diversification rights shortly 

before they first become eligible to exercise such rights. Such notice 

will better enable participants to exercise and benefit from the new 

diversification rights. 

EXPLANATION OF PROVISION

In general 

The provision requires a new notice under the Code and ERISA 

in connection with the right of an applicable individual to divest 

his or her account under an applicable defined contribution plan of 

employer securities or employer real property, as required under 

the provision relating to diversification rights with respect to 

amounts invested in employer securities or employer real property. 

Not later than 30 days before the first date on which an applicable 

individual is eligible to exercise such right with respect to any type 

of contribution, the administrator of the plan must provide the individual with a notice setting forth such right and describing the 

importance of diversifying the investment of retirement account assets. Under the diversification provision, an applicable individual’s 

right to divest his or her account of employer securities or employer 

real property attributable to elective deferrals and employee aftertax contributions and the right to divest his or her account of employer securities or employer real property attributable to other 

contributions (i.e., nonelective employer contributions and employer 

matching contributions) may become exercisable at different times. 

Thus, to the extent the applicable individual is first eligible to exercise such rights at different times, separate notices are required. 

The notice must be written in a manner calculated to be understood by the average plan participant and may be delivered in written, electronic, or other appropriate form to the extent that such 

form is reasonably accessible to the applicable individual. The Secretary of the Treasury has regulatory authority over the notice required under the Code and ERISA and is directed to prescribe a 

model notice to be used for this purpose within 180 days of enactment of the provision. It is expected that the Secretary of the 

Treasury will consult with the Secretary of Labor on the description of the importance of diversifying the investment of retirement 

account assets. In addition, it is intended that the Secretary of the 

Treasury will prescribe rules to enable the notice to be provided at 

reduced administrative expense, such as allowing the notice to be 

provided with the summary plan description, with a reminder of 

16 

19 In the case of a multiemployer plan, the excise tax is imposed on the plan. 20Governmental plans and church plans are exempt from ERISA, including requirements to 

provide notices or information to participants. 

these rights within a reasonable period before they become exercisable. 

Sanctions for failure to provide notice 

Excise tax 

Under the provision, an excise tax generally applies in the case 

of a failure to provide notice of diversification rights as required 

under the Code. The excise tax is generally imposed on the employer if notice is not provided.19 The excise tax is $100 per day 

for each participant or beneficiary with respect to whom the failure 

occurs, until notice is provided or the failure is otherwise corrected. 

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

not exceed $500,000. 

No tax will be imposed with respect to a failure if the employer 

does not know that the failure existed and exercises reasonable 

diligence to comply with the notice requirement. In addition, no tax 

will be imposed if the employer exercises reasonable diligence to 

comply and provides the required notice within 30 days of learning 

of the failure. In the case of a failure due to reasonable cause and 

not to willful neglect, the Secretary of the Treasury is authorized 

to waive the excise tax to the extent that the payment of the tax 

would be excessive or otherwise inequitable relative to the failure 

involved. 

ERISA civil penalty 

In the case of a failure to provide notice of diversification rights 

as required under ERISA, the Secretary of Labor may assess a civil 

penalty against the plan administrator of up to $100 a day from 

the date of the failure. For this purpose, each violation with respect 

to any single applicable individual is treated as a separate violation. 

EFFECTIVE DATE

The provision generally applies to plan years beginning after December 31, 2005. Under a transition rule, if notice under the provision would otherwise be required before 90 days after the date of 

enactment, notice is not required until 90 days after the date of enactment. 

C. PERIODIC PENSION BENEFIT STATEMENTS FOR DEFINED

CONTRIBUTION PLANS

(Secs. 103 and 205 of the bill, new sec. 4980I of the Code, and sec. 

105(a) of ERISA) 

PRESENT LAW

In general 

Under ERISA, a plan administrator is required to furnish participants with certain notices and information about the plan.20 If 

a plan administrator fails or refuses to furnish to a participant inVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00016 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
17 

formation required to be provided to the participant within 30 days 

of the participant’s written request, the participant generally may 

bring a civil action to recover from the plan administrator $100 a 

day, within the court’s discretion, or other relief that the court 

deems proper. 

The Code contains a variety of notice requirements with respect 

to qualified plans. Such requirements are generally enforced by an 

excise tax. For example, in case of a failure to provide notice of a 

significant reduction in benefit accruals, an excise tax of $100 a 

day is generally imposed on the employer. If the employer exercised 

reasonable diligence in meeting the requirements, the excise tax 

with respect to a taxable year is limited to no more than $500,000. 

Pension benefit statements 

ERISA provides that a plan administrator must furnish a benefit 

statement to any participant or beneficiary who makes a written 

request for such a statement. The benefit statement must indicate, 

on the basis of the latest available information: (1) the participant’s 

or beneficiary’s total accrued benefit; and (2) the participant’s or 

beneficiary’s vested accrued benefit or the earliest date on which 

the accrued benefit will become vested. A participant or beneficiary 

is not entitled to receive more than one benefit statement during 

any 12-month period. 

Statements to participants on separation from service 

A plan administrator must furnish a statement to each participant who: (1) separates from service during the year; (2) is entitled 

to a deferred vested benefit under the plan as of the end of the 

plan year; and (3) whose benefits were not paid during the year. 

The statement must set forth the nature, amount, and form of the 

deferred vested benefit to which the participant is entitled. The 

plan administrator generally must provide the statement no later 

than 180 days after the end of the plan year in which the separation from service occurs. 

REASONS FOR CHANGE

The Committee believes that regular information concerning the 

value of retirement benefits, especially the value of benefits accumulating in a defined contribution plan account, is necessary to increase employee awareness and appreciation of the importance of 

retirement savings. 

EXPLANATION OF PROVISION

Requirements for benefit statements 

Under the provision, the administrator of a defined contribution 

plan is required under the Code and ERISA to provide a benefit 

statement (1) to a participant or beneficiary who has the right to 

direct the investment of the assets in his or her account, at least 

quarterly, (2) to any other participant or other beneficiary who has 

his or her own account under the plan, at least annually, and (3) 

18 

21 In the case of a tax-sheltered annuity (sec. 403(b)) that is not a plan established or maintained by the employer, the benefit statement generally must be provided by the issuer of the 

annuity contract. The benefit statement requirements do not apply to a one-participant retirement plan The term ‘‘one-participant retirement plan’’ is defined as under the provision requiring plans to provide diversification rights with respect to employer securities and employer real 

property. 

to other beneficiaries, upon written request, but limited to one request during any 12-month period.21

The benefit statement is required to indicate, on the basis of the 

latest available information: (1) the total benefits accrued; (2) the 

vested accrued benefit or the earliest date on which the accrued 

benefit will become vested; and (3) an explanation of any offset that 

may be applied in determining accrued benefits under a plan that 

provides for permitted disparity or that is part of a floor-offset arrangement (i.e., an arrangement under which benefits payable to 

a participant under a defined benefit pension plan are reduced by 

benefits under a defined contribution plan). With respect to information on vested benefits, the Secretary of Labor is required to 

provide that the requirements of the provision are met if, at least 

annually, the plan: (1) updates the information on vested benefits 

that is provided in the benefit statement; or (2) provides in a separate statement information as is necessary to enable participants 

and beneficiaries to determine their vested benefits. 

The benefit statement must also include the value of each investment to which assets in the individual’s account are allocated (determined as of the plan’s most recent valuation date), including the 

value of any assets held in the form of employer securities or employer real property (without regard to whether the securities or 

real property were contributed by the employer or acquired at the 

direction of the individual). A quarterly benefit statement provided 

to a participant or beneficiary who has the right to direct investments must also provide: (1) an explanation of any limitations or 

restrictions on any right of the individual to direct an investment; 

and (2) a notice that investments in any individual account may 

not be adequately diversified if the value of any investment in the 

account exceeds 20 percent of the fair market value of all investments in the account. 

The benefit statement must be written in a manner calculated to 

be understood by the average plan participant. It may be delivered 

in written, electronic, or other appropriate form to the extent that 

such form is reasonably accessible to the recipient. For example, 

regulations could permit current benefit statements to be provided 

on a continuous basis through a secure plan website for a participant or beneficiary who has access to the website. 

The Secretary of Labor has regulatory authority over the benefits 

statements required under ERISA and the Code and the authority 

to issue interim final rules as the Secretary determines appropriate 

to carry out the provision. The Secretary of Labor is directed, within 180 days after the date of enactment of the provision, to develop 

one or more model benefit statements, written in a manner calculated to be understood by the average plan participant, that may 

be used by plan administrators in complying with the requirements 

of ERISA and the Code. The use of the model statement is optional. 

It is intended that the model statement include items such as the 

amount of nonforfeitable accrued benefits as of the statement date 

that are payable at normal retirement age under the plan, the 

19 

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

a tax-sheltered annuity (sec. 403(b)) that is not a plan established or maintained by the employer, the tax is generally imposed on the issuer of the annuity contract. 

amount of accrued benefits that are forfeitable but that may become nonforfeitable under the terms of the plan, information on 

how to contact the Social Security Administration to obtain a participant’s personal earnings and benefit estimate statement, and 

other information that may be important to understanding benefits 

earned under the plan. 

Sanctions for failure to provide information 

Excise tax 

Under the provision, an excise tax generally applies in the case 

of a failure to provide a benefit statement as required under the 

Code. The excise tax is generally imposed on the employer if a required benefit statement or model form is not provided.22 The excise tax is $100 per day for each participant or beneficiary with respect to whom the failure occurs, until the benefit statement or 

model form is provided or the failure is otherwise corrected. If the 

employer exercises reasonable diligence to meet the benefit statement, the total excise tax imposed during a taxable year will not 

exceed $500,000. 

No tax will be imposed with respect to a failure if the employer 

does not know that the failure existed and exercises reasonable 

diligence to comply with the benefit statement requirement. In addition, no tax will be imposed if the employer exercises reasonable 

diligence to comply and provides the required benefit statement 

within 30 days of learning of the failure. In the case of a failure 

due to reasonable cause and not to willful neglect, the Secretary of 

the Treasury is authorized to waive the excise tax to the extent 

that the payment of the tax would be excessive or otherwise inequitable relative to the failure involved. 

ERISA enforcement 

The ERISA remedies that apply in the case of a failure or refusal 

to provide a participant with information under present law apply 

if the plan administrator fails to furnish a benefit statement required under the provision. That is, the participant or beneficiary 

is entitled to bring a civil action to recover from the plan administrator $100 a day, within the court’s discretion, or such other relief 

that the court deems proper. 

Exception for governmental and church plans 

The provision contains an exception from the benefit statement 

under the Code for a governmental plan or a church plan. In addition, such plans are generally exempt from ERISA. Accordingly, the 

benefit statement and investment notice requirements do not apply 

to a governmental plan or a church plan. 

EFFECTIVE DATE

The provision is generally effective for plan years beginning after 

December 31, 2006. In the case of a plan maintained pursuant to 

one or more collective bargaining agreements, the provision is effective for plan years beginning after the earlier of (1) the later of DeVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00019 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
20 

23Governmental plans and church plans are exempt from ERISA, including requirements to 

provide notices or information to participants. 

cember 31, 2007, or the date on which the last of such collective 

bargaining agreements terminates (determined without regard to 

any extension thereof after the date of enactment), or (2) December 

31, 2008. 

D. PERIODIC PENSION BENEFIT STATEMENTS FOR DEFINED BENEFIT

PENSION PLANS

(Sec. 103 of the bill, new sec. 4980I of the Code, and secs. 105(a) 

and 502(c)(1) of ERISA) 

PRESENT LAW

In general 

Under ERISA, a plan administrator is required to furnish participants with certain notices and information about the plan.23 If 

a plan administrator fails or refuses to furnish to a participant information required to be provided to the participant within 30 days 

of the participant’s written request, the participant generally may 

bring a civil action to recover from the plan administrator $100 a 

day, within the court’s discretion, or other relief that the court 

deems proper. 

The Code contains a variety of notice requirements with respect 

to qualified plans. Such requirements are generally enforced by an 

excise tax. For example, in case of a failure to provide notice of a 

significant reduction in benefit accruals, an excise tax of $100 a 

day is generally imposed on the employer. If the employer exercised 

reasonable diligence in meeting the requirements, the excise tax 

with respect to a taxable year is limited to no more than $500,000. 

Pension benefit statements 

ERISA provides that a plan administrator must furnish a benefit 

statement to any participant or beneficiary who makes a written 

request for such a statement. The benefit statement must indicate, 

on the basis of the latest available information: (1) the participant’s 

or beneficiary’s total accrued benefit; and (2) the participant’s or 

beneficiary’s vested accrued benefit or the earliest date on which 

the accrued benefit will become vested. A participant or beneficiary 

is not entitled to receive more than one benefit statement during 

any 12-month period. 

Statements to participants on separation from service 

A plan administrator must furnish a statement to each participant who: (1) separates from service during the year; (2) is entitled 

to a deferred vested benefit under the plan as of the end of the 

plan year; and (3) whose benefits were not paid during the year. 

The statement must set forth the nature, amount, and form of the 

deferred vested benefit to which the participant is entitled. The 

plan administrator generally must provide the statement no later 

than 180 days after the end of the plan year in which the separation from service occurs. 

21 

REASONS FOR CHANGE

The Committee recognizes that benefits provided under a defined 

benefit pension plan are an important element in participants’ retirement income planning. The Committee believes that providing 

participants with regular information concerning their benefits is 

necessary to increase participant awareness and appreciation of the 

importance of retirement savings. 

EXPLANATION OF PROVISION

Requirements for benefit statements 

Under the provision, the administrator of a defined benefit pension plan is required under the Code and ERISA either: (1) to furnish a benefit statement at least once every three years to each 

participant who has a vested accrued benefit and who is employed 

by the employer at the time the benefit statements are furnished 

to participants; or (2) to furnish at least annually to each such participant notice of the availability of a benefit statement and the 

manner in which the participant can obtain it. The Secretary of 

Labor is authorized to provide that years in which no employee or 

former employee benefits under the plan need not be taken into account in determining the three-year period. It is intended that the 

annual notice of the availability of a benefit statement may be included with other communications to the participant if done in a 

manner reasonably designed to attract the attention of the participant. 

The administrator of a defined benefit pension plan is also required to furnish a benefit statement to a participant or beneficiary 

upon written request, limited to one request during any 12-month 

period. 

The benefit statement is required to indicate, on the basis of the 

latest available information: (1) the total benefits accrued; (2) the 

vested accrued benefit or the earliest date on which the accrued 

benefit will become vested; and (3) an explanation of any offset that 

may be applied in determining accrued benefits under a plan that 

provides for permitted disparity or that is part of a floor-offset arrangement (i.e., an arrangement under which benefits payable to 

a participant under a defined benefit pension plan are reduced by 

benefits under a defined contribution plan). In the case of a statement provided to a participant (other than at the participant’s request), information may be based on reasonable estimates determined under regulations prescribed by the Secretary of Labor in 

consultation with the Pension Benefit Guaranty Corporation. 

Form of benefit statement 

The benefit statement must be written in a manner calculated to 

be understood by the average plan participant. It may be delivered 

in written, electronic, or other appropriate form to the extent that 

such form is reasonably accessible to the recipient. For example, 

regulations could permit current benefit statements to be provided 

on a continuous basis through a secure plan website for a participant or beneficiary who has access to the website. 

The Secretary of Labor has regulatory authority over the benefits 

statements required under ERISA and the Code and the authority 

to issue interim final rules as the Secretary determines appropriate 

22 

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

to carry out the provision. The Secretary of Labor is directed, within 180 days after the date of enactment of the provision, to develop 

one or more model benefit statements, written in a manner calculated to be understood by the average plan participant, that may 

be used by plan administrators in complying with the requirements 

of ERISA and the Code. The use of the model statement is optional. 

It is intended that the model statement include items such as the 

amount of nonforfeitable accrued benefits as of the statement date 

that are payable at normal retirement age under the plan, the 

amount of accrued benefits that are forfeitable but that may become nonforfeitable under the terms of the plan, information on 

how to contact the Social Security Administration to obtain a participant’s personal earnings and benefit estimate statement, and 

other information that may be important to understanding benefits 

earned under the plan. 

Sanctions for failure to provide information 

Excise tax 

Under the provision, an excise tax generally applies in the case 

of a failure to provide a benefit statement as required under the 

Code. The excise tax is generally imposed on the employer if a required benefit statement or model form is not provided.24 The excise tax is $100 per day for each participant or beneficiary with respect to whom the failure occurs, until the benefit statement or 

model form is provided or the failure is otherwise corrected. If the 

employer exercises reasonable diligence to meet the benefit statement, the total excise tax imposed during a taxable year will not 

exceed $500,000. 

No tax will be imposed with respect to a failure if the employer 

does not know that the failure existed and exercises reasonable 

diligence to comply with the benefit statement requirement. In addition, no tax will be imposed if the employer exercises reasonable 

diligence to comply and provides the required benefit statement 

within 30 days of learning of the failure. In the case of a failure 

due to reasonable cause and not to willful neglect, the Secretary of 

the Treasury is authorized to waive the excise tax to the extent 

that the payment of the tax would be excessive or otherwise inequitable relative to the failure involved. 

ERISA enforcement 

The ERISA remedies that apply in the case of a failure or refusal 

to provide a participant with information under present law apply 

if the plan administrator fails to furnish a benefit statement required under the provision. That is, the participant or beneficiary 

is entitled to bring a civil action to recover from the plan administrator $100 a day, within the court’s discretion, or such other relief 

that the court deems proper. 

Exception for governmental and church plans 

The provision contains an exception from the benefit statement 

under the Code for a governmental plan or a church plan. In addition, such plans are generally exempt from ERISA. Accordingly, the 

23 

25Pub. L. No. 107–204 (2002). 26 An ‘‘individual account plan’’ is the term generally used under ERISA for a defined contribution plan. 27 ERISA sec. 101(i), as enacted by section 306(b) of the Sarbanes-Oxley Act of 2002. Under 

section 306(a), a director or executive officer of a publicly-traded corporation is prohibited from 

trading in employer stock during blackout periods in certain circumstances. Section 306 is effective 180 days after enactment. 28Governmental plans and church plans are exempt from ERISA. Accordingly, the blackout 

notice requirement does not apply to these plans. 

benefit statement and investment notice requirements do not apply 

to a governmental plan or a church plan. 

EFFECTIVE DATE

The provision is generally effective for plan years beginning after 

December 31, 2006. In the case of a plan maintained pursuant to 

one or more collective bargaining agreements, the provision is effective for plan years beginning after the earlier of (1) the later of December 31, 2007, or the date on which the last of such collective 

bargaining agreements terminates (determined without regard to 

any extension thereof after the date of enactment), or (2) December 

31, 2008. 

E. NOTICE TO PARTICIPANTS AND BENEFICIARIES OF BLACKOUT

PERIODS

(Secs. 104 and 205 of the bill, new sec. 4980J of the Code, and sec. 

101(i) of ERISA) 

PRESENT LAW

In general 

The Sarbanes-Oxley Act of 2002 25 amended ERISA to require 

that the plan administrator of an individual account plan 26 provide 

advance notice of a blackout period (a ‘‘blackout notice’’) to plan 

participants and beneficiaries to whom the blackout period applies.27 Generally, notice must be provided at least 30 days before 

the beginning of the blackout period. In the case of a blackout period that applies with respect to employer securities, the plan administrator must also provide timely notice of the blackout period 

to the employer (or the affiliate of the employer that issued the securities, if applicable). 

The blackout notice requirement does not apply to a one-participant retirement plan, which is defined as a plan that (1) on the 

first day of the plan year, covered only the employer (and the employer’s spouse) and the employer owns the entire business (whether or not incorporated) or covers only one or more partners (and 

their spouses) in a business partnership (including partners in an 

S or C corporation as defined in section 1361(a) of the Code), (2) 

meets the minimum coverage requirements without being combined with any other plan that covers employees of the business, 

(3) does not provide benefits to anyone except the employer (and 

the employer’s spouse) or the partners (and their spouses), (4) does 

not cover a business that is a member of an affiliated service 

group, a controlled group of corporations, or a group of corporations 

under common control, and (5) does not cover a business that 

leases employees.28

24 

Definition of blackout period 

A blackout period is any period during which any ability of participants or beneficiaries under the plan, which is otherwise available under the terms of the plan, to direct or diversify assets credited to their accounts, or to obtain loans or distributions from the 

plan, is temporarily suspended, limited, or restricted if the suspension, limitation, or restriction is for any period of more than three 

consecutive business days. However, a blackout period does not include a suspension, limitation, or restriction that (1) occurs by reason of the application of securities laws, (2) is a change to the plan 

providing for a regularly scheduled suspension, limitation, or restriction that is disclosed through a summary of material modifications to the plan or materials describing specific investment options 

under the plan, or changes thereto, or (3) applies only to one or 

more individuals, each of whom is a participant, alternate payee, 

or other beneficiary under a qualified domestic relations order. 

Timing of notice 

Notice of a blackout period is generally required at least 30 days 

before the beginning of the period. The 30-day notice requirement 

does not apply if (1) deferral of the blackout period would violate 

the fiduciary duty requirements of ERISA and a plan fiduciary so 

determines in writing, or (2) the inability to provide the 30-day advance notice is due to events that were unforeseeable or circumstances beyond the reasonable control of the plan administrator and a plan fiduciary so determines in writing. In those cases, 

notice must be provided as soon as reasonably practicable under 

the circumstances unless notice in advance of the termination of 

the blackout period is impracticable. 

Another exception to the 30-day period applies in the case of a 

blackout period that applies only to one or more participants or 

beneficiaries in connection with a merger, acquisition, divestiture, 

or similar transaction involving the plan or the employer and that 

occurs solely in connection with becoming or ceasing to be a participant or beneficiary under the plan by reason of the merger, acquisition, divestiture, or similar transaction. Under the exception, the 

blackout notice requirement is treated as met if notice is provided 

to the participants or beneficiaries to whom the blackout period applies as soon as reasonably practicable. 

The Secretary of Labor may provide additional exceptions to the 

notice requirement that the Secretary determines are in the interests of participants and beneficiaries. 

Form and content of notice 

A blackout notice must be written in a manner calculated to be 

understood by the average plan participant and must include (1) 

the reasons for the blackout period, (2) an identification of the investments and other rights affected, (3) the expected beginning 

date and length of the blackout period, and (4) in the case of a 

blackout period affecting investments, a statement that the participant or beneficiary should evaluate the appropriateness of current 

investment decisions in light of the inability to direct or diversify 

assets during the blackout period, and (5) other matters as required by regulations. If the expected beginning date or length of 

the blackout period changes after notice has been provided, the 

25 

plan administrator must provide notice of the change (and specify 

any material change in other matters related to the blackout) to affected participants and beneficiaries as soon as reasonably practicable. 

Notices provided in connection with a blackout period (or changes 

thereto) must be provided in writing and may be delivered in electronic or other form to the extent that the form is reasonably accessible to the recipient. The Secretary of Labor is required to issue 

guidance regarding the notice requirement and a model blackout 

notice. 

Penalty for failure to provide notice 

In the case of a failure to provide notice of a blackout period, the 

Secretary of Labor may assess a civil penalty against a plan administrator of up to $100 per day for each failure to provide a blackout 

notice. For this purpose, each violation with respect to a single participant or beneficiary is treated as a separate violation. 

Code requirements 

The Code does not contain a notice requirement with respect to 

blackouts. However, the Code contains a variety of other notice requirements with respect to qualified plans. Such requirements are 

generally enforced by an excise tax. For example, in case of a failure to provide notice of a significant reduction in benefit accruals, 

an excise tax of $100 a day is generally imposed on the employer. 

If the employer exercised reasonable diligence in meeting the requirements, the excise tax with respect to a taxable year is limited 

to no more than $500,000. 

REASONS FOR CHANGE

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

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

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

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

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

with a corporate transaction, such as a sale or merger. Present law 

requires advance notice of a blackout period to plan participants 

and beneficiaries to whom the blackout period applies. The Committee believes that such blackout notices serve an important purpose by allowing plan participants to prepare for any restrictions 

that will occur during a blackout period. The Committee believes 

that enhancing enforcement of the blackout notice requirement will 

ensure that all participants receive blackout notices, and thus, 

have the opportunity to prepare for any restrictions that will occur 

during a blackout period. 

At the request of the Committee, the Joint Committee staff undertook an investigation relating to Enron Corporation and related 

entities, including a review of the compensation arrangements of 

Enron employees, e.g., qualified retirement plans, nonqualified deVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00025 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
26 

29 Joint Committee on Taxation, Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations (JCS–3– 

03), February 2003. 30 Id. at Vol. I, 12–13, 38, 493–515. 31 In the case of a tax-sheltered annuity (sec. 403(b)) that is not a plan established or maintained by the employer, the blackout notice required under the Code generally must be provided 

by the issuer of the annuity contract. 32This is the same definition that applies for purposes of the provision relating to required 

diversification rights with respect to amounts invested in employer securities or real property. 33 In the case of a multiemployer plan, the excise tax is imposed on the plan. In the case of 

a tax-sheltered annuity (sec. 403(b)) that is not a plan established or maintained by the employer, the excise tax generally is imposed on the issuer of the annuity contract. 

ferred compensation arrangements, and other arrangements.29 The 

Joint Committee staff issued an official report of its investigation, 

including findings and recommendations resulting from its review 

of Enron’s pension plans and compensation arrangements. The 

Joint Committee staff found that Enron provided a variety of advance notices to plan participants explaining the proposed blackout; however, the Joint Committee staff determined that not all 

participants received the same notices. In particular, certain active 

employees received additional reminders of the blackout that were 

not sent to other participants.30 The Joint Committee staff’s findings support the Committee’s views regarding the need for plan 

participants to receive notice of blackouts sufficient to allow them 

to make appropriate decisions in anticipation of a blackout. 

EXPLANATION OF PROVISION

In general 

The provision amends the Code to include a blackout notice requirement similar to the present-law ERISA requirement.31 The 

blackout notice requirement under the Code does not apply to a 

one-participant retirement plan, a governmental plan, or a church 

plan. The Secretary of Labor has regulatory authority over the notice required under ERISA and the Code. 

Definition of one-participant retirement plan 

The provision clarifies the definition of a one-participant retirement plan not subject to the blackout notice requirement. Under 

the provision, for purposes of the blackout notice requirements 

under the Code and ERISA, the definition is conformed to the definition that applies under the provision relating to diversification, 

thus clarifying that such a plan covers only an individual (or the 

individual and his or her spouse) who owns 100 percent of the plan 

sponsor (i.e., the employer maintaining the plan), whether or not 

incorporated, or covers only one or more partners (or partners and 

their spouses) in the plan sponsor. For this purpose, a partner includes an owner of a business that is treated as a partnership for 

tax purposes and a two-percent shareholder of an S corporation.32

Excise tax for failure to provide notice 

Under the provision, an excise tax is generally imposed on the 

employer if a blackout notice is not provided as required under the 

Code.33 The excise tax is $100 per day for each applicable individual with respect to whom the failure occurred, until notice is 

provided or the failure is otherwise corrected. If the employer exercises reasonable diligence to meet the notice requirements, the 

total excise tax imposed during a taxable year will not exceed 

27 

$500,000. No tax will be imposed with respect to a failure if the 

employer does not know that the failure existed and exercises reasonable diligence to comply with the notice requirement. In addition, no tax will be imposed if the employer exercises reasonable 

diligence to comply and provides the required notice as soon as reasonably practicable after learning of the failure. In the case of a 

failure due to reasonable cause and not to willful neglect, the Secretary of the Treasury is authorized to waive the excise tax to the 

extent that the payment of the tax would be excessive or otherwise 

inequitable relative to the failure involved. 

EFFECTIVE DATE

The amendments to the Code apply to failures to provide the required notice after the date of enactment. The amendments to 

ERISA made by the provision are effective as if included in section 

306 of the Sarbanes-Oxley Act of 2002. 

F. ADDITIONAL IRA CONTRIBUTIONS FOR CERTAIN EMPLOYEES

(Sec. 105 of the bill and secs. 25B and 219 of the Code) 

PRESENT LAW

Under present law, favored tax treatment applies to qualified retirement plans maintained by employers and to individual retirement arrangements (‘‘IRAs’’). 

Qualified defined contribution plans may permit both employees 

and employers to make contributions to the plan. Under a qualified 

cash or deferred arrangement (commonly referred to as a ‘‘section 

401(k) plan’’), employees may elect to make pretax contributions to 

a plan, referred to as elective deferrals. Employees may also be permitted to make after-tax contributions to a plan. In addition, a 

plan may provide for employer nonelective contributions or matching contributions. Nonelective contributions are employer contributions that are made without regard to whether the employee makes 

elective deferrals or after-tax contributions. Matching contributions 

are employer contributions that are made only if the employee 

makes elective deferrals or after-tax contributions. Matching contributions are sometimes made in the form of employer stock. 

Under present law, an individual may generally make contributions to an IRA for a taxable year up to the lesser of a certain dollar amount or the individual’s compensation. The maximum annual 

dollar limit on IRA contributions to IRAs is $4,000 for 2005–2007 

and $5,000 for 2008, with indexing thereafter. Individuals who 

have attained age 50 may make additional ‘‘catch-up’’ contributions 

to an IRA for a taxable year of up to $500 in 2005 and $1,000 in 

2006 and thereafter. 

Present law provides a temporary nonrefundable tax credit for eligible taxpayers for qualified retirement savings contributions 

(‘‘saver’s’’ credit). The maximum annual contribution eligible for the 

credit is $2,000. The credit rate depends on the adjusted gross income (‘‘AGI’’) of the taxpayer. Taxpayers filing 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 deVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00027 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
28 

duction 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 over, other than individuals who are full-time students or 

claimed as a dependent on another taxpayer’s return. The credit is 

available with respect to contributions to various types of retirement savings arrangements, including contributions to a traditional or Roth IRA. 

REASONS FOR CHANGE

The Committee recognizes that, if employer matching contributions are made in the form of employer stock, the employer’s bankruptcy may cause employees to lose a substantial portion of their 

retirement savings. The Committee believes that employees should 

be permitted to make up for such losses by making additional IRA 

contributions. 

EXPLANATION OF PROVISION

Under the provision, an eligible individual would be permitted to 

make additional contributions to an IRA up to $1,500 per year in 

2005, and $3,000 per year in 2006–2009. To be eligible to make 

these additional contributions, an individual must have been a participant in a section 401(k) plan under which the employer matched 

at least 50 percent of the employee’s contribution to the plan with 

stock of the employer. In addition, (1) the employer must have filed 

for bankruptcy, (2) the employer or any other person must have 

been subject to an indictment or conviction resulting from business 

transactions related to the bankruptcy, and (3) the individual was 

a participant in the section 401(k) plan on the date six months before the employer filed for bankruptcy. An individual eligible to 

make these additional contributions is not permitted to make IRA 

catch-up contributions that apply to individuals age 50 and older. 

Under the provision, the saver’s credit applies, with modifications, to an additional IRA contribution made by an eligible individual in a taxable year beginning before January 1, 2008. The 

modified credit is equal to 50 percent of the additional IRA contribution and is available without regard to the individual’s adjusted gross income. 

EFFECTIVE DATE

The ability to make additional IRA contributions is effective for 

taxable years beginning after December 31, 2004, and before January 1, 2010. The modified saver’s credit applies with respect to additional IRA contributions made for taxable years beginning after 

December 31, 2004, and before January 1, 2008. 

29 

34Governmental plans and church plans are exempt from ERISA, including requirements to 

provide notices or information to participants. 

TITLE II—PROVIDING INVESTMENT ADVICE AND 

INVESTMENT EDUCATION TO PLAN PARTICIPANTS 

A. INVESTMENT EDUCATION REQUIREMENTS FOR DEFINED

CONTRIBUTION PLAN PARTICIPANTS

(Secs. 201 and 205 of the bill, new sec. 4980I of the Code, and secs. 

104 and 502 of ERISA) 

PRESENT LAW

In general 

Under ERISA, a plan administrator is required to furnish participants with certain notices and information about the plan.34 If 

a plan administrator fails or refuses to furnish to a participant information required to be provided to the participant within 30 days 

of the participant’s written request, the participant generally may 

bring a civil action to recover from the plan administrator $100 a 

day, within the court’s discretion, or other relief that the court 

deems proper. 

The Code contains a variety of notice requirements with respect 

to qualified plans. Such requirements are generally enforced by an 

excise tax. For example, in case of a failure to provide notice of a 

significant reduction in benefit accruals, an excise tax of $100 a 

day is generally imposed on the employer. If the employer exercised 

reasonable diligence in meeting the requirements, the excise tax 

with respect to a taxable year is limited to no more than $500,000. 

Pension benefit statements 

ERISA provides that a plan administrator must furnish a benefit 

statement to any participant or beneficiary who makes a written 

request for such a statement. The benefit statement must indicate, 

on the basis of the latest available information: (1) the participant’s 

or beneficiary’s total accrued benefit; and (2) the participant’s or 

beneficiary’s vested accrued benefit or the earliest date on which 

the accrued benefit will become vested. A participant or beneficiary 

is not entitled to receive more than one benefit statement during 

any 12-month period. 

Statements to participants on separation from service 

A plan administrator must furnish a statement to each participant who: (1) separates from service during the year; (2) is entitled 

to a deferred vested benefit under the plan as of the end of the 

plan year; and (3) whose benefits were not paid during the year. 

The statement must set forth the nature, amount, and form of the 

deferred vested benefit to which the participant is entitled. The 

plan administrator generally must provide the statement no later 

than 180 days after the end of the plan year in which the separation from service occurs. 

Investment guidelines 

Present law does not require that participants be given investment guidelines relating to retirement savings. 

30 

35 Joint Committee on Taxation, Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations (JCS–3– 

03), February 2003. 36 Id. at Vol. I, 12, 522–523, 526–535, 536. 37 Id. at Vol. I, 19, 39, 538. 38 In the case of a tax-sheltered annuity (sec. 403(b)) that is not a plan established or maintained by the employer, the model form generally must be provided by the issuer of the annuity 

contract. 

REASONS FOR CHANGE

The Committee believes that regular information concerning the 

value of retirement benefits, especially the value of benefits accumulating in a defined contribution plan account, is necessary to increase employee awareness and appreciation of the importance of 

retirement savings. 

Under some employer-sponsored retirement plans, participants 

are responsible for directing the investment of the assets in their 

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

with investment guidelines and information for calculating retirement income to enable them to make sound investment and retirement savings decisions. 

At the request of the Committee, the Joint Committee staff undertook an investigation relating to Enron Corporation and related 

entities, including a review of the compensation arrangements of 

Enron employees, e.g., qualified retirement plans, nonqualified deferred compensation arrangements, and other arrangements.35 The 

Joint Committee staff issued an official report of its investigation, 

including findings and recommendations resulting from its review 

of Enron’s pension plans and compensation arrangements. The 

Joint Committee staff’s findings support the Committee’s views regarding participants’ need for investment education. The Joint 

Committee staff found that significant amounts of plan assets were 

invested in Enron stock even though the plan offered approximately 20 other investment options.36 The Joint Committee staff 

recommended legislative changes to require plans to provide participants with notices regarding investment principles and investment education.37

EXPLANATION OF PROVISION

In general 

Under the provision, the administrator of a defined contribution 

plan (other than a one-participant retirement plan) is required 

under the Code and ERISA to provide at least once a year a model 

form relating to basic investment guidelines to each participant or 

beneficiary who has the right to direct the investment of the assets 

in his or her account under the plan.38 The Secretary of Labor has 

regulatory authority over the model form required to be provided 

under ERISA and the Code. 

Model form 

Under the provision, the Secretary of Labor is directed, in consultation with the Secretary of the Treasury, to develop and make 

available a model form containing basic guidelines for investing for 

31 

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

a tax-sheltered annuity (sec. 403(b)) that is not a plan established or maintained by the employer, the tax is generally imposed on the issuer of the annuity contract. 

retirement. The guidelines in the model form are to include: (1) information on the benefits of diversification of investments; (2) information on the essential differences, in terms of risk and return, of 

pension plan investments, including stocks, bonds, mutual funds 

and money market investments; (3) information on how an individual’s investment allocations under the plan may differ depending 

on the individual’s age and years to retirement, as well as other 

factors determined by the Secretary; (4) sources of information 

where individuals may learn more about pension rights, individual 

investing, and investment advice; and (5) such other information 

related to individual investing as the Secretary determines appropriate. For example, information on how investment fees may affect 

the return on an investment is appropriate and other information 

that the Secretary may determine must be included in the investment guidelines. 

The model form must also include addresses for Internet sites, 

and a worksheet, that a participant or beneficiary may use to calculate: (1) the retirement age value of the individual’s vested benefits under the plan (expressed as an annuity amount and determined by reference to varied historical annual rates of return and 

annuity interest rates); and (2) other important amounts relating 

to retirement savings, including the amount that an individual 

must save annually in order to provide a retirement income equal 

to various percentages of his or her current salary (adjusted for expected growth prior to retirement). The Secretary of Labor is directed to provide at least 90 days for public comment before publishing final notice of the model form and to update the model form 

at least annually. In addition, the Secretary of Labor is also required to develop an Internet site to be used by an individual in 

making these calculations, the address of which will be included in 

the model form. 

The model form must be written in a manner calculated to be 

understood by the average plan participant and may be delivered 

in written, electronic, or other appropriate form to the extent that 

such form is reasonably accessible to the recipient. 

Sanctions for failure to provide information 

Excise tax 

Under the provision, an excise tax generally applies in the case 

of a failure to provide an investment guideline model form as required under the Code. The excise tax is generally imposed on the 

employer if a required benefit statement or model form is not provided.39 The excise tax is $100 per day for each participant or beneficiary with respect to whom the failure occurs, until the model 

form is provided or the failure is otherwise corrected. If the employer exercises reasonable diligence to meet the model form requirement, the total excise tax imposed during a taxable year will 

not exceed $500,000. 

No tax will be imposed with respect to a failure if the employer 

does not know that the failure existed and exercises reasonable 

diligence to comply with the model form requirement. In addition, 

32 

no tax will be imposed if the employer exercises reasonable diligence to comply and provides the required model form within 30 

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

ERISA enforcement 

The Secretary of Labor may assess a civil penalty against the 

plan administrator of up to $100 a day from the date of the failure. 

For this purpose, each violation with respect to any single participant or beneficiary is treated as a separate violation. 

Exception for governmental and church plans 

The provision contains an exception from the investment notice 

requirements under the Code for a governmental plan or a church 

plan. In addition, such plans are generally exempt from ERISA. Accordingly, the benefit statement and investment notice requirements do not apply to a governmental plan or a church plan. 

EFFECTIVE DATE

The provision is generally effective for plan years beginning after 

December 31, 2006. In the case of a plan maintained pursuant to 

one or more collective bargaining agreements, the provision is effective for plan years beginning after the earlier of (1) the later of December 31, 2007, or the date on which the last of such collective 

bargaining agreements terminates (determined without regard to 

any extension thereof after the date of enactment), or (2) December 

31, 2008. 

B. INFORMATION RELATING TO INVESTMENT IN EMPLOYER

SECURITIES

(Secs. 202 and 205 of the bill, new sec. 4980H of the Code, and 

secs. 101 and 502 of ERISA) 

PRESENT LAW

The Code and ERISA require that certain information be provided to participants and beneficiaries under employer-sponsored 

retirement plans. Present law does not specifically require that 

participants in defined contribution plans which permit participants to direct the investment of the assets in their accounts in 

employer securities be provided with the reports, statements, and 

communications which are required to be provided to investors in 

connection with investing in securities under applicable securities 

laws. 

The Code contains a variety of notice requirements with respect 

to qualified plans. Such requirements are generally enforced by an 

excise tax. For example, in case of a failure to provide notice of a 

significant reduction in benefit accruals, an excise tax of $100 a 

day is generally imposed on the employer. If the employer exercised 

reasonable diligence in meeting the requirements, the excise tax 

with respect to a taxable year is limited to no more than $500,000. 

33 

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

Under ERISA, if a plan administrator fails or refuses to furnish 

to a participant information required to be provided to the participant within 30 days of the participant’s written request, the participant generally may bring a civil action to recover from the plan 

administrator $100 a day, within the court’s discretion, or other relief that the court deems proper. 

REASONS FOR CHANGE

The Committee believes that, in the case of a defined contribution plan that allows participants and beneficiaries to exercise control over the assets in their individual accounts, the same material 

investment information that the plan sponsor is required to disclose to investors under securities laws should be provided to participants and beneficiaries whose accounts are invested in employer 

stock. The Committee believes that plan administrators should be 

required to provide this information. 

EXPLANATION OF PROVISION

In general 

The provision creates a new requirement in connection with defined contribution plans which permit participants to direct the investment of the assets in their accounts in employer securities. The 

provision amends the Code and ERISA to require administrators of 

such plans to provide participants with all reports, proxy statements, and other communications regarding investment of such assets in employer securities to the extent that such reports, statements, and communications are required to be provided by the plan 

sponsor to investors in connection with investment employer securities under applicable securities laws. Any such information which 

is maintained by the plan sponsor must be provided to the plan administrator. 

The reports, statements, and communications may be delivered 

in written, electronic, or other appropriate form to the extent that 

such form is reasonably accessible to participants. The Secretary of 

Labor has regulatory authority over the ERISA and Code requirement to provide this information. 

Sanctions for failure to provide information 

Excise tax 

Under the provision, an excise tax generally applies in the case 

of a failure to provide the information as required under the Code. 

The excise tax is generally imposed on the employer if notice is not 

provided.40 The excise tax is $100 per day for each participant or 

beneficiary with respect to whom the failure occurs, until the information is provided or the failure is otherwise corrected. If the employer exercises reasonable diligence to meet the requirement, the 

total excise tax imposed during a taxable year will not exceed 

$500,000. 

No tax will be imposed with respect to a failure if the employer 

does not know that the failure existed and exercises reasonable 

diligence to comply with the requirement. In addition, no tax is imposed if the employer exercises reasonable diligence to comply and 

34 

provides the required information within 30 days of learning of the 

failure. In the case of a failure due to reasonable cause and not to 

willful neglect, the Secretary of the Treasury is authorized to waive 

the excise tax to the extent that the payment of the tax would be 

excessive or otherwise inequitable relative to the failure involved. 

ERISA civil penalty 

In the case of a failure or refusal to provide the information as 

required under the provision, the Secretary of Labor may assess a 

civil penalty against the plan administrator of up to $1,000 a day 

from the date of the failure or refusal until it is corrected. 

EFFECTIVE DATE

The provision is generally effective for plan years beginning after 

December 31, 2005. In the case of a plan maintained pursuant to 

one or more collective bargaining agreements, the provision is effective for plan years beginning after the earlier of (1) the later of December 31, 2006, or the date on which the last of such collective 

bargaining agreements terminates (determined without regard to 

any extension thereof after the date of enactment), or (2) December 

31, 2007. 

C. SAFE HARBOR FOR INDEPENDENT INVESTMENT ADVICE PROVIDED

TO PLAN PARTICIPANTS

(Sec. 203 of the bill and new sec. 404(e) of ERISA) 

PRESENT LAW

ERISA requires an employee benefit plan to provide for one or 

more named fiduciaries who jointly or severally have the authority 

to control and manage the operation and administration of the 

plan. In addition to fiduciaries named in the plan, or identified pursuant to a procedure specified in the plan, a person is a plan fiduciary under ERISA to the extent the fiduciary exercises any discretionary authority or control over management of the plan or exercises authority or control over management or disposition of its assets, renders investment advice for a fee or other compensation, or 

has any discretionary authority or responsibility in the administration of the plan. In certain circumstances, a fiduciary under ERISA 

may be liable for a breach of responsibility by a co-fiduciary. 

REASONS FOR CHANGE

The Committee believes that providing specific rules under which 

a fiduciary may arrange for independent investment advice to be 

provided to participants who are responsible for directing the investment of their retirement assets will facilitate the provision of 

such investment advice without undercutting the fiduciary requirements of ERISA. The provision of independent investment advice 

will better enable participants to make sound investment decisions. 

EXPLANATION OF PROVISION

In general 

The provision amends ERISA by adding specific rules dealing 

with the provision of investment advice to plan participants by a 

35 

41 An ‘‘individual account plan’’ is the term generally used under ERISA for a defined contribution plan. 42See 15 U.S.C. 80b–3a. Nothing in the provision is intended to restrict the authority under 

present law of any State to assert jurisdiction over investment advisers and investment adviser 

representatives based on their presence in the State or the fact that they have clients in the 

State. 43 An individual who is registered as an investment adviser under the laws of a State is a 

qualified investment adviser only if the State has an examination requirement to qualify for 

such registration. 

qualified investment adviser. The provision applies to an individual 

account plan 41 that permits a participant or beneficiary to direct 

the investment of the assets in his or her account. Under the provision, if certain requirements are met, an employer or other plan fiduciary will not be liable for investment advice provided by a qualified investment adviser. 

Qualified investment adviser 

Under the provision, a ‘‘qualified investment adviser’’ is defined 

as a person who is a plan fiduciary by reason of providing investment advice and who is also (1) a registered investment adviser 

under the Investment Advisers Act of 1940 or registered as an investment adviser under the laws of the State (consistent with section 203A of the Investment Advisers Act 42) in which the adviser 

maintains its principal office, (2) a bank or similar financial institution, (3) an insurance company qualified to do business under 

State law, or (4) a comparably qualified entity under criteria to be 

established by the Secretary of Labor. In addition, any individual 

who provides investment advice to participants on behalf of the investment adviser (such as an employee thereof) is required to be 

(1) a registered investment adviser under Federal or State law as 

described above,43 (2) a registered broker or dealer under the Securities Exchange Act, (3) a registered representative under the Securities Exchange Act or the Investment Advisers Act, or (4) any comparably qualified individual under criteria to be established by the 

Secretary of Labor. 

A qualified investment adviser is required to provide the following documents to the employer or plan fiduciary: (1) the contract for investment advice services, (2) a disclosure of any fees or 

other compensation to be received by the investment adviser for 

the provision of investment advice and any fees or other compensation to be received as a result of a participant’s investment choices, 

and (3) its registration with the Securities and Exchange Commission or other documentation of its status as a qualified investment 

adviser. A qualified investment adviser that acknowledges its fiduciary status will be a fiduciary under ERISA with respect to investment advice provided to a participant or beneficiary. 

Requirements for employer or other fiduciary 

Before designating the investment adviser and at least annually 

thereafter, the employer or other fiduciary is required to obtain 

written verification that the investment adviser (1) is a qualified 

investment adviser, (2) acknowledges its status as a plan fiduciary 

that is solely responsible for the investment advice it provides, (3) 

has reviewed the plan document (including investment options) and 

determined that its relationship with the plan and the investment 

advice provided to any participant or beneficiary, including the receipt of fees or compensation, will not violate the prohibited transVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00035 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
36 

44Secs. 132 and 3121(a)(20). 

action rules, (4) will consider any employer securities or employer 

real property allocated to the participant’s or beneficiary’s account 

in providing investment advice, and (5) has the necessary insurance coverage (as determined by the Secretary of Labor) for any 

claim by a participant or beneficiary. 

In designating an investment adviser, the employer or other fiduciary is required to review the documents provided by the qualified 

investment adviser. The employer or other fiduciary is also required to make a determination that there is no material reason 

not to engage the investment adviser. 

In the case of (1) information that the investment adviser is no 

longer qualified or (2) concerns about the investment adviser’s services raised by a substantial number of participants or beneficiaries, 

the employer or other fiduciary is required within 30 days to investigate and to determine whether to continue the investment adviser’s services. 

An employer or other fiduciary that complies with the requirements for designating and monitoring an investment adviser will 

be deemed to have satisfied its fiduciary duty in the prudent selection and periodic review of an investment adviser and does not 

bear liability as a fiduciary or co-fiduciary for any loss or breach 

resulting from the investment advice. 

EFFECTIVE DATE

The provision applies to investment advisers designated after the 

date of enactment of the provision. 

D. TREATMENT OF EMPLOYER-PROVIDED QUALIFIED RETIREMENT

PLANNING SERVICES

(Sec. 204 of the bill and sec. 132 of the Code) 

PRESENT LAW

Under present law, certain employer-provided fringe benefits are 

excludable from gross income and wages for employment tax purposes.44 These excludable fringe benefits include qualified retirement planning services provided to an employee and his or her 

spouse by an employer maintaining a qualified employer plan. A 

qualified employer plan includes a qualified retirement plan or annuity, a tax-sheltered annuity, a simplified employee pension, a 

SIMPLE retirement account, or a governmental plan, including an 

eligible deferred compensation plan maintained by a governmental 

employer. 

Qualified retirement planning services are retirement planning 

advice and information. The exclusion is not limited to information 

regarding the qualified employer plan, and, thus, for example, applies to advice and information regarding retirement income planning for an individual and his or her spouse and how the employer’s plan fits into the individual’s overall retirement income plan. 

On the other hand, the exclusion does not apply to services that 

may be related to retirement planning, such as tax preparation, accounting, legal or brokerage services. 

37 

45See 15 U.S.C. 80b–3a. 46 An individual who is registered as an investment adviser under the laws of a State is an 

eligible investment adviser only if the State has an examination requirement to qualify for such 

registration. 

The exclusion does not apply with respect to highly compensated 

employees unless the services are available on substantially the 

same terms to each member of the group of employees normally 

provided education and information regarding the employer’s qualified plan. 

REASONS FOR CHANGE

The Committee believes that it is important for all employees to 

have access to retirement planning advice and information. In 

order to plan adequately for retirement, individuals must anticipate retirement income needs and understand how their retirement 

income goals can be achieved. The Committee believes that allowing employees to purchase qualified retirement planning services 

on a salary-reduction basis will help many more employees obtain 

advice and assistance when making retirement decisions. 

EXPLANATION OF PROVISION

The provision permits employers to offer employees a choice between cash compensation and eligible qualified retirement planning 

services. The maximum amount for which such a choice can be provided is limited to $1,000 per individual, per year. The provision 

only applies to qualified retirement planning services provided by 

an eligible investment adviser. 

Under the provision, an ‘‘eligible investment adviser’’ is defined 

as a person who is (1) a registered investment adviser under the 

Investment Advisers Act of 1940 or registered as an investment adviser under the laws of the State (consistent with section 203A of 

the Investment Advisers Act 45) in which the adviser maintains its 

principal office, (2) a bank or similar financial institution, (3) an insurance company qualified to do business under State law, or (4) 

a comparably qualified entity under criteria to be established by 

the Secretary of the Treasury. In addition, any individual who provides investment advice to participants on behalf of the investment 

adviser (such as an employee thereof) is required to be (1) a registered investment adviser under Federal or State law as described 

above,46 (2) a registered broker or dealer under the Securities Exchange Act, (3) a registered representative under the Securities Exchange Act or the Investment Advisers Act, or (4) any comparably 

qualified individual under criteria to be established by the Secretary of the Treasury. 

As under present law, the provision applies only to amounts for 

retirement planning advice and information and does not apply to 

services that may be related to retirement planning, such as tax 

preparation, accounting, legal or brokerage services. 

Under the provision, no amount is includible in gross income or 

wages merely because the employee is offered the choice of cash in 

lieu of eligible qualified retirement planning services. Also, no 

amount is includible in income or wages merely because the employee is offered a choice among eligible qualified retirement planning services. The amount of cash offered is includible in income 

and wages only to the extent the employee elects cash. The excluVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00037 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
38 

47 Code sec. 412. 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 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). 

sion does not apply to highly compensated employees unless the 

salary reduction option is available on substantially the same 

terms to all employees normally provided education and information about the plan. 

Under the provision, salary reduction amounts used to provide 

eligible qualified retirement planning services are generally treated 

for pension plan purposes the same as other salary reduction contributions. Thus, such amounts are included in compensation for 

purposes of applying the limits on contributions and benefits, and 

an employer is able to elect whether or not to include such 

amounts in compensation for nondiscrimination testing. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2005, and before January 1, 2011. 

TITLE III—IMPROVEMENTS IN FUNDING RULES FOR 

SINGLE-EMPLOYER DEFINED BENEFIT PENSION PLANS 

A. MINIMUM FUNDING RULES FOR SINGLE-EMPLOYER DEFINED

BENEFIT PENSION PLANS

(Secs. 301–302, 305, 311–312, 314, and 321 of the bill, sec. 412 of 

the Code, new secs. 430 and 431 of the Code, secs. 302–308 of 

ERISA) 

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’’).47 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, 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 

39 

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 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, 

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. 

40 

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, 

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 asVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00040 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
41 

48Treas. Reg. sec. 1.412(c)(2)–1(b)(7)(ii). 49 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. 50The deficit reduction contribution rules apply to single-employer plans, other than singleemployer plans with no more than 100 participants on any day in the preceding plan year. Single-employer plans with more than 100 but not more than 150 participants are generally subject 

to lower contribution requirements under these rules. 51 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. 52 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. 

sets 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.48

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.49

Additional contributions for underfunded plans 

In general 

Under special funding rules (referred to as the ‘‘deficit reduction 

contribution’’ rules),50 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.51 A plan’s ‘‘funded current liability percentage’’ is generally the actuarial value of plan assets as a percentage of the 

plan’s current liability.52 In general, a plan’s current liability 

means 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). 

42 

53 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. 54 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. 55The 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. 56 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. 57 Code sec. 412(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. 58Pub. L. No. 108–218 (2004). 

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.53 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)).54

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 55 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 is generally from 90 percent to 105 percent (120 percent for 

plan years beginning in 2002 or 2003).56 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.57

Under the Pension Funding Equity Act of 2004 (‘‘PFEA 2004’’),58

a special interest rate applies in determining current liability for 

43 

59 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. 60 Code sec. 412(l)(7)(C)(ii). 61 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. 62For 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. 

plan years beginning in 2004 or 2005.59 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.60 The Secretary of the 

Treasury requires the use of the 1983 Group Annuity Mortality 

Table.61

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.62 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 general, 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, contributions 

for the current plan year must be made in quarterly installments 

44 

63 Code sec. 412(m). 64 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’’). 65 Code sec. 412(d). Under similar rules, the amortization period applicable to an unfunded 

past service liability or loss may also be extended. 66 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. 

with any remaining amount due 81⁄2 months after the end of the 

plan year.63 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.64

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’’).65 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.66 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). 

REASONS FOR CHANGE

The Committee believes that fundamental reform of the singleemployer defined benefit pension plan funding rules is necessary. 

The present-law single-employer defined benefit plan funding rules 

are overly complex and do not operate to ensure that pension plans 

become and remain adequately funded. The Committee believes 

that the present-law funding rules provide an inaccurate measure 

of a plan’s true financial status. The present-law rules have resulted in plan underfunding which has led to a loss of pension benefits for plan participants and record deficits for the PBGC. In recent years, plans which had complied with present-law requirements have nonetheless terminated on severely underfunded bases. 

45 

67The interest rate used under the provision for PBGC premiums, and other provisions relating to such premiums, is discussed under Title VI., below. 68The provision does not change the funding rules applicable to insurance contract plans. Governmental plans and church plans continue to be exempt from the funding rules to the extent 

Continued 

The Committee believes that liabilities should be measured more 

precisely than required under present law. The Committee believes 

that it is necessary to provide a more accurate interest rate for 

pension purposes and that a more accurate calculation would result 

from matching interest rates to the timing of expected payments 

rather than using a single long-term interest rate. Accordingly, the 

Committee believes that a yield curve that reflects the rates of interest on corporate bonds of varying maturities should be used for 

pension purposes. Such rates take into account the timing of when 

benefit payments will be due under the plan. 

Present-law rules for the valuation of plan assets allow value to 

be based on average value over a period of up to five years. The 

Committee believes that the use of such value can disguise the true 

value of plan assets and the funded status of the plan. The Committee believes that fair market value (or average value for a recent period) should be used to determine a plan’s funded status. 

The Committee recognizes that accurate measurement is necessary, but also recognizes that accurate measurement can result 

in large fluctuations in required pension plan contributions from 

one year to the next. Thus, the Committee believes that it is appropriate to impose a limit on the amount of fluctuation of required 

contributions from one year to the next. 

The Committee is also concerned about seriously underfunded 

plans maintained by employers experiencing ongoing financial 

weakness or uncertainty. Such plans present a risk to employees, 

as well as to the PBGC insurance program and to other PBGC premium payors. The Committee believes that such employers should 

be required to use certain additional assumptions that will require 

funding to a target that more closely reflects the cost of terminating the plan. 

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 generally applies the present-law 

funding rules.67 For such years, the provision extends the use of 

the rate of interest on amounts invested conservatively in longterm investment-grade corporate bonds in determining current liability for funding purposes. As under present law, the interest 

rate used must be within the permissible range 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. 

General funding rules for plan years beginning after 2006 

For plan years beginning after December 31, 2006, in the case 

of single-employer defined benefit pension 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.68

46 

provided under present law. The provision generally does not change the funding rules for multiemployer plans, except to repeal the alternative minimum funding standard account rules and 

extend controlled-group liability for required contributions to multiemployer plans. 69 It is intended that Treasury will provide guidance addressing normal cost issues, It is expected that such guidance will address issues such as the treatment of administrative expenses 

and determining accruals for the year in the case of a plan using a valuation date other than 

the first day of the plan year. 

Under the 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 target liability. 

The minimum required contribution for a plan year is the sum 

of (1) the target normal cost of the plan for the plan year; (2) the 

aggregate amortization payment for the plan year; and (3) the 

waiver amortization payment for the plan year. The sum of the amortization payments for the plan year cannot exceed the unfunded 

target liability for the plan year. For plan years beginning after 

2007, a limit applies on the amount that required contributions can 

increase or decrease from the contribution required for the prior 

year. 

A plan’s target normal cost for a plan year is the present value 

of benefits that accrue or are earned during the plan year. A plan’s 

unfunded target liability is the excess of the target liability for the 

plan year, over the value of the assets of the plan as of the valuation date. Under the provision, a plan’s target liability is the 

present value of all benefits accrued or earned under the plan as 

of the beginning of the plan year. As discussed below, if a plan 

sponsor is a financially-weak employer, the target normal cost is 

the at-risk normal cost and the target liability is the at-risk target 

liability. 

The provision specifies the interest rates and mortality table that 

must be used in determining a plan’s target normal cost and target 

liability, as well as certain other actuarial assumptions that must 

be used. 

As described in more detail below, under the provision, credit 

balances generated under present law are carried over to a new 

‘‘prefunding balance.’’ In addition, as described more fully below, 

contributions in excess of the minimum contributions required 

under the provision generally increase the prefunding balance. 

Prefunding balances may be credited against the minimum required contribution. In determining the required contribution for a 

plan year, the value of plan assets is reduced by any prefunding 

balance. 

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 which accrue or are earned under the plan during the plan 

year (the ‘‘current’’ year).69 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 accruing in the current year. 

As discussed below, if a plan sponsor is a financially-weak employer, the plan’s target normal cost is the at-risk target normal 

cost (subject to a phase-in rule discussed below). 

47 

Aggregate amortization payment 

In general 

The minimum required contribution includes the aggregate amortization payment (if any) for the plan. 

Target liability 

A plan’s target liability is the present value of all benefits accrued or earned under the plan as of the beginning of the plan 

year. 

As discussed below, if a plan sponsor is financially weak, the target liability is the at-risk target liability (subject to a phase-in rule 

discussed below). 

Unfunded target liability 

A plan’s unfunded target liability with respect to a plan year is 

the excess of the target liability for the plan year over the value 

of the assets of the plan as of the valuation date (reduced by any 

prefunding balance for purposes of determining the minimum required contribution). 

A transition rule generally applies in determining a plan’s unfunded target liability for plan years beginning in 2007 and 2008. 

In the case of plan years beginning in 2007, the unfunded target 

liability is the excess of 93 percent of the target liability for the 

plan year over the assets of the plan as of the valuation date (reduced by any prefunding balance). For plan years beginning in 

2008, the percentage is 96 percent. 

A five-year transition rule applies in the case of plans with 100 

or fewer participants. Under such rule, for plan years beginning in 

2007, the unfunded target liability is the excess of 92 percent of the 

target liability for the plan year over the assets of the plan as of 

the valuation date (reduced by any prefunding balance). The percentage is 94 percent for 2008, 96 percent for 2009, and 98 percent 

for 2010. 

Aggregate amortization payment 

The aggregate amortization payment for a plan year is the aggregate amount of the target liability amortization installments determined for the plan year with respect to amortizable target liability 

for the plan year and each of the six preceding plan years. 

Amortizable target liability is the amount by which (1) the unfunded target liability for the plan year is more or less than (2) the 

present value of all target liability amortization installments and 

waiver amortization installments which were determined for the 

current year or any succeeding plan year with respect to any amortizable target liability or waived funding deficiency for any plan 

year preceding the current plan year. 

If the plan has an amortizable target liability, the liability must 

be amortized over the seven year period beginning with the current 

plan year. Each amortization installment is a fixed amount equal 

to the amount necessary to amortize the liability in seven level amortization payments. If the present value of already scheduled amortization payments is greater than the plan’s unfunded target liability, the excess is amortized over seven years. Each annual amortization amount can offset any annual amortization amounts reVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00047 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
48 

70The phase-in yield curve method does not apply for this purpose. 71 In the case of single-employer plans, the provision repeals the present-law rules under 

which the amoritization period applicable to an unfunded past service liability or loss may be 

extended. 

quired with respect to shortfalls (i.e., negative amortization installments may offset positive amortization installments). 

In determining the present value of any amortization installment 

or the amount of any amortization installment, the plan must assume that each amortization installment will be paid on the valuation date for the plan year for which the installment is determined. The plan must also use the interest rates determined under 

the yield curve method (discussed below) for the current plan 

year.70

Waiver amortization payment 

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’’).71 If a plan has 

a waived funding deficiency for a plan year or any of the five preceding plan years, the minimum required contribution for the plan 

year includes the waiver amortization payment for the plan year. 

The waiver amortization payment for a plan year is the aggregate amount of the waiver amortization installments determined 

for the plan year with respect to any amortizable waived funding 

deficiency for the five preceding plan years. The waiver amortization installments with respect to an amortizable waived funding 

deficiency 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 by assuming each amortization installment will be paid on the valuation date for which the installment 

is determined and using the interest rates determined under the 

yield curve method for the plan year in which the waived funding 

deficiency to which the installment relates arose. 

Limitation on annual increases and decreases 

For plan years beginning after 2007, the provision includes a limitation on the amount that required contributions can increase or 

decrease from one plan year to the next. The limit is the greater 

of (1) 30 percent of the plan’s target normal cost for the preceding 

plan year or (2) two percent of the plan’s target liability for the preceding plan year. The minimum required contribution for the current plan year cannot be greater than the minimum required contribution for the preceding plan year plus the limit and cannot be 

less than the minimum required contribution for the preceding 

plan year minus the limit. 

For purposes of this rule, the minimum required contribution for 

the preceding year is determined (1) before interest is determined 

in the case of contributions made after the valuation date (as discussed below) and (2) after the application of the limit on the annual increase or decrease in minimum required contributions for 

that year. In addition, for purposes of this rule, the minimum required contribution for the preceding year is reduced by any amorVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00048 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
49 

72 If the rule applies for a plan year, the plan’s normal cost is treated as the minimum required contribution for the year for purposes of applying the limitation on annual increases or 

decreases for the following year. 

tization installment (i.e., any target liability amortization installment or waiver amortization installment) attributable to any amortizable target liability or any waived funding deficiency that was 

fully amortized as of the close of the preceding plan year. 

The limit does not apply to costs attributable to benefit improvements for the current year (i.e., the minimum required contribution 

taking into account the limit would be determined and then costs 

attributable to benefit improvements would be taken into account). 

A similar rule applies in the case of benefit decreases. 

Special rule for plans that reach funding target 

If the value of the plan’s assets (reduced by any prefunding balance) equals or exceeds the target liability for the plan year (1) the 

minimum required contribution otherwise determined is equal to 

target normal cost, reduced (but not below zero) by the amount of 

such excess, and (2) amortization installments determined with respect to unfunded target liability and waived funding deficiencies 

allocable to the current plan year or any succeeding plan year are 

not required to be made, or taken into account for any other purpose, in any succeeding plan year.72

Actuarial assumptions used in determining a plan’s target normal 

cost and target liability 

Interest rates 

The provision requires that the determination of present value or 

other computation requiring any interest rate assumption be made 

using the yield curve method. For plan years beginning in 2007 

and 2008, a phase-in yield curve method applies. 

The yield curve method is a method under which present value 

or other amounts requiring interest rate assumptions are determined: (1) using interest rates drawn from a yield curve prescribed 

by the Secretary of the Treasury that reflects interest rates on 

high-quality corporate bonds of varying maturities; and (2) by 

matching the timing of the expected benefit payments under the 

plan to the interest rates on the yield curve (i.e., for bonds with 

maturity dates comparable to the times when benefits are expected 

to be paid). Each month, the Secretary of the Treasury is required 

to publish any yield curve which shall apply to plan years beginning in such month and such yield curve must be based on average 

interest rates for business days occurring during the three preceding months. 

Under the phase-in yield curve method applicable for plan years 

beginning in 2007 and 2008, present value or any other amount requiring the use of interest rate assumptions is equal to the sum of 

two amounts: (1) the applicable percentage of such amount determined under the yield curve method; and (2) such amount determined using the interest rate rules in effect for plan years beginning in 2005 under present law and 2006 under the provision (i.e., 

an interest rate in the permissible range of the weighted four-year 

average of conservative long-term corporate bond rates), multiplied 

by a percentage equal to 100 percent minus the applicable percentVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00049 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
50 

73The 80 to 120 percent corridor under present law does not apply. 

age for the plan year. For this purpose, the applicable percentage 

is 33 percent for plan years beginning in 2007 and 67 percent for 

plan years beginning in 2008. 

Under the provision, certain amounts (e.g., contributions made 

after the valuation date) are determined using the plan’s ‘‘applicable effective interest rate’’ for a plan year. The applicable 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 

benefits accrued or earned under the plan as of the beginning of 

the plan year, would result in an amount equal to the plan’s target 

liability for the plan year. 

Mortality table 

As under present law, the provision requires that the Secretary 

of the Treasury prescribe by regulation mortality tables to be used 

in calculating funding requirements. Such tables must be based on 

the actual experience of pension plans and projected trends in such 

experience. It is expected that the Secretary will take into account 

projections of future improvements in mortality. In prescribing the 

mortality tables, the Secretary is required to take into account results of available independent studies of mortality of individuals 

covered by pension plans. 

As under present law, the provision requires the Secretary of the 

Treasury to issue separate mortality tables that may be used for 

individuals who are entitled to benefits under the plan on account 

of disability. 

As under present law, the provision requires that the Secretary 

periodically (at least every five years) review the mortality tables 

and, to the extent determined necessary, update the tables to reflect the actual experience in pension plans and projected trends in 

such experience. It is intended that the mortality currently used 

under present law will continue to apply until the Secretary issues 

an updated table, which is expected shortly. 

Value of plan assets 

The provision provides that the value of plan assets is to be determined on the basis of fair market value. The provision allows 

the value of plan assets to be determined by averaging fair market 

values over not more than the period beginning on the last day of 

the fourth month preceding the valuation date and ending on the 

valuation date in accordance with regulations prescribed by the 

Secretary.73

Other assumptions 

Under the provision, in determining present value or other computations, the probability that future benefits will be paid in optional forms of benefit provided under the plan must be taken into 

account (including lump-sum distributions). In addition, there must 

be taken into account any difference in the present value of such 

optional form of benefit and the present value of the future payments used in computing target normal costs and target liability. 

The provision generally does not require other specified assumptions to be used in determining the plan’s target normal cost and 

51 

74The 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. 75Plan years beginning on or before the date of enactment are not taken into account in determining whether an employer is financially weak. 76 In the case of a multiple employer plan, which covers employees of more than one employer, 

each employer’s financial status is determined separately, based on the employer’s controlled 

group. 77 If a plan sponsor receives a rating of investment grade or higher from any of the nationally 

recognized statistical rating organizations for any plan year, the plan sponsor is not treated as 

below investment grade for such year. Thus, the earliest that the plan sponsor could be determined to be a financially-weak employer is the third year following such year. 

funding target except in the case of plans maintained by financially-weak plan sponsors (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.74

Special rules for plans maintained by financially-weak employers 

The provision applies special rules in determining the target liability and target normal cost in the case of plans maintained by 

financially-weak employers. If, as of the valuation date, a plan 

sponsor is a financially-weak employer, the plan’s target liability is 

the at-risk target liability and the plan’s target normal cost is the 

at-risk target normal cost. 

In general, a plan sponsor is a financially-weak employer if, as 

of the valuation date for each of the three consecutive plan years 

ending with the current plan year, the plan sponsor is rated as 

below investment grade.75 A sponsor is rated as below investment 

grade if (1) it has an outstanding senior unsecured debt instrument 

which is rated lower than investment grade by each of the nationally recognized statistical rating organizations for corporate bonds 

that has issued a credit rating for such instrument, or (2) if no outstanding senior unsecured debt instrument has been rated by such 

an organization, but one or more organizations has made an issuer 

credit rating for the employer, all such organizations that have so 

rated the employer have rated the employer lower than investment 

grade.76

In determining if a plan sponsor is a financially-weak employer, 

a special rule applies in the case of a plan sponsor that, as of the 

current year valuation date, continues to be rated as below investment grade, but receives a higher credit rating by any rating organization than that received by such organization as of the valuation 

date for the preceding plan year (an ‘‘improvement year’’).77 Under 

such rule, the improvement year is not taken into account in determining if the plan sponsor is financially weak and plan years immediately before and after the improvement year are treated as 

consecutive plan years. The rule applies even if the credit rating 

by another rating organization is lowered for such period. For example, suppose that as of the valuation date for 2007, the employer 

is rated by all of the nationally recognized statistical rating organizations as below investment grade, including a rating by Moody’s 

of Ca. Suppose that the ratings for the employer remain the same 

as of the valuation date for 2008. If, as of the valuation date for 

2009, the rating by Moody’s is improved to B, plan year 2009 is an 

52 

improvement period and such year is disregarded in determining if 

the employer is financially weak. This result applies even if the 

rating from another rating agency is lowered as of the valuation 

date for 2009. If, as of the valuation date for 2010, there is no additional improvement (i.e., ratings by all of the rating organizations 

are either lowered or remain the same as those for 2009), the employer is treated as below investment grade for three consecutive 

plan years (2007, 2008 and 2010) and is financially-weak beginning 

in 2010. 

A phase-in rule applies in the case of plan sponsors that are financially weak for less than five consecutive years. If a plan sponsor was not financially weak on the valuation date of the four immediately preceding plan years, the at-risk target liability or atrisk target normal cost is equal to the sum of (1) the applicable 

percentage of the at-risk target liability or the at-risk target normal cost (whichever is applicable, determined without regard to the 

phase-in), and (2) a percentage equal to 100 percent minus the applicable percentage of the target liability or target normal cost 

(whichever is applicable, determined without regard to the rules for 

financially-weak employers). The applicable percentage of at-risk 

target liability or at-risk normal cost that is used is based on the 

number of years that the plan sponsor is financially weak. The applicable percentage is 20 percent for the first year that the plan 

sponsor is financially weak and increases by 20 percent per year 

until the fifth year when 100 percent of the at-risk target liability 

or at-risk normal cost is used. 

An improvement year is disregarded in applying the 20-percent 

per year phase-in. In the case of an improvement year, the applicable percentage is the applicable percentage in effect for the preceding plan year. The rule applies even if the credit rating by another rating organization is lowered for such period. If, as of the 

valuation date for any succeeding plan year, the credit rating has 

not been raised, the applicable percentage is increased by 20 percent for such succeeding plan year. 

If an employer is a member of a controlled group, the employer 

is not treated as financially weak if a significant member (as determined under regulations prescribed by the Secretary) of such group 

has an outstanding senior unsecured debt instrument that is rated 

as being investment grade by one of the nationally recognized statistical rating organizations. In the case of plans with fewer than 

500 participants, the employer is not treated as financially weak. 

In the case of a plan which on any day during the preceding plan 

year had at least 500 participants, if an employer has no outstanding senior unsecured debt instrument which is rated by a nationally recognized statistical rating organization and no such organization has made an issuer credit rating for the employer, the employer is treated as financially weak only to the extent provided in 

regulations prescribed by the Secretary. It is expected that the 

Treasury regulations will determine whether the plan sponsor is financially weak based on financial measures, e.g., whether the longterm debt to equity ratio of the controlled group is 1.5 or more 

(with debt to include the unfunded pension liability and equity to 

be based on fair market value for a privately-held company or market capitalization for a company whose stock is publicly-traded). 

53 

78This is as defined in Code section 401(k)(7)(B) without regard to (iv) thereof and includes 

(1) organizations engaged primarily in providing electric service on a mutual or cooperative 

basis, or engaged primarily in providing electric service to the public and which is exempt from 

tax or which is a State or local government, other than a municipality; (2) certain civic leagues 

and business leagues exempt from tax 80 percent of the members of which are described in (1); 

(3) certain cooperative telephone companies; and (4) any organization that is a national association of organizations described above. 79 It is intended that the determination of earliest retirement age will be addressed in Treasury guidance. 80 It is intended that Treasury guidance will specify that the form that is actuarially expected 

to result in the highest target liability must be assumed. The determination is not required to 

be made on an individual basis as long as no material difference in the plan’s liabilities results. 

A plan is not subject to the special rules for plans maintained by 

financially-weak employers for any plan year in which the plan has 

no unfunded target liability, i.e., the value of plan assets is at least 

equal to the plan’s target liability (determined without regard to 

the at-risk assumptions). For this purpose, the value of plan assets 

is not reduced by any prefunding balance. 

The rules for plans of financially-weak employers do not apply to 

a multiple employer plan if at least 85 percent of the employers 

participating in the plan are (1) certain rural cooperatives 78 or (2) 

certain cooperative organizations which are owned more than 50 

percent by producers of agricultural products or by certain cooperatives of agricultural producers. 

A plan’s at-risk target liability and at-risk normal cost are determined in the same manner as target liability and target normal 

cost, except that certain additional actuarial assumptions are required to be used. Under those assumptions, it must be assumed 

that all employees who are not otherwise assumed to retire as of 

the valuation date will retire at the earliest retirement age under 

the plan,79 but not before the end of the plan year for which the 

at-risk target liability and at-risk target normal cost are being determined. It is also required to be assumed that all employees will 

elect the retirement benefit available under the plan at the assumed age that would result in the highest present value of liabilities.80 In no event, however, can at-risk target liability or at-risk 

normal cost be less than target liability or target normal cost determined without regard to the at-risk rules. 

Use of prefunding balance to satisfy minimum required contributions 

The provision allows a plan sponsor to use any amount of a 

plan’s prefunding balance to satisfy all or a portion of the minimum required contribution for the plan year. The prefunding balance consists of a beginning balance, increased and decreased (as 

described below) and adjusted to reflect the rate of net gain or loss 

on plan assets. 

In the case of a single-employer plan that was in effect for a plan 

year beginning in 2006 and, as of the end of the 2006 plan year, 

had a positive balance in the funding standard account maintained 

under the funding rules as in effect for 2006, the beginning balance 

for the prefunding balance is such positive balance. In other cases, 

the beginning balance of the prefunding balance is zero. 

As of the first day of each plan year beginning after 2007, the 

prefunding balance of a plan is increased by the amount of the excess (if any) of (1) the aggregate total employer contributions for 

the preceding plan year, over (2) the minimum required contribution for the preceding plan year. The excess contribution must be 

54 

81 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 the first plan year. As under present 

law, a change in valuation date is a change in funding method requiring IRS approval. Thus, 

IRS approval is required to change the valuation date used by a smaller plan. However, the 

valuation date is automatically changed to the first day of the plan year if a plan is no longer 

eligible for the special rule. 

properly adjusted for interest accruing for the periods between the 

first day of the current plan year and the dates on which the excess 

contributions were made, determined by using the applicable effective interest rate for the preceding plan year and by treating contributions as being first used to satisfy the minimum required contribution. Additional contributions required to be made under the 

limitation on benefits provision do not increase the prefunding balance. 

As of the first day of each plan year beginning after 2007, the 

prefunding balance of a plan is decreased (but not below zero) by 

the amount credited against the minimum required contribution for 

the preceding plan year. 

In determining the prefunding balance as of the first day of the 

plan year, 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 with respect to plan 

assets for the preceding plan year, properly taking into account, in 

accordance with regulations, all contributions, distributions, and 

other plan payments made during the period. 

The value of assets must be reduced by the prefunding balance 

in determining the plan’s minimum required contribution. 

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 for 

the plan year and succeeding plan years if, on each day during the 

preceding plan year, the plan had 100 or fewer participants.81 For 

this purpose, all defined benefit pension plans (other than multiemployer plans) maintained by the same employer (or a predecessor 

employer), or by any member of such employer’s controlled group, 

are treated as a single plan, but, in the case of multiple employer 

plans, only participants with respect to such employer or controlled 

group member are taken into account. 

Treatment of contributions after valuation date 

If an employer makes any contribution to the plan after the valuation date for the plan year in which the contribution is made and 

the contribution is for a preceding plan year, the contribution is 

taken into account as an asset of the plan as of the valuation date. 

In the case of any plan year beginning after 2007, only the present 

value of such contribution is to be taken into account. The present 

55 

82Plan assets are not reduced by the plan’s prefunding balance for this purpose. 83The provision also retains the present-law rules under which the amount of any quarterly 

installment must be sufficient to cover any liquidity shortfall. 84The 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. 

value is determined using the applicable effective interest rate for 

the preceding plan year to which the contribution is properly allocable. If contributions for the plan year are made during the plan 

year, but before the valuation date for the plan year, such contributions and interest on such contributions between the date of the 

contributions and the valuation date (determined by using the applicable effective interest rate for the plan year) are not included 

in the plan assets. 

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 by interest at the 

plan’s applicable effective rate of interest for the plan year for the 

period between the valuation date and the payment date. Such interest is included in the minimum required contribution. 

The provision retains the present-law rules requiring quarterly 

contributions with some modifications. Except in the case of plans 

covering 100 or fewer participants during the preceding year and 

plans that had an unfunded target liability 82 of $1 million or less 

for the preceding year, quarterly contributions must be made during a plan year if the plan had a funded target liability percentage 

of less than 100 percent for the preceding plan year.83 If an employer fails to pay the full amount of a required installment for the 

plan year, the amount of interest charged on the underpayments 

is determined using a rate of interest equal to the applicable effective rate of interest for the plan, plus five percentage points. 

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.84 The excise tax is 10 percent of the aggregate unpaid minimum required contributions for all plan years remaining unpaid 

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. 

Regulations 

Under the provision, the Secretary of the Treasury is to prescribe 

such regulations as are necessary to carry out the provision, including regulations (1) for the proper treatment of increases in liabilities of any plan pursuant to plan amendments that are adopted, 

or which take effect, on a date during the plan year other than the 

valuation date; (2) for the application of any small plan exception 

under the provision in the case of mergers and acquisitions; and (3) 

for the application of the funding rules for multiple employer plans. 

In general, it is intended that for purposes of the minimum funding 

56 

85 Code sec. 412(d). 86 Code sec. 412(f). 87 Code sec. 401(a)(29). 

requirements, multiple employer plans will be treated as separate 

plans. 

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. LIMITATIONS ON BENEFIT IMPROVEMENTS AND DISTRIBUTIONS BY

SINGLE-EMPLOYER PLANS THAT ARE UNDERFUNDED OR MAIN- TAINED BY FINANCIALLY WEAK EMPLOYERS

(Secs. 303, 313, and 402 of the bill, new sec. 436 of the Code, and 

new sec. 305 of ERISA) 

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.85 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.86

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.87 The amount of security required is the excess 

of: (1) the lesser of (a) the amount by which the plan’s assets are 

57 

88 Code sec. 401(a)(33). 89 Code sec. 401(a)(32). 90 Code sec. 411(d)(6). 

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.88

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: (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.89

Prohibition on reductions in accrued benefits 

An amendment of a qualified retirement plan may not decrease 

the accrued benefit of a plan participant.90 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 

58 

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 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. Companies should be more responsible with respect 

to pension benefits and should not continue to promise increased 

benefits when current promises are unfulfilled. Lump 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 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 or a plan of an employer in 

bankruptcy, limitations may apply with respect to: (1) benefit increases; (2) certain forms of distribution; and (3) benefit accruals. 

Limitations on benefit increases for plans less than 80 percent funded and plans of employers in bankruptcy 

Restrictions on plans less than 80 percent funded 

If a plan’s adjusted funded target liability percentage as of the 

valuation date for the preceding plan year is less than 80 percent, 

then no applicable benefit increase may take effect in the current 

plan year until an additional funding requirement is satisfied. The 

additional funding requirement is satisfied if the plan sponsor, in 

addition to normal cost and the aggregate amortization payment 

and the waiver amortization payment for the year (if any), makes 

contributions sufficient so that the plan’s adjusted funded target liability percentage (determined by assuming that the applicable 

benefit increase had taken effect as of the beginning of the year) 

is at least 80 percent. If a contribution required under the provision is made after the first day of the plan year, the contribution 

is adjusted for interest as under the minimum funding rules. 

An applicable benefit increase generally is any increase in liabilities of the plan by plan amendment (or otherwise as specified by 

the Secretary) which would occur by reason of: (1) any increase in 

benefits; (2) any change in the accrual of benefits; or (3) any change 

in the rate at which benefits become nonforfeitable under the plan. 

It is intended that the Secretary will treat phased benefit increases 

as an applicable benefit increase pursuant to a plan amendment. 

For example, if a plan provides for a benefit of 1 percent for each 

year of service and the percentage increases to 1.5 percent after a 

certain date, and then increases to 2 percent at a later date, the 

increase in liabilities due to the increase to 1.5 percent is to be 

treated as an applicable benefit increase and the increase from 1.5 

percent to 2 percent is treated as a separate applicable benefit inVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00058 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
59 

91The special rules for plans maintained pursuant to a collective bargaining agreement apply 

with respect to individuals covered by such agreement. 92 The present-law restrictions on distributions during a period of liquidity shortfall continue 

to apply under the provision. 

crease. It is intended that increases in benefits due to increases in 

final average pay are not an applicable benefit increase. Rather, 

such increases are part of normal cost for that year. An applicable 

benefit increase does not include any increase in liabilities under 

a plan: (1) by reason of a plan amendment if such amendment is 

required as a condition of qualification of the plan; or (2) which is 

specified in Treasury regulations. 

Two additional exceptions apply in the case of a plan maintained 

pursuant to a collective bargaining agreement.91 In the case of 

such a plan, an applicable benefit increase does not include an increase in liabilities of the plan by reason of any increase in benefits 

under a formula which is not based on a participant’s compensation, if the rate of increase is not in excess of the contemporaneous 

rate of increase in average wages of participants covered by the 

amendment. In addition, in the case of increases in liabilities by 

reason of a plan provision pursuant to a collective bargaining 

agreement ratified when the plan had an adjusted funded target liability percentage of at least 80 percent and which takes effect in 

any plan year beginning after the year in which the agreement was 

ratified, the restriction does not apply for years beginning before 

the earlier of: (1) the date on which such collective bargaining 

agreement terminates (determined without regard to any extensions); and (2) the date which is three years after the date the limitation would otherwise apply. 

The limitation does not apply to a plan for the first five years the 

plan (or a predecessor plan) is in effect. 

Restrictions on plans of employers in bankruptcy 

In the case of any period during which the plan sponsor is in 

bankruptcy, the provision is applied by substituting ‘‘100 percent’’ 

for ‘‘80 percent.’’ In addition, the exceptions for collectively bargained plans and the exception for the first five years the plan is 

in effect do not apply. 

Limitation on certain forms of distribution for plans less than 60 

percent funded and plans of employers in bankruptcy 

In general 

Under the provision, restrictions on distributions apply if (1) a 

plan is less than 60 percent funded or (2) the employer is in bankruptcy and the plan is less than 100 percent funded.92

Restrictions on plans less than 60 percent funded 

If a plan’s adjusted funded target liability percentage is less than 

60 percent for the prior plan year, then no prohibited payments 

may be made in the current plan year until the plan actuary certifies that the plan has an adjusted funded target liability percentage of at least 60 percent or the employer makes sufficient contributions in addition to any other required contributions (or provides security as provided below) so that the plan’s adjusted funded 

60 

93The security may not be used to offset minimum required contributions and is not taken 

into account in determining the value of plan assets for purposes of the funding rules. 

target liability percentage for the current year is at least 60 percent. 

If the plan’s funded target liability percentage is not at least 60 

percent by the end of the plan year (or there is no actuarial certification), the freeze on prohibited payments continues until the 

plan’s funded target liability percentage has been at least 60 percent for two consecutive plan years. If contributions (or security) 

are required in order for the adjusted funded target liability percentage to be 60 percent by the end of the current plan year, and 

the employer fails to make the contributions (or provide security), 

such failure is treated as the failure to make a minimum required 

contribution for purposes of the quarterly contribution rules, the 

excise tax on failure to make required contributions, and the lien 

with respect to failures to make certain required contributions. 

If, before the close of the current plan year, the plan sponsor 

makes the contribution required under the provision or the plan’s 

enrolled actuary certifies that, as of the valuation date for the plan 

year, the adjusted funded target liability percentage is at least 60 

percent, then there is no freeze on prohibited payments and, under 

rules prescribed by the Secretary, the plan is to restore any payments not made during the plan year before such certification or 

contributions were made. 

The timing of the provision is illustrated by the following example. Suppose that the valuation date for a plan (and the beginning 

of the plan year) is January 1 and that the plan’s adjusted funded 

target liability percentage is less than 60 percent as of January 1, 

2008. If the plan’s adjusted funded target liability percentage is 

less than 60 percent as of January 1, 2009, then no prohibited payments can be made until the plan actuary certifies that such percentage is at least 60 percent or the employer makes sufficient contributions to the plan (or provides security) so that such percentage 

is at least 60 by the end of the plan year. If no such contributions 

or certification is made, then a prohibited period continues in effect 

until the plans’ adjusted funded target liability percentage is at 

least 60 percent for two consecutive plan years beginning after January 1, 2009. 

As described above, the requirement to make contributions under 

the provision may be satisfied by providing security in lieu of contributions.93 The security must meet the present-law requirements 

applicable to security required for certain plan amendments and 

must be provided no later than the due date of the contribution to 

which it relates (or such earlier date as the Secretary prescribes). 

The security is released at the end of the prohibited period for the 

failure to which the security relates. The security may be perfected 

and enforced at any time after the earlier of: (1) the date the employer fails to meet any minimum funding requirement (other than 

the requirement for which the security was provided), (2) the plan’s 

adjusted funded target liability percentage is less than 60 percent 

for seven years, or (3) the date on which the plan terminates. 

The prohibited payments for a plan that is less than 60-percent 

funded are generally the same as those that are prohibited under 

present law during a period of a liquidity shortfall. Thus, during 

61 

a prohibited period, a plan generally may not make: (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. However, an otherwise prohibited payment may be made if the payment does not exceed the 

lesser of: (1) 50 percent of the amount of the payment that would 

be made in the absence of the prohibition; and (2) the present value 

(as determined under guidance prescribed by the PBGC using the 

interest and mortality assumptions under section 417(e)) of the 

maximum PBGC guaranteed benefit. The PBGC is directed to publish such present value. 

Restrictions on plans in bankruptcy 

Under the provision, no prohibited payments (regardless of 

amount) may be made during any period the plan sponsor is in 

bankruptcy. This prohibition does not apply to any portion of a 

plan year which occurs on or after the date the plan’s actuary certifies that, as of the valuation date for the plan year, the plan’s 

funded target liability percentage is at least 100 percent. 

Additional limitation on benefit accruals for plans less than 60-percent funded 

If a plan is less than 60 percent funded, then accruals are frozen 

and certain benefits are eliminated. These limitations do not apply 

for the first five plan years a plan (or a predecessor plan) is in effect. 

If a plan’s adjusted funded target liability percentage is less than 

60 percent for the prior plan year, then benefit accruals are suspended in the current plan year until the plan actuary certifies 

that the plan has an adjusted funded target liability percentage of 

at least 60 percent or the employer makes sufficient contributions 

(or provides security as provided below) so that the plan’s adjusted 

funded target liability percentage for the current year is at least 

60 percent. 

If the plan’s funded target liability percentage is not at least 60 

percent by the end of the plan year (or there is no actuarial certification), the freeze continues until the plan’s funded target liability 

percentage has been at least 60 percent for two consecutive plan 

years. If contributions (or security) are required in order for the adjusted funded target liability percentage to be 60 percent by the 

end of the current plan year, and the employer fails to make the 

contributions (or provide security), such failure is treated as the 

failure to make a minimum required contribution for purposes of 

the quarterly contribution rules, the excise tax on failure to make 

required contributions, and the lien with respect to failures to 

make certain required contributions. 

A special rule applies in the case of a plan maintained pursuant 

to a collective bargaining agreement ratified before the freeze period would otherwise apply and in a plan year with respect to 

which the plan had an adjusted funded target liability percentage 

of at least 60 percent. In the case of benefits pursuant to and indiVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00061 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
62 

viduals covered by such an agreement, the freeze does not apply for 

years beginning before the earlier of: (1) the date on which such 

collective bargaining agreement terminates (determined without regard to any extensions); and (2) the date which is three years after 

the date the freeze would otherwise apply. 

During a freeze period, the accrued benefit, any death or disability benefit, and any social security supplement (as described in 

sec. 411(a)(9)) of each participant are frozen at the amount of such 

benefit or supplement immediately before the freeze period and all 

other benefits provided under the plan are eliminated to the extent 

that such freezing or elimination would be permitted under the 

anti-cutback rules (or other applicable Code or ERISA requirements) if they had been implemented by a plan amendment. 

The same rules relating to providing security in lieu of contributions that apply with respect to restrictions on distributions apply 

with respect to a freeze period. 

Determining funding levels and other rules 

For purposes of the restrictions on benefits, accruals, and payments, the funded target liability percentage for any plan year is 

a percentage equal to a fraction, the numerator of which is the 

value of plan assets (determined as under the funding rules) and 

the denominator of which is the target liability for the plan year. 

In determining adjusted funded target liability percentage, certain 

distributions for the immediately preceding two plan years are 

added back in to the numerator and denominator of the fraction. 

The distributions added back in are the sum of purchases of annuities, payments of single sums, and such other disbursements as 

the Secretary provides in regulations. In determining the funded 

target liability percentage, plan assets are not reduced by any 

prefunding balance. Contributions required under the provisions 

relating to benefit limitations, prohibited payments and freeze periods do not give rise to a prefunding balance (and such contribution 

requirements cannot be satisfied with a prefunding balance). 

Notice to participants 

The provision amends the Code and ERISA to require that the 

plan administrator provide written notice to participants and beneficiaries of a limitation applicable to a plan within a reasonable period of time before the limitation takes effect. Similarly, the plan 

administrator is to provide written notice to participants and beneficiaries of the date a limitation will cease to apply to a plan within 

a reasonable period of time before such cessation. The Secretary of 

the Treasury may provide that a notice be provided at a later time 

if it is not practicable to provide the notice in advance. 

Under the provision, an excise tax generally applies in the case 

of a failure to provide the information as required under the Code. 

The excise tax is generally imposed on the employer if notice is not 

provided. The excise tax is $100 per day for each participant or 

beneficiary with respect to whom the failure occurs, until the information is provided or the failure is otherwise corrected. If the employer exercises reasonable diligence to meet the requirement, the 

total excise tax imposed during a taxable year will not exceed 

$500,000. The $500,000 limit is applied separately with respect to 

each type of notice required. 

63 

No tax will be imposed with respect to a failure if the employer 

does not know that the failure existed and exercises reasonable 

diligence to comply with the requirement. In addition, no tax is imposed if the employer uses reasonable diligence to comply and provides the required information within 30 days of learning of the 

failure. In the case of a failure due to reasonable cause and not to 

willful neglect, the Secretary of the Treasury is authorized to waive 

the excise tax to the extent that the payment of the tax would be 

excessive or otherwise inequitable relative to the failure involved. 

In addition to the excise tax, if the required notice is not provided, the Secretary of Labor may impose a civil penalty of up to 

$100 a day from the time of the failure. Each violation with respect 

to any single participant or beneficiary is treated as a separate violation. 

Coordination with other requirements 

Under the provision, a plan does not fail to meet the qualification 

requirements solely by reason of complying with the requirements 

of the provision. 

Restoration of benefits 

If limitations on distributions or accruals apply with respect to 

plan for a plan year, unless the plan provides otherwise, prohibited 

distributions or accruals resume as of the day following the prohibited or freeze period. This rule is not to be construed as affecting 

the plan’s treatment of benefits prohibited, frozen, or eliminated 

during the prohibited or freeze period. 

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. 

Only plan years after the effective date are taken into account 

in determining whether a limitation applies to a plan. Thus, in the 

case of a plan that is not maintained pursuant to a collective bargaining agreement, the first year that a limitation could apply to 

a plan based on its funding status is a plan year beginning in 2008. 

64 

94 Code sec. 404. 95The 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 normal cost) over the actuarial value of plan 

assets. 96 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. 

C. INCREASE IN DEDUCTION LIMITS FOR SINGLE-EMPLOYER PLANS

(Secs. 304, 322, and 323 of the bill and secs. 404 and 4972 of the 

Code) 

PRESENT LAW

Employer contributions to qualified retirement plans are deductible subject to certain limits.94 In general, the deduction limit depends on the kind of plan. 

In the case of a defined benefit pension plan, 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.95 The 

maximum amount otherwise deductible generally is not less than 

the plan’s unfunded current liability.96 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. 

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. 

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. 

65 

97 Under the provision relating to funding requirements for single-employer plans, the interest 

rate used to determine current liability for plan years beginning in 2006 must be within the 

permissible range 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. Current liability as determined for funding purposes in 

2006 applies also in determining the deduction limits for 2006. 

REASONS FOR CHANGE

The Committee is concerned that the present-law deduction limits play a role in the underfunding of defined benefit pension plans 

by restricting employers’ ability to make contributions in addition 

to minimum required contributions. 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 the 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. Such additional 

contributions also further benefit security for plan participants 

(and reduce risk to the PBGC) by increasing the assets available 

to pay promised plan benefits. 

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. The Committee is also concerned that the overall deduction limit may discourage employers 

from making defined benefit pension plan contributions in addition 

to minimum required contributions, which increases the risk that 

plan assets will not be sufficient to provide benefits in the case of 

plan termination. The Committee believes that the overall deduction limit should be applied without regard to contributions to defined benefit pension plans covered by the PBGC insurance program. 

EXPLANATION OF PROVISION

Deduction limits for contributions to defined benefit pension plans 

Under the provision, for 2006, the maximum amount deductible 

for contributions to a single-employer defined benefit pension plan 

is not less than the excess (if any) of (1) 180 percent of the plan’s 

current liability, over (2) the value of plan assets.97

For years after 2006, the maximum deductible amount for a single-employer defined benefit pension plan is not less than the 

greater of: (1) the excess (if any) of the sum of the plan’s target liability, the plan’s target normal cost, and a cushion amount for a 

plan year, over the value of plan assets (as determined under the 

minimum funding rules); and (2) the minimum required contribution for the plan year. However, in the case of a plan to which atrisk target liability and at-risk target normal cost do not apply, the 

amount in (1) is not less than the excess (if any) of the sum of the 

66 

98 In determining the cushion amount for a plan with 100 or fewer participants, target liability 

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. 

plan’s at-risk target liability and at-risk target normal cost (determined as if they did apply), over the value of plan assets. 

The cushion amount for a plan year is the sum of (1) 80 percent 

of the plan’s target liability for the plan year; and (2) the amount 

by which the plan’s target liability would increase if determined by 

taking into account increases in participants’ compensation for future years or, if the plan does not base benefits attributable to past 

service on compensation, increases in benefits that are expected to 

occur in succeeding plans year (determined on the basis of average 

annual benefit increases over the previous six years).98 For this 

purpose, the dollar limits on benefits and on compensation apply, 

but, in the case of a plan that is covered by the PBGC insurance 

program, increases in the limits that are expected to occur in succeeding plan years may be taken into account. 

The provision retains the present-law rule under which, 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. 

Overall deduction limit for combinations of plans 

For 2006, in the case of single-employer plans, the overall limit 

on deductions for contributions to one or more defined benefit pension plans and one or more defined contribution plans applies to 

contributions to defined contribution plans only to the extent that 

such contributions exceed six percent of compensation otherwise 

paid or accrued during the taxable year to the beneficiaries under 

the plans. 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. 

Under the provision, for years after 2006, single-employer defined benefit plans that are covered by the PBGC insurance program are not taken into account in applying the overall limit on 

deductions for contributions to combinations of defined benefit and 

defined contribution plans. Thus, the deduction for contributions to 

a defined benefit pension plan or a defined contribution plan is not 

affected by the overall deduction limit merely because employees 

are covered by both plans if the defined benefit plan is covered by 

the PBGC insurance program (i.e., the separate deduction limits for 

contributions to defined contribution plans and defined benefit pension plans apply). 

In addition, for years after 2006, in applying the overall deduction limit to contributions to one or more single-employer defined 

benefit pension plans that are not covered by the PBGC insurance 

program and one or more defined contribution plans, the overall 

limit applies to contributions to defined contribution plans only to 

the extent that such contributions exceed six percent of compensation otherwise paid or accrued during the taxable year to the beneficiaries under the plans. For purposes of determining the excise 

67 

99 Code sec. 417(e)(3). 100 Code sec. 411(d)(6). 

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 years beginning after December 31, 

2005. 

D. REPLACEMENT OF 30-YEAR TREASURY RATE FOR CALCULATING

LUMP-SUM DISTRIBUTIONS

(Sec. 331 of the bill, sec. 417(e) of the Code, and sec. 205(g) of 

ERISA) 

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 present value of certain optional forms of benefit, such as a 

lump sum.99 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. 

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. 

Under the anticutback rule, an amendment of a qualified retirement plan generally may not eliminate an optional form of benefit.100 For this purpose, a change in the interest rate used to determine an optional form of benefit is generally treated as the 

elimination of one optional form of benefit and the addition of a 

new optional form of benefit. 

68 

101 In applying the phase-in yield curve method for purposes of the provision relating to the 

funding requirements for single-employer defined benefit pension plans, an interest rate based 

on a weighted four-year average of conservative long term corporate bond rates applies, rather 

than the annual rate of interest on 30-year Treasury securities. 

REASONS FOR CHANGE

Under present law, the interest rate on 30-year Treasury securities is used to determine present value in the case of certain forms 

of benefit, such as lump sums. The Committee considers interest 

rates on high-quality corporate bonds to be more appropriate for 

this purpose. In addition, the Committee believes that a more accurate present value will result from matching interest rates to the 

timing of the payments being valued, rather than using a single 

long-term interest rate. Accordingly, a yield curve that reflects the 

rates of interest on corporate bonds of varying maturities should be 

used for this purpose. 

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 replaces the applicable interest rate used in determining the minimum present value of certain optional forms of 

benefit, such as lump sums, with the phase-in yield curve method 

(for plan years beginning in 2007–2010) and the yield curve method 

(for plan years beginning after 2010), based on the methods used 

to determine target liability (i.e., the value of plan liabilities) under 

the provision relating to the funding requirements for single-employer defined benefit pension plans. 

Under the yield curve method, present value is determined: (1) 

using interest rates drawn from a yield curve prescribed by the 

Secretary of the Treasury that reflects interest rates on high-quality corporate bonds with varying maturities (as used in determining target liability); and (2) by matching the timing of the expected benefit payments under the plan to the interest rates on the 

yield curve (i.e., for bonds with maturity dates comparable to the 

times when benefits are expected to be paid). The present-law rules 

relating to the use of a stability period and averaging continue to 

apply. 

Under the phase-in yield curve method, present value is the sum 

of two amounts: (1) the applicable percentage of present value determined under the yield curve method; and (2) present value determined using the annual rate of interest on 30-year Treasury securities, multiplied by a percentage equal to 100 percent minus the 

applicable percentage for the plan year.101 For this purpose, the applicable percentage for a plan year is determined in accordance 

with the following table. 

69 

102 Code sec. 415(b). 

TABLE 2.—APPLICABLE PERCENTAGE FOR PLAN YEARS BEGINNING 

IN 2007–2010 

Plan years beginning in Applicable percentage 

2007 ......................................................................................................................... 20

2008 ......................................................................................................................... 40

2009 ......................................................................................................................... 60

2010 ......................................................................................................................... 80

Thus, for example, for plan years beginning in 2008, a lump-sum 

benefit payable under a plan may not be less than the sum of: (1) 

40 percent of the minimum lump-sum benefit determined under 

the yield curve method, and (2) 60 percent of the minimum lumpsum benefit determined using the annual rate of interest on 30- 

year Treasury securities. 

Under the provision relating to plan amendments, a plan amendment made pursuant to the provision generally will not violate the 

anticutback rule if certain requirements are met (e.g., the plan 

amendment is made on or before the last day of the first plan year 

beginning on or after January 1, 2007). Thus, subject to those requirements, a plan amendment will not violate the anticutback 

rule merely because it provides for the use of the phase-in yield 

curve method and the yield curve method, rather than the interest 

rate on 30-year Treasury securities, in determining benefits subject 

to the minimum present value rules. 

The provision provides a special rule that allows a plan amendment to change the interest rate used to determine certain optional 

forms of benefit. Under the special rule, a plan amendment will not 

violate the anticutback rule if: (1) for the last plan year beginning 

in 2003, the plan provides that the annual rate of interest on 30- 

year Treasury securities is used in determining the amount of a 

benefit (other than the accrued benefit) that is not subject to the 

minimum present value rules; (2) the plan is amended to provide 

that a different rate of interest is used in determining the amount 

of such benefit; and (3) the first plan year for which such amendment is effective begins no later than January 1, 2007. The provision relating to plan amendments applies to a plan amendment 

made pursuant to the special rule. 

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2006. 

E. INTEREST RATE ASSUMPTION FOR APPLYING BENEFIT

LIMITATIONS TO LUMP-SUM DISTRIBUTIONS

(Sec. 332 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).102 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 

70 

103 Code sec. 411(d)(6). 104 In the case of a plan under which lump-sum benefits are determined solely as required 

under the minimum value rules (rather than using an interest rate that results in larger lumpsum benefits), the interest rate specified in the plan is the interest rate applicable under the 

minimum value rules. Thus, for purposes of applying the benefit limits to lump-sum benefits 

under the plan, the interest rate used must be not less than the greater of: (1) 5.5 percent; or 

(2) the interest rate applicable under the minimum value rules. 

form that is subject to the minimum present value rules, such as 

a lump-sum benefit, the interest rate used generally must be not 

less than 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. For 2004 and 

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. 

Under the anticutback rule, an amendment of a qualified retirement plan generally may not eliminate an optional form of benefit.103 For this purpose, a change in the interest rate used to determine an optional form of benefit is generally treated as the 

elimination of one optional form of benefit and the addition of a 

new optional form of benefit. 

REASONS FOR CHANGE

The Committee understands that, under some plans, in determining lump-sum benefits, a fixed interest rate is used 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). The use of a fixed rate rather 

than a variable rate makes the value of benefits more predictable 

for employees and also makes employers’ required contributions 

more predictable. The Committee further understands that the 

present-law requirement to use a variable rate in applying the benefit limits to lump sums interferes with this predictability. The 

Committee therefore believes that it should be permissible to use 

a fixed rate in applying the benefit limits to lump sums. 

EXPLANATION OF PROVISION

Under the provision, for purposes of adjusting a benefit in a form 

that is subject to the minimum present 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; or (2) the interest rate specified 

in the plan.104 Thus, the rule that applies for 2004 and 2005 is 

made permanent. 

Under the provision relating to plan amendments, a plan amendment made pursuant to the provision generally will not violate the 

anticutback rule if certain requirements are met (e.g., the plan 

amendment is made on or before the last day of the first plan year 

beginning on or after January 1, 2007). Thus, subject to those requirements, a plan amendment that changes made pursuant to the 

provision to change the interest rate used to apply the benefit limits to benefits that are subject to the minimum present value rules 

will not violate the anticutback rule. 

EFFECTIVE DATE

The provision is effective for years beginning after 2005. 

71 

105 Code section 409A. 

F. RESTRICTIONS ON FUNDING OF NONQUALIFIED DEFERRED COM- PENSATION PLAN WHEN EMPLOYER’S DEFINED BENEFIT PENSION

PLAN IS UNDERFUNDED

(Sec. 333 of the bill, secs. 409A and 4980I of the Code, new sec. 306 

of ERISA, and sec. 502(g) of ERISA) 

PRESENT LAW

In general 

Present law does not include any prohibition on the funding of 

nonqualified deferred compensation in connection with the funded 

status of a defined benefit pension plan of the same plan sponsor. 

Income tax treatment of nonqualified deferred compensation 

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.105 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 underfunded defined benefit pension plans to fund nonqualified deferred compensation plans covering executives while 

the pension plan is not adequately funded. Executives of companies 

with underfunded defined benefit pension plans should not benefit 

from having their nonqualified deferred compensation arrangements funded, and thus, more secure, while the pension plan faces 

underfunding. 

While rank-and-file employees have little control over a company’s decision to fund its pension plans, executives often have conVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00071 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
72 

trol in determining whether nonqualified deferred compensation 

plans will be funded. 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 it is also appropriate to restrict funding of 

nonqualified deferred compensation during the period immediately 

preceding termination of the company’s pension plan and when the 

plan sponsor is in bankruptcy. 

The Committee believes that if a nonqualified deferred compensation plan covering executives is funded during certain periods 

of pension plan underfunding, when the plan sponsor is in bankruptcy, or immediately preceding termination of a pension plan, executives should be required to recognize current income inclusion 

upon the funding of their nonqualified deferred compensation plans 

and penalties should apply. 

EXPLANATION OF PROVISION

ERISA prohibition on funding nonqualified deferred compensation 

The provision provides that during any restricted period, a plan 

sponsor of a single-employer defined benefit pension plan (and any 

member of its controlled group) may not directly or indirectly 

transfer assets, and may not directly or indirectly otherwise reserve assets, in a trust (or other arrangement determined by the 

Secretary of Treasury) for purposes of paying deferred compensation of an applicable covered employee under a nonqualified deferred compensation plan of such plan sponsor or member. 

With respect to any single-employer defined benefit pension plan, 

the restricted period is (1) if the plan’s adjusted target liability percentage as of the valuation date for the preceding plan year and 

current plan year is less than 80 percent, the period beginning on 

the first day of the current plan year and ending on the first day 

for which the plan’s adjusted funded target liability percentage is 

at least 80 percent; (2) any period that the plan sponsor is in bankruptcy; and (3) in the case of a plan that terminates, the 12-month 

period beginning on the date which is six months before the termination date of the plan if, as of the termination date, plan assets 

are not sufficient for benefit liabilities. 

In general, covered employees include the chief executive officer 

(or individual acting in such capacity) and the four highest compensated officers for the taxable year (other than the chief executive officer). An applicable covered employee includes any (1) covered employee of a plan sponsor; (2) covered employee of a member 

of a controlled group which includes the plan sponsor; and (3) 

former employee who was a covered employee at the time of termination of employment with the plan sponsor or a member of a controlled group which includes the plan sponsor. 

The provision requires that the plan administrator of a singleemployer defined benefit pension plan notify the plan sponsor within a reasonable time after the occurrence of an event which results 

in a restricted period with respect to the plan. The notice must include the duration of the restricted period and the restrictions that 

apply during such period. Within 30 days of receipt of the notice, 

the plan sponsor must notify the plan administrator (of the singleVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00072 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
73 

employer defined benefit pension plan) of nonqualified deferred 

compensation plans maintained by the plan sponsor (or members 

of the controlled group) and the amount of any assets transferred 

or otherwise reserved by the plan sponsor (or member) in violation 

of the prohibition on transfers during any portion of the restricted 

period occurring on or before the date the plan sponsor provided 

such notice. If, subsequent to this notice, and during any portion 

of the remaining restricted period, the plan sponsor (or member of 

controlled group) (1) transfers or reserves assets in violation of the 

prohibition, or (2) establishes a new nonqualified deferred compensation plan, the plan sponsor must notify the plan administrator (of the single-employer defined benefit pension plan) within 

three days of such action. An excise tax of $1,000 per day applies 

in the case of a failure to provide a notice as required by the provision. 

The provision provides that any fiduciary of the plan may have 

access to the financial records of a plan sponsor (or member of the 

controlled group) to determine if assets were transferred or otherwise reserved in violation of the provision. 

The provision also creates a civil right of action by a fiduciary 

of a single-employer defined benefit pension plan against (1) a plan 

sponsor, member of a controlled group which includes the plan 

sponsor, an applicable covered employee, or a person holding assets 

which are part of a nonqualified deferred compensation plan, to recover on behalf of the plan (A) assets which were set aside or transferred in violation of the provision (and earnings thereon), or (B) 

amounts equivalent to such assets and earnings; or (2) a plan sponsor, or member of a controlled group which includes the plan sponsor, to compel the production of records the fiduciary is entitled to 

under the provision. The provision also provides for the recovery of 

attorney’s fees and costs of the action. 

Tax consequences of funding nonqualified deferred compensation 

Under the provision, if during any restricted period, a plan sponsor of a single-employer defined benefit pension plan (or any member of the controlled group) directly or indirectly transfers assets, 

or directly or indirectly otherwise reserves assets, in a trust (or 

other arrangement as determined by the Secretary of the Treasury) 

for purposes of paying deferred compensation of an applicable covered employee under a nonqualified deferred compensation plan, 

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. Thus, the provision requires current income inclusion to the extent of assets transferred or otherwise reserved. 

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. 

74 

106 A qualified employer plan also includes a section 501(c)(18) trust. 107 Code sec. 412. 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. 

Definition of nonqualified deferred compensation plan 

A nonqualified deferred compensation plan is any plan that provides for the deferral of compensation other than a qualified employer plan or any bona fide vacation leave, sick leave, compensatory time, disability pay, or death benefit plan. A qualified employer plan means a qualified retirement plan, tax-deferred annuity, simplified employee pension, and SIMPLE.106 A qualified governmental excess benefit arrangement (sec. 415(m)) is a qualified 

employer plan. An eligible deferred compensation plan (sec. 457(b)) 

is also a qualified employer plan under the provision. The term 

plan includes any agreement or arrangement, including an agreement or arrangement that includes one person. 

EFFECTIVE DATE

The provision is effective for transfers and other reservations of 

assets after December 31, 2006. 

G. SPECIAL FUNDING RULES FOR PLANS MAINTAINED BY COMMER- CIAL AIRLINES THAT ARE AMENDED TO CEASE FUTURE BENEFIT

ACCRUALS

(Sec. 334 of the bill) 

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’’).107 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, 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 credits or 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 

75 

from a change in actuarial assumptions, or a waiver of minimum 

required contributions. 

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, 

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 attribVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00075 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
76 

108 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. 109The deficit reduction contribution rules apply to single-employer plans, other than singleemployer plans with no more than 100 participants on any day in the preceding plan year. Single-employer plans with more than 100 but not more than 150 participants are generally subject 

to lower contribution requirements under these rules. 110 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. 

utable 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. 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.108

Additional contributions for underfunded plans 

Under special funding rules (referred to as the ‘‘deficit reduction 

contribution’’ rules),109 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.110 A plan’s ‘‘funded current liability percentage’’ is generally the actuarial value of plan assets as a percentage of the 

plan’s current liability. In general, a plan’s current liability means 

77 

111Specific interest rate and mortality assumptions must be used in determining a plan’s current liability for purposes of the special funding rule. 

all liabilities to employees and their beneficiaries under the plan, 

determined on a present-value basis.111

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 generally 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. 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)). 

The Pension Funding Equity Act of 2004 allows certain employers, including a commercial passenger airline, to elect a reduced 

contribution under the deficit reduction contribution rules with respect to certain plans for plan years beginning after December 27, 

2003, and before December 28, 2005. If an employer so elects, the 

additional contribution is the greater of: (1) 20 percent of the 

amount of the additional contribution that would otherwise be required; or (2) the additional contribution that would be required if 

the deficit reduction contribution for the plan year were determined 

as the expected increase in current liability due to benefits accruing during the plan year. An election of a reduced contribution may 

be made only with respect to a plan that was not subject to the deficit reduction contribution rules for the plan year beginning in 

2000. In addition, certain notice and benefit restriction requirements must be met. 

Other funding-related 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 (inVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00077 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
78 

112 Code sec. 412(d). Under similar rules, the amortization period applicable to unfunded past 

service liability may also be extended. 

cluding 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 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 general, 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. 

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’’).112 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. 

Notice of certain plan amendments 

A notice requirement must be met if an amendment to a defined 

benefit pension plan provides for a significant reduction in the rate 

of future benefit accrual. In that case, the plan administrator must 

furnish a written notice concerning the amendment. Notice may 

also be required if a plan amendment eliminates or reduces an 

early retirement benefit or retirement-type subsidy. The plan administrator is required to provide the notice to any participant or 

alternate payee whose rate of future benefit accrual may reasonably be expected to be significantly reduced by the plan amendment (and to any employee organization representing affected participants). The notice must be written in a manner calculated to be 

understood by the average plan participant and must provide sufficient information to allow recipients to understand the effect of the 

amendment. In the case of a single-employer plan, the plan administrator is generally required to provide the notice at least 45 days 

before the effective date of the plan amendment. In the case of a 

multiemployer plan, the notice is generally required to be provided 

15 days before the effective date of the plan amendment. 

REASONS FOR CHANGE

The Committee recognizes that the minimum funding rules play 

an important role in assuring that defined benefit pension plans 

are adequately funded. However, the Committee believes that special issues arise with respect to plans maintained by commercial 

airlines. The airline industry has faced significant economic challenges in recent years, forcing some airlines into bankruptcy proVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00078 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
79 

113 Any amortization bases, credit balance, or prefunding balance under the plan’s funding 

standard account as of the end of the last year preceding the first applicable year is reduced 

to zero. 

ceedings. Recent economic conditions have also caused some plans 

maintained by airlines to be significantly underfunded. In some 

cases, underfunded plans have been terminated in bankruptcy proceedings, resulting in a loss of benefits by participants and an increase in PBGC liabilities. 

Many airlines have taken measures to reduce costs, including in 

some cases freezing benefits (and thus liabilities) under their defined benefit pension plans. While the freezing of benefits is unfortunate, it is consistent with the Committee’s view that employers 

should fund benefits that have already been promised to employees 

before promising additional benefits. The Committee is concerned 

that, even if benefits under plans maintained by such airlines are 

frozen, the amount of contributions required under the minimum 

funding rules may have the effect of diverting funds needed to assure the continued viability of the airlines’ business, which could 

result in further terminations of underfunded plans. The Committee therefore believes that such airlines should be provided with 

additional time for funding their plans, subject to appropriate conditions. 

EXPLANATION OF PROVISION

In general 

Under the provision, if an election is made with respect to an eligible plan for a plan year (an ‘‘applicable’’ plan year), the minimum 

required contribution for the plan year is determined under a special method.113 If minimum required contributions as determined 

under the provision are made: (1) for an applicable plan year beginning before January 1, 2007 (for which the present-law funding 

rules apply), the plan does not have an accumulated funding deficiency; and (2) for an applicable plan year beginning on or after 

January 1, 2007 (for which the changes to the funding rules made 

under the bill apply), the minimum required contribution is the 

contribution determined under the provision. For purposes of the 

provision, an eligible plan is a single-employer defined benefit pension plan sponsored by an employer that is a commercial passenger 

airline and with respect to which certain benefit accrual and benefit increase restrictions are met. 

An election under the provision must be made at such time and 

in such manner as prescribed by the Secretary of the Treasury. The 

employer may select the first plan year to which the election applies from among plan years ending after the date of the election. 

The election applies to that plan year and subsequent plan years, 

unless the election is revoked with the approval of the Secretary. 

The employer may also change the plan year with respect to the 

plan by specifying a new plan year in the election. Such a change 

in plan year does not require approval of the Secretary. 

Determination of required contribution 

Under the provision, the minimum required contribution for any 

applicable plan year during the amortization period is the amount 

required to amortize the plan’s unfunded liability, determined as of 

80 

114 If an election to use the special method is revoked before the end of the amortization period, the plan is subject to the generally applicable minimum funding rules beginning with the 

first plan year for which the election is revoked, and the plan’s prefunding balance as of the 

beginning of that year is zero. 

the first day of the plan year, in equal annual installments over the 

remaining amortization period. For this purpose, the amortization 

period is the 14-plan-year period beginning with the first applicable 

plan year. Thus, the annual amortization amount is redetermined 

each year, based on the plan’s unfunded liability at that time and 

the remainder of the amortization period. For any plan years beginning after the end of the amortization period, the plan is subject 

to the generally applicable minimum funding rules (as modified 

under the provision of the bill relating to funding requirements for 

single-employer plans, including the limitations on benefit increases and distributions by underfunded plans). The plan’s 

prefunding balance as of the first day of the first year beginning 

after the end of the amortization period is zero.114

For purposes of the provision, a plan’s unfunded liability is the 

unfunded accrued liability under the plan, determined under the 

unit credit funding method. As under present law, minimum required contributions (including the annual amortization amount) 

under the provision must be determined using 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. The assumptions are required also to 

offer the actuary’s best estimate of anticipated experience under 

the plan. In addition, as under present law, the rate of interest 

used must be an appropriate rate consistent with the rate or rates 

used under the plan to determine costs, and the value of plan assets used must be the fair market value. 

Benefit accrual and benefit increase restrictions 

Under the provision, effective as of the first day of the first applicable plan year and at all times thereafter, an eligible plan must 

provide that, with respect to each participant: (1) the accrued benefit, any death or disability benefit, and any social security supplement are frozen at the amount of the benefit or supplement immediately before such first day; and (2) all other benefits under the 

plan are eliminated. However, the freezing or elimination of benefits or supplements is required only to the extent that it would be 

permitted under the anticutback rule if implemented by a plan 

amendment adopted immediately before such first day. 

In addition, no applicable benefit increase under an eligible plan 

may take effect at any time during the period beginning on July 

26, 2005, and ending on the day before the first day of the first applicable plan year. For this purpose, an applicable benefit increase 

generally is any increase in liabilities of the plan by plan amendment (or otherwise as specified by the Secretary) which would 

occur by reason of: (1) any increase in benefits; (2) any change in 

the accrual of benefits; or (3) any change in the rate at which benefits become nonforfeitable under the plan. An applicable benefit increase does not include any increase in liabilities under a plan: (1) 

by reason of a plan amendment if such amendment is required as 

81 

115 Applicable benefit increase is generally defined as under the provision relating to benefit 

limitations under single-employer defined benefit pension plans. However, exceptions for certain 

benefit increases provided under a plan maintained pursuant to a collective bargaining agreement do not apply. 

a condition of qualification of the plan; or (2) which is specified in 

Treasury regulations.115

Treatment of successors plans, PBGC benefit guarantee, and other 

rules 

Under the provision, authority is granted to the Secretary of the 

Treasury to disqualify one or more single-employer defined benefit 

pension plans (‘‘successor’’ plans) established by an employer maintaining an eligible plan to which the special method applies if the 

successor plan or plans provide benefit accruals to any substantial 

number of successor employees. For this purpose, a successor employee is any employee covered by the eligible plan or any employee performing substantially the same type of work with respect 

to the employer’s business operations as an employee covered by 

the eligible plan. The Secretary of the Treasury may, in his or her 

discretion, disqualify a successor plan unless all benefit obligations 

under the eligible plan have been satisfied. 

Under the provision, if an election to apply the special method 

is made with respect to a plan and the plan is terminated, certain 

aspects of the PBGC guarantee provisions are applied as if the plan 

terminated on the first day of the first applicable plan year. Specifically, the amount of guaranteed benefits payable by the PBGC 

is determined based on plan provisions, salary, service, and the 

guarantee in effect on the first day of the first applicable plan year. 

In addition, the priority among participants for purposes of allocating plan assets and employer recoveries to non-guaranteed benefits in the event of plan termination is determined as of the first 

day of the first applicable plan year. 

Under the provision, the provision of the bill under which defined 

benefit plans that are covered by the PBGC insurance program are 

not taken into account in applying the overall limit on deductions 

for contributions to combinations of defined benefit and defined 

contribution plans, does not apply to an eligible plan to which the 

special method applies. 

In the case of notice required with respect to an amendment that 

is made to an eligible plan maintained pursuant to one or more collective bargaining agreements in order to comply with the benefit 

accrual and benefit increase restrictions under the provision, the 

provision allows the notice to be provided 15 days before the effective date of the plan amendment. 

EFFECTIVE DATE

The provision is effective for plan years ending after the date of 

enactment. 

82 

H. MODIFICATION OF PENSION FUNDING REQUIREMENTS FOR PLANS

SUBJECT TO CURRENT TRANSITION RULE

(Sec. 335 of the bill and sec. 769 of the Retirement Protection Act 

of 1994, as amended by the Pension Funding Equity Act of 

2004) 

PRESENT LAW

Defined benefit pension plans are required to meet certain minimum funding rules. In some cases, additional contributions are required 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 

83 

116The term ‘‘unfunded target liability’’ is defined under the provision relating to minimum 

funding rules for single-employer plans and generally means: (1) the excess (if any) of the plan’s 

target liability 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 balance). 

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. 

REASONS FOR CHANGE

The present-law funding rules for plans maintained by certain 

interstate bus companies were enacted because the generally applicable funding rules required greater contributions for such plans 

than were warranted 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. Under the provision, for the plan 

year beginning in 2006, the funded current liability percentage of 

such 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 by the plan is used in: (1) determining any 

present value or making any computation under the minimum 

funding rules; and (2) determining unfunded target liability for 

PBGC variable premium rate purposes.116 In addition, in determining the minimum required contribution for plan years after 

2006, the value of plan assets is not reduced by the plan’s 

prefunding balance if, pursuant to a written agreement with the 

PBGC entered into before January 1, 2006, the prefunding balance 

is not available to reduce the minimum required contribution for 

the plan year. 

84 

117There is little guidance under present law with respect to many of the issues raised by 

cash balance conversions. In 1999, the IRS imposed a moratorium on determination letters for 

cash balance conversions pending clarification of applicable legal requirements. Under the moratorium, all determination letter requests regarding converted cash balance plans are sent to the 

National Office for review; however, the National Office is not currently acting on these plans. 

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2005. 

I. TREATMENT OF CASH BALANCE AND OTHER HYBRID DEFINED

BENEFIT PENSION PLANS

(Sec. 341 of the bill, secs. 411 and 417 of the Code, and secs. 204 

and 205 of ERISA) 

PRESENT LAW

Cash balance and other hybrid plans 

A cash balance plan is a defined benefit pension plan with benefits resembling the benefits associated with defined contribution 

plans. Cash balance plans are sometimes referred to as ‘‘hybrid’’ 

plans because they combine features of a defined benefit pension 

plan and a defined contribution plan. Other types of hybrid plans 

exist as well, such as so-called ‘‘pension equity’’ plans. 

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. 

Cash balance plans and other hybrid plans are subject to the 

qualification requirements applicable to defined benefit pension 

plans generally. However, because such plans have features of both 

defined benefit pension plans and defined contributions plans, 

questions arise as to the proper application of the qualification requirements to such plans.117 Issues that commonly arise include: 

(1) the application of the age discrimination rules; (2) the proper 

method for determining lump-sum distributions; and (3) the treatment of a conversion to a cash balance plan or other hybrid plan 

formula. 

Age discrimination 

Present law prohibits any reduction in the rate of a participant’s 

benefit accrual (or the cessation of accruals) under a defined benefit 

pension plan because of the attainment of any age. The age discrimination rules do not prohibit all benefit formulas under which 

85 

118Tootle v. ARINC Inc., 2004 U.S. Dist. LEXIS 10629 (June 10, 2004); Cooper v. IBM Personal Pension Plan, 274 F. Supp. 2d 1010 (S.D. Ill. 2003); Eaton v. Onan, 117 F. Supp. 2d 812 

(S.D. Ind. 2000). In addition, proposed Treasury regulations issued in December 2002 provided 

rules under which cash balance plans could provide front-loaded interest credits without violating the age discrimination rules. However, the Treasury Department announced the withdrawal of the regulations in June 2004. 119 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), 

cert. denied, 532 U.S. 967 (2001); West v. AK Steel Corp. Retirement Accumulation Plan, 318 

F. Supp.2d 579 (S.D. Ohio 2004); Notice 96–8, 1996–1996–1 C.B. 359. Additionally, under Esden, 

if participants accrue interest credits under a cash balance plan at an interest rate that is higher than the interest assumptions prescribed by the Code for determining the present value of 

the annuity, the interest credits must be reflected in the projection of the participant’s hypothetical account balance to normal retirement age in order to avoid violating the Code’s prohibition against forfeitures. 

a reduction in accruals is correlated with participants’ age in some 

manner. For example, a plan may limit the total amount of benefits, or may limit the years of service or participation considered in 

determining benefits. 

An age discrimination issue has arisen as a result of front-loaded 

interest credits under cash balance plans because there is a longer 

time for interest credits to accrue on hypothetical contributions to 

the account of a younger participant. Several court cases have considered whether front-loaded interest credits under cash balance 

plans violate the age discrimination rules and have reached inconsistent conclusions.118 A similar issue may arise with respect to 

other types of hybrid plans. 

Determination of minimum lump-sum benefits 

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, 

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. 

Most cash balance plans are designed to permit a lump-sum distribution of a participant’s hypothetical account balance upon termination of employment. As is the case with defined benefit pension plans generally, such a lump-sum amount is required to be not 

less than the present value of the benefit payable at normal retirement age, determined using the statutory interest and mortality 

assumptions.119 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, 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. 

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 will 

cause a discrepancy between the value of the minimum lump-sum 

and the employee’s hypothetical account balance. In particular, if 

86 

120This result is sometimes referred to as ‘‘whipsaw.’’ 121This notice is required under the Economic Growth and Tax Relief Reconciliation Act of 

2001 (‘‘EGTRRA’’) and applies to plan amendments effective on or after June 7, 2001. 

the plan’s interest crediting rate is higher than the statutory interest rate, then the resulting lump-sum amount will generally be 

greater than the hypothetical account balance.120

Protection of accrued benefits when a plan is amended 

In general, an amendment of a qualified retirement plan may not 

reduce benefits that have already accrued (the ‘‘anticutback rule’’). 

For this purpose, an amendment is treated as reducing accrued 

benefits if it has the effect of eliminating or reducing an early retirement benefit or a retirement-type subsidy or of eliminating an 

optional form of benefit. Several approaches may be used to comply 

with the anticutback rule, including wearaway and no-wearaway 

approaches. 

Under a wearaway approach, a participant’s accrued benefit after 

a plan amendment is determined as the greater of: (1) the participant’s accrued benefit before the amendment (‘‘preamendment’’ accrued benefit); and (2) the benefit determined by applying the new 

benefit formula to all the participant’s years of service, both before 

and after the amendment. Under a wearaway approach, if a participant’s preamendment accrued benefit is greater than the benefit 

provided under the new formula, the participant may have a period 

(a wearaway period) during which the participant does not accrue 

any additional benefits. 

Under a no-wearaway approach, a participant’s benefit after a 

plan amendment is determined as the sum of: (1) the participant’s 

preamendment accrued benefit; and (2) the accrued benefit that results from applying the new formula with respect to years of service after the plan amendment. Under this approach, participants 

earn additional benefits under the new plan formula immediately. 

In addition to wearaway and no-wearaway approaches, a plan 

amendment may include a grandfather provision under which the 

benefit formula that applied before the amendment continues to 

apply to the participants in the plan before the amendment if it 

provides a greater benefit than the new formula or under which 

such participants may choose between the old and new formulas. 

Alternatively, a plan amendment may provide a grandfather provision for older and longer-service participants. 

A notice requirement must be met if an amendment to a defined 

benefit pension plan provides for a significant reduction in the rate 

of future benefit accrual.121 In that case, the plan administrator 

must furnish a written notice concerning the amendment. Notice 

may also be required if a plan amendment eliminates or reduces 

an early retirement benefit or retirement-type subsidy. The plan 

administrator is required to provide the notice to any participant 

or alternate payee whose rate of future benefit accrual may reasonably be expected to be significantly reduced by the plan amendment (and to any employee organization representing affected participants). The notice must be written in a manner calculated to be 

understood by the average plan participant and must provide sufficient information to allow recipients to understand the effect of the 

amendment. The plan administrator is generally required to proVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00086 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
87 

122 Joint Committee on Taxation, 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. 

vide the notice at least 45 days before the effective date of the plan 

amendment. 

REASONS FOR CHANGE

The Committee believes that cash balance and other hybrid 

plans may 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 the design of these 

plans raises questions as to how the defined benefit pension plan 

rules should be applied to them. 

In addition, cash balance plan issues arose as part of the Joint 

Committee staff’s investigation (undertaken at the request of the 

Committee) relating to Enron Corporation and related entities, including a review of the qualified retirement plans covering Enron 

employees. In the report of its investigation, the Joint Committee 

staff found that the lack of clear guidance with respect to cash balance plan conversions and cash balance plans in general creates 

uncertainty for employers and employees and recommended that 

clear rules be adopted with respect to the operation of cash balance 

plans and the conversion of traditional defined benefit pension 

plans into cash balance plans.122

The Committee is also concerned about assuring adequate protections for participants in hybrid plans, including in the case of conversions to hybrid plans. For example, concern about cash balance 

plan conversions led to the enactment under EGTRRA of the notice 

requirement applicable in the case of a plan amendment that provides for a significant reduction in the rate of future benefit accrual. 

The Committee believes that the uncertainty that exists with respect to certain aspects of hybrid plans should be resolved by providing rules that both accommodate the nature and design of these 

plans and include appropriate protections for participants. 

EXPLANATION OF PROVISION

In general 

The provision provides rules for qualified cash balance plans (as 

defined in the provision) that address: (1) application of the prohibition on age discrimination; and (2) determination of minimum 

lump-sum benefits. The provision also provides rules with respect 

to the conversion of a defined benefit pension plan to a cash balance plan design. 

Under the provision, a qualified cash balance plan is a cash balance plan that meets certain vesting and interest credit requirements. With respect to vesting, benefits under the plan must be 

fully vested after three years of service. With respect to interest 

credits, the plan must generally provide that any interest credit (or 

equivalent amount) for any plan year is at a rate that is: (1) not 

less than the Federal mid-term interest rate (i.e., the rate on the 

average market yield on outstanding marketable Treasury securities with remaining periods to maturity of over three years, but not 

over nine years); and (2) not greater than the greater of the FedVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00087 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
88 

123The rate of interest on amounts invested conservatively in long-term investment grade corporate bonds 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. The Secretary is directed to make publicly available the indices and methodology used to determine the rate. It is intended that the 

Secretary of the Treasury will also issue regulations that provide alternatives to the use of the 

applicable Federal mid-term interest rate in appropriate circumstances. For example, in the case 

of pension equity plans, the interest credit requirement may be indirectly reflected in the benefit 

formula using a fixed rate of return, such as three percent, and reasonable service groupings. 

eral mid-term interest rate and a rate equivalent to the rate of interest on amounts invested conservatively in long-term investment 

grade corporate bonds.123 In addition, if the interest credit rate 

under the plan is a variable rate, the plan must provide that, on 

plan termination, the rate of interest used to determine accrued 

benefits under the plan is equal to the average of the interest rates 

used under the plan during the five-year period ending on the termination date. 

Under the provision, a cash balance plan is a defined benefit 

plan under which the accrued benefit is determined by reference to 

a hypothetical ‘‘accumulation’’ account, to which pay credits and interest credits are credited. In addition, the Secretary of the Treasury is directed to issue regulations that include in the definition of 

cash balance plan any defined benefit plan (or any portion of a defined benefit plan) that has an effect similar to a cash balance 

plan. The regulations may provide that if a plan sponsor represents 

in communications to participants and beneficiaries that a plan 

amendment results in a plan being a defined benefit plan having 

an effect similar to a cash balance plan, the plan is treated as a 

cash balance plan. The regulations may also provide for the treatment of a cash balance plan as a qualified cash balance plan if the 

plan has an effect similar to the effect of a qualified cash balance 

plan. For example, the regulations may provide rules under which 

a pension equity plan is treated as a qualified cash balance plan. 

Age discrimination 

Under the provision, a qualified cash balance plan does not violate the prohibition on age discrimination merely because it may 

reasonably be expected that the period over which interest credits 

will be made to a participant’s accumulation account (or its equivalent) is longer for a younger participant, provided that the rate of 

any pay credit or interest credit to an account under the plan does 

not decrease by reason of the participant’s attainment of any age. 

Determination of minimum lump-sum benefits 

Under the provision, except as provided in regulations, for purposes of determining the minimum present value of a participant’s 

accrued benefit under a qualified cash balance plan, the present 

value of the accrued benefit is equal to the balance in the participant’s accumulation account (or its equivalent) as of the time the 

present value determination is made. 

Conversions 

In general 

Under the provision, for purposes of the anticutback rule, an ‘‘applicable’’ plan amendment is treated as reducing a participant’s accrued benefit unless certain requirements are met. An applicable 

plan amendment is generally a plan amendment to a defined benVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00088 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
89 

124 If the benefits under two or more defined benefit plans established by an employer are coordinated in such a manner as to have the effect of the adoption of an applicable plan amendment, the sponsor of the defined benefit plan or plans providing for the coordination is treated 

as having adopted an applicable plan amendment as of the date the coordination begins. In addition, the Secretary of the Treasury is directed to issue regulations to prevent the avoidance 

of the requirements with respect to an applicable plan amendment through the use of two or 

more plan amendments rather than a single amendment. 

efit plan that has the effect of converting the plan to a cash balance 

plan.124

The provision requires that, under the terms of the plan as in effect after the amendment, the accrued benefit of a participant who 

is a participant as of the effective date of the amendment cannot 

at any time be less than the accrued benefit determined under one 

of three methods (as described below), which is specified in the 

plan and applies uniformly to all participants. An applicable plan 

amendment is not treated as using one of the three methods if the 

plan amendment has the effect of converting the plan into a cash 

balance plan other than a qualified cash balance plan. 

Methods of determining accrued benefits 

Methods.—The three methods under which accrued benefits must 

be determined after an applicable plan amendment are as follows: 

(1) no wearaway; (2) greater of new or old plan terms or participant 

election; and (3) equivalent methods as provided by the Secretary. 

No wearaway.—Under this method, the accrued benefit is the 

sum of: (1) a participant’s accrued benefit for years of service before 

the effective date of the amendment, determined under the terms 

of the plan as in effect before the amendment; and (2) except for 

certain required benefits (described below), the participant’s accrued benefit for years of service after the effective date of the plan 

amendment, determined under the terms of the plan as in effect 

after the terms of the amendment. 

In applying (2) above, the plan must provide certain required 

benefits under one of two options. Under the first option, for each 

of the first five years for which the amendment is effective, the accrued benefit of all participants is the greater of the accrued benefits determined under the terms of the plan as in effect before and 

after the amendment. Under the second option, for all periods after 

the effective date of the amendment, the accrued benefit of all participants who, as of the effective date of the amendment, have attained the age of 40 and have a combined age and years of service 

of at least 55, is determined under either of the following methods 

as selected by the plan and specified in the amendment: (1) the accrued benefit is the greater of the accrued benefits determined 

under the terms of the plan as in effect before and after the amendment; or (2) at the election of the participant at the time of conversion, the accrued benefit is determined under the terms of the plan 

as in effect either before or after the amendment. 

Requirements similar to the requirements described above must 

also be met with respect to any early retirement benefit or retirement-type subsidy. 

Greater of new or old plan terms or participant election.—Under 

this method, the accrued benefit is determined under either of the 

following methods as selected by the plan and specified in the 

amendment: (1) the accrued benefit is the greater of the accrued 

benefits determined under the terms of the plan as in effect before 

90 

and after the amendment; or (2) at the election of the participant 

at the time of conversion, the accrued benefit is determined under 

the terms of the plan as in effect either before or after the amendment. 

Requirements similar to the requirements described above must 

also be met with respect to any early retirement benefit or retirement-type subsidy. 

Regulations.—Under the third method, the accrued benefit is determined under regulations issued by the Secretary of Treasury 

that require a plan to provide a credit of additional amounts or increases in initial account balances in amounts substantially equivalent to the benefits that would be required to be provided in order 

to satisfy one of the two preceding methods. 

Additional rules 

If, for purposes of any of the methods, an applicable plan amendment provides that an amount will initially be credited to a participant’s accumulation account (or its equivalent) on the effective date 

of the amendment with respect to a participant’s accrued benefit 

for periods before the effective date, the method is treated as being 

satisfied with respect to such accrued benefit only if the amount 

initially credited is not less than the present value of the accrued 

benefit, determined using the mortality table applicable under the 

minimum present value rules and the lower of: (1) the interest rate 

applicable under the minimum present value rules or (2) the interest rate used to credit interest under the plan. For purposes of the 

first method described above, if any early retirement benefit or retirement-type subsidy is not included in the initial account balance, 

the plan shall credit the accumulation account with the amount of 

such benefit or subsidy for the plan year in which the participant 

retires if, as of such time, the participant has met any age, years 

of service, and other requirements under the plan for entitlement 

to the subsidy. 

If a plan provides a participant with an election under the first 

or second method, the plan is not treated as satisfying the method 

unless the plan provides the participant with notice of the right to 

make the election, including information (meeting requirements 

prescribed by the Secretary of the Treasury) (1) which the participant may use to project benefits under the formulas from which the 

participant may choose and model the impact of the choice, and (2) 

with respect to circumstances under which the participant might 

not receive the projected accrued benefits by reason of a plan termination or otherwise. In addition, the plan must provide that if, 

during any of the first five plan years during which the participant’s election is in effect, a plan amendment is adopted that results in a significant reduction in the future rate of benefit accrual, 

the accrued benefit of the participant must be determined as if the 

participant had made the election that resulted in the greatest accrued benefit. Moreover, a plan is not treated as satisfying either 

method if any other benefit is contingent (directly or indirectly) on 

the election. 

The Secretary of the Treasury is directed to prescribe regulations 

under which, if a plan amendment is treated as meeting the requirements of the provision with respect to any participant because 

the participant is eligible to continue to accrue benefits in the same 

91 

manner as under the terms of the plan as in effect before the 

amendment: (1) the plan is not treated as failing to meet the accrual requirements if the requirements of the provision are met; 

and (2) subject to terms and conditions provided in the regulations, 

the plan is not treated as failing to satisfy the prohibition on discrimination in favor of highly compensated employees merely because the plan provides any accrual or benefit required to be provided under the method used to meet the requirements of the provision or because only participants as of the effective date of the 

amendment are eligible to continue to accrue benefits in the same 

manner as under the terms of the plan as in effect before the 

amendment, provided that the plan satisfied the prohibition on discrimination in favor of highly compensated employees under the 

terms of the plan as in effect before the amendment. 

No inference regarding present law 

Nothing in the provision is to be construed to infer the proper 

treatment of cash balance plans, or conversions to cash balance 

plans, under the rules prohibiting age discrimination or for determining the minimum present value of benefits as in effect before 

the provision is effective. Further, it is intended that no inference 

be drawn that a cash balance plan or conversion that occurred in 

the past is or was in violation of the law merely because it fails 

or failed to meet the requirements set forth in the bill for future 

cash balance plans and conversions. 

EFFECTIVE DATE

The provisions relating to age discrimination and the determination of lump-sum benefits are generally effective for periods after 

July 26, 2005. In the case of a plan in existence on July 26, 2005, 

for purposes of the provisions relating to age discrimination and 

the determination of lump-sum benefits, the vesting and interest 

credit requirements that must be met in order to be a qualified 

cash balance plan apply for plan years beginning after December 

31, 2006, unless the plan sponsor elects to apply these requirements for any period after July 26, 2005, and before the first plan 

year beginning after December 31, 2006. In the case of a plan 

maintained pursuant to one or more collective bargaining agreements ratified on or before the date of enactment, the vesting and 

interest credit requirements do not apply for plan years beginning 

before the earlier of: (1) the later of January 1, 2007, or the date 

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

date of enactment); or (2) January 1, 2009. 

The provision relating to conversions is effective with respect to 

plan amendments adopted and taking effect after July 26, 2005, except that a plan sponsor may elect to apply the provision with respect to a plan amendment adopted before July 26, 2005, and taking effect after that date. 

92 

125Legally, 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. 126The 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). 

J. DEFINED BENEFIT PENSION PLAN BENEFITS PROVIDED IN COMBINATION WITH A QUALIFIED CASH-OR-DEFERRED ARRANGEMENT

(Sec. 342 of the bill, new sec. 414(x) of the Code, and new sec. 

210(e) of ERISA) 

PRESENT LAW

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),125 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 (referred to as ‘‘elective deferrals’’ or ‘‘elective contributions’’).126 A 

section 401(k) plan may provide that elective deferrals are made for 

an employee at a specified rate unless the employee elects otherwise (i.e., elects not to make contributions or to make contributions 

at a different rate), provided that the employee has an effective opportunity to elect to receive cash in lieu of the default contributions. Such a design is sometimes referred to as ‘‘automatic enrollment.’’ 

Besides elective deferrals, a section 401(k) plan may provide for: 

(1) matching contributions, which are employer contributions that 

are made only if an employee makes elective deferrals; and (2) nonelective contributions, which are employer contributions that are 

made without regard to whether an employee makes elective deferrals. Under a section 401(k) plan, no benefit other than matching 

contributions can be contingent on whether an employee makes 

elective deferrals. Thus, an employee’s eligibility for benefits under 

a defined benefit pension plan cannot be contingent on whether the 

employee makes elective deferrals. 

A cash balance plan is a defined benefit pension plan with benefits resembling the benefits associated with defined contribution 

plans. Cash balance plans are sometimes 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’’). Other types of hybrid plans exist as well, such as socalled ‘‘pension equity’’ plans. 

The assets of a qualified retirement plan (either a defined contribution plan or a defined benefit pension plan) must be held in 

trust for the exclusive benefit of participants and beneficiaries. Defined benefit pension plans are subject to funding rules, which require employers to make contributions at specified minimum levVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00092 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
93 

127The Pension Benefit Guaranty Corporation generally guarantees a minimum level of benefits under a defined benefit plan. 128 Under special rules, referred to as the permitted disparity rules, higher contributions or 

benefits can be provided to higher-paid employees in certain circumstances without violating the 

general nondiscrimination rules. 

els.127 In addition, limits apply on the extent to which defined benefit pension plan assets may be invested in employer securities or 

real property. The minimum funding rules and limits on investments in employer securities or real property generally do not 

apply to defined contribution plans. 

Nondiscrimination requirements 

Under a general nondiscrimination requirement, the contributions or benefits provided under a qualified retirement plan must 

not discriminate in favor of highly compensated employees.128

Treasury regulations provide detailed and exclusive rules for determining whether a plan satisfies the general nondiscrimination 

rules. Under the regulations, the amount of contributions or benefits provided under the plan and the benefits, rights and features 

offered under the plan must be tested. 

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; and (2) the rate of matching contribution with respect to any 

94 

129 Alternatively, matching contributions may be provided at a different rate, provided that: 

(1) the rate of matching contribution doesn’t increase as the rate of elective deferral increases; 

and (2) the aggregate amount of matching contributions with respect to each rate of elective 

deferral is not less than the amount that would be provided under the general rule. 

rate of elective deferrals of a highly compensated employee is not 

greater than the rate of matching contribution with respect to the 

same rate of elective deferral of a nonhighly compensated employee.129

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 

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 must satisfy the ACP test. Alternatively, it is deemed to 

satisfy the ACP test if it satisfies a matching contribution safe harbor, under which (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 rules 

A qualified retirement plan generally must satisfy one of two alternative minimum vesting schedules. A plan satisfies the first 

schedule if a participant acquires a nonforfeitable right to 100 percent of the participant’s accrued benefit derived from employer contributions upon the completion of five years of service. A plan satisfies the second schedule if a participant has a nonforfeitable right 

to at least 20 percent of the participant’s accrued benefit derived 

from employer contributions after three years of service, 40 percent 

after four years of service, 60 percent after five years of service, 80 

percent after six years of service, and 100 percent after seven years 

of service. 

Special vesting rules apply to elective deferrals and matching 

contributions. Elective deferrals must be immediately vested. 

Matching contributions generally must vest at least as rapidly as 

under one of two alternative minimum vesting schedules. A plan 

satisfies the first schedule if a participant acquires a nonforfeitable 

right to 100 percent of matching contributions upon the completion 

of three years of service. A plan satisfies the second schedule if a 

participant has a nonforfeitable right to 20 percent of matching 

contributions for each year of service beginning with the participant’s second year of service and ending with 100 percent after six 

95 

130The top-heavy vesting schedules are the same as the vesting schedules that apply to 

matching contributions. 

years of service. However, matching contributions under a safe harbor section 401(k) plan must be immediately vested. 

Top-heavy rules 

Under present law, a top-heavy plan is a qualified retirement 

plan under which cumulative benefits are provided primarily to key 

employees. An employee is considered a key employee if, during the 

prior year, the employee was (1) an officer with compensation in 

excess of a certain amount ($135,000 for 2005), (2) a five-percent 

owner, or (3) a one-percent owner with compensation in excess of 

$150,000. A plan that is top-heavy must provide (1) minimum employer contributions or benefits to participants who are not key employees and (2) more rapid vesting for participants who are not key 

employees (as discussed below). 

In the case of a defined contribution plan, the minimum contribution is the lesser of (1) three percent of compensation, or (2) 

the highest percentage of compensation at which contributions 

were made for any key employee. In the case of a defined benefit 

pension, the minimum benefit is the lesser of (1) two percent of average compensation multiplied by the participant’s years of service, 

or (2) 20 percent of average compensation. For this purpose, a participant’s average compensation is generally average compensation 

for the consecutive-year period (not exceeding five years) during 

which the participant’s aggregate compensation is the greatest. 

Top-heavy plans must satisfy one of two alternative minimum 

vesting schedules. A plan satisfies the first schedule if a participant acquires a nonforfeitable right to 100 percent of contributions 

or benefits upon the completion of three years of service. A plan 

satisfies the second schedule if a participant has a nonforfeitable 

right to 20 percent of contributions or benefits for each year of 

service beginning with the participant’s second year of service and 

ending with 100 percent after six years of service.130

A safe harbor section 401(k) plan is not subject to the top-heavy 

rules, provided that, if the provides for matching contributions, it 

must also satisfy the matching contribution safe harbor. 

Other qualified retirement plan requirements 

Qualified retirement plans are subject to various other requirements, some of which depend on whether the plan is a defined contribution plan or a defined benefit pension. Such requirements include limits on contributions and benefits and spousal protections. 

In the case of a defined contribution plan, annual additions with 

respect to each plan participant cannot exceed the lesser of: (1) 100 

percent of the participant’s compensation; or (2) a dollar amount, 

indexed for inflation ($42,000 for 2005). Annual additions are the 

sum of employer contributions, employee contributions, and forfeitures with respect to an individual under all defined contribution 

plans of the same employer. In the case of a defined benefit pension, annual benefits payable under the plan generally may not exceed the lesser of: (1) 100 percent of average compensation; or (2) 

$170,000 (for 2005). 

96 

Defined benefit pension plans are required to provide benefits in 

the form of annuity unless the participant (and his or her spouse, 

in the case of a married participant) consents to another form of 

benefit. In addition, in the case of a married participant, benefits 

generally must be paid in the form of a qualified joint and survivor 

annuity (‘‘QJSA’’) unless the participant and his or her spouse consent to a distribution in another form. A QJSA is an annuity for 

the life of the participant, with a survivor annuity for the life of 

the spouse which is not less than 50 percent (and not more than 

100 percent) of the amount of the annuity payable during the joint 

lives of the participant and his or her spouse. These spousal protection requirements generally do not apply to a defined contribution 

plan that does not offer annuity distributions. 

Annual reporting by qualified retirement plans 

The plan administrator of a qualified retirement plan generally 

must file an annual return with the Secretary of the Treasury and 

an annual report with the Secretary of Labor. In addition, in the 

case of a defined benefit pension, certain information is generally 

required to be filed with the Pension Benefit Guaranty Corporation 

(‘‘PBGC’’). Form 5500, which consists of a primary form and various schedules, includes the information required to be filed with 

all three agencies. The plan administrator satisfies the reporting 

requirement with respect to each agency by filing the Form 5500 

with the Department of Labor. 

The Form 5500 is due by the last day of the seventh month following the close of the plan year. The due date may be extended 

up to two and one-half months. Copies of filed Form 5500s are 

available for public examination at the U.S. Department of Labor. 

A plan administrator must automatically provide participants 

with a summary of the annual report within two months after the 

due date of the annual report (i.e., by the end of the ninth month 

after the end of the plan year unless an extension applies). In addition, a copy of the full annual report must be provided to participants on written request. 

REASONS FOR CHANGE

The Committee recognizes that, over time, coverage under defined benefit pension plans has declined and coverage under defined contribution plans, particularly section 401(k) plans, has 

grown. Defined benefit pension plans play a valuable role in providing retirement income security; for example, benefits are payable in the form of an annuity and benefits are guaranteed by the 

PBGC. In addition, providing defined benefit pension plan coverage 

in combination with a section 401(k) plan offers the opportunity for 

enhanced retirement savings. However, maintaining multiple plans 

may result in burdensome administrative costs, especially for 

smaller employers. Moreover, present law does not allow benefits 

provided under a defined benefit pension plan to be taken into account for purposes of the nondiscrimination test applicable to section 401(k) plans. The Committee believes that employers should 

be encouraged to provide defined benefit pension plans in combination with section 401(k) plans in a manner that reduces administrative costs and provides meaningful benefits to both rank-and-file 

and highly compensated employees. 

97 

131Qualified cash balance plan is defined as under the provision relating to the treatment of 

cash balance and other hybrid defined benefit pension plans and means a cash balance plan (or 

other hybrid plan as provided under regulations) that meets certain vesting and interest credit 

requirements. 

EXPLANATION OF PROVISION

In general 

The provision provides rules for an ‘‘eligible combined plan.’’ An 

eligible combined plan is a plan: (1) which consists of a defined 

benefit plan and an ‘‘applicable’’ defined contribution plan; (2) the 

assets of which are held in a single trust forming part of the plan 

and are clearly identified and allocated to the defined benefit plan 

and the applicable defined contribution plan to the extent necessary for the separate application of the Code and ERISA; and (3) 

that meets certain benefit, contribution, and vesting requirements 

as discussed below. For this purpose, an applicable defined contribution plan is a defined contribution plan that includes a qualified cash or deferred arrangement (i.e., a section 401(k) plan). 

Except as specified in the provision, the provisions of the Code 

and ERISA are applied to any defined benefit plan and any applicable defined contribution plan that are part of an eligible combined plan in the same manner as if each were not part of the eligible combined plan. Thus, for example, the present-law limits on 

contributions and benefits apply separately to contributions under 

an applicable defined contribution plan that is part of an eligible 

combined plan and to benefits under the defined benefit plan that 

is part of the eligible combined plan. In addition, the spousal protection rules apply to the defined benefit plan, but not to the applicable defined contribution plan except to the extent provided under 

present law. Moreover, although the assets of an eligible combined 

plan are held in a single trust, the funding rules apply to a defined 

benefit plan that is part of an eligible combined plan on the basis 

of the assets identified and allocated to the defined benefit, and the 

limits on investing defined benefit plan assets in employer securities or real property apply to such assets. Similarly, separate participant accounts are required to be maintained under the applicable defined contribution plan that is part of the eligible combined 

plan, and earnings (or losses) on participants’ account are based on 

the earnings (or losses) with respect to the assets of the applicable 

defined contribution plan. 

Requirements with respect to defined benefit plan 

Under the provision, a defined benefit plan that is part of an eligible combined plan is required to provide each participant with a 

benefit of not less than the applicable percentage of the participant’s final average pay. The applicable percentage is the lesser of: 

(1) one percent multiplied by the participant’s years of service; or 

(2) 20 percent. For this purpose, final average pay is determined 

using the consecutive-year period (not exceeding five years) during 

which the participant has the greatest aggregate compensation. 

If the defined benefit plan is a qualified cash balance plan,131 the 

plan is treated as meeting the benefit requirement under the provision if each participant receives a pay credit for each plan year of 

not less than the percentage of compensation determined in accordance with the following table: 

98 

132 As under present law, matching contributions may be provided at a different rate, provided 

that: (1) the rate of matching contribution doesn’t increase as the rate of elective deferral increases; and (2) the aggregate amount of matching contributions with respect to each rate of 

elective deferral is not less than the amount that would be provided under the general rule. 

TABLE 3.—PERCENTAGE OF COMPENSATION 

Participant’s age as of the beginning of the plan year Percentage 

30 or less ................................................................................................................. 2 

Over 30 but less than 40 ....................................................................................... 4 

Over 40 but less than 50 ....................................................................................... 6 

50 or over ................................................................................................................ 8 

A defined benefit that is part of an eligible combined plan must 

provide the required benefit to each participant, regardless of 

whether the participant makes elective deferrals to the applicable 

defined contribution plan that is part of the eligible combined plan. 

Any benefits provided under the defined benefit plan (including 

any benefits provided in addition to required benefits) must be fully 

vested after three years of service. 

Requirements with respect to applicable defined contribution plan 

Under the provision, certain automatic enrollment and matching 

contribution requirements must be met with respect to an applicable defined contribution plan that is part of an eligible combined 

plan. First, the qualified cash or deferred arrangement under the 

plan must constitute an automatic contribution arrangement, 

under which each employee eligible to participate is treated as having elected to make deferrals of four percent of compensation unless the employee elects otherwise (i.e., elects not to make deferrals 

or to make deferrals at a different rate). Participants must be given 

notice of their right to elect otherwise and must be given a reasonable period of time after receiving notice in which to make an election. In addition, participants must be given notice of their rights 

and obligations within a reasonable period before each year. 

Under the applicable defined contribution plan, the employer 

must make matching contributions on behalf of each employee eligible to participate in the arrangement in an amount equal to 50 

percent of the employee’s elective deferrals up to four percent of 

compensation, and the rate of matching contribution with respect 

to any elective deferrals for highly compensated employees is not 

greater than the rate of match for nonhighly compensated employees.132 Matching contributions in addition to the required matching 

contributions may also be made. The employer may also make nonelective contributions under the applicable defined contribution 

plan, but any nonelective contributions are not taken into account 

in determining whether the matching contribution requirement is 

met. 

Any matching contributions under the applicable defined contribution plan (including any in excess of required matching contributions) must be fully vested when made. Any nonelective contributions made under the applicable defined contribution plan 

must be fully vested after three years of service. 

Nondiscrimination and other rules 

An applicable defined contribution plan satisfies the ADP test on 

a safe-harbor basis. Matching contributions under an applicable defined contribution plan must satisfy the ACP test or may satisfy 

99 

133The permitted disparity rules do not apply in determining whether an applicable defined 

contribution plan or a defined benefit plan that is part of an eligible combined plan satisfies 

(1) the contribution or benefit requirements under the provision or (2) the nondiscrimination requirements. 

the matching contribution safe harbor under present law, as modified to reflect the matching contribution requirements applicable 

under the provision. 

Nonelective contributions under an applicable defined contribution plan and benefits under a defined benefit plan that are part 

of an eligible combined plan are generally subject to the nondiscrimination rules as under present law. However, neither a defined benefit plan nor an applicable defined contribution plan that 

is part of an eligible combined plan may be combined with another 

plan in determining whether the nondiscrimination requirements 

are met.133

An applicable defined contribution plan and a defined benefit 

plan that are part of an eligible combined plan are treated as meeting the top-heavy requirements. 

The provision requires that all contributions, benefits, and other 

rights and features that are provided under a defined benefit plan 

or an applicable defined contribution plan that is part of an eligible 

combined plan must be provided uniformly to all participants. This 

requirement applies regardless of whether nonuniform contributions, benefits, or other rights or features could be provided without 

violating the nondiscrimination rules. However, it is intended that 

a plan will not violate the uniformity requirement merely because 

benefits accrued for periods before a defined benefit or defined contribution plan became part of an eligible combined plan are protected (as required under the anticutback rules). 

Annual reporting 

An eligible combined plan is treated as a single plan for purposes 

of annual reporting. Thus, only a single Form 5500 is required. All 

of the information required under present law with respect to a defined benefit plan or a defined contribution plan must be provided 

in the Form 5500 for the eligible combined plan. In addition, only 

a single summary annual report must be provided to participants. 

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2006. 

K. STUDIES

(Secs. 451 and 452 of the bill) 

1. Study on revitalizing the defined benefit plans 

PRESENT LAW

Qualified retirement plans are broadly classified into two categories under the Code, defined benefit plans and defined contribution plans, based on the nature of the benefits provided. Under a 

defined benefit plan, benefits are determined under a plan formula, 

such as a formula based on the participant’s compensation and 

years of service. Subject to certain limits, benefits under a defined 

benefit plan are guaranteed by the PBGC. 

100 

Under a defined contribution plan, benefits are based solely on 

contributions allocated to separate accounts for each plan participant (as adjusted by gains, losses, and expenses). Benefits under 

defined contribution plans are not insured by the PBGC. 

REASONS FOR CHANGE

The Committee has a continuing interest in retirement income 

security and in the role that defined benefit plans pay in providing 

that security. The Committee bill address a number of issues with 

respect to defined benefit plans, including funding reforms and providing clear rules for cash balance and other hybrid plans. The 

Committee believes it appropriate to continue to study issues relating to defined benefit plans to determine further ways in which retirement security may be enhanced. 

EXPLANATION OF PROVISION

The Department of the Treasury, the Department of Labor, and 

the PBGC are directed to jointly undertake a study on ways to revitalize employer interest in defined benefit plans. In conducting 

the study, the Treasury and Labor Departments and the PBGC are 

to consider: (1) ways to encourage the establishment of defined benefit plans by small and mid-sized employers; (2) ways to encourage 

the continued maintenance of defined benefit plans by larger employers; and (3) legislative provisions to accomplish these objectives. 

Within two years after the date of enactment, the results of the 

study, together with any recommendations for legislative changes, 

are to be reported to the Senate Committees on Finance and 

Health, Education, Labor, and Pensions and to the House Committees on Ways and Means and Education and the Workforce. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

2. Study on floor-offset ESOPs 

PRESENT LAW

Qualified retirement plans are broadly classified into two categories under the Code, defined benefit plans and defined contribution plans, based on the nature of the benefits provided. Under a 

defined benefit plan, benefits are determined under a plan formula, 

such as a formula based on the participant’s compensation and 

years of service. Subject to certain limits, benefits under a defined 

benefit plan are guaranteed by the PBGC. 

Under a defined contribution plan, benefits are based solely on 

contributions allocated to separate accounts for each plan participant (as adjusted by gains, losses, and expenses). Benefits under 

defined contribution plans are not insured by the PBGC. 

Under ERISA, defined contribution plans are referred to as ‘‘individual account plans.’’ Individual account plans may provide that 

plan participants may direct the investment of assets allocated to 

their accounts. If certain requirements are satisfied, ERISA fiduVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00100 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
101 

134 ERISA sec. 404(c). 135 ERISA sec. 407. The 10-percent limitation also applies to employer real property. 136Department of the Treasury, General Explanations of the Administration’s Fiscal Year 

2006 Revenue Proposals (February 2005) at 95. 

ciary liability does not apply to investment decisions made by plan 

participants under an individual account plan.134

ERISA generally prohibits qualified retirement plans from acquiring employer securities if, after the acquisition, more than 10 

percent of the assets of the plan would be invested in employer securities.135 This 10-percent limitation does not apply to eligible individual account plans. 

A floor-offset arrangement is an arrangement under which benefits payable to a participant under a defined benefit plan are reduced by benefits under an individual account plan. The 10-percent 

limitation on the acquisition of employer securities applies to an individual account plan that is part of a floor-offset arrangement, unless the floor-offset arrangement was established on or before December 17, 1987. 

An employee stock ownership plan (an ‘‘ESOP’’) is an individual 

account plan that is designed to invest primarily in employer securities and which meets certain other requirements. ESOPs are not 

subject to the 10-percent limit on the acquisition of employer securities, unless the ESOP is part of a floor-offset arrangement (as described above). 

REASONS FOR CHANGE

Concerns have been raised with respect to the impact of grandfathered floor-offset arrangements on benefit security. For example, 

the Administration’s Fiscal Year 2006 Budget includes a proposal 

to eliminate the grandfather for pre-1988 floor-offset arrangements. 

The rationale behind this proposal is that if a company with such 

a plan goes out of business, the employer stock held in the related 

defined contribution plan typically becomes worthless, with the result that the defined benefit plan is left with a large unfunded liability.136 The Committee believes it appropriate to study the effects these arrangements may have on benefit security. 

EXPLANATION OF PROVISION

The Department of the Treasury and the PBGC are directed to 

undertake a study to determine the number of floor-offset ESOPs 

still in existence and the extent to which such plans pose a risk to 

plan participants or beneficiaries or the PBGC. The study is to consider legislative provisions to address the risks posed by floor-offset 

ESOPs. 

Within one year after the date of enactment, the Department of 

the Treasury and the PBGC are to report the results of the study, 

together with any recommendations for legislative changes, to the 

Senate Committees on Finance and Health, Education, Labor, and 

Pensions and the House Committees on Ways and Means and Education and the Workforce. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

102 

137 In addition to the provisions described here, the bill also contains notice requirements that 

apply with respect to benefit limitations for underfunded single-employer defined benefit pension plans and bankruptcy of an employer. These notices are described respectively under Title 

III–B (above) and Title VI–B (below). 138 Code secs. 6058 and 6059; ERISA secs. 103 and 4065. 139 Code sec. 6059; ERISA sec. 103(d). Once the actuarial report for a plan year is filed, the 

actuarial assumptions used for that plan year may not be changed. 140 ERISA sec. 104(b). A participant must also be provided with a copy of the full annual report on written request. 

TITLE IV—DISCLOSURE AND BENEFIT STATEMENT REQUIREMENTS FOR SINGLE-EMPLOYER DEFINED BENEFIT 

PENSION PLANS 137

A. ACTUARIAL REPORTS AND SUMMARY ANNUAL REPORTS

(Sec. 401 of the bill, sec. 6059 and new sec. 4980K of the Code, and 

secs. 103, 104, 502, 4010 and 4011 of ERISA) 

PRESENT LAW

Actuarial report 

The plan administrator of a qualified retirement plan generally 

must file an annual return with the Secretary of the Treasury, an 

annual report with the Secretary of Labor, and certain information 

with the Pension Benefit Guaranty Corporation (‘‘PBGC’’).138 Form 

5500, which consists of a primary form and various schedules, includes the information required to be filed with all three agencies. 

The plan administrator satisfies the reporting requirement with respect to each agency by filing the Form 5500 with the Department 

of Labor. 

In the case of a defined benefit pension plan, the annual report 

must include an actuarial report (filed on Schedule B of the Form 

5500).139 The actuarial report must include, for example, information as to the value of plan assets, the plan’s accrued and current 

liabilities, expected disbursements from the plan for the year, plan 

contributions, the plan’s actuarial cost method and actuarial assumptions, and amortization bases established in the year. The report must be signed by an actuary enrolled to practice before the 

IRS, Department of Labor and the PBGC. 

The Form 5500 is due by the last day of the seventh month following the close of the plan year. The due date may be extended 

up to two and one-half months. Copies of filed Form 5500s are 

available for public examination at the U.S. Department of Labor. 

Summary annual report 

A plan administrator must provide a summary of the annual report to participants, and beneficiaries receiving benefits under the 

plan, within two months after the due date of the annual report 

(i.e., by the end of the ninth month after the end of the plan year 

unless an extension applies).140 The summary annual report must 

include information about the assets and liabilities of the plan, 

plan receipts and disbursements, the plan’s funded status, and 

such other material as is necessary to fairly summarize the latest 

annual report. The summary annual report must also include a 

statement whether contributions were made to keep the plan funded in accordance with minimum funding requirements, or whether 

contributions were not made and the amount of the deficit. If an 

extension applies for the Form 5500, the summary annual report 

103 

141 ERISA sec. 502(c)(1)(B). 142 ERISA sec. 4011. 143 ERISA sec. 4010. 

must be provided within two months after the extended due date. 

A plan administrator who fails to provide a summary annual report 

to a participant or beneficiary within 30 days of a written request 

may be liable to the participant or beneficiary for a civil penalty 

of up to $100 a day from the date of the failure. 141

Certain notices must be provided to participants in a single-employer defined benefit pension plan relating to the funding status 

of the plan. In the case of an underfunded plan for which variable 

rate PBGC premiums are required, the plan administrator generally must notify plan participants of the plan’s funding status 

and the limits on the PBGC benefit guarantee if the plan terminates while underfunded. 142

Required reporting to the PBGC 

Certain financial information with respect to the members of a 

controlled group and actuarial information with respect to plans 

maintained by members of the controlled group must be reported 

annually to the PBGC.143 This information (referred to as ‘‘section 

4010 information’’) must be reported if: (1) the aggregate unfunded 

vested benefits under all plans maintained by controlled-group 

members exceed $50 million; (2) required contributions totaling 

more than $1 million have not been made with respect to an underfunded plan maintained by a controlled-group member; or (3) any 

portion of a waived funding deficiency exceeding $1 million is outstanding with respect to a plan maintained by a controlled-group 

member. Section 4010 information provided to the PBGC is not 

available to the public. 

REASONS FOR CHANGE

The Committee believes that additional information affecting the 

funding status of single-employ defined benefit pension plans 

should be available to plan participants, the Treasury and Labor 

Departments and the PBGC, and the public, in order to provide a 

more accurate picture of the funding status of such plans and the 

security of benefits promised under the plan. The Committee further believes that such information should be provided on a more 

timely basis. In addition, the Committee wishes to reduce administrative burdens by consolidating information required to be provided to plan participants and to strengthen enforcement of the 

summary annual report requirement. 

EXPLANATION OF PROVISION

Actuarial report 

Under the provision, an actuarial report with respect to a singleemployer defined benefit pension plan must include the following 

information: (1) the fair market value of the plan’s assets; (2) the 

plan’s target liability and target normal cost; (3) the plan’s at-risk 

target liability and at-risk normal cost (determined as if the plan 

sponsor is a financially-weak employer for the plan year and the 

104 

144Target liability, target normal cost, at-risk target liability, at-risk normal cost, and financially-weak status are defined under the provision relating to funding requirements for singleemployer plans. 145 Because a plan covering 100 or fewer participants is not subject to the quarterly contributions requirements, the acceleration of the due date for the actuarial report does not apply to 

such a plan. 146 It is intended that, once the actuarial report for a plan year is filed, the actuarial assumptions used for that plan year may not be changed. 147This information replaces the present-law requirement under ERISA section 4011 that 

plan participants be notified of the plan’s funding status and the limits on the PBGC benefit 

guarantee. 

four immediately preceding plan years); and (4) any other information prescribed by the Secretary of Labor.144

Under the provision, if quarterly contributions are required with 

respect to a single-employer plan, the deadline for the actuarial report is accelerated.145 The actuarial report is due on the 15th day 

of the second month following the close of the plan year (e.g., February 15 for calendar year plans).146 If any contribution is subsequently made for the plan year, the additional contribution is required to be reflected in an amended actuarial report with the 

Form 5500. 

Summary annual report 

The provision changes the information that must be included in 

a summary annual report and the time by which the summary annual report must be provided. The provision also amends the Code 

to add a summary annual report requirement. 

Under the provision, the summary annual report under ERISA 

must be provided to participants, and beneficiaries receiving benefits under the plan, within 15 days of the due date of the annual 

report and must include the following additional information: (1) a 

statement of the plan’s funded target liability percentage (i.e., the 

value of the plan’s assets as a percentage of the plan’s target liability) for the plan year and the two preceding plan years; (2) a statement of whether the plan sponsor was a financially-weak employer 

for the plan year and the two preceding plan years; and (3) the limits on benefits guaranteed by the PBGC if the plan is terminated 

while underfunded.147 In the case of a failure to provide the summary annual report to a participant or beneficiary, the Secretary 

of Labor may assess a civil penalty against the plan administrator 

of up to $100 a day from the date of the failure. 

The provision adds a Code requirement of a summary annual report, similar to the summary annual report required under ERISA. 

The summary annual report is to be provided by the date prescribed by the Secretary of the Treasury. The Secretary of Labor 

may prescribe the form and manner of the summary annual report 

required under the Code. The summary annual report must be 

written in a manner calculated to be understood by the average 

plan participant and may be delivered in written, electronic, or 

other appropriate form to the extent that such form is reasonably 

accessible to the recipient. It is intended that providing participants and beneficiaries with a summary annual report, containing 

the information required under the Code and ERISA, within the required timeframe, will satisfy the requirements under both the 

Code and ERISA. 

Under the provision, an excise tax is generally imposed on the 

employer in the case of a failure to provide the summary annual 

105 

148 Code sec. 404. 149The 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. 150 In the case of a plan with 100 or fewer participants, current liability for this purpose does 

not include the liability attributable to benefit increases for highly compensated employees reContinued 

report required under the Code. The excise tax is $100 per day for 

each participant or beneficiary with respect to whom the failure occurs, until the summary annual report is provided or the failure is 

otherwise corrected. If the employer exercises reasonable diligence 

to meet the requirement, the total excise tax imposed during a taxable year will not exceed $500,000. The $500,000 limit is applied 

separately with respect to each type of notice required. 

No tax will be imposed with respect to a failure if the employer 

does not know that the failure existed and exercises reasonable 

diligence to comply with the requirement. In addition, no tax is imposed if the employer uses reasonable diligence to comply and provides the summary annual report within 30 days of learning of the 

failure. In the case of a failure due to reasonable cause and not to 

willful neglect, the Secretary of the Treasury is authorized to waive 

the excise tax to the extent that the payment of the tax would be 

excessive or otherwise inequitable relative to the failure involved. 

Public disclosure of section 4010 information 

Under the provision, section 4010 information provided to the 

PBGC is available to the public. 

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2006. 

TITLE V—IMPROVEMENTS IN FUNDING RULES FOR 

MULTIEMPLOYER DEFINED BENEFIT PLANS 

A. INCREASE IN DEDUCTION LIMITS

(Secs. 322 and 501 of the bill and sec. 404 of the Code) 

PRESENT LAW

Employer contributions to qualified retirement plans are deductible subject to certain limits.148 In general, the deduction limit depends on the kind of plan. 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. 

In the case of a defined benefit pension plan, 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.149 The 

maximum amount otherwise deductible generally is not less than 

the plan’s unfunded current liability.150

106 

sulting from an amendment that is made or becomes effective, whichever is later, within the 

last two years. 151The provision does not include the present-law rule under which, in the case of a plan with 

100 or fewer participants, the liability attributable to certain benefit increases for highly compensated employees is disregarded. 

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. 

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. 

REASONS FOR CHANGE

The Committee is concerned that the present-law deduction limits play a role in the underfunding of multiemployer defined benefit 

pension plans by creating the potential that contributions required 

under collective bargaining agreements might not be 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. The Committee believes that the deduction limit 

for contributions to multiemployer defined benefit pension plans 

should be increased in order to reduce the possibility that contributions required under collective bargaining agreements are not deductible and to encourage contributions in amounts sufficient to assure that promised benefits are adequately funded. The Committee 

further believes that the overall limit on deductible contributions 

should not apply to multiemployer plans. 

EXPLANATION OF PROVISION

The provision increases the limits on deductions for contributions 

to multiemployer plans. Under the provision, the maximum 

amount otherwise deductible for contributions to a multiemployer 

defined benefit pension plan is not less than the excess (if any) of 

(1) 130 percent of the plan’s current liability, over (2) the value of 

plan assets.151

In addition, under the provision, multiemployer plans are not 

taken into account in applying the overall limit on deductions for 

contributions to combinations of defined benefit and defined contribution plans. Thus, the deduction for contributions to a defined 

benefit pension plan or a defined contribution plan is not affected 

by the overall deduction limit merely because employees are covered by both plans if either plan is a multiemployer plan (i.e., the 

separate deduction limits for contributions to defined contribution 

plans and defined benefit pension plans apply). 

107 

152 ERISA sec. 101(f). 

EFFECTIVE DATE

The provision is effective for contributions for years beginning 

after December 31, 2005. 

B. MULTIEMPLOYER PLAN FUNDING NOTICE

(Sec. 502 of the bill and new sec. 4980L of the Code) 

PRESENT LAW

Under ERISA, effective for plan years beginning after December 

31, 2004, the plan administrator of a multiemployer plan must provide an annual funding notice to: (1) each participant and beneficiary; (2) each labor organization representing such participants 

or beneficiaries; (3) each employer that has an obligation to contribute under the plan; and (4) the PBGC.152

Such a notice must include: (1) identifying information, including 

the name of the plan, the address and phone number of the plan 

administrator and the plan’s principal administrative officer, each 

plan sponsor’s employer identification number, and the plan identification number; (2) a statement as to whether the plan’s funded 

current liability percentage for the plan year to which the notice 

relates is at least 100 percent (and if not, a statement of the percentage); (3) a statement of the value of the plan’s assets, the 

amount of benefit payments, and the ratio of the assets to the payments for the plan year to which the notice relates; (4) a summary 

of the rules governing insolvent multiemployer plans, including the 

limitations on benefit payments and any potential benefit reductions and suspensions (and the potential effects of such limitations, 

reductions, and suspensions on the plan); (5) a general description 

of the benefits under the plan which are eligible to be guaranteed 

by the PBGC and the limitations of the guarantee and circumstances in which such limitations apply; and (6) any additional 

information which the plan administrator elects to include to the 

extent it is not inconsistent with regulations prescribed by the Secretary of Labor. 

The annual funding notice must be provided no later than two 

months after the deadline (including extensions) for filing the 

plan’s annual report for the plan year to which the notice relates 

(i.e., generally nine or eleven months after the end of the plan 

year). The funding notice must be provided in a form and manner 

prescribed in regulations by the Secretary of Labor. Additionally, 

it must be written so as to be understood by the average plan participant and may be provided in written, electronic, or some other 

appropriate form to the extent that it is reasonably accessible to 

persons to whom the notice is required to be provided. 

A plan administrator that fails to provide the required notice to 

a participant or beneficiary may be liable to the participant or beneficiary in the amount of up to $100 a day from the time of the failure and for such other relief as a court may deem proper. 

REASONS FOR CHANGE

The Committee believes that providing participants in multiemployer defined benefit pension plans with annual notices regarding 

108 

plan funding and solvency, and the potential effect on plan benefits, increases participants’ understanding of the security of their 

retirement benefits. In addition, providing such notices to employee 

representatives, employers, and the PBGC increases the likelihood 

that possible funding problems are addressed promptly. The Committee believes that enhancing enforcement of the present-law notice requirement will help to ensure that required notices are provided. 

EXPLANATION OF PROVISION

The provision amends the Code to include a multiemployer plan 

funding notice requirement similar to the present-law ERISA requirement. 

Under the provision, an excise tax is generally imposed on the 

plan if a funding notice is not provided as required under the Code. 

The excise tax is $100 per day for each person with respect to 

whom the failure occurred, until notice is provided or the failure 

is otherwise corrected. If the plan administrator exercises reasonable diligence to meet the notice requirements, the total excise tax 

imposed during a taxable year will not exceed $500,000. No tax will 

be imposed with respect to a failure if the plan administrator does 

not know that the failure existed and exercises reasonable diligence 

to comply with the notice requirement. In addition, no tax will be 

imposed if the plan administrator exercises reasonable diligence to 

comply and provides the required notice as soon as reasonably 

practicable after learning of the failure. In the case of a failure due 

to reasonable cause and not to willful neglect, the Secretary of the 

Treasury is authorized to waive the excise tax to the extent that 

the payment of the tax would be excessive or otherwise inequitable 

relative to the failure involved. 

EFFECTIVE DATE

The provision is effective for failures to provide the required notice after the date of enactment. 

C. PERMIT QUALIFIED TRANSFERS OF EXCESS PENSION ASSETS TO

RETIREE HEALTH ACCOUNTS BY MULTIEMPLOYER PLAN

(Sec. 503 of the bill, sec. 420 of the Code and secs. 101, 403 and 

408 of ERISA) 

PRESENT LAW

Defined benefit plan assets generally may not revert to an employer prior to termination of the plan and satisfaction of all plan 

liabilities. In addition, a reversion may occur only if the plan so 

provides. A reversion prior to plan termination may constitute a 

prohibited transaction and may result in plan disqualification. Any 

assets that revert to the employer upon plan termination are includible in the gross income of the employer and subject to an excise tax. The excise tax rate is 20 percent if the employer maintains a replacement plan or makes certain benefit increases in connection with the termination; if not, the excise tax rate is 50 percent. Upon plan termination, the accrued benefits of all plan participants are required to be 100-percent vested. 

109 

153Sec. 420. 154The value of plan assets for this purpose is the lesser of fair market value or actuarial 

value. 155 In the case of plan years beginning before January 1, 2004, excess assets generally means 

the excess, if any, of the value of the plan’s assets over the greater of (1) the lesser of (a) the 

accrued liability under the plan (including normal cost) or (b) 170 percent of the plan’s current 

liability (for 2003), or (2) 125 percent of the plan’s current liability. The current liability full 

funding limit was repealed for years beginning after 2003. Under the general sunset provision 

of EGTRRA, the limit is reinstated for years after 2010. 

A pension plan may provide medical benefits to retired employees through a separate account that is part of such plan. A qualified transfer of excess assets of a defined benefit plan to such a 

separate account within the plan may be made in order to fund retiree health benefits.153 A qualified transfer does not result in plan 

disqualification, is not a prohibited transaction, and is not treated 

as a reversion. Thus, transferred assets are not includible in the 

gross income of the employer and are not subject to the excise tax 

on reversions. No more than one qualified transfer may be made 

in any taxable year. A qualified transfer may not be made from a 

multiemployer plan. No qualified transfer may be made after December 31, 2013. 

Excess assets generally means the excess, if any, of the value of 

the plan’s assets 154 over the greater of (1) the accrued liability 

under the plan (including normal cost) or (2) 125 percent of the 

plan’s current liability.155 In addition, excess assets transferred in 

a qualified transfer may not exceed the amount reasonably estimated to be the amount that the employer will pay out of such account during the taxable year of the transfer for qualified current 

retiree health liabilities. No deduction is allowed to the employer 

for (1) a qualified transfer or (2) the payment of qualified current 

retiree health liabilities out of transferred funds (and any income 

thereon). 

Transferred assets (and any income thereon) must be used to pay 

qualified current retiree health liabilities for the taxable year of the 

transfer. Transferred amounts generally must benefit pension plan 

participants, other than key employees, who are entitled upon retirement to receive retiree medical benefits through the separate 

account. Retiree health benefits of key employees may not be paid 

out of transferred assets. 

Amounts not used to pay qualified current retiree health liabilities for the taxable year of the transfer are to be returned to the 

general assets of the plan. These amounts are not includible in the 

gross income of the employer, but are treated as an employer reversion and are subject to a 20-percent excise tax. 

In order for the transfer to be qualified, accrued retirement benefits under the pension plan generally must be 100-percent vested 

as if the plan terminated immediately before the transfer (or in the 

case of a participant who separated in the one-year period ending 

on the date of the transfer, immediately before the separation). 

In order for a transfer to be qualified, the employer generally 

must maintain retiree health benefits at the same level for the taxable year of the transfer and the following four years. 

In addition, ERISA provides that, at least 60 days before the 

date of a qualified transfer, the employer must notify the Secretary 

of Labor, the Secretary of the Treasury, employee representatives, 

and the plan administrator of the transfer, and the plan adminisVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00109 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
110 

156 ERISA sec. 101(e). ERISA also provides that a qualified transfer is not a prohibited transaction under ERISA or a prohibited reversion. 157 Code sec. 404(c). 

trator must notify each plan participant and beneficiary of the 

transfer.156

Under present law, special deduction rules apply to a multiemployer defined benefit plan established before January 1, 1954, 

under an agreement between the Federal government and employee representatives in a certain industry.157

REASONS FOR CHANGE

The Committee believes that it is appropriate to allow the multiemployer defined benefit plan to which special deduction rules 

apply to make qualified transfers of excess benefit plan assets. 

EXPLANATION OF PROVISION

The provision allows qualified transfers of excess defined benefit 

plan assets to be made by the multiemployer defined benefit plan 

to which special deduction rules apply (or a continuation or spinoff thereof) that primarily covers employees in the building and 

construction industry. 

EFFECTIVE DATE

The provision is effective for transfers made in taxable years beginning after December 31, 2004. 

TITLE VI—IMPROVEMENTS IN PBGC GUARANTEE 

PROVISIONS 

A. INCREASES IN PBGC PREMIUMS FOR SINGLE-EMPLOYER PLANS

(Sec. 601 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 

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 

111 

158The 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. 159 ERISA sec. 4022(b) and (c). 160The 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 plans 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; 

(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). 

terminate the plan unless the employer (and members of the employer’s controlled group) meets one of four criteria of financial distress.158

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.159

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.160 The dollar limit is indexed annually for inflation. The guaranteed amount is reduced for benefits starting before age 65. 

112 

161The phase in does not apply if the benefit is less than $20 per month. 

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.161

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 rate variable 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 PFEA 2004, in determining the amount of unfunded 

vested benefits for PBGC variable rate premium purposes 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 Committee’s proposals relating to defined benefit 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 reflected in pension benefits. Thus, the Committee bill increases the 

PBGC premium to reflect past increases in wages and provides for 

automatic increases in the future to reflect wage increases. 

113 

162The 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 

for years beginning after December 31, 2006. 163 ERISA sec. 4022(b) and (c). 

Changes to the variable rate premium are also appropriate to 

better reflect the risk that underfunded plans present to the pension insurance system. Thus, the Committee bill modifies the base 

for the premium to conform to the funding targets under the funding provisions of the bill. 

EXPLANATION OF PROVISION

Flat rate premiums 

The provision increases the flat-rate premium to $30 per participant for years beginning after December 31, 2005. After 2006, the 

flat-rate premium is indexed for increases in the social security 

contribution and benefit base (rounded to the nearest dollar). 

Variable rate premium 

Under the provision, for years beginning in 2006, the variable 

rate premium is equal to $9.00 for each $1,000 of a plan’s unfunded 

current liability as of the close of the preceding plan year. The interest rate used in determining current liability for plan years beginning in 2005 continues to apply for plan years beginning in 

2006. 

For years beginning after 2006, the variable rate premium is 

equal to $9.00 for each $1,000 of a plan’s unfunded target liability 

(determined as under the minimum funding rules) as of the close 

of the preceding plan year.162

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2005. 

B. RULES RELATING TO BANKRUPTCY OF EMPLOYER

(Secs. 403 and 602 of the bill and secs. 4022 and 4044 of ERISA) 

PRESENT LAW

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 is guaranteed.163

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). 

114 

164The 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 plans 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; 

(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. 165The phase in does not apply if the benefit is less than $20 per month. 

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.164The dollar limit is indexed annually for 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.165

Asset allocation 

ERISA contains rules for allocating the assets of a single-employer plan when the plan terminates. Plan assets available to pay 

for benefits under a terminating plan include all plan assets remaining after subtracting all liabilities (other than liabilities for future benefit payments), paid or payable from plan assets under the 

provisions of the plan. On termination, the plan administrator 

must allocate plan assets available to pay for benefits under the 

plan in the manner prescribed by ERISA. In general, plan assets 

available to pay for benefits under the plan are allocated to six priority categories. If the plan has sufficient assets to pay for all benefits in a particular priority category, the remaining assets are allocated to the next lower priority category. This process is repeated 

until all benefits in the priority categories are provided or until all 

available plan assets have been allocated. 

REASONS FOR CHANGE

The PBGC reports that many plan sponsors continue to operate 

their plans until late in the bankruptcy process, and then terminate the plan just prior to emerging from bankruptcy or prior to 

liquidation. During the time the sponsor is in bankruptcy, payment 

of lump sums and annuity purchases may drain plan assets, which 

may reduce assets available for payment of non-guaranteed benefits to other participants. Benefits may also continue to accrue during bankruptcy and the PBGC limits on guarantees may continue 

to increase as a result of inflation adjustments, which may further 

increase unfunded benefits and the liability of the pension insurance system. In addition, the longer a company is in bankruptcy, 

the more participants earn a higher priority claim under the plan 

to share in limited plan assets and recoveries for payment of nonguaranteed benefits. This increase in the number of participants 

with higher priority claims dilutes the potential payments to those 

who have been retired or eligible to retire for the longest time. 

115 

166For purposes of the provision, a contributing sponsor is considered to have entered bankruptcy if the sponsor files or has had filed against it a petition seeking liquidation or reorganization in a case under title 11 of the United States Code or under any similar Federal law or 

law of a State or political subdivision. 

EXPLANATION OF PROVISION

Under the provision, the amount of guaranteed benefits payable 

by the PBGC is frozen when a contributing sponsor enters bankruptcy or a similar proceeding.166 If the plan terminates during the 

contributing sponsor’s bankruptcy, the amount of guaranteed benefits payable by the PBGC is determined based on plan provisions, 

salary, service, and the guarantee in effect on the date the employer entered bankruptcy. The priority among participants for 

purposes of allocating plan assets and employer recoveries to nonguaranteed benefits in the event of plan termination is determined 

as of the date the sponsor enters bankruptcy or a similar proceeding. 

A contributing sponsor of a single-employer plan is required to 

notify the plan administrator when the sponsor enters bankruptcy 

or a similar proceeding. Within a reasonable time after a plan administrator knows or has reason to know that a contributing sponsor has entered bankruptcy (or similar proceeding), the administrator is required to notify plan participants and beneficiaries of 

the bankruptcy and the limitations on benefit guarantees if the 

plan is terminated while underfunded, taking into account the 

bankruptcy. 

The Secretary of Labor is to prescribe the form and manner of 

notices required under this provision. The notice is to be written 

in a manner calculated to be understood by the average plan participant and may be delivered in written, electronic, or other appropriate form to the extent that such form is reasonably accessible 

to the applicable individual. 

The Secretary of Labor may assess a civil penalty of up to $100 

a day for each failure to provide the notice required by the provision. Each violation with respect to any single participant or beneficiary is treated as a separate violation. 

EFFECTIVE DATE

The provision is effective with respect to Federal bankruptcy or 

similar proceedings or arrangements for the benefit of creditors 

which are initiated on or after the date that is 30 days after enactment. 

C. LIMITATION ON PBGC GUARANTEE OF SHUTDOWN AND OTHER

BENEFITS

(Sec. 603 of the bill and sec. 4022 of ERISA) 

PRESENT LAW

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. Under present law, unpredictable contingent 

event benefits generally are not taken into account for funding purposes until the event has occurred. 

116 

167Treas. Reg. sec. 1.401–1(b)(1)(i). 168Treas. Reg. secs. 1.401(a)(4)–3(f)(4) and 1.411(a)–7(c). 169 ERISA sec. 4022(a). 170 ERISA sec. 4022(b) and (c). 

Under present law, defined benefit pension plans are not permitted to provide ‘‘layoff’’ benefits (i.e., severance benefits).167 However, defined benefit pension plans may provide subsidized early retirement benefits, including early retirement window benefits.168

Within certain limits, the PBGC guarantees any retirement benefit that was vested on the date of plan termination (other than 

benefits that vest solely on account of the termination), and any 

survivor or disability benefit that was owed or was in payment status at the date of plan termination.169 Generally only that part of 

the retirement benefit that is payable in monthly installments is 

guaranteed.170

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, early retirement benefits provided only if a plant shuts down) are guaranteed only if the triggering event occurs before plan termination. 

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. 

REASONS FOR CHANGE

Under present law, unpredictable contingent event benefits can 

create significant losses for the PBGC pension insurance system 

because such benefits cannot be funded due to the contingent nature of the event. In some cases, the PBGC has been faced with 

terminating a plan just prior to a plant shutdown in order to protect the system against further losses. 

EXPLANATION OF PROVISION

The provision provides that the PBGC guarantee of certain benefits phases in under the rules relating to plan amendments. Under 

the provision, if a benefit is payable by reason of (1) a plant shutdown or similar event, or (2) any event other than attainment of 

any age, performance of any service, receipt or derivation of any 

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

guarantee provisions apply as if a plan amendment had been 

adopted on the date such event occurred that provides for the payment of such benefits. 

EFFECTIVE DATE

The provision is effective for benefits that become payable as a 

result of a plant shutdown or other covered event that occurs after 

July 26, 2005. 

117 

D. PBGC PREMIUMS FOR SMALL AND NEW PLANS

(Secs. 604 and 605 the bill and sec. 4006 of ERISA) 

PRESENT LAW

Under present law, the Pension Benefit Guaranty Corporation 

(‘‘PBGC’’) provides insurance protection for participants and beneficiaries under certain defined benefit pension plans by guaranteeing certain basic benefits under the plan in the event the plan 

is terminated with insufficient assets to pay benefits promised 

under the plan. The guaranteed benefits are funded in part by premium payments from employers who sponsor defined benefit pension plans. The amount of the required annual PBGC premium for 

a single-employer plan is generally a flat rate premium of $19 per 

participant and an additional variable-rate premium based on a 

charge of $9 per $1,000 of unfunded vested benefits. Unfunded 

vested benefits under a plan generally means (1) the unfunded current liability for vested benefits under the plan, over (2) the value 

of the plan’s assets, reduced by any credit balance in the funding 

standard account. No variable-rate premium is imposed for a year 

if contributions to the plan were at least equal to the full funding 

limit. 

The PBGC guarantee is phased in ratably in the case of plans 

that have been in effect for less than five years, and with respect 

to benefit increases from a plan amendment that was in effect for 

less than five years before termination of the plan. 

REASONS FOR CHANGE

The Committee believes that reducing the PBGC premiums for 

new plans and plans of small employers will help encourage the establishment of defined benefit pension plans, particularly by small 

employers. 

EXPLANATION OF PROVISION

Reduced flat-rate premiums for new plans of small employers 

Under the provision, for the first five plan years of a new singleemployer plan of a small employer, the flat-rate PBGC premium is 

$5 per plan participant. 

A small employer would be a contributing sponsor that, on the 

first day of the plan year, has 100 or fewer employees. For this 

purpose, all employees of the members of the controlled group of 

the contributing sponsor are to be taken into account. In the case 

of a plan to which more than one unrelated contributing sponsor 

contributes, employees of all contributing sponsors (and their controlled group members) are to be taken into account in determining 

whether the plan was a plan of a small employer. 

A new plan means a defined benefit pension plan maintained by 

a contributing sponsor if, during the 36-month period ending on the 

date of adoption of the plan, such contributing sponsor (or controlled group member or a predecessor of either) has not established or maintained a plan subject to PBGC coverage with respect 

to which benefits were accrued for substantially the same employees as in the new plan. 

118 

Reduced variable-rate PBGC premium for new plans 

The provision provides that the variable-rate premium is phased 

in for new defined benefit pension plans over a six-year period 

starting with the plan’s first plan year. The amount of the variablerate premium is a percentage of the variable premium otherwise 

due, as follows: zero percent of the otherwise applicable variablerate premium in the first plan year; 20 percent in the second plan 

year; 40 percent in the third plan year; 60 percent in the fourth 

plan year; 80 percent in the fifth plan year; and 100 percent in the 

sixth plan year (and thereafter). 

A new defined benefit pension plan is defined as described above 

under the provision relating to flat-rate premiums for new plans of 

small employers. 

Reduced variable-rate PBGC premium for small plans 

In the case of a plan of a small employer, the variable-rate premium is no more than $5 multiplied by the number of plan participants in the plan at the end of the preceding plan year. For purposes of the provision, a small employer is a contributing sponsor 

that, on the first day of the plan year, has 25 or fewer employees. 

For this purpose, all employees of the members of the controlled 

group of the contributing sponsor are to be taken into account. In 

the case of a plan to which more than one unrelated contributing 

sponsor contributed, employees of all contributing sponsors (and 

their controlled group members) are to be taken into account in determining whether the plan was a plan of a small employer. 

EFFECTIVE DATE

The reduction of the flat-rate premium for new plans of small 

employers and the reduction of the variable-rate premium for new 

plans apply to plans first effective after December 31, 2005. The reduction of the variable-rate premium for small plans applies to 

plan years beginning after December 31, 2005. 

E. AUTHORIZATION FOR PBGC TO PAY INTEREST ON PREMIUM

OVERPAYMENT REFUNDS

(Sec. 606 of the bill and sec. 4007(b) of ERISA) 

PRESENT LAW

The PBGC charges interest on underpayments of premiums, but 

is not authorized to pay interest on overpayments. 

REASONS FOR CHANGE

The Committee believes that an employer or other person who 

overpays PBGC premiums should receive interest on a refund of 

the overpayment. 

EXPLANATION OF PROVISION

The provision allows the PBGC to pay interest on overpayments 

made by premium payors. Interest paid on overpayments is to be 

calculated at the same rate and in the same manner as interest 

charged on premium underpayments. 

119 

EFFECTIVE DATE

The provision is effective with respect to interest accruing for periods beginning not earlier than the date of enactment. 

F. RULES FOR SUBSTANTIAL OWNER BENEFITS IN TERMINATED

PLANS

(Sec. 607 of the bill and secs. 4021, 4022, 4043, and 4044 of ERISA) 

PRESENT LAW

Under present law, the Pension Benefit Guaranty Corporation 

(‘‘PBGC’’) provides participants and beneficiaries in a defined benefit pension plan with certain minimal guarantees as to the receipt 

of benefits under the plan in case of plan termination. The employer sponsoring the defined benefit pension plan is required to 

pay premiums to the PBGC to provide insurance for the guaranteed benefits. In general, the PBGC will guarantee all basic benefits which are payable in periodic installments for the life (or lives) 

of the participant and his or her beneficiaries and are non-forfeitable at the time of plan termination. The amount of the guaranteed 

benefit is subject to certain limitations. One limitation is that the 

plan (or an amendment to the plan which increases benefits) must 

be in effect for 60 months before termination for the PBGC to guarantee the full amount of basic benefits for a plan participant, other 

than a substantial owner. In the case of a substantial owner, the 

guaranteed basic benefit is phased in over 30 years beginning with 

participation in the plan. A substantial owner is one who owns, directly or indirectly, more than 10 percent of the voting stock of a 

corporation or all the stock of a corporation. Special rules restricting the amount of benefit guaranteed and the allocation of assets 

also apply to substantial owners. 

REASONS FOR CHANGE

The Committee believes that the present-law rules concerning 

limitations on guaranteed benefits for substantial owners are overly complicated and restrictive and thus may discourage some small 

business owners from establishing defined benefit pension plans. 

EXPLANATION OF PROVISION

The provision provides that the 60-month phase-in of guaranteed 

benefits applies to a substantial owner with less than 50 percent 

ownership interest. For a substantial owner with a 50 percent or 

more ownership interest (‘‘majority owner’’), the phase-in occurs 

over a 10-year period and depends on the number of years the plan 

has been in effect. The majority owner’s guaranteed benefit is limited so that it cannot be more than the amount phased in over 60 

months for other participants. The rules regarding allocation of assets apply to substantial owners, other than majority owners, in 

the same manner as other participants. 

EFFECTIVE DATE

The provision is effective for plan terminations with respect to 

which notices of intent to terminate are provided, or for which proVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00119 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
120 

171The PBGC termination insurance program does not cover plans of professional service employers that have fewer than 25 participants. 

ceedings for termination are instituted by the PBGC, after December 31, 2005. 

G. ACCELERATION OF PBGC COMPUTATION OF BENEFITS

ATTRIBUTABLE TO RECOVERIES FROM EMPLOYERS

(Sec. 608 of the bill and secs. 4022(c) and 4062(c) of ERISA) 

PRESENT LAW

In general 

The Pension Benefit Guaranty Corporation (‘‘PBGC’’) provides insurance protection for participants and beneficiaries under certain 

defined benefit pension plans by guaranteeing certain basic benefits under the plan in the event the plan is terminated with insufficient assets to pay promised benefits.171 The guaranteed benefits 

are funded in part by premium payments from employers who 

sponsor defined benefit plans. In general, the PBGC guarantees all 

basic benefits which are payable in periodic installments for the life 

(or lives) of the participant and his or her beneficiaries and are 

non-forfeitable at the time of plan termination. 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. 

The PBGC pays plan benefits, subject to the guarantee limits, 

when it becomes trustee of a terminated plan. The PBGC also pays 

amounts in addition to the guarantee limits (‘‘additional benefits’’) 

if there are sufficient plan assets, including amounts recovered 

from the employer for unfunded benefit liabilities and contributions 

owed to the plan. The employer (including members of its controlled group) is statutorily liable for these amounts. 

Plan underfunding recoveries 

The PBGC’s recoveries on its claims for unfunded benefit liabilities are shared between the PBGC and plan participants. The 

amounts recovered are allocated partly to the PBGC to help cover 

its losses for paying unfunded guaranteed benefits and partly to 

participants to help cover the loss of benefits that are above the 

PBGC’s guarantees and are not funded. In determining the portion 

of the recovered amounts that will be allocated to participants, 

present law specifies the use of a recovery ratio based on plan terminations during a specified period, rather than the actual amount 

recovered for each specific plan. The recovery ratio that applies to 

a plan includes the PBGC’s actual recovery experience for plan terminations in the five-Federal fiscal year period immediately preceding the Federal fiscal year in which falls the notice of intent to 

terminate for the particular plan. 

The recovery ratio is used for all but very large plans taken over 

by the PBGC. For a very large plan (i.e., a plan for which participants’ benefit losses exceed $20 million) actual recovery amounts 

with respect to the specific plan are used to determine the portion 

of the amounts recovered that will be allocated to participants. 

121 

172 Code secs. 401(a)(11) and 417; ERISA sec. 205. 

Recoveries for due and unpaid employer contributions 

Amounts recovered from an employer for contributions owed to 

the plan are treated as plan assets and are allocated to plan benefits in the same manner as other assets in the plan’s trust on the 

plan termination date. The amounts recovered are determined on 

a plan-specific basis rather than based on an historical average recovery ratio. 

REASONS FOR CHANGE

The Committee wishes to modify the rules for calculating certain 

recoveries by the PBGC to accelerate the time by which such recoveries can be determined, thereby accelerating the time by which 

benefits may be paid to participants in terminated plans. 

EXPLANATION OF PROVISION

The provision makes two amendments to the PBGC insurance 

provisions of ERISA. First, it changes the five-year period used to 

determine the recovery ratio for unfunded benefit liabilities so that 

the period begins two years earlier. Thus, under the bill, the recovery ratio that applies to a plan includes the PBGC’s actual recovery 

experience for plan terminations in the five-Federal fiscal year period ending with the third fiscal year preceding the fiscal year in 

which falls the notice of intent to terminate for the particular plan. 

In addition, the provision creates a recovery ratio for determining 

amounts recovered for contributions owed to the plan, based on the 

PBGC’s recovery experience over the same five-year period. 

The provision does not apply to very large plans (i.e., plans for 

which participants’ benefit losses exceed $20 million). As under 

present law, in the case of a very large plan, actual amounts recovered for unfunded benefit liabilities and for contributions owed to 

the plan are used to determine the amount available to provide additional benefits to participants. 

EFFECTIVE DATE

The provision is effective for any plan termination for which notices of intent to terminate are provided (or, in the case of a termination by the PBGC, a notice of determination that the plan must 

be terminated is issued) on or after the date that is 30 days after 

the date of enactment. 

TITLE VII—SPOUSAL PENSION PROTECTION 

A. STUDY OF SPOUSAL CONSENT FOR DISTRIBUTIONS FROM DEFINED

CONTRIBUTION PLANS

(Sec. 701 of the bill) 

PRESENT LAW

Qualified retirement plans are generally subject to requirements 

regarding the form in which benefits may be paid without spousal 

consent.172 The extent to which the requirements apply depends on 

the type of plan. 

122 

173 A money purchase pension plan is a type of defined contribution plan that provides for a 

set level of required employer contributions, generally as a specified percentage of participants’ 

compensation, and for the distribution of benefits in the form of an annuity. 174 In the case of a money purchase pension plan, a QPSA means an annuity for the life of 

the surviving spouse that has an actuarial value of at least 50 percent of the participant’s vested 

account balance as of the date of death. 

Defined benefit pension plans and money purchase pension 

plans173 are generally required to provide benefits in the form of 

a qualified joint and survivor annuity (‘‘QJSA’’) unless the participant and his or her spouse consent to another form of benefit. A 

QJSA is an annuity for the life of the participant, with a survivor 

annuity for the life of the spouse that is not less than 50 percent 

(and not more than 100 percent) of the amount of the annuity payable during the joint lives of the participant and his or her spouse. 

In addition, if a married participant dies before the commencement 

of retirement benefits, the surviving spouse must be provided with 

a qualified preretirement survivor annuity (‘‘QPSA’’), which generally must provide the surviving spouse with a benefit that is not 

less than the benefit that would have been provided under the survivor portion of a QJSA.174

The participant and his or her spouse may waive the right to a 

QJSA and QPSA if certain requirements are satisfied. In general, 

these requirements include providing the participant with a written explanation of the terms and conditions of the survivor annuity, the right to make, and the effect of, a waiver of the annuity, 

the rights of the spouse to waive the survivor annuity, and the 

right of the participant to revoke the waiver. In addition, the 

spouse must provide a written consent to the waiver, witnessed by 

a plan representative or a notary public, which acknowledges the 

effect of the waiver. 

Defined contribution plans other than money purchase pension 

plans are generally not subject to the QJSA and QPSA rules unless 

the plan offers benefits in the form of an annuity and the participant elects an annuity. However, such defined contribution plans 

must provide that the participant’s surviving spouse is the beneficiary of the participant’s entire vested account balance under the 

plan, unless the spouse consents to designation of another beneficiary. In addition, the plan must not have received a transfer of 

assets from a plan to which the QJSA and QPSA requirements applied or must separately account for the transferred assets. 

REASONS FOR CHANGE

Present law requires defined benefit pension plans and money 

purchase pensions plans to provide annuity benefits to a participant’s surviving spouse unless the spouse consents to waive the annuity. The spousal consent rules provide important protections for 

spouses, particularly nonworking spouses. These rules also assist 

married employees and their spouses in determining how to meet 

their retirement income needs by requiring distributions in the 

form of a QJSA unless the participant and spouse consent to another form. 

Most defined contribution plans do not offer benefits in the form 

of an annuity and thus are not subject to the QJSA and QPSA 

rules under present law. Requiring such plans to offer annuities 

(unless the participant and spouse elect otherwise) represents a 

123 

175 Code sec. 401(a)(13); ERISA sec. 206(d). 176 Code secs. 401(a)(13)(B) and 414(p); ERISA sec. 206(d)(3). 

significant policy change and is likely to increase administrative 

burdens for such plans. However, for many employees, a defined 

contribution plan is the only type of retirement plan offered by 

their employer. The Committee believes a study should be conducted on the feasibility and desirability of extending the spousal 

consent requirements to defined contribution plans. 

EXPLANATION OF PROVISION

The Secretary of Labor and the Secretary of the Treasury are required to conduct a joint study of the feasibility and desirability of 

extending the spousal consent requirements to defined contribution 

plans to which the requirements do not apply under present law 

and to report the results thereof, with recommendations for legislative changes, within two years after the date of enactment, to the 

House Committees on Ways and Means and on Education and the 

Workforce and the Senate Committees on Finance and on Health, 

Education, Labor and Pensions. In conducting the study, the Secretary of Labor and the Secretary of the Treasury are required to 

consider: (1) any modifications of the spousal consent requirements 

that are necessary to apply the requirements to defined contribution plans; and (2) the feasibility of providing notice and spousal 

consent in electronic form that are capable of authentication. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

B. DIVISION OF PENSION BENEFITS UPON DIVORCE

(Sec. 702 of the bill) 

PRESENT LAW

Benefits provided under a qualified retirement plan for a participant may not be assigned or alienated to creditors of the participant, except in very limited circumstances.175 One exception to the 

prohibition on assignment or alienation is a qualified domestic relations order (‘‘QDRO’’).176 A QDRO is a domestic relations order 

that creates or recognizes a right of an alternate payee, including 

a former spouse, to any plan benefit payable with respect to a participant and that meets certain procedural requirements. In addition, a QDRO generally may not require the plan to provide any 

type or form of benefit, or any option, not otherwise provided under 

the plan, or to provide increased benefits. 

Present law also provides that a QDRO may not require the payment of benefits to an alternate payee that are required to be paid 

to another alternate payee under a domestic relations order previously determined to be a QDRO. This rule implicitly recognizes 

that a domestic relations order issued after a QDRO may also qualify as a QDRO. However, present law does not otherwise provide 

specific rules for the treatment of a domestic relations order as a 

QDRO if the order is issued after another domestic relations order 

or a QDRO (including an order issued after a divorce decree) or revises another domestic relations order or a QDRO. 

124 

Present law provides specific rules that apply during any period 

in which the status of a domestic relations order as a QDRO is 

being determined (by the plan administrator, by a court, or otherwise). During such a period, the plan administrator is required to 

account separately for the amounts that would have been payable 

to the alternate payee during the period if the order had been determined to be a QDRO (referred to as ‘‘segregated amounts’’). If, 

within the 18-month period beginning with the date on which the 

first payment would be required to be made under the order, the 

order (or modification thereof) is determined to be a QDRO, the 

plan administrator is required to pay the segregated amounts (including any interest thereon) to the person or persons entitled 

thereto. If, within the 18-month period, the order is determined not 

to be a QDRO, or its status as a QDRO is not resolved, the plan 

administrator is required to pay the segregated amounts (including 

any interest) to the person or persons who would be entitled to 

such amounts if there were no order. In such a case, any subsequent determination that the order is a QDRO is applied prospectively only. 

REASONS FOR CHANGE

The Committee understands that uncertainty exists under 

present law as to the treatment of certain domestic relations orders 

as QDROs, such as those that are issued subsequent to divorce or 

that revise a previous domestic relations order or QDRO. The Committee understands that issues as to whether a subsequent domestic relations order is a QDRO have arisen even in cases involving 

the same former spouse, such as a domestic relations order that 

deals with benefits not dealt with in a QDRO previously issued to 

the same former spouse. The Committee believes the treatment of 

such domestic relations orders should be clarified. 

EXPLANATION OF PROVISION

The Secretary of Labor is directed to issue, not later than one 

year after the date of enactment of the provision, regulations to 

clarify the status of certain domestic relations orders. In particular, 

the regulations are to clarify that a domestic relations order otherwise meeting the QDRO requirements will not fail to be treated as 

a QDRO solely because of the time it is issued or because it is 

issued after or revises another domestic relations order or another 

QDRO. The regulations are also to clarify that such a domestic relations order is in all respects subject to the same requirements 

and protections that apply to QDROs. For example, as under 

present law, such a domestic relations order may not require the 

payment of benefits to an alternate payee that are required to be 

paid to another alternate payee under an earlier QDRO. In addition, the present-law rules regarding segregated amounts that 

apply while the status of a domestic relations order as a QDRO is 

being determined continue to apply. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

125 

C. PROTECTION OF RIGHTS OF FORMER SPOUSES UNDER THE

RAILROAD RETIREMENT SYSTEM

(Secs. 703 and 704 of the bill and secs. 2 and 5 of the Railroad Retirement Act of 1974) 

PRESENT LAW

In general 

The Railroad Retirement System has two main components. Tier 

I of the system is financed by taxes on employers and employees 

equal to the Social Security payroll tax and provides qualified railroad retirees (and their qualified spouses, dependents, widows, or 

widowers) with benefits that are roughly equal to Social Security. 

Covered railroad workers and their employers pay the Tier I tax 

instead of the Social Security payroll tax, and most railroad retirees collect Tier I benefits instead of Social Security. Tier II of the 

system replicates a private pension plan, with employers and employees contributing a certain percentage of pay toward the system 

to finance defined benefits to eligible railroad retirees (and qualified spouses, dependents, widows, or widowers) upon retirement; 

however, the Federal Government collects the Tier II payroll contribution and pays out the benefits. 

Former spouses of living railroad employees 

Generally, a former spouse of a railroad employee who is otherwise eligible for any Tier I or Tier II benefit cannot receive either 

benefit until the railroad employee actually retires and begins receiving his or her retirement benefits. This is the case regardless 

of whether a State divorce court has awarded such railroad retirement benefits to the former spouse. 

Former spouses of deceased railroad employees 

The former spouse of a railroad employee may be eligible for survivors benefits under Tier I of the Railroad Retirement System. 

However, a former spouse loses eligibility for any otherwise allowable Tier II benefits upon the death of the railroad employee. 

REASONS FOR CHANGE

The Committee wishes to provide more equitable treatment of 

former spouses of railroad employees. 

EXPLANATION OF PROVISION

Former spouses of living railroad employees 

The bill eliminates the requirement that a railroad employee actually receive railroad retirement benefits for the former spouse to 

be entitled to any Tier I benefit or Tier II benefit awarded under 

a State divorce court decision. 

Former spouses of deceased railroad employees 

The bill provides that a former spouse of a railroad employee 

does not lose eligibility for otherwise allowable Tier II benefits 

upon the death of the railroad employee. 

126 

177 Code secs. 401(a)(11) and 417; ERISA sec. 205. 178Thus, a plan could provide an annuity for the life of the participant, with a survivor annuity for the life of the spouse equal to 75 percent of the amount of the annuity payable during 

the joint lives of the participant and his or her spouse. 179Waiver and election rules apply to the waiver of the right of the spouse to be the beneficiary under a defined contribution plan that is not required to provide a QJSA. 

EFFECTIVE DATE

The railroad retirement provisions are effective one year after 

the date of enactment. 

D. MODIFICATIONS OF JOINT AND SURVIVOR ANNUITY

REQUIREMENTS

(Sec. 705 of the bill and secs. 401 and 417 of the Code and sec. 205 

of ERISA) 

PRESENT LAW

Defined benefit pension plans and money purchase pension plans 

are required to provide benefits in the form of a qualified joint and 

survivor annuity (‘‘QJSA’’) unless the participant and his or her 

spouse consent to another form of benefit.177 A QJSA is an annuity 

for the life of the participant, with a survivor annuity for the life 

of the spouse which is not less than 50 percent (and not more than 

100 percent) of the amount of the annuity payable during the joint 

lives of the participant and his or her spouse.178 In the case of a 

married participant who dies before the commencement of retirement benefits, the surviving spouse must be provided with a qualified preretirement survivor annuity (‘‘QPSA’’), which must provide 

the surviving spouse with a benefit that is not less than the benefit 

that would have been provided under the survivor portion of a 

QJSA. 

The participant and his or her spouse may waive the right to a 

QJSA and QPSA provided certain requirements are satisfied. In 

general, these conditions include providing the participant with a 

written explanation of the terms and conditions of the survivor annuity, the right to make, and the effect of, a waiver of the annuity, 

the rights of the spouse to waive the survivor annuity, and the 

right of the participant to revoke the waiver. In addition, the 

spouse must provide a written consent to the waiver, witnessed by 

a plan representative or a notary public, which acknowledges the 

effect of the waiver. 

Defined contribution plans other than money purchase pension 

plans are not required to provide a QJSA or QPSA if the participant does not elect an annuity as the form of payment, the surviving spouse is the beneficiary of the participant’s entire vested 

account balance under the plan (unless the spouse consents to designation of another beneficiary),179 and, with respect to the participant, the plan has not received a transfer from a plan to which the 

QJSA and QPSA requirements applied (or separately accounts for 

the transferred assets). In the case of a defined contribution plan 

subject to the QJSA and QPSA requirements, a QPSA means an 

annuity for the life of the surviving spouse that has an actuarial 

value of at least 50 percent of the participant’s vested account balance as of the date of death. 

127 

REASONS FOR CHANGE

The Committee believes that it is appropriate to allow participants greater choice in selecting their form of benefits. The Committee believes that participants should have more options regarding their form of benefits so that they can determine the most appropriate option depending on the participant’s individual circumstances. For example, some couples may prefer an option that 

pays a smaller benefit to the couple while they are both alive with 

a larger benefit to the surviving spouse. 

EXPLANATION OF PROVISION

The provision revises the minimum survivor annuity requirements to require that, at the election of the participant, benefits 

will be paid in the form of a ‘‘qualified optional survivor annuity.’’ 

A qualified optional survivor annuity means an annuity for the life 

of the participant with a survivor annuity for the life of the spouse 

which is equal to the applicable percentage of the amount of the 

annuity which is payable during the joint lives of the participant 

and the spouse and which is the actuarial equivalent of a single annuity for the life of the participant. 

If the survivor annuity under plan’s qualified joint and survivor 

annuity is less than 75 percent of the annuity payable during the 

joint lives of the participant and spouse, the applicable percentage 

is 75 percent. If the survivor annuity under plan’s qualified joint 

and survivor annuity is greater than or equal to 75 percent of the 

annuity payable during the joint lives of the participant and 

spouse, the applicable percentage is 50 percent. Thus, for example, 

if the survivor annuity under the plan’s qualified joint and survivor 

annuity is 50 percent, the survivor annuity under the qualified optional survivor annuity must be 75 percent. 

The written explanation required to be provided to participants 

explaining the terms and conditions of the qualified joint and survivor annuity must also include the terms and conditions of the 

qualified optional survivor annuity. 

Under the provision relating to plan amendments, a plan amendment made pursuant to a provision under the bill generally will not 

violate the anticutback rule if certain requirements are met (e.g., 

the plan amendment is made on or before the last day of the first 

plan year beginning on or after January 1, 2006). Thus, a plan is 

not treated as having decreased the accrued benefit of a participant 

solely by reason of the adoption of a plan amendment pursuant to 

the provision requiring that the plan offer a qualified optional survivor annuity. The elimination of a subsidized qualified joint and 

survivor annuity is not protected by the anticutback provision in 

the bill unless an equivalent or greater subsidy is retained in one 

of the forms offered under the plan as amended. For example, if a 

plan that offers a subsidized 50 percent qualified joint and survivor 

annuity is amended to provide an unsubsidized 50 percent qualified joint and survivor annuity and an unsubsidized 75 percent 

joint and survivor annuity as its qualified optional survivor annuity, the replacement of the subsidized 50 percent qualified joint and 

survivor annuity with the unsubsidized 50 percent qualified joint 

and survivor annuity is not protected by the anticutback protection. 

128 

180Sec. 415. 181Sec. 415(n)(3). 

EFFECTIVE DATE

The provision applies generally to plan years beginning after December 31, 2005. In the case of a plan maintained pursuant to one 

or more collective bargaining agreements, the provision applies to 

plan years beginning on or after the earlier of (1) the later of January 1, 2006, and the last date on which an applicable collective bargaining agreement terminates (without regard to extensions), and 

(2) January 1, 2007. 

TITLE VIII—IMPROVEMENTS IN PORTABILITY AND 

DISTRIBUTION RULES 

A. PURCHASE OF PERMISSIVE SERVICE CREDIT

(Sec. 801 of the bill and secs. 403(b)(13), 415(n)(3), and 457(e)(17) 

of the Code) 

PRESENT LAW

In general 

Present law imposes limits on contributions and benefits under 

qualified plans.180 The limits on contributions and benefits under 

qualified plans are based on the type of plan. Under a defined benefit plan, the maximum annual benefit payable at retirement is 

generally the lesser of (1) a certain dollar amount ($170,000 for 

2005) or (2) 100 percent of the participant’s average compensation 

for his or her high three years. 

A qualified retirement plan maintained by a State or local government employer may provide that a participant may make aftertax employee contributions in order to purchase permissive service 

credit, subject to certain limits.181

In the case of any repayment of contributions and earnings to a 

governmental plan with respect to an amount previously refunded 

upon a forfeiture of service credit under the plan (or another plan 

maintained by a State or local government employer within the 

same State), any such repayment is not taken into account for purposes of the section 415 limits on contributions and benefits. Also, 

service credit obtained as a result of such a repayment is not considered permissive service credit for purposes of the section 415 

limits. 

Permissive service credit 

Definition of permissive service credit 

Permissive service credit means credit for a period of service recognized by the governmental plan which the participant has not received under the plan and which the employee receives only if the 

employee voluntarily contributes to the plan an amount (as determined by the plan) that does not exceed the amount necessary to 

fund the benefit attributable to the period of service and that is in 

addition to the regular employee contributions, if any, under the 

plan. 

129 

182Priv. Ltr. Rul. 200229051 (April 26, 2002). 183Secs. 403(b)(13) and 457(e)(17). 

The IRS has ruled that credit is not permissive service credit 

where it is purchased to provide enhanced retirement benefits for 

a period of service already credited under the plan, as the enhanced benefit is treated as credit for service already received.182

Nonqualified service 

Service credit is not permissive service credit if more than five 

years of permissive service credit is purchased for nonqualified 

service or if nonqualified service is taken into account for an employee who has less than five years of participation under the plan. 

Nonqualified service is service other than service (1) as a Federal, 

State or local government employee, (2) as an employee of an association representing Federal, State or local government employees, 

(3) as an employee of an educational institution which provides elementary or secondary education, as determined under State law, or 

(4) for military service. Service under (1), (2) and (3) is nonqualified 

service if it enables a participant to receive a retirement benefit for 

the same service under more than one plan. 

Trustee-to-trustee transfers to purchase permissive service credit 

Under EGTRRA, a participant is not required to include in gross 

income a direct trustee-to-trustee transfer to a governmental defined benefit plan from a section 403(b) annuity or a section 457 

plan if the transferred amount is used (1) to purchase permissive 

service credit under the plan, or (2) to repay contributions and 

earnings with respect to an amount previously refunded under a 

forfeiture of service credit under the plan (or another plan maintained by a State or local government employer within the same 

State).183

REASONS FOR CHANGE

The Committee believes that allowing employees to use their section 403(b) annuity and governmental section 457 plan benefits to 

purchase permissive service credits or make repayments with respect to forfeitures of service credit results in more significant retirement benefits for employees who would not otherwise be able 

to afford such credits or repayments. The Committee believes that 

it is appropriate to modify the provisions regarding such transfers 

in order to facilitate such purchases or repayments. The Committee 

also believes that it is appropriate to expand the definition of permissive service credit and to allow participants to purchase credit 

for other periods deemed appropriate by the public retirement systems. 

EXPLANATION OF PROVISION

Permissive service credit 

The provision modifies the definition of permissive service credit 

by providing that permissive service credit means service credit 

which relates to benefits to which the participant is not otherwise 

entitled under such governmental plan, rather than service credit 

which such participant has not received under the plan. Credit 

qualifies as permissive service credit if it is purchased to provide 

130 

an increased benefit for a period of service already credited under 

the plan (e.g., if a lower level of benefit is converted to a higher 

benefit level otherwise offered under the same plan) as long as it 

relates to benefits to which the participant is not otherwise entitled. 

The provision allows participants to purchase credit for periods 

regardless of whether service is performed, subject to the limits on 

nonqualified service. 

Under the provision, service as an employee of an educational organization providing elementary or secondary education can be determined under the law of the jurisdiction in which the service was 

performed. Thus, for example, permissive service credit can be 

granted for time spent teaching outside of the United States without being considered nonqualified service credit. 

Trustee-to-trustee transfers to purchase permissive service credit 

The provision provides that the limits regarding nonqualified 

service are not applicable in determining whether a trustee-totrustee transfer from a section 403(b) annuity or a section 457 plan 

to a governmental defined benefit plan is for the purchase of permissive service credit. Thus, failure of the transferee plan to satisfy 

the limits does not cause the transferred amounts to be included 

in the participant’s income. As under present law, the transferee 

plan must satisfy the limits in providing permissive service credit 

as a result of the transfer. 

The provision provides that trustee-to-trustee transfers under 

sections 457(e)(17) and 403(b)(13) may be made regardless of 

whether the transfer is made between plans maintained by the 

same employer. The provision also provides that amounts transferred from a section 403(b) annuity or a section 457 plan to a governmental defined benefit plan to purchase permissive service credit are subject to the distribution rules applicable under the Internal 

Revenue Code to the defined benefit plan. 

EFFECTIVE DATE

The provision is generally effective as if included in the amendments made by section 1526 of the Taxpayer Relief Act of 1997, except that the provision regarding trustee-to-trustee transfers is effective as if included in the amendments made by section 647 of 

the Economic Growth and Tax Relief Reconciliation Act of 2001. 

B. ROLLOVER OF AFTER-TAX AMOUNTS IN ANNUITY CONTRACTS

(Sec. 802 of the bill and sec. 402(c)(2) of the Code) 

PRESENT LAW

Employee after-tax contributions may be rolled over from a taxqualified retirement plan into another tax-qualified retirement 

plan, if the plan to which the rollover is made is a defined contribution plan, the rollover is accomplished through a direct rollover, 

and the plan to which the rollover is made provides for separate 

accounting for such contributions (and earnings thereon). After-tax 

contributions can also be rolled over from a tax-sheltered annuity 

(a ‘‘section 403(b) annuity’’) to another tax-sheltered annuity if the 

rollover is a direct rollover, and the annuity to which the rollover 

131 

184Sec. 402(c)(2); IRS Notice 2002–3, 2002–2 I.R.B. 289. 

is made provides for separate accounting for such contributions 

(and earnings thereon). After-tax contributions may also be rolled 

over to an IRA. If the rollover is to an IRA, the rollover need not 

be a direct rollover and the IRA owner has the responsibility to 

keep track of the amount of after-tax contributions.184

REASONS FOR CHANGE

Under present law, tax-sheltered annuities may provide for aftertax contributions, but are not permitted to receive rollovers of 

after-tax contributions from qualified retirement plans. Under 

present law, after-tax contributions cannot be rolled over into a defined benefit plan. The Committee wishes to expand opportunities 

for portability with respect to after-tax contributions. 

EXPLANATION OF PROVISION

The provision allows after-tax contributions to be rolled over 

from a qualified retirement plan to another qualified retirement 

plan (either a defined contribution or a defined benefit plan) or to 

a tax-sheltered annuity. As under present law, the rollover must be 

a direct rollover, and the plan to which the rollover is made must 

separately account for after-tax contributions (and earnings thereon). 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2005. 

C. APPLICATION OF MINIMUM DISTRIBUTION RULES TO

GOVERNMENTAL PLANS

(Sec. 803 of the bill) 

PRESENT LAW

Minimum distribution rules apply to tax-favored retirement arrangements, including governmental plans. In general, under these 

rules, distribution of minimum benefits must begin no later than 

the required beginning date. Minimum distribution rules also apply 

to benefits payable with respect to a plan participant who has died. 

Failure to comply with the minimum distribution rules results in 

an excise tax imposed on the plan participant equal to 50 percent 

of the required minimum distribution not distributed for the year. 

The excise tax may be waived in certain cases. 

In the case of distributions prior to the death of the plan participant, the minimum distribution rules are satisfied if either (1) the 

participant’s entire interest in the plan is distributed by the required beginning date, or (2) the participant’s interest in the plan 

is to be distributed (in accordance with regulations) beginning not 

later than the required beginning date, over a permissible period. 

The permissible periods are (1) the life of the participant, (2) the 

lives of the participant and a designated beneficiary, (3) the life expectancy of the participant, or (4) the joint life and last survivor 

expectancy of the participant and a designated beneficiary. In calculating minimum required distributions from account-type arVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00131 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
132 

rangements (e.g., a defined contribution plan or an individual retirement arrangement), life expectancies of the participant and the 

participant’s spouse generally may be recomputed annually. 

The required beginning date generally is April 1 of the calendar 

year following the later of (1) the calendar year in which the participant attains age 701⁄2 or (2) the calendar year in which the participant retires. 

The minimum distribution rules also apply to distributions to 

beneficiaries of deceased participants. In general, if the participant 

dies after minimum distributions have begun, the remaining interest must be distributed at least as rapidly as under the minimum 

distribution method being used as of the date of death. If the participant dies before minimum distributions have begun, then the 

entire remaining interest must generally be distributed within five 

years of the participant’s death. The five-year rule does not apply 

if distributions begin within one year of the participant’s death and 

are payable over the life of a designated beneficiary or over the life 

expectancy of a designated beneficiary. A surviving spouse beneficiary is not required to begin distributions until the date the deceased participant would have attained age 701⁄2. In addition, if the 

surviving spouse makes a rollover from the plan into a plan or IRA 

of his or her own, the minimum distribution rules apply separately 

to the surviving spouse. 

REASONS FOR CHANGE

The Committee believes that governmental plans should be provided greater flexibility in complying with the minimum distribution requirements to accommodate plan designs commonly used by 

governmental plans. 

EXPLANATION OF PROVISION

The provision directs the Secretary of the Treasury to issue regulations under which a governmental plan is treated as complying 

with the minimum distribution requirements, for all years to which 

such requirements apply, if the plan complies with a reasonable, 

good faith interpretation of the statutory requirements. It is intended that the regulations apply for periods before the date of enactment. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

D. WAIVER OF 10-PERCENT EARLY WITHDRAWAL TAX ON CERTAIN

DISTRIBUTIONS FROM PENSION PLANS FOR PUBLIC SAFETY EMPLOYEES

(Sec. 804 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 

133 

185The 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). 186Sec. 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. 

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. 

REASONS FOR CHANGE

The Committee recognizes that public safety employees often retire earlier than workers in other professions. The Committee believes that public safety employees who separate from service after 

age 50 should be permitted to receive distributions from defined 

benefit pension plans without the imposition of the early withdrawal tax. 

EXPLANATION OF PROVISION

Under the provision, the 10-percent early withdrawal tax does 

not apply to distributions from a governmental defined benefit pension plan to a qualified public safety employee who separates from 

service after age 50. A qualified public safety employee is an employee of 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. 

EFFECTIVE DATE

The provision is effective for distributions made after the date of 

enactment. 

E. ROLLOVERS BY NONSPOUSE BENEFICIARIES OF CERTAIN

RETIREMENT PLAN DISTRIBUTIONS

(Sec. 805 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.185

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.186 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 

134 

187Some 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. 188 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. 

such plans or an IRA.187 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 

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.188 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. In addition, if the surviving 

spouse makes a rollover from the plan into a plan or IRA of his 

or her own, the minimum distribution rules apply separately to the 

surviving spouse. 

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 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 

135 

189The minimum vesting requirements are also contained in Title I of the Employee Retirement Income Security Act of 1974 (‘‘ERISA’’). 

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 roll over 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 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 

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. 

F. FASTER VESTING OF EMPLOYER NONELECTIVE CONTRIBUTIONS

(Sec. 806 of the bill, sec. 411 of the Code, and sec. 203 of ERISA) 

PRESENT LAW

Under present law, in general, a plan is not a qualified plan unless a participant’s employer-provided benefit vests at least as rapidly as under one of two alternative minimum vesting schedules. A 

plan satisfies the first schedule if a participant acquires a nonforfeitable right to 100 percent of the participant’s accrued benefit 

derived from employer contributions upon the completion of five 

years of service. A plan satisfies the second schedule if a participant has a nonforfeitable right to at least 20 percent of the participant’s accrued benefit derived from employer contributions after 

three years of service, 40 percent after four years of service, 60 percent after five years of service, 80 percent after six years of service, 

and 100 percent after seven years of service.189

Faster vesting schedules apply to employer matching contributions. Employer matching contributions are required to vest at 

least as rapidly as under one of the following two alternative minimum vesting schedules. A plan satisfies the first schedule if a participant acquires a nonforfeitable right to 100 percent of employer 

matching contributions upon the completion of three years of service. A plan satisfies the second schedule if a participant has a nonforfeitable right to 20 percent of employer matching contributions 

for each year of service beginning with the participant’s second 

136 

190The dollar limit is scheduled to increase until it is $5,000 in 2008–2010. Individuals age 

50 and older may make additional, catch-up contributions. 191 In the case of a married couple, deductible IRA contributions of up to the dollar limit can 

be made for each spouse (including, for example, a homemaker who does not work outside the 

home), if the combined compensation of both spouses is at least equal to the contributed amount. 

year of service and ending with 100 percent after six years of service. 

REASONS FOR CHANGE

For many employees, a defined contribution plan is the only type 

of retirement plan offered by their employer. Providing faster vesting for all employer contributions to such plans will enable shorterservice employees to accumulate greater retirement savings. 

In addition, providing the same vesting rule for all employer contributions to defined contribution plans will provide simplification. 

EXPLANATION OF PROVISION

The provision applies the present-law vesting schedule for 

matching contributions to all employer contributions to defined contribution plans. 

EFFECTIVE DATE

The provision is generally effective for contributions (including 

allocations of forfeitures) for plan years beginning after December 

31, 2005. In the case of a plan maintained pursuant to one or more 

collective bargaining agreements, the provision is not effective for 

contributions (including allocations of forfeitures) for plan years beginning before the earlier of (1) the later of the date on which the 

last of such collective bargaining agreements terminates (determined without regard to any extension thereof on or after the date 

of enactment) or January 1, 2006, or, or (2) January 1, 2008. The 

provision does not apply to any employee until the employee has 

an hour of service after the effective date. In applying the new 

vesting schedule, service before the effective date is taken into account. 

G. ALLOW DIRECT ROLLOVERS FROM RETIREMENT PLANS TO ROTH

IRAS

(Sec. 807 of the bill and sec. 408A(e) of the Code) 

PRESENT LAW

IRAs in general 

There are two general types of individual retirement arrangements (‘‘IRAs’’): traditional IRAs, to which both deductible and nondeductible contributions may be made, and Roth IRAs. 

Traditional IRAs 

An individual may make deductible contributions to an IRA up 

to the lesser of a dollar limit (generally $4,000 for 2005) 190 or the 

individual’s compensation if neither the individual nor the individual’s spouse is an active participant in an employer-sponsored retirement plan.191 If the individual (or the individual’s spouse) is an 

active participant in an employer-sponsored retirement plan, the 

deduction limit is phased out for taxpayers with adjusted gross inVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00136 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
137 

come (‘‘AGI’’) over certain levels for the taxable year. A different, 

higher, income phaseout applies in the case of an individual who 

is not an active participant in an employer sponsored plan but 

whose spouse is. 

To the extent an individual cannot or does not make deductible 

contributions to an IRA or contributions to a Roth IRA, the individual may make nondeductible contributions to a traditional IRA. 

Amounts held in a traditional IRA are includible in income when 

withdrawn (except to the extent the withdrawal is a return of nondeductible contributions). Includible amounts withdrawn prior to 

attainment of age 591⁄2 are subject to an additional 10-percent 

early withdrawal tax, unless the withdrawal is due to death or disability, is made in the form of certain periodic payments, or is used 

for certain specified purposes. 

Roth IRAs 

Individuals with AGI below certain levels may make nondeductible contributions to a Roth IRA. The maximum annual contributions that can be made to all of an individuals IRAs (both traditional and Roth) cannot exceed the maximum deductible IRA contribution limit. The maximum annual contribution that can be 

made to a Roth IRA is phased out for taxpayers with income above 

certain levels. 

Amounts held in a Roth IRA that are withdrawn as a qualified 

distribution are not includible in income, or subject to the additional 10-percent tax on early withdrawals. A qualified distribution 

is a distribution that (1) is made after the five-taxable year period 

beginning with the first taxable year for which the individual made 

a contribution to a Roth IRA, and (2) which is made after attainment of age 591⁄2, on account of death or disability, or is made for 

first-time homebuyer expenses of up to $10,000. 

Distributions from a Roth IRA that are not qualified distributions are includible in income to the extent attributable to earnings, and subject to the 10-percent early withdrawal tax (unless an 

exception applies). The same exceptions to the early withdrawal 

tax that apply to IRAs apply to Roth IRAs. 

Rollover contributions 

If certain requirements are satisfied, a participant in a tax-qualified retirement plan, a tax-sheltered annuity (sec. 403(b)), or a governmental section 457 plan may roll over distributions from the 

plan or annuity into a traditional IRA. Distributions from such 

plans may not be rolled over into a Roth IRA. 

Taxpayers with modified AGI of $100,000 or less generally may 

roll over amounts in a traditional IRA into a Roth IRA. The 

amount rolled over is includible in income as if a withdrawal had 

been made, except that the 10-percent early withdrawal tax does 

not apply. Married taxpayers who file separate returns cannot roll 

over amounts in a traditional IRA into a Roth IRA. Amounts that 

have been distributed from a tax-qualified retirement plan, a taxsheltered annuity, or a governmental section 457 plan may be 

rolled over into a traditional IRA, and then rolled over from the 

traditional IRA into a Roth IRA. 

138 

192 A SIMPLE IRA may not be in the form of a Roth IRA. References herein to IRAs do not 

refer to Roth IRAs. 193 Because State or local governments generally are not permitted to maintain section 401(k) 

plans, they also generally are not permitted to maintain SIMPLE section 401(k) plans. However, 

a State or local government with a pre-May 6, 1986, grandfathered section 401(k) plan may 

adopt a SIMPLE section 401(k) plan. 

REASONS FOR CHANGE

Under present law if an individual wishes to roll over amounts 

from a qualified retirement plan or similar arrangement to a Roth 

IRA, they may do so, but only by first making a rollover into a traditional IRA and then converting the amounts in the traditional 

IRA into a Roth IRA. The Committee believes it unnecessary to impose such complications on rollovers from qualified retirement 

plans to Roth IRAs. 

EXPLANATION OF PROVISION

The provision allows distributions from tax-qualified retirement 

plans, tax-sheltered annuities, and governmental 457 plans to be 

rolled over directly from such plan into a Roth IRA, subject to the 

present law rules that apply to rollovers from a traditional IRA 

into a Roth IRA. For example, a rollover from a tax-qualified retirement plan into a Roth IRA is includible in gross income (except to 

the extent it represents a return of after-tax contributions), and the 

10–percent early distribution tax does not apply. Similarly, an individual with AGI of $100,000 or more could not roll over amounts 

from a tax-qualified retirement plan directly into a Roth IRA. 

EFFECTIVE DATE

The provision is effective for distributions made after December 

31, 2005. 

H. ELIMINATION OF HIGHER EARLY WITHDRAWAL TAX ON CERTAIN

SIMPLE PLAN DISTRIBUTIONS

(Sec. 808 of the bill and sec. 72(t) of the Code) 

PRESENT LAW

SIMPLE plans 

Under present law, certain small businesses can establish a simplified retirement plan called the savings incentive match plan for 

employees (‘‘SIMPLE’’) retirement plan. SIMPLE plans can be 

adopted by employers: (1) that employ 100 or fewer employees who 

received at least $5,000 in compensation during the preceding year; 

and (2) that do not maintain another employer-sponsored retirement plan. A SIMPLE plan can be either an individual retirement 

arrangement (an ‘‘IRA’’) 192 for each employee or part of a qualified 

cash or deferred arrangement (a ‘‘section 401(k) plan’’).193 The 

rules applicable to SIMPLE IRAs and SIMPLE section 401(k) plans 

are similar, but not identical. 

If established in IRA form, a SIMPLE plan is not subject to the 

nondiscrimination rules generally applicable to qualified retirement 

plans (including the top-heavy rules) and simplified reporting requirements apply. If established as part of a section 401(k) plan, 

the SIMPLE does not have to satisfy the special nondiscrimination 

tests applicable to section 401(k) plans and is not subject to the 

139 

194 A SIMPLE IRA may not be in the form of a Roth IRA. References herein to IRAs do not 

refer to Roth IRAs. 195 Because State or local governments generally are not permitted to maintain section 401(k) 

plans, they also generally are not permitted to maintain SIMPLE section 401(k) plans. However, 

Continued 

top-heavy rules. The other qualified retirement plan rules apply to 

SIMPLE section 401(k) plans. 

Elective deferrals under a section 401(k) plan generally may not 

be distributable before the occurrence of certain specified events, 

such as severance of employment, death, disability, attainment of 

age 591⁄2, or financial hardship. This restriction on distributions applies to elective deferrals made under a SIMPLE section 401(k) 

plan, but not elective deferrals made under a SIMPLE IRA. 

Early withdrawal tax 

Taxable distributions made from an IRA or from certain employer-sponsored retirement plans (including a section 401(k) plan) 

before age 591⁄2, death, or disability generally are subject to an additional 10-percent income tax. Early withdrawals from a SIMPLE 

plan generally are subject to the additional 10-percent tax. However, in the case of a SIMPLE IRA, early withdrawals during the 

two-year period beginning on the date the employee first participated in the SIMPLE IRA are subject to an additional 25-percent 

tax. 

REASONS FOR CHANGE

The Committee believes that early withdrawals from SIMPLE 

IRAs should be subject to the same additional tax as other early 

withdrawals. 

EXPLANATION OF PROVISION

The provision eliminates the 25-percent tax on early withdrawals 

from a SIMPLE IRA during the two-year period beginning on the 

date the employee first participated in the SIMPLE IRA. Thus, 

such withdrawals are subject to the 10-percent early withdrawal 

tax. 

EFFECTIVE DATE

The provision is effective for years beginning after December 31, 

2005. 

I. SIMPLE PLAN PORTABILITY

(Sec. 809 of the bill and secs. 402(c) and 408(d) of the Code) 

PRESENT LAW

Under present law, certain small businesses can establish a simplified retirement plan called the savings incentive match plan for 

employees (‘‘SIMPLE’’) retirement plan. SIMPLE plans can be 

adopted by employers: (1) that employ 100 or fewer employees who 

received at least $5,000 in compensation during the preceding year; 

and (2) that do not maintain another employer-sponsored retirement plan. A SIMPLE plan can be either an individual retirement 

arrangement (an ‘‘IRA’’) 194 for each employee or part of a qualified 

cash or deferred arrangement (a ‘‘section 401(k) plan’’).195 The 

140 

a State or local government with a pre-May 6, 1986, grandfathered section 401(k) plan may 

adopt a SIMPLE section 401(k) plan. 

rules applicable to SIMPLE IRAs and SIMPLE section 401(k) plans 

are similar, but not identical. 

If established in IRA form, a SIMPLE plan is not subject to the 

nondiscrimination rules generally applicable to qualified retirement 

plans (including the top-heavy rules) and simplified reporting requirements apply. If established as part of a section 401(k) plan, 

the SIMPLE does not have to satisfy the special nondiscrimination 

tests applicable to section 401(k) plans and is not subject to the 

top-heavy rules. The other qualified retirement plan rules apply to 

SIMPLE section 401(k) plans. 

Distributions from employer-sponsored retirement plans and 

IRAs (including SIMPLE plans) are generally includible in gross income, except to the extent the amount distributed represents a return of after-tax contributions (i.e., basis). If certain requirements 

are satisfied, distributions from a tax-favored retirement arrangement (i.e., a qualified retirement plan, a tax-sheltered annuity, a 

governmental section 457 plan, or an IRA) may generally be rolled 

over on a nontaxable basis to another tax-favored retirement arrangement. However, a distribution from a SIMPLE IRA during 

the two-year period beginning on the date the employee first participated in the SIMPLE IRA may be rolled over only to another 

SIMPLE IRA. 

REASONS FOR CHANGE

The Committee believes that allowing rollovers between SIMPLE 

IRAs and other tax-favored retirement arrangements will help preserve retirement savings. 

EXPLANATION OF PROVISION

The provision allows distributions from a SIMPLE IRA to be 

rolled over to another tax-favored retirement arrangement (i.e., an 

IRA, a qualified retirement plan, a tax-sheltered annuity, or a governmental section 457 plan) and distributions from another tax-favored retirement arrangement to be rollover over to a SIMPLE 

IRA. 

EFFECTIVE DATE

The provision is effective for years beginning after December 31, 

2005. 

J. ELIGIBILITY FOR PARTICIPATION IN ELIGIBLE DEFERRED

COMPENSATION PLANS

(Sec. 810 of the bill) 

PRESENT LAW

A section 457 plan is an eligible deferred compensation plan of 

a State or local government or tax-exempt employer that meets certain requirements. In some cases, different rules apply under section 457 to governmental plans and plans of tax-exempt employers. 

Amounts deferred under an eligible deferred compensation plan 

of a non-governmental tax-exempt organization are includible in 

141 

196The portion of a participant’s benefit that is attributable to amounts rolled over from another plan may be disregarded in determining the present value of the participant’s vested accrued benefit. 197Sec. 401(a)(31)(B). This provision was enacted by section 657 of EGTRRA and applies to 

distributions after the issuance of final regulations by the Department of Labor providing safe 

harbors for satisfying fiduciary requirements related to automatic rollovers. Proposed regulaContinued 

gross income for the year in which amounts are paid or made available. Under present law, if the amount payable to a participant 

does not exceed $5,000, a plan may allow a distribution up to 

$5,000 without such amount being treated as made available if the 

distribution can be made only if no amount has been deferred 

under the plan by the participant during the two-year period ending on the date of the distribution and there has been no prior distribution under the plan. Prior to the Small Business Job Protection Act of 1996, under former section 457(e)(9), benefits were not 

treated as made available because a participant could elect to receive a lump sum payable after separation from service and within 

60 days of the election if (1) the total amount payable under the 

plan did not exceed $3,500 and (2) no additional amounts could be 

deferred under the plan. 

REASONS FOR CHANGE

The Committee believes that individuals should not be precluded 

from participating in an eligible deferred compensation plan by reason of certain prior distributions. 

EXPLANATION OF PROVISION

Under the provision, an individual is not precluded from participating in an eligible deferred compensation plan by reason of having received a distribution under section 457(e)(9) as in effect before the Small Business Job Protection Act of 1996. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

K. BENEFIT TRANSFERS TO THE PBGC 

(Sec. 811 of the bill, sec. 401(a)(31) of the Code, and sec. 4050 of 

ERISA) 

PRESENT LAW

Involuntary distributions and automatic rollovers 

If a qualified retirement plan participant ceases to be employed 

by the employer that maintains the plan, the plan may distribute 

the participant’s nonforfeitable accrued benefit without the consent 

of the participant (an ‘‘involuntary distribution’’) and, if applicable, 

the participant’s spouse, if the present value of the benefit does not 

exceed $5,000.196 Generally, a participant may roll over an involuntary distribution from a qualified plan to an individual retirement 

arrangement (an ‘‘IRA’’) or to another qualified plan. In the case of an involuntary distribution that exceeds $1,000 

and that is an eligible rollover distribution from a qualified retirement plan, the plan administrator must roll the distribution over 

to an IRA (an ‘‘automatic rollover’’) in certain cases.197 That is, the 

142 

tions providing such a safe harbor were issued by the Department of Labor, to be effective six 

months after the issuance of final regulations. 69 Fed. Reg. 9900 (March 2, 2004). The provisions of EGTRRA generally do not apply for years beginning after December 31, 2010. 198Secs. 4041(b)(3)(A) and 4050 of ERISA. 

plan administrator must make a direct trustee-to-trustee transfer 

of the distribution to an IRA, unless the participant affirmatively 

elects to have the distribution transferred to a different IRA or a 

qualified plan or to receive it directly. 

Before making a distribution that is eligible for rollover, a plan 

administrator must provide the participant with a written explanation of the ability to have the distribution rolled over directly to 

an IRA or another qualified plan and the related tax consequences. 

In the case of an automatic rollover to an IRA, the written explanation provided by the plan administrator is required to explain 

that an automatic rollover will be made unless the participant 

elects otherwise. The plan administrator is also required to notify 

the participant in writing (as part of the general written explanation or separately) that the distribution may be transferred to 

another IRA. 

Missing participant benefits 

In the case of a defined benefit pension plan that is subject to 

the plan termination insurance program under Title IV of the Employee Retirement Income Security Act of 1974 (‘‘ERISA’’), is maintained by a single employer, and terminates under a standard termination, the plan administrator generally must purchase annuity 

contracts from a private insurer to provide the benefits to which 

participants are entitled and distribute the annuity contracts to the 

participants. 

If the plan administrator of a terminating single employer plan 

cannot locate a participant after a diligent search (a ‘‘missing participant’’), the plan administrator may satisfy the distribution requirement only by purchasing an annuity from an insurer or transferring the participant’s designated benefit to the Pension Benefit 

Guaranty Corporation (‘‘PBGC’’), which holds the benefit of the 

missing participant as trustee until the PBGC locates the missing 

participant and distributes the benefit.198

The PBGC missing participant program is not available to multiemployer plans or defined contribution plans and other plans not 

covered by Title IV of ERISA. 

REASONS FOR CHANGE

The Committee believes that allowing plan administrators to 

make automatic rollovers to the PBGC will facilitate automatic 

rollovers and reduce administrative burdens while providing adequate participant protections. 

EXPLANATION OF PROVISION

The provision provides an alternative to the automatic rollover to 

an IRA of an involuntary distribution that exceeds $1,000. Under 

the provision, unless the participant elects to have the distribution 

transferred to an IRA or a qualified retirement plan or to receive 

it directly, the plan may provide for the transfer of the distribution 

143 

199The provision applies to all automatic rollovers, not just those for missing participants or 

from terminating plans. 

to the PBGC, instead of to an IRA.199 The written explanation provided to the participant by the plan administrator before the involuntary distribution must explain that a transfer to the PBGC will 

be made unless the participant elects otherwise. 

The provision extends the provisions relating to the PBGC missing participant program to involuntary distributions that are transferred to the PBGC. Benefits transferred to the PBGC under the 

provision are to be distributed by the PBGC to the participant upon 

application filed by the participant with the PBGC in such form 

and manner as prescribed by the PBGC in regulations. Benefits are 

to be distributed in a single sum (plus interest) or in another form 

as specified in PBGC regulations. 

Under the provision, on a transfer of benefits to the PBGC, a 

plan administrator must provide information required by the 

PBGC with respect to the benefits transferred. The PBGC may 

charge a reasonable fee for costs incurred in connection with the 

transfer and management of transferred amounts. 

The transfer of an involuntary distribution to the PBGC is treated as a transfer to an IRA (i.e., the amount transferred is not included in the participant’s income). An amount distributed by the 

PBGC is generally treated as a distribution from an IRA. 

EFFECTIVE DATE

The provision is generally effective as if included in the amendments made by section 657 of EGTRRA, i.e., after the issuance of 

final regulations by the Department of Labor. The extension of the 

PBGC missing participant program to involuntary distributions 

that are transferred to the PBGC is effective for distributions made 

after the issuance of final regulations implementing such extension. The PBGC is directed to issue such regulations not later than 

December 31, 2006. 

L. MISSING PARTICIPANTS

(Sec. 812 of the bill and sec. 4050 of ERISA) 

PRESENT LAW

In the case of a defined benefit pension plan that is subject to 

the plan termination insurance program under Title IV of the Employee Retirement Income Security Act of 1974 (‘‘ERISA’’), is maintained by a single employer, and terminates under a standard termination, the plan administrator generally must purchase annuity 

contracts from a private insurer to provide the benefits to which 

participants are entitled and distribute the annuity contracts to the 

participants. 

If the plan administrator of a terminating single employer plan 

cannot locate a participant after a diligent search (a ‘‘missing participant’’), the plan administrator may satisfy the distribution requirement only by purchasing an annuity from an insurer or transferring the participant’s designated benefit to the Pension Benefit 

Guaranty Corporation (‘‘PBGC’’), which holds the benefit of the 

144 

200Secs. 4041(b)(3)(A) and 4050 of ERISA. 

missing participant as trustee until the PBGC locates the missing 

participant and distributes the benefit.200

The PBGC missing participant program is not available to multiemployer plans or defined contribution plans and other plans not 

covered by Title IV of ERISA. 

REASONS FOR CHANGE

The Committee recognizes that no statutory provision or formal 

regulatory guidance exists concerning an appropriate method of 

handling the benefits of missing participants in terminated multiemployer plans or defined contribution plans and other plans not 

subject to the PBGC termination insurance program. Therefore, 

sponsors of these plans face uncertainty with respect to the benefits of missing participants. The Committee believes that it is appropriate to extend the established PBGC missing participant program to these plans in order to reduce uncertainty for plan sponsors and increase the likelihood that missing participants will receive their retirement benefits. 

EXPLANATION OF PROVISION

The PBGC is directed to prescribe rules for terminating multiemployer plans similar to the present-law missing participant rules 

applicable to terminating single-employer plans that are subject to 

Title IV of ERISA. 

In addition, plan administrators of certain types of plans not subject to the PBGC termination insurance program under present law 

are permitted, but not required, to elect to transfer missing participants’ benefits to the PBGC upon plan termination. Specifically, 

the provision extends the missing participants program (in accordance with regulations) to defined contribution plans, defined benefit 

pension plans that have no more than 25 active participants and 

are maintained by professional service employers, and the portion 

of defined benefit pension plans that provide benefits based upon 

the separate accounts of participants and therefore are treated as 

defined contribution plans under ERISA. 

EFFECTIVE DATE

The provision is effective for distributions made after final regulations implementing the provision are prescribed. 

TITLE IX—ADMINISTRATIVE PROVISIONS 

A. UPDATING OF EMPLOYEE PLANS COMPLIANCE RESOLUTION

SYSTEM

(Sec. 901 of the bill) 

PRESENT LAW

A retirement plan that is intended to be a tax-qualified plan provides retirement benefits on a tax-favored basis if the plan satisfies 

all of the requirements of section 401(a). Similarly, an annuity that 

is intended to be a tax-sheltered annuity provides retirement benefits on a tax-favored basis if the program satisfies all of the reVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00144 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
145 

201 Rev. Proc. 2003–44, 2003–25 I.R.B. 1051. 

quirements of section 403(b). Failure to satisfy all of the applicable 

requirements of section 401(a) or section 403(b) may disqualify a 

plan or annuity for the intended tax-favored treatment. 

The Internal Revenue Service (‘‘IRS’’) has established the Employee Plans Compliance Resolution System (‘‘EPCRS’’), which is a 

comprehensive system of correction programs for sponsors of retirement plans and annuities that are intended, but have failed, to satisfy the requirements of section 401(a), section 403(a), section 

403(b), section 408(k), or section 408(p) as applicable.201 EPCRS 

permits employers to correct compliance failures and continue to 

provide their employees with retirement benefits on a tax-favored 

basis. 

The IRS has designed EPCRS to (1) encourage operational and 

formal compliance, (2) promote voluntary and timely correction of 

compliance failures, (3) provide sanctions for compliance failures 

identified on audit that are reasonable in light of the nature, extent, and severity of the violation, (4) provide consistent and uniform administration of the correction programs, and (5) permit employers to rely on the availability of EPCRS in taking corrective actions to maintain the tax-favored status of their retirement plans 

and annuities. 

The basic elements of the programs that comprise EPCRS are 

self-correction, voluntary correction with IRS approval, and correction on audit. The Self-Correction Program (‘‘SCP’’) generally permits a plan sponsor that has established compliance practices and 

procedures to correct certain insignificant failures at any time (including during an audit), and certain significant failures within a 

2-year period, without payment of any fee or sanction. The Voluntary Correction Program (‘‘VCP’’) permits an employer, at any 

time before an audit, to pay a limited fee and receive IRS approval 

of a correction. For a failure that is discovered on audit and corrected, the Audit Closing Agreement Program (‘‘Audit CAP’’) provides for a sanction that bears a reasonable relationship to the nature, extent, and severity of the failure and that takes into account 

the extent to which correction occurred before audit. 

The IRS has expressed its intent that EPCRS will be updated 

and improved periodically in light of experience and comments 

from those who use it. 

REASONS FOR CHANGE

The Committee commends the IRS for the establishment of 

EPCRS and agrees with the IRS that EPCRS should be updated 

and improved periodically. The Committee believes that future improvements should facilitate use of the compliance and correction 

programs by small employers and expand the flexibility of the programs. 

EXPLANATION OF PROVISION

The provision clarifies that the Secretary has the full authority 

to establish and implement EPCRS (or any successor program) and 

any other employee plans correction policies, including the authority to waive income, excise or other taxes to ensure that any tax, 

146 

202The IRS has announced that governmental plans that are subject to the nondiscrimination 

requirements are deemed to satisfy such requirements pending the issuance of final regulations 

addressing this issue. Notice 2003–6, 2003–3 I.R.B. 298; Notice 2001–46, 2001–2 C.B. 122. 

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

Under the provision, the Secretary of the Treasury is directed to 

continue to update and improve EPCRS (or any successor program), giving special attention to (1) increasing the awareness and 

knowledge of small employers concerning the availability and use 

of EPCRS, (2) taking into account special concerns and circumstances that small employers face with respect to compliance 

and correction of compliance failures, (3) extending the duration of 

the self-correction period under SCP for significant compliance failures, (4) expanding the availability to correct insignificant compliance failures under SCP during audit, and (5) assuring that any 

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

failure is not excessive and bears a reasonable relationship to the 

nature, extent, and severity of the failure. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

B. EXTENSION TO ALL GOVERNMENTAL PLANS OF MORATORIUM ON

APPLICATION OF CERTAIN NONDISCRIMINATION RULES

(Sec. 902 of the bill, sec. 1505 of the Taxpayer Relief Act of 1997, 

and secs. 401(a) and 401(k) of the Code) 

PRESENT LAW

A qualified retirement plan maintained by a State or local government is exempt from the requirements concerning nondiscrimination (sec. 401(a)(4)) and minimum participation (sec. 

401(a)(26)). A qualified retirement plan maintained by a State or 

local government is also treated as meeting the participation and 

nondiscrimination requirements applicable to a qualified cash or 

deferred arrangement (sec. 401(k)(3)). Other governmental plans 

are subject to these requirements.202

REASONS FOR CHANGE

The Committee believes that application of the nondiscrimination 

and minimum participation rules to governmental plans is unnecessary and inappropriate in light of the unique circumstances 

under which such plans and organizations operate. Further, the 

Committee believes that it is appropriate to provide for consistent 

application of the minimum coverage, nondiscrimination, and minimum participation rules for governmental plans. 

EXPLANATION OF PROVISION

The provision exempts all governmental plans (as defined in sec. 

414(d)) from the nondiscrimination and minimum participation 

rules. The provision also treats all governmental plans as meeting 

the participation and nondiscrimination requirements applicable to 

a qualified cash or deferred arrangement. 

147 

203The portion of a participant’s benefit that is attributable to amounts rolled over from another plan may be disregarded in determining the present value of the participant’s vested accrued benefit. 

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2005. 

C. NOTICE AND CONSENT PERIOD REGARDING DISTRIBUTIONS

(Sec. 903 of the bill, sec. 417(a) of the Code, and sec. 205(c) of 

ERISA) 

PRESENT LAW

Notice and consent requirements apply to certain distributions 

from qualified retirement plans. These requirements relate to the 

content and timing of information that a plan must provide to a 

participant prior to a distribution, and to whether the plan must 

obtain the participant’s consent to the distribution. The nature and 

extent of the notice and consent requirements applicable to a distribution depend upon the value of the participant’s vested accrued 

benefit and whether the joint and survivor annuity requirements 

(sec. 417) apply to the participant. 

If the present value of the participant’s vested accrued benefit 

exceeds $5,000,203 the plan may not distribute the participant’s 

benefit without the written consent of the participant. The participant’s consent to a distribution is not valid unless the participant 

has received from the plan a notice that contains a written explanation of (1) the material features and the relative values of the 

optional forms of benefit available under the plan, (2) the participant’s right, if any, to have the distribution directly transferred to 

another retirement plan or individual retirement arrangement 

(‘‘IRA’’), and (3) the rules concerning the taxation of a distribution. 

If the joint and survivor annuity requirements are applicable, this 

notice also must contain a written explanation of (1) the terms and 

conditions of the qualified joint and survivor annuity (‘‘QJSA’’), (2) 

the participant’s right to make, and the effect of, an election to 

waive the QJSA, (3) the rights of the participant’s spouse with respect to a participant’s waiver of the QJSA, and (4) the right to 

make, and the effect of, a revocation of a waiver of the QJSA. The 

plan generally must provide this notice to the participant no less 

than 30 and no more than 90 days before the date distribution 

commences. 

REASONS FOR CHANGE

The Committee understands that an employee is not always able 

to evaluate distribution alternatives, select the most appropriate 

alternative, and notify the plan of the selection within a 90-day period. The Committee believes that requiring a plan to furnish multiple distribution notices to an employee who does not make a distribution election within 90 days is administratively burdensome. 

In addition, the Committee believes that participants who are entitled to defer distributions should be informed of the impact of a decision not to defer distribution on the taxation and accumulation of 

their retirement benefits. 

148 

204Treas. Reg. sec. 301.6058–1(a). 

EXPLANATION OF PROVISION

Under the provision, a qualified retirement plan is required to 

provide the applicable distribution notice no less than 30 days and 

no more than 180 days before the date distribution commences. 

The Secretary of the Treasury is directed to modify the applicable 

regulations to reflect the extension of the notice period to 180 days 

and to provide that the description of a participant’s right, if any, 

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

EFFECTIVE DATE

The provision and the modifications required to be made under 

the provision apply to years beginning after December 31, 2005. In 

the case of a description of the consequences of a participant’s failure to defer receipt of a distribution that is made before the date, 

90 days after the date on which the Secretary of the Treasury 

makes modifications to the applicable regulations, the plan administrator is required to make a reasonable attempt to comply with 

the requirements of the provision. 

D. PENSION PLAN REPORTING SIMPLIFICATION

(Sec. 904 of the bill) 

PRESENT LAW

A plan administrator of a pension, annuity, stock bonus, profitsharing or other funded plan of deferred compensation generally 

must file with the Secretary of the Treasury an annual return for 

each plan year containing certain information with respect to the 

qualification, financial condition, and operation of the plan. Title I 

of ERISA also may require the plan administrator to file annual reports concerning the plan with the Department of Labor and the 

Pension Benefit Guaranty Corporation (‘‘PBGC’’). The plan administrator must use the Form 5500 series as the format for the required annual return.204 The Form 5500 series annual return/report, which consists of a primary form and various schedules, includes the information required to be filed with all three agencies. 

The plan administrator satisfies the reporting requirement with respect to each agency by filing the Form 5500 series annual return/ 

report with the Department of Labor, which forwards the form to 

the Internal Revenue Service and the PBGC. 

The Form 5500 series consists of 2 different forms: Form 5500 

and Form 5500–EZ. Form 5500 is the more comprehensive of the 

forms and requires the most detailed financial information. The 

plan administrator of a ‘‘one-participant plan’’ generally may file 

Form 5500–EZ, which consists of only one page. For this purpose, 

a plan is a one-participant plan if: (1) the only participants in the 

plan are the sole owner of a business that maintains the plan (and 

such owner’s spouse), or partners in a partnership that maintains 

the plan (and such partners’ spouses); (2) the plan is not aggregated with another plan in order to satisfy the minimum coverage 

requirements of section 410(b); (3) the plan does not provide benefits to anyone other than the sole owner of the business (or the sole 

149 

owner and spouse) or the partners in the business (or the partners 

and spouses); (4) the employer is not a member of a related group 

of employers; and (5) the employer does not use the services of 

leased employees. In addition, the plan administrator of a one-participant plan is not required to file a return if the plan does not 

have an accumulated funding deficiency and the total value of the 

plan assets as of the end of the plan year and all prior plan years 

beginning on or after January 1, 1994, does not exceed $100,000. 

With respect to a plan that does not satisfy the eligibility requirements for Form 5500–EZ, the characteristics and the size of 

the plan determine the amount of detailed financial information 

that the plan administrator must provide on Form 5500. If the plan 

has more than 100 participants at the beginning of the plan year, 

the plan administrator generally must provide more information. 

REASONS FOR CHANGE

The Committee believes that simplification of the reporting requirements applicable to plans of small employers will encourage 

such employers to provide retirement benefits for their employees. 

EXPLANATION OF PROVISION

The Secretary of the Treasury, in consultation with the Secretary 

of Labor, is directed to modify the annual return filing requirements with respect to a one-participant plan to provide that if the 

total value of the plan assets of such a plan as of the end of the 

plan year does not exceed $250,000, the plan administrator is not 

required to file a return. In addition, the provision directs the Secretary of the Treasury and the Secretary of Labor to provide simplified reporting requirements for plan years beginning after December 31, 2006, for certain plans with fewer than 25 participants. 

EFFECTIVE DATE

The provision relating to one-participant retirement plans is effective for plan years beginning on or after January 1, 2006. The 

provision relating to simplified reporting for plans with fewer than 

25 participants is effective on the date of enactment. 

E. VOLUNTARY EARLY RETIREMENT INCENTIVE AND EMPLOYMENT

RETENTION PLANS MAINTAINED BY LOCAL EDUCATIONAL AGENCIES AND OTHER ENTITIES

(Sec. 904 of the bill, secs. 457(e)(11) and 457(f) of the Code, sec. 

3(2)(B) of ERISA, and sec. 4(l)(1) of the ADEA) 

PRESENT LAW

Eligible deferred compensation plans of State and local governments and tax-exempt employers 

A ‘‘section 457 plan’’ is an eligible deferred compensation plan of 

a State or local government or tax-exempt employer that meets certain requirements. For example, the amount that can be deferred 

annually under section 457 cannot exceed a certain dollar limit 

($14,000 for 2005). Amounts deferred under a section 457 plan are 

generally includible in gross income when paid or made available 

(or, in the case of governmental section 457 plans, when paid). SubVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00149 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
150 

205See ADEA sec. 4(l)(1). 206See ADEA sec. 4(f)(2). 

ject to certain exceptions, amounts deferred under a plan that does 

not comply with section 457 (an ‘‘ineligible plan’’) are includible in 

income when the amounts are not subject to a substantial risk of 

forfeiture. Section 457 does not apply to any bona fide vacation 

leave, sick leave, compensatory time, severance pay, disability pay, 

or death benefit plan. Additionally, section 457 does not apply to 

qualified retirement plans or qualified governmental excess benefit 

plans that provide benefits in excess of those that are provided 

under a qualified retirement plan maintained by the governmental 

employer. 

ERISA 

ERISA provides rules governing the operation of most employee 

benefit plans. The rules to which a plan is subject depend on 

whether the plan is an employee welfare benefit plan or an employee pension benefit plan. For example, employee pension benefit 

plans are subject to reporting and disclosure requirements, participation and vesting requirements, funding requirements, and fiduciary provisions. Employee welfare benefit plans are not subject to 

all of these requirements. Governmental plans are exempt from 

ERISA. 

Age Discrimination in Employment Act 

The Age Discrimination in Employment Act (‘‘ADEA’’) generally 

prohibits discrimination in employment because of age. However, 

certain defined benefit pension plans may lawfully provide payments that constitute the subsidized portion of an early retirement 

benefit or social security supplements pursuant to ADEA 205, and 

employers may lawfully provide a voluntary early retirement incentive plan that is consistent with the purposes of ADEA.206

REASONS FOR CHANGE

The Committee is aware that some public school districts and related tax-exempt education associations provide certain employees 

with voluntary early retirement incentive benefits similar to benefits that can be provided under a defined benefit pension plan. If 

provided under a defined benefit pension plan, these benefits would 

not be includible in income until paid and would also generally be 

permitted under ADEA. However, for reasons related to the structure of State-maintained defined benefit pension plans covering 

these employees and fiscal operations of the local school districts, 

these benefits are provided to the employees directly, rather than 

under the defined benefit pension plan. The Committee believes it 

is appropriate to treat these benefits in a manner similar to the 

treatment that would apply if the benefits were provided under the 

defined benefit pension plan. The Committee also believes that it 

is appropriate to address the treatment of certain employment retention plans maintained by local school districts and related taxexempt education associations. 

151 

207The accrual and vesting rules have the effect of limiting the social security supplements 

and early retirement benefits that may be provided under a defined benefit pension plan; however, government plans are exempt from these rules. 

EXPLANATION OF PROVISION

Early retirement incentive plans of local educational agencies and 

education associations 

In general 

The provision addresses the treatment of certain voluntary early 

retirement incentive plans under section 457, ERISA, and ADEA. 

Code section 457 

Under the provision, special rules apply under section 457 to a 

voluntary early retirement incentive plan that is maintained by a 

local educational agency or a tax-exempt education association 

which principally represents employees of one or more such agencies and that makes payments or supplements as an early retirement benefit, a retirement-type subsidy, or a social security supplement in coordination with a defined benefit pension plan maintained by a State or local government or by such an association. 

Such a voluntary early retirement incentive plan is treated as a 

bona fide severance plan for purposes of section 457, and therefore 

is not subject to the limits under section 457, to the extent the payments or supplements could otherwise be provided under the defined benefit pension plan. For purposes of the provision, the payments or supplements that could otherwise be provided under the 

defined benefit pension plan are to be determined by applying the 

accrual and vesting rules for defined benefit pension plans.207

ERISA 

In addition, such voluntary early retirement incentive plans are 

treated as welfare benefit plans for purposes of ERISA (other than 

governmental plans that are exempt from ERISA). 

ADEA 

The provision also addresses the treatment under ADEA of voluntary early retirement incentive plans that are maintained by 

local educational agencies and tax-exempt education associations 

which principally represent employees of one or more such agencies, and that make payments or supplements that constitute the 

subsidized portion of an early retirement benefit or a social security supplement and that are made in coordination with a defined 

benefit pension plan maintained by a State or local government or 

by such an association. Under the provision, for purposes of ADEA, 

such a plan is treated as part of the defined benefit pension plan 

and the payments or supplements under the plan are not severance 

pay that may be subject to certain deductions under ADEA. 

Employment retention plans of local educational agencies and education associations 

The provision addresses the treatment of certain employment retention plans under section 457 and ERISA. The provision applies 

to employment retention plans that are maintained by local educational agencies or tax-exempt education associations which prinVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00151 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
152 

cipally represent employees of one or more such agencies and that 

provide compensation to an employee (payable on termination of 

employment) for purposes of retaining the services of the employee 

or rewarding the employee for service with educational agencies or 

associations. 

Under the provision, special tax treatment applies to the portion 

of an employment retention plan that provides benefits that do not 

exceed twice the applicable annual dollar limit on deferrals under 

section 457 ($14,000 for 2005). The provision provides an exception 

from the rules under section 457 for ineligible plans with respect 

to such portion of an employment retention plan. This exception 

applies for years preceding the year in which benefits under the 

employment retention plan are paid or otherwise made available to 

the employee. In addition, such portion of an employment retention 

plan is not treated as providing for the deferral of compensation for 

tax purposes. 

Under the provision, an employment retention plan is also treated as a welfare benefit plan for purposes of ERISA (other than a 

governmental plan that is exempt from ERISA). 

EFFECTIVE DATE

The provision is generally effective on the date of enactment. The 

amendments to section 457 apply to taxable years ending after the 

date of enactment. The amendments to ERISA apply to plan years 

ending after the date of enactment. Nothing in the provision alters 

or affects the construction of the Code, ERISA, or ADEA as applied 

to any plan, arrangement, or conduct to which the provision does 

not apply. 

F. NO REDUCTION IN UNEMPLOYMENT COMPENSATION AS A RESULT

OF PENSION ROLLOVERS

(Sec. 906 of the bill and sec. 3304(a)(15) of the Code) 

PRESENT LAW

Under present law, unemployment compensation payable by a 

State to an individual generally is reduced by the amount of retirement benefits received by the individual. Distributions from certain 

employer-sponsored retirement plans or IRAs that are transferred 

to a similar retirement plan or IRA (‘‘rollover distributions’’) generally are not includible in income. Some States currently reduce 

the amount of an individual’s unemployment compensation by the 

amount of a rollover distribution. 

REASONS FOR CHANGE

Unlike an individual’s unemployment compensation, rollover distributions are not intended to meet current living expenses. To the 

extent that a reduction of an individual’s unemployment compensation results in that individual liquidating a portion of a rollover 

distribution to meet current living expenses, the Committee believes that the purpose of the rules permitting rollover distributions, which are designed to ensure that the amounts contributed 

to employer-sponsored retirement plans or IRAs are used for retirement purposes, are defeated. 

153 

208Pub. L. No. 107–16. 209 EGTRRA sec. 641. 

EXPLANATION OF PROVISION

The provision amends the Code so that the reduction of unemployment compensation payable to an individual by reason of the 

receipt of retirement benefits does not apply in the case of a rollover distribution. 

EFFECTIVE DATE

The provision is effective for weeks beginning on or after the date 

of enactment. 

G. WITHHOLDING ON CERTAIN DISTRIBUTIONS FROM GOVERNMENTAL

ELIGIBLE DEFERRED COMPENSATION PLANS

(Sec. 907 of the bill and sec. 457 of the Code) 

PRESENT LAW

Before the Economic Growth and Tax Relief Reconciliation Act of 

2001 208 (‘‘EGTRRA’’), distributions from an eligible deferred compensation plan under section 457 (a ‘‘section 457 plan’’) were subject to the withholding rules for wages, rather than the withholding 

rules for distributions from qualified retirement plans. Under the 

wage withholding rules, graduated withholding applies based on 

the amount of the wages. Under the withholding rules for qualified 

retirement plans, an individual may generally elect not to have 

taxes withheld from distributions. However, withholding is required at a 20-percent rate in the case of an eligible rollover distribution that is not automatically rolled over into another retirement plan. Eligible rollover distributions include distributions that 

are payable over a period of less than 10 years. 

EGTRRA conformed the rollover rules and withholding rules for 

governmental section 457 plans to the rules for qualified retirement plans.209 The EGTRRA changes are effective for distributions 

after December 31, 2001. As a result, as of 2002, required withholding at a 20-percent rate applies to distributions made from a 

governmental section 457 plan for a period of less than 10 years, 

including distributions that began before the effective date of the 

EGTRRA changes. 

REASONS FOR CHANGE

The Committee believes that distributions that have already 

begun from governmental section 457 plans under the prior-law 

rules should not have to be modified to conform to the EGTRRA 

withholding provisions. 

EXPLANATION OF PROVISION

Under the provision, the pre-EGTRRA withholding rules may be 

applied to distributions from a governmental section 457 plan if the 

distribution is part of a series of distributions which began before 

January 1, 2002, and is payable for less than 10 years. 

154 

EFFECTIVE DATE

The provision is effective as if included in section 641 of 

EGTRRA. 

H. DEFINED BENEFIT PLANS MAINTAINED BY TRIBAL GOVERNMENTS

(Sec. 908 of the bill) 

PRESENT LAW

Under present law, in some cases governmental plans are subject 

to different rules than other qualified plans. For example, governmental plans generally are not subject to the same nondiscrimination rules as other plans and the minimum funding rules do not 

apply to such plans. 

REASONS FOR CHANGE

Questions have arisen with respect to the application of the 

qualified plan rules to plans of tribal governments. Clarification of 

the status of such plans would provide greater certainty for plan 

sponsors, plan participants, and the IRS. 

EXPLANATION OF PROVISION

The bill provides that, in the case of defined benefit plans, the 

term ‘‘governmental plan’’ under the Code and ERISA includes a 

plan established or maintained for its employees by an Indian tribal government (as defined in section 7701(a)(40)), a subdivision of 

an Indian tribal government (determined in accordance with section 7871(d)), an agency instrumentality (or subdivision) of an Indian tribal government, or an entity established under Federal, 

State, or tribal law which is wholly owned or controlled by any of 

the foregoing. In addition, under the provision, certain special rules 

applicable to defined benefit plans maintained by State or local 

governments apply also to defined benefit plans maintained by Indian tribal governments, and such plans are not subject to the 

PBGC insurance program. No inference is intended that the provision is not present law or that defined contributions plans maintained by an employer described in the proposal are not governmental plans. 

EFFECTIVE DATE

The provision is effective for any year beginning before, on, or 

after the date of enactment. 

I. TREATMENT OF PLAN OF CERTAIN NONPROFIT ORGANIZATION AS

A GOVERNMENTAL PLAN

(Sec. 909 of the bill) 

PRESENT LAW

Under present law, in some cases governmental plans are subject 

to different rules than other qualified plans. For example, governmental plans generally are not subject to the same nondiscrimination rules as other plans and the minimum funding rules do not 

apply to such plans. 

155 

210Sec. 401(b). 211 Code sec. 411(d)(6); ERISA sec. 204(g). 212Pub. L. No. 107–16. 

REASONS FOR CHANGE

Questions have arisen as to the application of the qualified plan 

rules to a plan of a nonprofit organization that is a governmental 

entity under applicable State law. Clarification of the status of 

such plan would provide greater certainty for the plan sponsor, 

plan participants, and the IRS. 

EXPLANATION OF PROVISION

The bill provides that a defined benefit plan of a nonprofit organization is treated as a governmental plan under the Code and 

ERISA if the organization was: (1) incorporated on September 16, 

1998, under a State nonprofit corporation statute; and (2) organized for the express purpose of supporting the missions and goals 

of a public corporation which was (a) created by a State statute effective on July 1, 1995, (b) is a governmental entity under State 

law, and (c) is a member of the nonprofit corporation. 

EFFECTIVE DATE

The provision is effective for any year beginning before, on, or 

after the date of enactment. 

J. PROVISIONS RELATING TO PLAN AMENDMENTS

(Sec. 910 of the bill) 

PRESENT LAW

Present law provides a remedial amendment period during 

which, under certain circumstances, a plan may be amended retroactively in order to comply with the qualification requirements.210

In general, plan amendments to reflect changes in the law generally must be made by the time prescribed by law for filing the 

income tax return of the employer for the employer’s taxable year 

in which the change in law occurs. The Secretary of the Treasury 

may extend the time by which plan amendments need to be made. 

The Code and ERISA provide that, in general, accrued benefits 

cannot be reduced by a plan amendment.211 This prohibition on the 

reduction of accrued benefits is commonly referred to as the 

‘‘anticutback rule.’’ 

REASONS FOR CHANGE

The Committee believes that employers should have adequate 

time to amend their plans to reflect changes in the law while operating their plans in compliance with such changes. 

EXPLANATION OF PROVISION

The provision permits certain plan amendments made pursuant 

to the changes made by the bill or by the Economic Growth and 

Tax Relief Reconciliation Act of 2001 212 (‘‘EGTRRA’’), or regulations issued thereunder, to be retroactively effective. If the plan 

amendment meets the requirements of the provision, then the plan 

will be treated as being operated in accordance with its terms and 

156 

213See also, section 411(j)(3) of the Job Creation and Worker Assistance Act of 2002, which 

provides a special rule for plan amendments adopted on or before June 30, 2002, in connection 

with EGTRRA, in the case of a plan that incorporated the section 415 limits by reference on 

June 7, 2001, the date of enactment of EGTRRA. 

the amendment will not violate the anticutback rule. In order for 

this treatment to apply, the plan amendment is required to be 

made on or before the last day of the first plan year beginning on 

or after January 1, 2006, or such later date as provided by the Secretary of the Treasury. Governmental plans are given an additional 

two years in which to make required plan amendments. If the 

amendment is required to be made to retain qualified status as a 

result of the changes in the law (or regulations), the amendment 

is required to be made retroactively effective as of the date on 

which the change became effective with respect to the plan and the 

plan is required to be operated in compliance until the amendment 

is made. Amendments that are not required to retain qualified status but that are made pursuant to the changes made by the bill 

or EGTRRA (or applicable regulations) may be made retroactively 

effective as of the first day the plan is operated in accordance with 

the amendment. 

A plan amendment will not be considered to be pursuant to the 

bill or EGTRRA (or applicable regulations) if it has an effective 

date before the effective date of the provision under the bill or 

EGTRRA (or regulations) to which it relates. Similarly, the provision does not provide relief from the anticutback rule for periods 

prior to the effective date of the relevant provision (or regulations) 

or the plan amendment. 

The Secretary of the Treasury is authorized to provide exceptions 

to the relief from the prohibition on reductions in accrued benefits. 

It is intended that the Secretary will not permit inappropriate reductions in contributions or benefits that are not directly related to 

the provisions under the bill or EGTRRA. For example, it is intended that a plan that incorporates the section 415 limits by reference can be retroactively amended to impose the section 415 limits in effect before EGTTRA.213 On the other hand, suppose a plan 

incorporates the section 401(a)(17) limit on compensation by reference and provides for an employer contribution of three percent 

of compensation. It is expected that the Secretary will provide that, 

in that case, the plan cannot be amended retroactively to reduce 

the contribution percentage for those participants not affected by 

the section 401(a)(17) limit, even though the reduction will result 

in the same dollar level of contributions for some participants because of the increase in compensation taken into account under the 

plan as a result of the increase in the section 401(a)(17) limit under 

EGTRRA. As another example, suppose that under present law a 

plan is top-heavy and therefore a minimum benefit is required 

under the plan, and that under the provisions of EGTRRA, the 

plan is not considered to be top-heavy. It is expected that the Secretary will generally permit plans to be retroactively amended to 

reflect the new top-heavy provisions of EGTRRA. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

157 

214Sec. 7441. 215Sec. 7443(c). 216Secs. 7447 and 7448. 

TITLE X—UNITED STATES TAX COURT MODERNIZATION 

A. TAX COURT PENSION AND COMPENSATION

1. Judges of the Tax Court (secs. 1001–1007 and 1013 of the bill 

and secs. 7443, 7447, 7448, and 7472 of the Code) 

PRESENT LAW

The Tax Court is established by the Congress pursuant to Article 

I of the U.S. Constitution.214 The salary of a Tax Court judge is 

the same salary as received by a U.S. District Court judge.215

Present law also provides Tax Court judges with some benefits that 

correspond to benefits provided to U.S. District Court judges, including specific retirement and survivor benefit programs for Tax 

Court judges.216

Under the retirement program, a Tax Court judge may elect to 

receive retirement pay from the Tax Court in lieu of benefits under 

another Federal retirement program. A Tax Court judge may also 

elect to participate in a plan providing annuity benefits for the 

judge’s surviving spouse and dependent children (the ‘‘survivors’’ 

annuity plan’’). Generally, benefits under the survivors’ annuity 

plan are payable only if the judge has performed at least five years 

of service. Cost-of-living increases in benefits under the survivors’ 

annuity plan are generally based on increases in pay for active 

judges. 

Tax Court judges participate in the Federal Employees Group 

Life Insurance program (the ‘‘FEGLI’’ program). Retired Tax Court 

judges are eligible to participate in the FEGLI program as the result of an administrative determination of their eligibility, rather 

than a specific statutory provision. 

Tax Court judges are not covered by the leave system for Federal 

Executive Branch employees. As a result, an individual who works 

in the Federal Executive Branch before being appointed to the Tax 

Court does not continue to accrue annual leave under the same 

leave program and may not use leave accrued prior to his or her 

appointment to the Tax Court. 

Tax Court judges are not eligible to participate in the Thrift Savings Plan. 

Under the retirement program for Tax Court judges, retired 

judges generally receive retired pay equal to the rate of salary of 

an active judge and must be available for recall to perform judicial 

duties as needed by the court for up to 90 days a year (unless the 

judge consents to more). However, retired judges may elect to 

freeze the amount of their retired pay, and those who do so are not 

available for recall. 

Retired Tax Court judges on recall are subject to the limitations 

on outside earned income that apply to active Federal employees 

under the Ethics in Government Act of 1978. However, retired District Court judges on recall may receive compensation for teaching 

without regard to the limitations on outside earned income. Retired 

Tax Court judges who elect to freeze the amount of their retired 

158 

217See, e.g., S. Rep. No. 91–552, at 303 (1969). 

pay (thus making themselves unavailable for recall) are not subject 

to the limitations on outside earned income. 

REASONS FOR CHANGE

Tax Court judges receive compensation at the same rate as District Court judges. In addition, the benefit programs for Tax Court 

judges are intended to accord with similar programs applicable to 

District Court judges.217 However, subsequent legislative changes 

in the benefits provided to District Court judges and judges in certain other Article I courts have not applied to Tax Court judges, 

thus creating disparities between the treatment of Tax Court 

judges and the treatment of other Federal judges. 

The Committee believes that, as a general matter, parity should 

exist between the benefits provided to Tax Court judges and those 

provided to District Court judges. Thus, the benefits provided to 

Tax Court judges should be updated to reflect benefits currently 

provided to District Court judges. 

In addition, the Committee is concerned that certain aspects of 

the present-law rules relating to Tax Court judges may be inequitable in that Tax Court judges are treated less favorably than District Court judges and judges in certain other Article I courts. With 

respect to increases in FEGLI premiums for Tax Court judges age 

65 or older, the Committee believes that the Tax Court should be 

authorized to pay for such increases, similar to authority in other 

Federal courts. In addition, because Tax Court judges are not covered by the leave system for Federal Executive Branch employees, 

a judge who has unused accrued annual leave for service with the 

Federal Executive Branch should be able to receive a lump sum 

payment for such accrued annual leave. Moreover, the Committee 

believes that exempting from the limitation on outside earned income compensation received by retired Tax Court judges for teaching will encourage such judges to remain available for recall by the 

court. 

EXPLANATION OF PROVISION

Survivor annuities for assassinated judges 

Under the provision, benefits under the survivors’ annuity plan 

are payable if a Tax Court judge is assassinated before the judge 

has performed five years of service. 

Cost-of-living adjustments for survivor annuities 

The provision provides that cost-of-living increases in benefits 

under the survivors’ annuity plan are generally based on cost-of-living increases in benefits paid under the Civil Service Retirement 

System. 

Life insurance coverage 

Under the provision, a judge or retired judge of the Tax Court 

is deemed to be an employee continuing in active employment for 

purposes of participation in the Federal Employees Group Life Insurance program. In addition, in the case of a Tax Court judge age 

65 or over, the Tax Court is authorized to pay on behalf of the 

159 

218This date relates to changes in the FEGLI program, including changes to premium rates 

to reflect employees’ ages. 219Sec. 7441. 220Sec. 7443A. 

judge any increase in employee premiums under the FEGLI program that occur after April 24, 1999,218 including expenses generated by such payment, as authorized by the chief judge of the 

Tax Court in a manner consistent with payments authorized by the 

Judicial Conference of the United States (i.e., the body with policymaking authority over the administration of the courts of the Federal judicial branch). 

Accrued annual leave 

Under the provision, in the case of a judge who is employed by 

the Federal executive branch before appointment to the Tax Court, 

the judge is entitled to receive a lump-sum payment for the balance 

of his or her accrued annual leave on appointment to the Tax 

Court. 

Thrift Savings Plan participation 

Under the provision, Tax Court judges are permitted to participate in the Thrift Savings Plan. A Tax Court judge is not eligible 

for agency contributions to the Thrift Savings Plan. 

Exemption for teaching compensation from outside earned income 

limitations 

Under the provision, compensation earned by a retired Tax Court 

judge for teaching is not treated as outside earned income for purposes of limitations under the Ethics in Government Act of 1978. 

EFFECTIVE DATE

The provisions are effective on the date of enactment, except 

that: (1) the provision relating to cost-of-living increases in benefits 

under the survivors’ annuity plan applies with respect to increases 

in Civil Service Retirement benefits taking effect after the date of 

enactment; (2) the provision relating to FEGLI coverage applies to 

any individual serving as a Tax Court judge or any retired Tax 

Court judge on or after the date of enactment; (3) the provision relating to payment of accrued annual leave applies to any Tax Court 

judge with an outstanding leave balance as of the date of enactment and to any individual appointed to serve as a Tax Court 

judge after such date; and (4) the provision relating to teaching 

compensation of a retired Tax Court judge applies to any individual 

serving as a retired Tax Court judge on or after the date of enactment. 

2. Special trial judges of the Tax Court (secs. 1008–1013 of the bill 

and sec. 7448 and new secs. 7443A, 7443B, and 7443C of the 

Code) 

PRESENT LAW

The Tax Court is established by the Congress pursuant to Article 

I of the U.S. Constitution.219 The chief judge of the Tax Court may 

appoint special trial judges to handle certain cases.220 Special trial 

judges serve for an indefinite term. Special trial judges receive a 

160 

salary of 90 percent of the salary of a Tax Court judge and are generally covered by the benefit programs that apply to Federal executive branch employees, including the Civil Service Retirement System or the Federal Employees’ Retirement System. 

REASONS FOR CHANGE

Special trial judges of the Tax Court perform a role similar to 

that of magistrate judges in courts established under Article III of 

the U.S. Constitution (‘‘Article III’’ courts). However, disparities 

exist between the positions of magistrate judges of Article III 

courts and special trial judges of the Tax Court. For example, magistrate judges of Article III courts are appointed for a specific term, 

are subject to removal only in limited circumstances, and are eligible for coverage under special retirement and survivor benefit programs. The Committee believes that special trial judges of the Tax 

Court and magistrate judges of Article III courts should receive 

comparable treatment as to the status of the position, salary, and 

benefits. This will better enable the Tax Court to attract and retain 

qualified persons to serve in this capacity. 

EXPLANATION OF PROVISION

Magistrate judges of the Tax Court 

Under the provision, the position of special trial judge of the Tax 

Court is renamed as magistrate judge of the Tax Court. Magistrate 

judges are appointed (or reappointed) to serve for eight-year terms 

and are subject to removal in limited circumstances. 

Under the provision, a magistrate judge receives a salary of 92 

percent of the salary of a Tax Court judge. 

The provision exempts magistrate judges from the leave program 

that applies to employees of the Federal executive branch and provides rules for individuals who are subject to such leave program 

before becoming exempt. 

Survivors’ annuity plan 

Under the provision, magistrate judges of the Tax Court may 

elect to participate in the survivors’ annuity plan for Tax Court 

judges. An election to participate in the survivors’ annuity plan 

must be filed not later than the latest of: (1) twelve months after 

the date of enactment of the provision; (2) six months after the 

date the judge takes office; or (3) six months after the date the 

judge marries. 

Retirement annuity program for magistrate judges 

The provision establishes a new retirement annuity program for 

magistrate judges of the Tax Court, under which a magistrate 

judge may elect to receive a retirement annuity from the Tax Court 

in lieu of benefits under another Federal retirement program. A 

magistrate judge may elect to be covered by the retirement program within five years of appointment or five years of date of enactment. A magistrate judge who elects to be covered by the retirement program generally receives a refund of contributions (with interest) made to the Civil Service Retirement System or the Federal 

Employees’ Retirement System. 

161 

A magistrate judge may retire at age 65 with 14 years of service 

and receive an annuity equal to his or her salary at the time of retirement. For this purpose, service may include service performed 

as a special trial judge or a magistrate judge, provided the service 

is performed no earlier than 91⁄2 years before the date of enactment 

of the provision. The provision also provides for payment of a reduced annuity in the case a magistrate judge with at least eight 

years of service or in the case of disability or failure to be reappointed. 

A magistrate judge receiving a retirement annuity is entitled to 

cost-of-living increases based on cost-of-living increases in benefits 

paid under the Civil Service Retirement System. However, such an 

increase cannot cause the retirement annuity to exceed the current 

salary of a magistrate judge. 

Contributions of one percent of salary are withheld from the salary of a magistrate judge who elects to participate in the retirement annuity program. Such contributions must be made also with 

respect to prior service for which the magistrate judge elects credit 

under the retirement annuity program. No contributions are required after 14 years of service. A lump sum refund of the magistrate judge’s contributions (with interest) is made if no annuity 

is payable, for example, if the magistrate judge dies before retirement. 

A magistrate judge’s right to a retirement annuity is generally 

suspended or reduced in the case of employment outside the Tax 

Court. 

The provision includes rules under which annuity payments may 

be made to a person other than the magistrate judge in certain circumstances, such as divorce or legal separation, under a court decree, a court order, or court-approved property settlement. 

The provision establishes the Tax Court Judicial Officers’ Retirement Fund (the ‘‘Fund’’). Amounts in the Fund are authorized to 

be appropriated for the payment of annuities, refunds, and other 

payments under the retirement annuity program. Contributions 

withheld from a magistrate judge’s salary are deposited in the 

Fund. In addition, the provision authorizes to be appropriated to 

the Fund amounts required to reduce the Fund’s unfunded liability 

to zero. For this purpose, the Fund’s unfunded liability means the 

estimated excess, actuarially determined on an annual basis, of the 

present value of benefits payable from the Fund over the sum of 

(1) the present value of contributions to be withheld from the future salary of the magistrate judges and (2) the balance in the 

Fund as of the date the unfunded liability is determined. 

Under the provision, a magistrate judge who elects to participate 

in the retirement annuity program is also permitted to participate 

in the Thrift Savings Plan. Such a magistrate judge is not eligible 

for agency contributions to the Thrift Savings Plan. 

Retirement annuity rule for incumbent magistrate judges 

The provision provides a transition rule for magistrate judges in 

active service on the date of enactment of the provision. Under the 

transition rule, such a magistrate judge is entitled to an annuity 

under the Civil Service Retirement System or the Federal Employees’ Retirement System based on prior service that is not credited 

under the magistrate judges’ retirement annuity program. If the 

162 

221Sec. 6330(a). 222Sec. 6320. 223Sec. 6330(d). 224Sec. 7441. 225Sec. 7442. 

magistrate judge made contributions to the Civil Service Retirement System or the Federal Employees’ Retirement System with 

respect to service that is credited under the magistrate judges’ retirement annuity program, such contributions are refunded (with 

interest). 

A magistrate judge who elects the transition rule is also entitled 

to the annuity payable under the magistrate judges’ retirement 

program in the case of retirement with at least eight years of service or on failure to be reappointed. This annuity is based on service 

as a magistrate judge or special trial judge of the Tax Court that 

is performed no earlier than 91⁄2 years before the date of enactment 

of the provision and for which the magistrate judge makes contributions of one percent of salary. 

Recall of retired magistrate judges 

The provision provides rules under which a retired magistrate 

judge may be recalled to perform services for up to 90 days a year. 

EFFECTIVE DATE

The provisions are effective on date of enactment. 

B. TAX COURT PROCEDURE

1. Jurisdiction of Tax Court over collection due process cases (sec. 

1021 of the bill and sec. 6330 of the Code) 

PRESENT LAW

In general, the Internal Revenue Service (‘‘IRS’’) is required to 

notify taxpayers that they have a right to a fair and impartial 

hearing before levy may be made on any property or right to property.221 Similar rules apply with respect to liens.222 The hearing is 

held by an impartial officer from the IRS Office of Appeals, who is 

required to issue a determination with respect to the issues raised 

by the taxpayer at the hearing. The taxpayer is entitled to appeal 

that determination to a court. The appeal must be brought to the 

United States Tax Court (the ‘‘Tax Court’’), unless the Tax Court 

does not have jurisdiction over the underlying tax liability. If that 

is the case, then the appeal must be brought in the district court 

of the United States.223 If a court determines that an appeal was 

not made to the correct court, the taxpayer has 30 days after such 

determination to file with the correct court. 

The Tax Court is established under Article I of the United States 

Constitution 224 and is a court of limited jurisdiction.225 The Tax 

Court only has the jurisdiction that is expressly conferred on it by 

statute. For example, the jurisdiction of the Tax Court includes the 

authority to redetermine the correct amount of an income, estate, 

or gift tax deficiency, to make certain types of declaratory judgments, and to determine certain worker classification status issues, 

but does not include jurisdiction over most excise taxes imposed by 

the Internal Revenue Code. Thus, the Tax Court lacks jurisdiction 

163 

226Sec. 7436. 

over the appeal of a due process hearing relating to certain collections matters. 

REASONS FOR CHANGE

The Tax Court does not have jurisdiction over all of the tax 

issues underlying collection due process cases. For example, the jurisdiction of the Tax Court does not extend to issues involving most 

excise taxes. Thus, a taxpayer seeking to appeal the collection due 

process determination must know whether the Tax Court or a district court has jurisdiction over the underlying tax liability. 

The judicial appeals structure of present law was designed in 

recognition of these jurisdictional limitations; however, in many 

cases the underlying taxes are not involved in determining the due 

process issue. The present-law structure can lead to taxpayer confusion over which court is the proper court in which to file an appeal. Some believe that this confusion may also be used by some 

taxpayers seeking to delay the collection process. Accordingly, the 

Committee believes that the Tax Court should have jurisdiction 

over all appeals of collection due process determinations. The Committee believes that the simplification provided by the provision 

will benefit the taxpayers seeking judicial review and benefit the 

IRS by eliminating confusion over which court is the proper venue 

for appeal and will reduce the period of time before judicial review. 

This provision will also eliminate the opportunity to use the 

present-law rules in unintended ways to delay or defeat the collection process. 

EXPLANATION OF PROVISION

The provision modifies the jurisdiction of the Tax Court by providing that all appeals of collection due process determinations are 

to be made to the Tax Court. 

EFFECTIVE DATE

The provision applies to determinations made by the IRS after 

the date which is 60 days after the date of enactment. 

2. Authority for magistrate judges to hear and decide certain employment status cases (sec. 1022 of the bill and sec. 7443A of 

the Code) 

PRESENT LAW

In connection with the audit of any person, if there is an actual 

controversy involving a determination by the IRS as part of an examination that (1) one or more individuals performing services for 

that person are employees of that person or (2) that person is not 

entitled to relief under section 530 of the Revenue Act of 1978, the 

Tax Court has jurisdiction to determine whether the IRS is correct 

and the proper amount of employment tax under such determination.226 Any redetermination by the Tax Court has the force and 

effect of a decision of the Tax Court and is reviewable. 

An election may be made by the taxpayer for small case procedures if the amount of the employment taxes in dispute is $50,000 

164 

227Sec. 7436(c). 228Sec. 7443A(b) and (c). 229Sec. 7443A(b)(5). 230 Under another provision of the bill, the position of special trial judge is renamed magistrate judge. 231See Stone v. White, 301 U.S. 532 (1937); Bull v. United States, 295 U.S. 247 (1935). 232 153 F.3d 302 (6th Cir. 1998), cert. den., 525 U.S. 1140 (1999). 233 264 F.3d 904 (9th Cir. 2001), cert. den., 535 U.S. 927 (2002). 

or less for each calendar quarter involved.227 The decision entered 

under the small case procedure is not reviewable in any other court 

and should not be cited as authority. 

The chief judge of the Tax Court may assign proceedings to special trial judges. The Code enumerates certain types of proceedings 

that may be so assigned and may be decided by a special trial 

judge.228 In addition, the chief judge may designate any other proceeding to be heard by a special trial judge.229

REASONS FOR CHANGE

The Committee believes that it is important for special trial 

judges to preside over and enter decisions in proceedings involving 

a determination of employment status in which the amount of employment taxes in dispute is $50,000 or less for each calendar quarter. The Committee believes that this clarification will improve the 

operations and internal functioning of the Tax Court. 

EXPLANATION OF PROVISION

The provision clarifies that the chief judge of the Tax Court may 

assign to special trial judges any employment tax cases that are 

subject to the small case procedure and may authorize special trial 

judges to decide such small tax cases.230

EFFECTIVE DATE

The provision is effective for any employment status proceeding 

in the Tax Court with respect to which a decision has not become 

final before the date of enactment. 

3. Confirmation of Tax Court authority to apply doctrine of equitable recoupment (sec. 1023 of the bill and sec. 6214 of the 

Code) 

PRESENT LAW

Equitable recoupment is a common-law equitable principle that 

permits the defensive use of an otherwise time-barred claim to reduce or defeat an opponent’s claim if both claims arise from the 

same transaction. U.S. District Courts and the U.S. Court of Federal Claims, the two Federal tax refund forums, may apply equitable recoupment in deciding tax refund cases.231 In Estate of 

Mueller v. Commissioner,232 the Court of Appeals for the Sixth Circuit held that the Tax Court may not apply the doctrine of equitable recoupment. More recently, the Court of Appeals for the 

Ninth Circuit, in Branson v. Commissioner,233 held that the Tax 

Court may apply the doctrine of equitable recoupment. 

REASONS FOR CHANGE

The conflict among the circuit courts regarding the application of 

the doctrine of equitable recoupment results in uncertainty and 

165 

234Sec. 7451. 235See Rule 20(a) of the Tax Court Rules of Practice and Procedure. 

confusion. For example, the cases of similarly situated taxpayers 

may be resolved differently simply because the taxpayers reside in 

different circuit court jurisdictions. The Committee believes that it 

is important to clarify the applicability of the doctrine of equitable 

recoupment in order to eliminate the uncertainty or confusion of 

differing results in differing circuits. The Committee also believes 

that the provision will provide simplification benefits to both taxpayers and the IRS. 

EXPLANATION OF PROVISION

The provision confirms that the Tax Court may apply the principle of equitable recoupment to the same extent that it may be applied in Federal civil tax cases by the U.S. District Courts or the 

U.S. Court of Federal Claims. No negative inference should be 

drawn as to whether the Tax Court has the authority to continue 

to apply other equitable principles in deciding matters over which 

it has jurisdiction. 

EFFECTIVE DATE

The provision is effective for any action or proceeding in the Tax 

Court with respect to which a decision has not become final as of 

the date of enactment. 

4. Tax Court filing fees (sec. 1024 of the bill and sec. 7451 of the 

Code) 

PRESENT LAW

The Tax Court is authorized to impose a fee of up to $60 for the 

filing of any petition for the redetermination of a deficiency or for 

declaratory judgments relating to the status and classification of 

501(c)(3) organizations, the judicial review of final partnership administrative adjustments, and the judicial review of partnership 

items if an administrative adjustment request is not allowed in 

full.234 The statute does not specifically authorize the Tax Court to 

impose a filing fee for the filing of a petition for review of the IRS’s 

failure to abate interest or for failure to award administrative costs 

and other areas of jurisdiction for which a petition may be filed. 

The practice of the Tax Court is to impose a $60 filing fee in all 

cases commenced by petition.235

REASONS FOR CHANGE

The Committee believes it is appropriate to clarify that the Tax 

Court filing fee applies to any case commenced by the filing of a 

petition. 

EXPLANATION OF PROVISION

The provision clarifies that the Tax Court is authorized to charge a filing fee of up to $60 in all cases commenced by the filing of a 

petition. No negative inference should be drawn as to whether the 

Tax Court has the authority under present law to impose a filing 

fee for any case commenced by the filing of a petition. 

166 

236Sec. 7441. 237Sec. 7471. 238See, e.g., S. Rep. No. 91–552, at 302 (1969). 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

5. Appointment of Tax Court employees (sec. 1025 of the bill and 

sec. 7471(a) of the Code) 

PRESENT LAW

The Tax Court is a legislative court established by the Congress 

pursuant to Article I of the U.S. Constitution (an ‘‘Article I’’ 

court).236 The Tax Court is authorized to appoint employees, subject to the rules applicable to employment with the Executive 

Branch of the Federal Government (generally referred to as ‘‘competitive service’’), as administered by the Office of Personnel Management.237

Employment with the Federal Executive Branch is governed by 

certain general statutory principles, such as recruitment of qualified individuals, fair and equitable treatment of employees and applicants, maintenance of high standards of employee conduct, and 

protection of employees against arbitrary action. The rules for employment in the Federal Executive Branch address various aspects 

of such employment, including: (1) procedures for the appointment 

of employees in the competitive service, including preferences for 

certain individuals (e.g., veterans); (2) compensation, benefits, and 

leave programs for employees; (3) appraisals of employee performance; (4) disciplinary actions; and (5) employee rights, including appeal rights. In addition, employees are protected from certain personnel practices (referred to as ‘‘prohibited personnel practices’’), 

such as discrimination on the basis of race, color, religion, age, sex, 

national origin, political affiliation, marital status, or handicapping 

condition. 

REASONS FOR CHANGE

The Tax Court was established as an Article I court in part because of its need for independence from the Executive Branch and 

its responsibility for reviewing determinations of a Federal Executive Branch agency (i.e., the Internal Revenue Service).238 Accordingly, the Committee believes that the Tax Court should have the 

authority to establish its own personnel system, rather than being 

subject to the rules administered by the Federal Executive Branch. 

Similar authority has previously been provided to other Article I 

courts and to courts established under Article III of the U.S. Constitution (‘‘Article III’’ courts). Currently, the Tax Court is the only 

Federal court (Article I or III) that does not have its own personnel 

system. Authority to establish its own personnel system will also 

provide the Tax Court with greater flexibility in meeting its staffing needs, thus enabling the court to operate more effectively. The 

Committee also believes that a personnel system established by the 

Tax Court should be consistent with the general principles that 

govern other employment with the Federal Government and should 

provide certain protections to employees. 

167 

EXPLANATION OF PROVISION

The provision extends to the Tax Court authority to establish its 

own personnel management system. Any personnel management 

system adopted by the Tax Court must: (1) include the merit system principles that govern employment with the Federal Executive 

Branch; (2) prohibit personnel practices that are prohibited in the 

Federal Executive Branch; and (3) in the case of an individual eligible for preference for employment in the Federal Executive Branch, 

provide preference for that individual in a manner and to an extent 

consistent with preference in the Federal Executive Branch. 

The provision requires the Tax Court to prohibit discrimination 

on the basis of race, color, religion, age, sex, national origin, political affiliation, marital status, or handicapping condition. The Tax 

Court is also required to promulgate procedures for resolving complaints of discrimination by employees and applicants for employment. 

The provision allows the Tax Court to appoint a clerk without regard to the Federal Executive Branch rules regarding appointments in the competitive service. Under the provision, the clerk 

serves at the pleasure of the Tax Court. 

The provision also allows the Tax Court to appoint other necessary employees without regard to the Federal Executive Branch 

rules regarding appointments in the competitive service. Under the 

provision, these deputies and employees are subject to removal by 

the Tax Court. 

The provision allows judges and special trial judges of the Tax 

Court to appoint law clerks and secretaries, in such numbers as the 

Tax Court may approve, without regard to the Federal Executive 

Branch rules regarding appointments in the competitive service. 

Under the provision, a law clerk or secretary serves at the pleasure 

of the appointing judge. 

The provision exempts law clerks from the sick leave and annual 

leave provisions applicable to employees of the Federal Executive 

Branch. Any unused sick or annual leave to the credit of a law 

clerk as of the effective date of the provision remains credited to 

the individual and is available to the individual upon separation 

from the Federal Government, or upon transfer to a position subject to such sick leave and annual leave provisions. 

The provision allows the Tax Court to fix and adjust the compensation of the clerk and other employees without regard to the 

Federal Executive Branch rules regarding employee classifications 

and pay rates. To the maximum extent feasible, Tax Court employees are to be compensated at rates consistent with those of employees holding comparable positions in the Federal Judicial Branch. 

The Tax Court may also establish programs for employee evaluations, premium pay, and resolution of employee grievances. 

In the case of an individual who is an employee of the Tax Court 

on the day before the effective date of the provision, the provision 

preserves certain rights that the employee is entitled to as of that 

day. The provision preserves the right to: (1) appeal a reduction in 

grade or removal; (2) appeal an adverse action; (3) appeal a prohibited personnel practice; (4) make an allegation of a prohibited personnel practice; or (5) file an employment discrimination appeal. 

168 

239Sec. 7475. 

These rights are preserved for as long as the individual remains an 

employee of the Tax Court. 

Under the provision, a Tax Court employee who completes at 

least one year of continuous service under a nontemporary appointment with the Tax Court acquires competitive service status for appointment to any position in the Federal Executive Branch competitive service for which the employee possesses the required 

qualifications. 

The provision also allows the Tax Court to procure the services 

of experts and consultants in accordance with Federal Executive 

Branch rules. 

EFFECTIVE DATE

The provision is effective on the date that the Tax Court adopts 

a personnel management system after the date of enactment of the 

provision. 

6. Expanded use of practice fees (sec. 1026 of the bill and sec. 7475 

of the Code) 

PRESENT LAW

The Tax Court is authorized to impose on practitioners admitted to practice before the Tax Court a fee of up to $30 per year.239

These fees are to be used to employ independent counsel to pursue 

disciplinary matters. 

REASONS FOR CHANGE

The Committee understands that many pro se taxpayers are not 

familiar with Tax Court procedures and applicable legal requirements. The Committee believes it is beneficial for Tax Court fees 

imposed on practitioners also to be available to provide services to 

pro se taxpayers. 

EXPLANATION OF PROVISION

The provision provides that Tax Court fees imposed on practitioners also are available to provide services to pro se taxpayers. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

TITLE XI—OTHER PROVISIONS 

A. TRANSFER OF FUNDS ATTRIBUTABLE TO BLACK LUNG TRUST

FUNDS TO COMBINED BENEFIT FUND

(Sec. 1101 of the bill and secs. 501(c)(21) and 9705 of the Code) 

PRESENT LAW

Qualified black lung benefit trusts 

A qualified black lung benefit trust is exempt from Federal income taxation. Contributions to a qualified black lung benefit trust 

generally are deductible to the extent such contributions are necessary to fund the trust. 

169 

Under present law, no assets of a qualified black lung benefit 

trust may be used for, or diverted to, any purpose other than (1) 

to satisfy liabilities, or pay insurance premiums to cover liabilities, 

arising under the Black Lung Acts, (2) to pay administrative costs 

of operating the trust, (3) to pay accident and health benefits or 

premiums for insurance exclusively covering such benefits (including administrative and other incidental expenses relating to such 

benefits) for retired coal miners and their spouses and dependents 

(within certain limits) or (4) investment in Federal, State, or local 

securities and obligations, or in time demand deposits in a bank or 

insured credit union. Additionally, trust assets may be paid into 

the national Black Lung Disability Trust Fund, or into the general 

fund of the U.S. Treasury. 

The amount of assets in qualified black lung benefit trusts available to pay accident and health benefits or premiums for insurance 

exclusively covering such benefits (including administrative and 

other incidental expenses relating to such benefits) for retired coal 

miners and their spouses and dependents may not exceed a yearly 

limit or an aggregate limit, whichever is less. The yearly limit is 

the amount of trust assets in excess of 110 percent of the present 

value of the liability for black lung benefits determined as of the 

close of the preceding taxable year of the trust. The aggregate limit 

is the excess of the sum of the yearly limit as of the close of the 

last taxable year ending before October 24, 1992, plus earnings 

thereon as of the close of the taxable year preceding the taxable 

year involved over the aggregate payments for accident of health 

benefits for retired coal miners and their spouses and dependents 

made from the trust since October 24, 1992. Each of these determinations is required to be made by an independent actuary. 

In general, amounts used to pay retiree accident or health benefits are not includible in the income of the company, nor is a deduction allowed for such amounts. 

United Mine Workers of America Combined Benefit Fund 

The United Mine Workers of America (‘‘UMWA’’) Combined Benefit Fund was established by the Coal Industry Retiree Health Benefit Act of 1992 to assume responsibility of payments for medical 

care expenses of retired miners and their dependents who were eligible for health care from the private 1950 and 1974 UMWA Benefit Plans. The UMWA Combined Benefit Fund is financed by assessments on current and former signatories to labor agreements 

with the UMWA, past transfers from an overfunded United Mine 

Workers pension fund, and transfers from the Abandoned Mine 

Reclamation Fund. 

REASONS FOR CHANGE

The Committee believes that better than expected market performance of black lung trust assets and fewer black lung claims 

have resulted in a situation where some coal companies have significant unanticipated excess assets in their black lung trusts. Removing the aggregate limit on the amount of black lung benefit 

trusts available to pay accident and health benefits or premiums 

for insurance exclusively covering such benefits for retired coal 

miners will allow coal companies to use greater amounts of their 

excess black lung trust assets to fund such benefits. Depositing the 

170 

240Sec. 101(a). 241This favorable tax treatment is available only if a life insurance contract meets certain requirements designed to limit the investment character of the contract (sec. 7702). 242Sec. 72(e). In the case of a modified endowment contract, however, in general, distributions 

are treated as income first, loans are treated as distributions (i.e., income rather than basis recovery first), and an additional 10-percent tax is imposed on the income portion of distributions 

made before age 591⁄2 and in certain other circumstances (secs. 72(e) and (v)). A modified endowment contract is a life insurance contract that does not meet a statutory ‘‘7-pay’’ test, i.e., generally is funded more rapidly than seven annual level premiums (sec. 7702A). 

revenue raised by eliminating the aggregate limit into the UMWA 

Combined Benefit Fund will help to fund retired coal miners’ 

health benefits. 

EXPLANATION OF PROVISION

The provision eliminates the aggregate limit on the amount of 

excess black lung benefit trust assets that may be used to pay accident and health benefits or premiums for insurance exclusively covering such benefits (including administrative and other incidental 

expenses relating to such benefits) for retired coal miners and their 

spouses and dependents. In addition, under the provision, each fiscal year, the Secretary of the Treasury will transfer to the UMWA 

Combined Benefit Fund an amount which the Secretary estimates 

to be the additional amounts received in the Treasury for that fiscal year by reason of the elimination of the aggregate limit. The 

Secretary will adjust the amount transferred for any year to the extent necessary to correct errors in any estimate for any prior year. 

Any amount transferred to the UMWA Combined Benefit Fund 

under the provision will be used to proportionately reduce the unassigned beneficiary premium of each assigned operator for any 

plan year beginning after December 31, 2002. 

EFFECTIVE DATE

The provision is effective for taxable years beginning after December 31, 2002. 

B. TAX TREATMENT OF COMPANY-OWNED LIFE INSURANCE (‘‘COLI’’) 

(Secs. 1102 and 813 of the bill and new secs. 101(j) and 6039I of 

the Code) 

PRESENT LAW

Amounts received under a life insurance contract 

Amounts received under a life insurance contract paid by reason 

of the death of the insured are not includible in gross income for 

Federal tax purposes.240 No Federal income tax generally is imposed on a policyholder with respect to the earnings under a life 

insurance contract (inside buildup).241

Distributions from a life insurance contract (other than a modified endowment contract) that are made prior to the death of the 

insured generally are includible in income to the extent that the 

amounts distributed exceed the taxpayer’s investment in the contract (i.e., basis). Such distributions generally are treated first as 

a tax-free recovery of basis, and then as income.242

171 

243 In addition to the statutory limitations described below, interest deductions under company-owned life insurance arrangements have also been limited by recent cases applying general 

principles of tax law. See Winn-Dixie Stores, Inc. v. Commissioner, 113 T.C. 254 (1999), aff’d 

254 F.3d 1313 (11th Cir. 2001), cert. denied, April 15, 2002; Internal Revenue Service v. CM 

Holdings, Inc., 254 B.R. 578 (D. Del. 2000), aff’d, 301 F.3d 96 (3d Cir. 2002); American Electric 

Power, Inc. v. U.S., 136 F. Supp. 2d 762 (S. D. Ohio 2001), aff’d, 326 F.3d 737 (6th Cir. 2003), 

reh. denied, 338 F.3d 534 (6th Cir. 2003), cert. denied, U.S. No. 03–529 (Jan. 12, 2004); but see 

Dow Chemical Company v. U.S., 250 F. Supp. 2d 748 (E.D. Mich. 2003), modified, 278 F. Supp. 

2d 844 (E.D. Mich. 2003). 244Sec. 264(a)(1). 245Sec. 264(a)(4). 246Sec. 264(e)(3). 247Sec. 264(f). This applies to any life insurance, annuity or endowment contract issued after 

June 8, 1997. 

Premium and interest deduction limitations 243

Premiums 

Under present law, no deduction is permitted for premiums paid 

on any life insurance, annuity or endowment contract, if the taxpayer is directly or indirectly a beneficiary under the contract.244

Interest paid or accrued with respect to the contract 

No deduction generally is allowed for interest paid or accrued on 

any debt with respect to a life insurance, annuity or endowment 

contract covering the life of any individual.245 An exception is provided under this provision for insurance of key persons. 

Interest that is otherwise deductible (e.g., is not disallowed under 

other applicable rules or general principles of tax law) may be deductible under the key person exception, to the extent that the aggregate amount of the debt does not exceed $50,000 per insured individual. The deductible interest may not exceed the amount determined by applying a rate based on a Moody’s Corporate Bond Yield 

Average-Monthly Average Corporates. A key person is an individual who is either an officer or a 20-percent owner of the taxpayer. The number of individuals that can be treated as key persons may not exceed the greater of (1) five individuals, or (2) the 

lesser of five percent of the total number of officers and employees 

of the taxpayer, or 20 individuals.246

Pro rata interest limitation 

A pro rata interest deduction disallowance rule also applies. 

Under this rule, in the case of a taxpayer other than a natural person, no deduction is allowed for the portion of the taxpayer’s interest expense that is allocable to unborrowed policy cash surrender 

values.247 Interest expense is allocable to unborrowed policy cash 

values based on the ratio of (1) the taxpayer’s average unborrowed 

policy cash values of life insurance, annuity and endowment contracts, to (2) the sum of the average unborrowed cash values (or average adjusted bases, for other assets) of all the taxpayer’s assets. 

Under the pro rata interest disallowance rule, an exception is 

provided for any contract owned by an entity engaged in a trade 

or business, if the contract covers an individual who is a 20-percent 

owner of the entity, or an officer, director, or employee of the trade 

or business. The exception also applies to a joint-life contract covering a 20-percent owner and his or her spouse. 

172 

248Sec. 264(a)(2). 249Sec. 264(a)(3). 250Sec. 414(q). For purposes of determining the top-paid 20 percent of employees, certain employees, such as employees subject to a collective bargaining agreement, are disregarded. 251Sec. 105(h)(5). For purposes of determining the top-paid 25 percent of employees, certain 

employees, such as employees subject to a collective bargaining agreement, are disregarded. 

‘‘Single premium’’ and ‘‘4-out-of-7’’ limitations 

Other interest deduction limitation rules also apply with respect 

to life insurance, annuity and endowment contracts. Present law 

provides that no deduction is allowed for any amount paid or accrued on debt incurred or continued to purchase or carry a single 

premium life insurance, annuity or endowment contract.248 In addition, present law provides that no deduction is allowed for any 

amount paid or accrued on debt incurred or continued to purchase 

or carry a life insurance, annuity or endowment contract pursuant 

to a plan of purchase that contemplates the systematic direct or indirect borrowing of part or all of the increases in the cash value 

of the contract (either from the insurer or otherwise).249 Under this 

rule, several exceptions are provided, including an exception if no 

part of four of the annual premiums due during the initial sevenyear period is paid by means of such debt (known as the ‘‘4-outof-7 rule’’). 

Definitions of highly compensated employee 

Present law defines highly compensated employees and individuals for various purposes. For purposes of nondiscrimination rules 

relating to qualified retirement plans, an employee, including a 

self-employed individual, is treated as highly compensated with respect to a year if the employee (1) was a five-percent owner of the 

employer at any time during the year or the preceding year or (2) 

either (a) had compensation for the preceding year in excess of 

$95,000 (for 2005) or (b) at the election of the employer had compensation in excess of $95,000 (for 2005) and was in the highest 

paid 20 percent of employees for such year.250 The $95,000 dollar 

amount is indexed for inflation. 

For purposes of nondiscrimination rules relating to self-insured 

medical reimbursement plans, a highly compensated individual is 

an employee who is one of the five highest paid officers of the employer, a shareholder who owns more than 10 percent of the value 

of the stock of the employer, or is among the highest paid 25 percent of all employees.251

REASONS FOR CHANGE

The Committee is aware of companies who have, in the past, 

purchased insurance on rank-and-file employees and collect the 

proceeds years after the employee terminated employment with the 

company. To curtail this practice, when proceeds are payable more 

than 12 months after termination of employment, the bill excludes 

from income only proceeds on policies purchased on the lives of directors and highly compensated individuals, including the highestpaid 35 percent of employees. 

The Committee is also aware of reports that in some cases the 

insured employee is not aware that his or her life has been insured. 

The Committee believes that it is important for employers to provide notice to insured employees and to obtain the consent of emVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00172 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
173 

252 As under present law, certain employees are disregarded in making the determinations regarding the top-paid groups. 253For this purpose, a member of the family is defined in section 267(c)(4) to include only the 

individual’s brothers and sisters (whether by the whole or half blood), spouse, ancestors, and 

lineal descendants. 

ployees to be insured, and consequently, the bill imposes notice and 

consent requirements in order for the exceptions to the income inclusion rule to apply. 

In order to aid compliance with the provisions and facilitate IRS 

enforcement, the bill also imposes recordkeeping requirements with 

respect to employer-owned life insurance contracts issued after the 

date of enactment. 

EXPLANATION OF PROVISION

The provision provides generally that, in the case of an employerowned life insurance contract, the amount excluded from the applicable policyholder’s income as a death benefit cannot exceed the 

premiums and other amounts paid by such applicable policyholder 

for the contract. The excess death benefit is included in income. 

Exceptions to this income inclusion rule are provided. In the case 

of an employer-owned life insurance contract with respect to which 

the notice and consent requirements of the provision are met, the 

income inclusion rule does not apply to an amount received by reason of the death of an insured individual who, with respect to the 

applicable policyholder, was an employee at any time during the 

12-month period before the insured’s death, or who, at the time the 

contract was issued, was a director or highly compensated employee or highly compensated individual. For this purpose, such a 

person is one who is either: (1) a highly compensated employee as 

defined under the rules relating to qualified retirement plans, determined without regard to the election regarding the top-paid 20 

percent of employees; or (2) a highly compensated individual as defined under the rules relating to self-insured medical reimbursement plans, determined by substituting the highest-paid 35 percent 

of employees for the highest-paid 25 percent of employees.252

In the case of an employer-owned life insurance contract with respect to which the notice and consent requirements of the provision 

are met, the income inclusion rule does not apply to an amount received by reason of the death of an insured, to the extent the 

amount is (1) paid to a member of the family 253 of the insured, to 

an individual who is the designated beneficiary of the insured 

under the contract (other than an applicable policyholder), to a 

trust established for the benefit of any such member of the family 

or designated beneficiary, or to the estate of the insured; or (2) 

used to purchase an equity (or partnership capital or profits) interest in the applicable policyholder from such a family member, beneficiary, trust or estate. It is intended that such amounts be so paid 

or used by the due date of the tax return for the taxable year of 

the applicable policyholder in which they are received as a death 

benefit under the insurance contract, so that the payment of the 

amount to such a person or persons, or the use of the amount to 

make such a purchase, is known in the taxable year for which the 

exception from the income inclusion rule is claimed. 

An employer-owned life insurance contract is defined for purposes of the provision as a life insurance contract which (1) is 

174 

254The relationships include specified relationships among family members, shareholders and 

corporations, corporations that are members of a controlled group, trust grantors and fiduciaries, 

tax-exempt organizations and persons that control such organizations, commonly controlled S 

corporations, partnerships and C corporations, estates and beneficiaries, commonly controlled 

partnerships, and partners and partnerships. Detailed rules apply to determine the specific relationships. 

owned by a person engaged in a trade or business and under which 

such person (or a related person) is directly or indirectly a beneficiary, and (2) covers the life of an individual who is an employee 

with respect to the trade or business of the applicable policyholder 

on the date the contract is issued. 

An applicable policyholder means, with respect to an employerowned life insurance contract, the person (including related persons) that owns the contract, if the person is engaged in a trade 

or business, and if the person (or a related person) is directly or 

indirectly a beneficiary under the contract. 

For purposes of the provision, a related person includes any person that bears a relationship specified in section 267(b) or 

707(b)(1) 254 or is engaged in trades or businesses that are under 

common control (within the meaning of section 52(a) or (b)). 

The notice and consent requirements of the provision are met if, 

before the issuance of the contract, (1) the employee is notified in 

writing that the applicable policyholder intends to insure the employee’s life, and is notified of the maximum face amount at issue 

of the life insurance contract that the employer might take out on 

the life of the employee, (2) the employee provides written consent 

to being insured under the contract and that such coverage may 

continue after the insured terminates employment, and (3) the employee is informed in writing that an applicable policyholder will be 

a beneficiary of any proceeds payable on the death of the employee. 

For purposes of the provision, an employee includes an officer, a 

director, and a highly compensated employee; an insured means, 

with respect to an employer-owned life insurance contract, an individual covered by the contract who is a U.S. citizen or resident. In 

the case of a contract covering the joint lives of two individuals, references to an insured include both of the individuals. 

The provision requires annual reporting and recordkeeping by 

applicable policyholders that own one or more employer-owned life 

insurance contracts. The information to be reported is (1) the number of employees of the applicable policyholder at the end of the 

year, (2) the number of employees insured under employer-owned 

life insurance contracts at the end of the year, (3) the total amount 

of insurance in force at the end of the year under such contracts, 

(4) the name, address, and taxpayer identification number of the 

applicable policyholder and the type of business in which it is engaged, and (5) a statement that the applicable policyholder has a 

valid consent (in accordance with the consent requirements under 

the provision) for each insured employee and, if all such consents 

were not obtained, the total number of insured employees for whom 

such consent was not obtained. The applicable policyholder is required to keep records necessary to determine whether the requirements of the reporting rule and the income inclusion rule of new 

section 101(j) are met. 

175 

EFFECTIVE DATE

The amendments made by this section generally apply to contracts issued after the date of enactment, except for contracts 

issued after such date pursuant to an exchange described in section 

1035 of the Code. In addition, certain material increases in the 

death benefit or other material changes will generally cause a contract to be treated as a new contract, with an exception for existing 

lives under a master contract. Increases in the death benefit that 

occur as a result of the operation of section 7702 of the Code or the 

terms of the existing contract, provided that the insurer’s consent 

to the increase is not required, will not cause a contract to be treated as a new contract. In addition, certain changes to a contract will 

not be considered material changes so as to cause a contract to be 

treated as a new contract. These changes include administrative 

changes, changes from general to separate account, or changes as 

a result of the exercise of an option or right granted under the contract as originally issued. 

Examples of situations in which death benefit increases would 

not cause a contract to be treated as a new contract include the following: 

1. Section 7702 provides that life insurance contracts need to 

either meet the cash value accumulation test of section 7702(b) 

or the guideline premium requirements of section 7702(c) and 

the cash value corridor of section 7702(d). Under the corridor 

test, the amount of the death benefit may not be less than the 

applicable percentage of the cash surrender value. Contracts 

may be written to comply with the corridor requirement by 

providing for automatic increases in the death benefit based on 

the cash surrender value. Death benefit increases required by 

the corridor test or the cash value accumulation test do not require the insurer’s consent at the time of increase and occur 

in order to keep the contract in compliance with section 7702. 

2. Death benefits may also increase due to normal operation 

of the contract. For example, for some contracts, policyholder 

dividends paid under the contract may be applied to purchase 

paid-up additions, which increase the death benefits. The insurer’s consent is not required for these death benefit increases. 

3. For variable contracts and universal life contracts, the 

death benefit may increase as a result of market performance 

or the contract design. For example, some contracts provide 

that the death benefit will equal the cash value plus a specified 

amount at risk. With these contracts, the amount of the death 

benefit at any time will vary depending on changes in the cash 

value of the contract. The insurance company’s consent is not 

required for these death benefit increases. 

III. BUDGET EFFECTS OF THE BILL 

A. COMMITTEE ESTIMATES

In compliance with paragraph 11(a) of rule XXVI of the Standing 

Rules of the Senate, the following statement is made concerning 

the estimated budget effects of the provisions of the bill as reported. 

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B. BUDGET AUTHORITY AND TAX EXPENDITURES

Budget authority 

In compliance with section 308(a)(1) of the Budget Act, the Committee states that the provisions of section 1010 of the bill involve 

new or increased budget authority with respect to the Tax Court 

Judicial Officers’ Retirement Fund. 

Tax expenditures 

In compliance with section 308(a)(2) of the Budget Act, the Committee states that the revenue-reducing provisions of the bill involve increased tax expenditures (see revenue table in Part III.A., 

above). The revenue increasing provisions of the bill generally involve reduced tax expenditures (see revenue table in Part III.A., 

above). 

C. CONSULTATION WITH CONGRESSIONAL BUDGET OFFICE

In accordance with section 403 of the Budget Act, the Committee 

advises that the Congressional Budget Office has not submitted a 

statement on the bill. The letter from the Congressional Budget Office has not been received, and therefore will be provided separately. 

IV. VOTES OF THE COMMITTEE 

In compliance with paragraph 7(b) of rule XXVI of the Standing 

Rules of the Senate, the following statements are made concerning 

the votes taken on the Committee’s consideration of the bill. 

Motion to report the bill 

The bill, as modified, was ordered favorably reported by voice 

vote, a quorum being present, on July 26, 2005. 

Votes on amendments 

No amendments were offered for vote. 

V. REGULATORY IMPACT AND OTHER MATTERS 

A. REGULATORY IMPACT

Pursuant to paragraph 11(b) of rule XXVI of the Standing Rules 

of the Senate, the Committee makes the following statement concerning the regulatory impact that might be incurred in carrying 

out the provisions of the bill as amended. 

Impact on individuals and businesses 

The bill includes provisions relating to qualified retirement 

plans, including provisions designed to increase retirement income 

security by (1) providing employees with greater opportunity to diversify plan investments in employer securities, (2) requiring plans 

to provide additional information with respect to plan benefits and 

investments, (3) improving funding of defined benefit plans and the 

Pension Benefit Guaranty Corporation and clarifying the rules for 

cash balance and other hybrid plans, and (4) improving employees’ 

retirement savings opportunities, portability, and spousal protections. The bill also includes a variety of provisions intended to reVerDate Aug 31 2005 01:32 Nov 11, 2005 Jkt 049010 PO 00000 Frm 00181 Fmt 6659 Sfmt 6602 E:\HR\OC\SR174.XXX SR174
182 

duce administrative burdens on employers with regard to a variety 

of pension plan issues. The bill also includes directives for a number of studies relating to specific issues that affect retirement income security. The bill also contains a provision dealing with the 

tax treatment of company-owned life insurance. Some of the provisions of the bill provisions may impose additional administrative 

requirements on employers that sponsor retirement plans; however, 

in some cases the employer may avoid application of the provisions 

through plan design. In addition, some of the provisions will reduce 

regulatory burdens on employers that sponsor retirement plans. 

The funding provisions of the bill will require additional plan contributions from some employers with currently underfunded plans. 

These provisions are designed to increase the retirement income security of employees covered by such plans. 

The bill includes various other provisions that are not expected 

to impose additional administrative requirements or regulatory 

burdens on individuals or businesses. 

Impact on personal privacy and paperwork 

The provisions of the bill do not impact personal privacy. 

Some provisions of the bill relating to pension plans will reduce 

paperwork burdens on employers that sponsor qualified retirement 

plans. Other provisions may impose additional burdens on employers; however, in many cases an employer may reduce such burdens 

through plan design. The provision regarding withholding requirements with respect to certain stock options will reduce regulatory 

burdens on individuals and businesses that may currently apply 

withholding to these options. 

B. UNFUNDED MANDATES STATEMENT

This information is provided in accordance with section 423 of 

the Unfunded Mandates Reform 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 provisions of the bill 

do not impose a Federal intergovernmental mandate on State, 

local, or tribal governments. 

C. TAX COMPLEXITY ANALYSIS

Section 4022(b) of the Internal Revenue Service Reform and Restructuring Act of 1998 (the ‘‘IRS Reform Act’’) requires the Joint 

Committee on Taxation (in consultation with the Internal Revenue 

Service and the Department of the Treasury) to provide a tax complexity analysis. The complexity analysis is required for all legislation reported by the 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. 

183 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL AS 

REPORTED 

In the opinion of the Committee, it is necessary in order to expedite the business of the Senate, to dispense with the requirements 

of paragraph 12 of rule XXVI of the Standing Rules of the Senate 

(relating to the showing of changes in existing law made by the bill 

as reported by the Committee). 

Æ