99–010

Calendar No. 552

107TH CONGRESS REPORT

2d Session " ! SENATE 107–242

NATIONAL EMPLOYEE SAVINGS AND TRUST EQUITY

GUARANTEE ACT

AUGUST 2, 2002.—Ordered to be printed

Filed under authority of the order of the Senate of August 1, 2002

Mr. BAUCUS, from the Committee on Finance,

submitted the following

R E P O R T

[To accompany S. 1971]

The Committee on Finance, to which was referred the bill (S.

1971) 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 assets are adequately diversified and by providing workers with adequate access to, and information about, their pension plans, and for

other purposes, having considered the same, reports favorably

thereon with an amendment in the nature of a substitute and recommends that the bill, as amended, do pass.

CONTENTS

Page

I. Legislative Background .................................................................................... 3

II. Explanation of the Bill ..................................................................................... 3

Title I. Diversification of Pension Plan Assets ............................................... 3

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) ............................................................................................. 3

Title II. Protection of Employees During Pension Plan Transaction Suspension Period ............................................................................................... 9

A. Notice to Participants or Beneficiaries of Transaction Suspension Periods (sec. 201 of the bill, new sec. 4980G of the Code,

and new sec. 101(i) of ERISA) ....................................................... 9

B. Inapplicability of Relief from Fiduciary Liability During Suspension of Ability of Participant or Beneficiary to Direct Investments (sec. 202 of the bill and sec. 404(c) of ERISA) ........... 13
2

C. Clarification of Participant Access to Remedies under ERISA

(sec. 203 of the bill and sec. 409 of ERISA) .................................. 16

D. Increased Maximum Bond Amount for Plans Holding Employer

Securities (sec. 204 of the bill and sec. 412(a) of ERISA) ........... 17

Title III. Providing Information to Assist Participants ................................. 18

A. Benefit Statements and Investment Guidelines (secs. 301–302

of the bill, new sec. 4980H of the Code, and secs. 104 and

105 of ERISA) ................................................................................. 18

B. Information on Optional Forms of Benefit (sec. 303 of the bill) ... 23

C. Fiduciary Duty to Provide Material Information Relating to

Investment in Employer Stock (sec. 304 of the bill and sec.

404(c) of ERISA) ............................................................................. 24

D. Electronic Disclosure of Insider Trading (sec. 305 of the bill

and sec. 101 of ERISA) ................................................................... 26

E. Fiduciary Rules for Plan Sponsors Designating Independent Investment Advisors (sec. 306 of the bill and new sec. 404(e)

of ERISA) ........................................................................................ 27

Title IV. Other Provisions Relating to Pensions ............................................ 29

A. Employee Plans Compliance Resolution System (sec. 401 of the

bill) ................................................................................................... 29

B. Extension to all Governmental Plans of Moratorium on Application of Certain Nondiscrimination Rules Applicable to State

and Local Government Plans (sec. 402 of the bill, sec. 1505

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

of the Code) ..................................................................................... 30

C. Notice and Consent Period Regarding Distributions (sec. 403

of the bill, sec. 417 of the Code, and sec. 205 of ERISA) ............. 31

D. Technical Corrections to Saver Act (sec. 404 of the bill and

sec. 517 of ERISA) .......................................................................... 33

E. Missing Participants (sec. 405 of the bill and secs. 206(f) and

4050 of ERISA) ............................................................................... 34

F. Reduced PBGC Premiums for Small and New Plans (secs. 406–

407 of the bill and sec. 4006 of ERISA) ........................................ 35

G. Authorization for PBGC to Pay Interest on Premium Overpayment Refunds (sec. 408 of the bill and sec. 4007(b) of ERISA) .. 36

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

409 of the bill and secs. 4022 and 4044 of ERISA) ...................... 37

I. Benefit Suspension Notice (sec. 410 of the bill) .............................. 38

J. Interest Rate Range for Additional Funding Requirements (sec.

411 of the bill, sec. 412 of the Code, and secs. 302 and 4006

of ERISA) ........................................................................................ 39

K. Voluntary Early Retirement Incentive Plans Maintained by

Local Educational Agencies and Other Entities (sec. 412 of

the bill, sec. 457 of the Code, sec. 3(2)(B) of ERISA, and sec.

4(l)(1) of the Age Discrimination in Employment Act) ................ 41

L. Automatic Rollovers of Certain Involuntary Distributions (sec.

413 of the bill and sec. 404(c) of ERISA) ...................................... 44

M. Extension of Transition Rule to Pension Funding Requirements

(sec. 414 of the bill and sec. 769(c) of the Retirement Protection

Act of 1994) ..................................................................................... 46

N. Studies (secs. 421–425 of the bill) .................................................. 48

O. Plan Amendments (sec. 431 of the bill) .......................................... 49

Title V. Provisions Relating to Executives and Stock Options ..................... 51

A. Repeal of Limitation on Issuance of Treasury Guidance Regarding Nonqualified Deferred Compensation (sec. 501 of the bill) .. 51

B. Taxation of Deferred Compensation Provided through Offshore

Trusts (sec. 502 of the bill and sec. 83 of the Code) .................... 54

C. Treatment of Loans to Executives (sec. 503 of the bill and

new sec. 7872A and sec. 7872 of the Code) .................................. 56

D. Required Wage Withholding at Top Marginal Rate for Supplemental Wage Payments in Excess of $1 Million (sec. 504 of

the bill and sec. 13273 of the Revenue Reconciliation Act of

1993) ................................................................................................ 59

E. Chief Executive Officer Required To Sign Corporate Income

Tax Returns (sec. 511 of the bill and sec. 6062 of the Code) ...... 60
3

F. Exclusion of Incentive Stock Options and Employee Stock Purchase Plan Stock Options from Wages (sec. 521 of the bill

and secs. 421(b), 423(c), 3121(a), 3231, and 3306(b) of the

Code) ................................................................................................ 61

G. Capital Gain Treatment on Sale of Stock Acquired from Exercise of Statutory Stock Options to Comply with Conflict of

Interest Requirements (sec. 522 of the bill and sec. 421 of

the Code) ......................................................................................... 62

III. Budget Effects of the Bill ................................................................................. 64

A. Committee Estimates ....................................................................... 64

B. Budget Authority and Tax Expenditures ....................................... 68

C. Consultation with Congressional Budget Office ............................ 68

IV. Votes of the Committee .................................................................................... 68

V. Regulatory Impact and Other Matters ........................................................... 68

A. Regulatory Impact ............................................................................ 68

B. Unfunded Mandates Statement ...................................................... 69

C. Tax Complexity Analysis ................................................................. 69

VI. Changes in Existing Law Made By the Bill as Reported .............................. 70

I. LEGISLATIVE BACKGROUND

The Senate Committee on Finance marked up S. 1971 (the ‘‘National Employee Savings and Trust Equity Guarantee Act’’) on July

11, 2002, and ordered the bill, as amended, favorably reported by

voice vote.

The Committee held a hearing on February 27, 2002, regarding

retirement security. The Committee also held a hearing on April

18, 2002, regarding corporate governance and executive compensation.

II. EXPLANATION OF THE BILL

TITLE I. DIVERSIFICATION OF PENSION PLAN ASSETS

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

Qualified retirement plans are subject to regulation under the Internal Revenue Code (the ‘‘Code’’) and under the Employee Retirement Income Security Act of 1974 (‘‘ERISA’’). Some of the requirements under the Code and ERISA for qualified retirement plans

are identical or very similar. For example, both the Code and

ERISA impose minimum participation and vesting requirements.

Other requirements are contained only in the Code or only in

ERISA. In the case of a Code requirement, failure to satisfy the requirement could result in the loss of qualified status for the plan

or in the imposition of an excise tax. In the case of an ERISA requirement, failure to satisfy the requirement could result in the imposition of a penalty or a civil action by a participant or the Department of Labor.

The Code and ERISA contain different rules that limit the investment of defined contribution plan assets in employer securities.

The extent to which the limits apply depends on the type of plan

and the type of contribution involved.
4

1Such an ESOP design is sometimes referred to as a ‘‘KSOP.’’ 2 All references are to provisions of the Code unless otherwise indicated.

3Sec. 401(a)(28); IRS Notice 88–56, 1988–1 C.B. 540, Q&A 16. 4The 10-percent limitation also applies to defined benefit plans and to a defined contribution

plan that is part of an arrangement under which benefits payable to a participant under a defined benefit plan are reduced by benefits under the defined contribution plan (i.e., a ‘‘floor-offset’’ arrangement). 5 Under ERISA, plans that are not subject to the 10-percent limitation on the acquisition of

employer securities are referred to as ‘‘eligible individual account plans.’’

Diversification requirements applicable to employee stock ownership

plans (‘‘ESOPs’’)

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

ESOP and is designed to invest primarily in stock of the employer.

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, including employer nonelective contributions and

others. For example, an ESOP may include a 401(k) feature that

permits employees to make elective deferrals.1

Under the Code,2 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. The diversification requirement applies to a participant for

six years, starting with the year in which the individual firsts

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).3

10-percent limit on the acquisition of employer securities

The Employee Retirement Income Security Act of 1974 (‘‘ERISA’’)

prohibits money purchase pension plans (other than certain plans

in existence before the enactment of ERISA) from acquiring employer securities if, after the acquisition, more than 10 percent of

the assets of the plan would be invested in employer stock. This 10-

percent limitation generally does not apply to other types of defined

contribution plans.4 Thus, most defined contribution plans, such as

profit-sharing plans, stock bonus plans, and ESOPs, are not subject

to any limit under ERISA on the amount of employer contributions

that can be invested in employer securities. 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 in such plans.5
5

Under ERISA, the 10-percent limitation on the acquisition of employer securities, described above, 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 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 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

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 qualified plans, particularly in the 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 that certain contributions 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 allowing participants greater opportunity to diversify plan investments in employer stock will help

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

their own investments. Thus, the Committee bill requires defined

contribution plans that hold employer securities that are publicly

traded to permit qualified plan participants to direct the plan to reinvest employer securities in other assets. The Committee bill generally requires diversification in accordance with the present-law

rules regarding vesting.

The Committee believes that the current role of ESOPs should

be preserved; 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. For ex-
6

6For 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. 7For 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.

ample, some ESOPs hold a controlling interest in the employer,

and the Committee believes it is appropriate to encourage this form

of ownership.

EXPLANATION OF PROVISION

In general

Under the provision, in order to satisfy the requirements under

the Code and under ERISA, certain defined contribution plans are

required to provide diversification rights with respect to amounts

invested in employer securities. Such a plan is required to permit

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

account held in employer securities be invested in alternative investments. 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.

Plans subject to requirements

The diversification requirements generally apply to any 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 6 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 any class of publicly-traded stock. This treatment does not

apply if the employer (and any parent corporation 7 of the employer) has not 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 class of 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 spe-
7

8Providing the diversification rights required under the provision, or greater diversification

rights, will not cause an ESOP to fail to be designed to invest primarily in qualifying employer

securities under section 4975(e)(7)(A). 9The term ‘‘one-participant retirement plan’’ is defined in the provision relating to notice of

a transaction suspension period. 10 Years of service is defined as under the rules relating to vesting (sec. 411(a)).

cial nondiscrimination tests (including the safe harbor methods of

satisfying the tests) is subject to the diversification requirements

under the provision. An ESOP that is subject to the diversification

requirements under the provision is no longer subject to the

present-law ESOP diversification rules.8

The diversification requirements under the provision 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 an individual (or the individual and his or her spouse)

and the individual owns the entire business maintaining the plan

(whether or not incorporated) or covers only one or more partners

(or partners and their spouses) in a business partnership, (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 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 uses leased employees.9

Elective deferrals and 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, 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 all other contributions

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

contributions), an applicable individual who is a participant with

three years of service,10 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 acquired before the first plan year for which 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. In determining the portion

of the account subject to diversification under the transition rule,

any previous diversification of employer securities pursuant to an

election under the present-law ESOP diversification requirements

is taken into 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, 2002.
8

TABLE 1.—APPLICABLE PERCENTAGE FOR EMPLOYER SECURITIES HELD ON EFFECTIVE DATE

Plan year for which diversification applies Applicable percentage

First year ................................................................................... 33 (or, if greater, the amount that would be required under

present-law ESOP diversification rule).

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 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 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.

Requirements for investment alternatives

In order to satisfy the diversification requirements, the plan is

required to give applicable individuals a choice of at least three investment options, other than employer securities, each of which is

diversified and has materially different risk and return characteristics. Other investment options offered by the plan generally also

have to be available. A plan may not impose restrictions or conditions with respect to the investment of employer securities 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). Such a restriction or condition includes a provision

under which a participant who divests his or her account of employer securities receives less favorable treatment (such as a lower

rate of employer contributions) than a participant whose account

remains invested in employer securities. A plan does not fail to

meet the diversification requirements merely because the plan limits the times when investment changes can be made to periodic,

reasonable opportunities that occur at least quarterly.

EFFECTIVE DATE

The provision is generally effective for plan years beginning after

December 31, 2002. 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, 2003, 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, 2004.
9

11 ERISA also permits the Secretary of Labor, a participant, a beneficiary, or a plan fiduciary

to bring civil action to enforce any ERISA requirements.

TITLE II. PROTECTION OF EMPLOYEES DURING PENSION

PLAN TRANSACTION SUSPENSION PERIOD

A. NOTICE TO PARTICIPANTS OR BENEFICIARIES OF TRANSACTION

SUSPENSION PERIODS

(Sec. 201 of the bill, new sec. 4980G of the Code, and new sec.

101(i) of ERISA)

PRESENT LAW

The Code and ERISA require various notices to be provided to

participants and beneficiaries under an employer-sponsored retirement plan regarding their rights under the plan. Present law does

not specifically require that participants be given advance notice of

temporary periods during which the ability to direct investments or

to obtain loans or distributions from the plan is restricted.

Failure to provide a notice required under the Code may result

in the imposition of an excise tax (e.g., sec. 4980F, relating to notice requirements for plans significantly reducing benefit accruals)

or a reporting penalty (e.g., sec. 6652(i), relating to a failure to give

written explanation of qualifying rollover distributions). Failure to

provide a notice required under ERISA may result in the imposition of a civil penalty.11

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. The Committee believes that plan participants should be given advance notice of such a period, before the period begins, in order to give participants the opportunity to prepare for any restrictions that will

occur. For example, if the ability to direct investments will be restricted, a participant may wish to make investment changes before the restriction period begins.

EXPLANATION OF PROVISION

In general

Under the provision, the Code and ERISA require that advance

notice of a transaction suspension period must be provided by the

administrator of an applicable pension plan to the applicable individuals to whom the transaction suspension period applies (and to

any employee organization representing such individuals). An applicable individual (as defined under the provision relating to diversification) is (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. Generally,
10

notice must be provided at least 30 days before the beginning of

the transaction suspension period.

An applicable pension plan is a qualified retirement plan or annuity, a tax-sheltered annuity plan, or an eligible deferred compensation plan of a governmental employer that maintains accounts for participants and beneficiaries. An applicable pension

plan includes a plan that is a governmental plan or a church plan,

and such a plan is subject to the notice requirement under the

Code. However, governmental plans (including an eligible deferred

compensation plan of a governmental employer) and church plans

are generally exempt from ERISA. As a result, the ERISA notice

requirement does not apply to such a plan.

An applicable pension plan does not include a one-participant retirement plan, defined as a plan that (1) on the first day of the plan

year, covers only an individual (or the individual and his or her

spouse) and the individual owns the entire business maintaining

the plan (whether or not incorporated) or covers only one or more

partners (or partners and their spouses) in a business partnership,

(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 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 uses leased employees.

Definition of transaction suspension period

A transaction suspension period means a period of more than

three consecutive business days during which certain rights are

significantly restricted. The rights that are relevant for purposes of

a transaction suspension period are rights otherwise provided

under the plan to one or more applicable individuals to direct investments (including investments in employer securities) or to obtain loans or distributions from the plan. However, rights that are

significantly restricted because of the application of securities laws

or other circumstances specified in regulations and restrictions required in connection with a qualified domestic relations order are

not taken into account in determining whether a transaction suspension period occurs.

Whether an individual’s right to direct investments or obtain

loans or distributions from the plan is significantly restricted is

generally determined by reference to the normal rights and procedures provided under the plan. A variety of factors may be relevant

in making this determination. For example, if, in connection with

a change in plan recordkeepers, no investment directions, loans, or

distributions can be executed over a three-day weekend (i.e., a Saturday, a Sunday, and a Monday that is a Federal holiday), then no

transaction suspension period results if the participants would not,

under the terms of the plan, have been able to engage in such

transactions during that period in any event. As another example,

suppose a plan provides that a participant’s loan request will be

processed within 30 days from the time the loan request is submitted. The mere fact that, in connection with a change in plan administrators, the processing of loan requests is suspended for a tenday period does not result in a transaction suspension period if par-
11

ticipants’ ability to submit loan requests continues during the tenday period and the ten-day suspension does not cause the processing of loan requests to take longer than the 30-day period provided in the plan. In addition, if a plan provides that a participant’s ability to make investment changes, or obtain a loan or a

distribution, is limited for a certain period in connection with a

qualified domestic relations order with respect to the participant’s

account, that limitation generally does not result in a transaction

suspension period.

In the case of a right that may be exercised at only certain times,

for example, on only certain days during a month, in determining

whether there is a transaction period, it may be relevant to consider the time until the right is again available. For example, if,

under the plan, rights may be exercised only on the first three

business days of the month, a significant restriction placed on

those rights for those three days has the effect of restricting those

rights until the following month, even though the restriction is for

only three days.

Factors in addition to the time period involved may also be relevant in determining whether a transaction suspension period occurs, and the relevant factors may vary depending on the rights affected. For example, suppose a plan offers a variety of investment

options, including three options that have similar characteristics

(e.g., similar risk and return characteristics). If the ability to transfer funds into only one of these options is restricted, this might not

result in a transaction suspension period for purposes of the provision, because participants have the right to transfer funds into

similar investment options. In addition, a transaction suspension

period does not occur as a result of plan provisions that restrict a

participant’s right to direct the investment of the assets in his or

her account to certain periods, such as the first fifteen days of each

month.

Timing of notice

Notice of a transaction suspension period is generally required at

least 30 days before the beginning of the period. An exception applies in the case of a transaction suspension period imposed because of an event outside the control of the employer, plan, or plan

administrator. In that case, notice must be provided as soon as reasonably practicable under the circumstances. The Secretary of the

Treasury is given the authority to provide additional exceptions

(and to specify the time when notice is required) in the case of a

transaction suspension period due to other circumstances specified

by the Secretary, including the application of securities laws.

In the case of a transaction suspension period beginning within

30 days after a major corporate disposition by a corporation maintaining the plan, the notice requirements are treated as met if, not

later than 30 days before the disposition, the plan administrator

(or the employer maintaining the plan) provides notice of the transaction suspension period. A ‘‘major corporate disposition’’ means

the disposition of substantially all of the stock of the corporation,

or a subsidiary thereof, or the disposition of substantially all of the

assets used in a trade or business of the corporation or subsidiary.

In accordance with Treasury regulations, similar rules will apply in

the case of an entity that is not a corporation.
12

12 If the expected beginning date or length of the transaction suspension period changes after

notice has been provided, notice of the change must be provided as soon as reasonably practicable. 13 In the case of a multiemployer plan, the excise tax is imposed on the plan. In the case of

a tax-sheltered annuity program under section 403(b) that is not treated as established or maintained by the employer for purposes of ERISA, the excise tax is imposed on the plan administrator.

It is intended under the provision that participants will be given

the opportunity to execute investment changes with respect to their

accounts, or obtain loans or distributions otherwise permitted

under the plan, before the transaction suspension period begins.

Form and content of notice

Notice of a transaction suspension period must be written in a

manner calculated to be understood by the average plan participant and provide sufficient information (as determined under

Treasury guidance) to allow the recipients to understand the timing and effect of the transaction suspension period. Specifically, the

notice is required to include (1) the reasons for the suspension, (2)

an identification of the investments and other rights under the

plan that are affected, (3) the expected beginning date and length

of the suspension period,12 and (4) in the case of a transaction suspension period affecting rights related to plan investments, a statement that the applicable individual should evaluate the appropriateness of current investment decisions in light of the inability

to direct or diversify assets during the expected period of suspension. The notice must be provided in writing and may be delivered

in electronic or other form that is reasonably expected to result in

receipt of the notice by the applicable individual. The Secretary of

the Treasury is required, in consultation with the Secretary of

Labor, to issue a model transaction suspension period notice.

Sanctions for failure to provide notice

Excise tax

An excise tax generally applies in the case of a failure to provide

notice of a transaction suspension period as required under the

Code. A reporting penalty applies in the case of a failure related

to a governmental plan or a church plan.

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

employer if notice of a transaction suspension is not provided.13

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 $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.
13

14 In the case of a governmental plan or church plan, a penalty does not apply to a failure

to provide notice to an employee organization. 15The civil penalty under ERISA does not apply to a governmental plan or a church plan that

is exempt from ERISA. 16 Certain defined contribution plans are not subject to the diversification requirement for investments or the general prudence requirement (to the extent that it requires diversification)

with respect to investments in employer stock.

The excise tax does not apply in the case of a failure to provide

notice of a transaction suspension period with respect to a governmental plan or a church plan. In that case, on notice and demand

by the Secretary, a penalty applies of $100 per day for each applicable individual with respect to whom the failure occurs, until notice is provided or the failure is otherwise corrected.14 The limitations and exceptions to the excise tax apply also to the penalty.

ERISA civil penalty

In the case of a failure to provide notice of a transaction suspension period as required under ERISA, the Secretary of Labor is authorized to assess a civil penalty of up to $100 per day for each violation.15 For this purpose, each violation with respect to a single

participant or beneficiary is treated as a separate violation.

EFFECTIVE DATE

The provision is generally effective for plan years beginning after

December 31, 2002. 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, 2003, 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, 2004. No later than 120 days after enactment of the provision,

the Secretary of the Treasury is required to specify (1) the circumstances under which 30 days notice of a transaction suspension

period is not required and (2) the time by which notice is required

to be provided in those circumstances.

B. INAPPLICABILITY OF RELIEF FROM FIDUCIARY LIABILITY DURING

SUSPENSION OF ABILITY OF PARTICIPANT OR BENEFICIARY TO DI- RECT INVESTMENTS

(Sec. 202 of the bill and sec. 404(c) of ERISA)

PRESENT LAW

Fiduciary rules under ERISA

ERISA contains general fiduciary duty standards that apply to

all fiduciary actions, including investment decisions. ERISA requires that a plan fiduciary generally must discharge its duties

solely in the interests of participants and beneficiaries and with

care, prudence, and diligence. With respect to plan assets, ERISA

requires a fiduciary to diversify the investments of the plan so as

to minimize the risk of large losses, unless under the circumstances

it is clearly prudent not to do so.16

A plan fiduciary that breaches any of the fiduciary responsibilities, obligations, or duties imposed by ERISA is personally liable

to make good to the plan any losses to the plan resulting from such

breach and to restore to the plan any profits the fiduciary has
14

made through the use of plan assets. A plan fiduciary may be liable

also for a breach of responsibility by another fiduciary (a ‘‘co-fiduciary’’) in certain circumstances.

Special rule for participant control of assets

ERISA provides a special rule for a defined contribution plan

that permits participants to exercise control over the assets in their

individual accounts. Under the special rule, if a participant exercises control over the assets in his or her account (as determined

under regulations), the participant is not deemed to be a fiduciary

by reason of such exercise and no person who is otherwise a fiduciary is liable for any loss, or by reason of any breach, that results

from the participant’s exercise of control.

Regulations issued by the Department of Labor describe the requirements that must be met in order for a participant to be treated as exercising control over the assets in his or her account. With

respect to investment options: • the plan must provide at least three different investment options, each of which is diversified and has materially different risk

and return characteristics; • the plan must allow participants to give investment instructions with respect to each investment option under the plan with

a frequency that is appropriate in light of the reasonably expected

market volatility of the investment option (the general volatility

rule);

• at a minimum, participants must be allowed to give investment instructions at least every three months with respect to least

three of the investment options, and those investment options must

constitute a broad range of options (the three-month minimum

rule);

• participants must be provided with detailed information about

the investment options, information regarding fees, investment instructions and limitations, and copies of financial data and

prospectuses; and • specific requirements must be satisfied with respect to investments in employer stock to ensure that employees’ buying, selling,

and voting decisions are confidential and free from employer influence.

If these and the other requirements under the regulations are

met, a plan fiduciary may be liable for the investment options

made available under the plan, but not for the specific investment

decisions made by participants.

REASONS FOR CHANGE

The Committee believes that participants generally should not be

considered to exercise control over the assets in their accounts

when they are prevented from making investment changes because

of a transaction suspension period. On the other hand, transaction

suspension periods are sometimes necessary to ensure the proper

administration of a plan. Accordingly, the Committee believes that

a fiduciary that fulfills its fiduciary responsibilities under ERISA

in connection with authorizing the transaction suspension period

should not be responsible for losses that occur during the transaction suspension period with respect to investments chosen by the

participant.
15

EXPLANATION OF PROVISION

Under the provision, relief from fiduciary liability for any loss or

breach resulting from a participant’s exercise of control over assets

generally does not apply in the case of a transaction suspension period during which the ability of the participant to direct the investment of the assets in his or her account is suspended by a plan

sponsor or fiduciary. For this purpose, transaction suspension period is defined as under the provision requiring advance notice of

a transaction suspension period. Under a special rule, if a transaction suspension period occurs in connection with a change in the

investment options offered under the plan, a participant is deemed

to have exercised control over the assets in his or her account before the transaction suspension period if, after notice of the change

in investment options is given to the participant, assets in the account of the participant are transferred either (1) to investment options in accordance with the participant’s affirmative election (provided that the election otherwise meets the conditions for the participant to exercise control over the assets in the account), or (2)

in the absence of an affirmative election by the participant and

where fiduciary relief applied with respect to the prior investment

options, to investment options with reasonably comparable risk and

return characteristics in the manner set forth in the notice.

In addition, if the fiduciary meets the requirements of ERISA in

connection with authorizing the transaction suspension period, the

fiduciary will not be liable for any loss occurring during the period

as a result of a participant’s or beneficiary’s exercise of control over

assets in his or her account before the period. Matters to be considered in determining whether the requirements of ERISA were satisfied include (but are not limited to) whether the fiduciary (1) determined that the expected transaction suspension period was reasonable, (2) provided notice of the transaction suspension period (as

required under another provision of the bill), and (3) acted in accordance with the general fiduciary duty standards of ERISA in determining whether to enter into the transaction suspension period.

The Secretary of Labor is required, in consultation with the Secretary of Treasury, to issue, before December 31, 2002, final regulations providing guidance, including safe harbors, on how plan fiduciaries will be able to satisfy their fiduciary responsibilities during

a transaction suspension period during which the ability of a participant or beneficiary to direct the investment of the assets in his

or her account is suspended.

EFFECTIVE DATE

The provision is generally effective for plan years beginning after

December 31, 2002. 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, 2003, 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, 2004.
16

17 ERISA sec. 502(a). Some of these provisions also allow the Secretary of Labor or another

plan fiduciary to bring a civil action. 18 ERISA sec. 409, relating to liability for breach of fiduciary duty. Participant civil actions

for breach of such duties are authorized in ERISA sec. 502(a)(2). 19Massachusetts Mutual Life Insurance Co. v. Russell, 473 U.S. 134 (1985). 20 Under ERISA, a defined contribution plan is generally referred to as an individual account

plan. 21Funds held under a defined contribution plan must be allocated to participants’ accounts

in accordance with a definite formula. The plan must provide for the valuation of amounts held

by the plan, and allocations and adjustments of participants’ accounts in accordance with the

valuation, at least once a year. See Rev. Rul. 80–155, 1980–1 C.B. 84. 22 ERISA sec. 502(a)(1)(B). 23 ERISA sec. 502(a)(3). 24 Varity Corporation v. Charles Howe, 516 U.S. 489 (1996).

C. CLARIFICATION OF PARTICIPANT ACCESS TO REMEDIES UNDER

ERISA

(Sec. 203 of the bill and sec. 409 of ERISA)

PRESENT LAW

ERISA contains several provisions under which a participant

may bring a civil action against a plan fiduciary.17

A participant may bring a civil action for appropriate relief under

the general fiduciary liability provision of ERISA.18 Under this provision, a plan fiduciary that breaches any of the fiduciary responsibilities, obligations, or duties imposed by ERISA is personally liable to make good to the plan any losses to the plan resulting from

such breach and to restore to the plan any profits the fiduciary has

made through the use of plan assets. In addition, the fiduciary is

subject to other equitable or remedial relief as a court deems appropriate, including the removal of the fiduciary. This general fiduciary liability provision has been interpreted to provide broad relief

(including money damages) and to authorize the award of damages

to make the plan whole for investment losses due to a breach of

fiduciary duty. However, amounts recovered under the general fiduciary liability provision are not payable to a participant personally, even in the case of a civil action brought by a participant, because such recovery must be on behalf of the plan.19

In the case of a recovery with respect to an individual account

plan,20 amounts recovered generally are payable to the plan and allocated to participants’ accounts.21 Issues have arisen under

present law regarding the extent to which damages recovered

under the general fiduciary liability provision with respect to a

breach of fiduciary liability affecting a participant’s individual account under an individual account plan are to be allocated to the

participant’s account.

ERISA also gives a participant the right to bring a civil action— • to recover benefits due to him or her under the terms of the

plan, to enforce his or her rights under the terms of the plan, or

to clarify his or her rights to future benefits under the terms of the

plan,22 or • to enjoin any act or practice which violates any provision of

this title or the terms of the plan, or to obtain other appropriate

equitable relief to redress such violations or to enforce any provisions of this title or the terms of the plan.23

These provisions enable a participant to seek recovery on his or

her own behalf, not just on behalf of the plan, including recovery

for a breach of fiduciary duty.24 However, ‘‘appropriate equitable
17

25Mertens v. Hewitt Associates, 508 U.S. 248 (1993). 26 Helfrich v. PNC Bank, Kentucky, Inc., 267 F.3d 477 (6th Cir. 2001), cert.den., reported at

2002 U.S. LEXIS 1558 (March 18, 2002); Kerr v. Charles F. Vatterott & Co., 184 F.3d 938 (8th

Cir. 1999). In Ream v. Frey, 107 F.3d 147 (3rd Cir. 1997), a participant brought an action under

ERISA section 502(a)(3) for breach of fiduciary duty against a former trustee of a plan that was

no longer functioning. The Circuit Court noted that, while the district court seemed to treat the

complaint as an action for money damages, the participant sought only to recover his vested

interest in the plan, which largely reflected his own contributions, so that the relief granted to

the participant could be characterized as restitution (i.e., a form of equitable relief).

relief’’ that a participant may obtain on his or her own behalf does

not include money damages (i.e., compensatory damages).25 Participants in defined contribution plans who have brought action

against a plan fiduciary under one of these ERISA provisions have

been denied the recovery of damages for the difference between the

earnings on their accounts and the amount of earnings they would

have received if the plan administrator had complied with the participants’ instructions as to the transfer or distribution of the accounts because lost earnings are considered compensatory damages.26

REASONS FOR CHANGE

The Committee believes that, in the case of a breach of fiduciary

duty that causes financial harm to the accounts of individual participants under an individual account plan, ERISA was intended to

make available the full range of ERISA relief so as to put a participant’s account in the financial position it would have been in if the

fiduciary breach had not occurred. The Committee wishes to remove any doubt that may exist under present law as to whether

such relief is available. Accordingly, the Committee bill provides

that amounts recovered for harm to particular accounts is to be allocated to those accounts to the extent the court deems appropriate.

EXPLANATION OF PROVISION

The provision clarifies that, in the case of a fiduciary breach with

respect to an individual account plan, the relief available under the

general fiduciary liability provision of ERISA will, to the extent the

court deems appropriate, be apportioned to each individual account

affected by the breach. No inference is intended as to the scope of

recovery available to participants under present law.

EFFECTIVE DATE

The provision is effective on the date of enactment.

D. INCREASED MAXIMUM BOND AMOUNT FOR PLANS HOLDING

EMPLOYER SECURITIES

(Sec. 204 of the bill and sec. 412(a) of ERISA)

PRESENT LAW

ERISA generally requires every fiduciary and every person who

handles funds or other property of an employee benefit plan (a

‘‘plan official’’) to be bonded under a qualifying bond. A plan official

without a qualifying bond is prohibited from receiving, handling, or

otherwise exercising control of any funds or property of an employee benefit plan. The amount of the bond is fixed annually at

no less than 10 percent of the funds handled but must be at least
18

$1,000 and not more than $500,000 (unless the Secretary of Labor

prescribes a larger amount after notice and an opportunity to be

heard). Qualifying bonds must have a corporate surety which is an

acceptable surety on Federal bonds and meet certain other requirements.

REASONS FOR CHANGE

The present-law bonding requirement is intended to protect employee benefit plan participants against losses that result from

fraud or dishonesty on the part of plan officials who handle plan

assets. The maximum amount of the bond has been $500,000 since

the bonding requirement was enacted in 1962 under a predecessor

to ERISA. The Committee is aware that many employee benefit

plans have significant investments in employer securities. Such investments can be beneficial for plan participants; however, recent

highly publicized cases regarding the financial distress of companies with plans that invest in employer securities highlight the additional risks that such investments can pose. Thus, the Committee

believes it is appropriate to provide additional protection for such

plans by raising the maximum bond amount.

EXPLANATION OF PROVISION

The bill raises the maximum bond amount to $1 million for fiduciaries of plans that hold employer securities.

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2002.

TITLE III. PROVIDING INFORMATION TO ASSIST

PARTICIPANTS

A. BENEFIT STATEMENTS AND INVESTMENT GUIDELINES

(Secs. 301–302 of the bill, new sec. 4980H of the Code, and secs.

104 and 105 of ERISA)

PRESENT LAW

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. This requirement applies in the case

of any plan that is subject to ERISA, including defined contribution

and defined benefit plans. 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. If the plan administrator fails or refuses to furnish

the benefit statement within 30 days of the participant’s or beneficiary’s written request, the participant or beneficiary may bring

a civil action to recover from the plan administrator $100 a day,
19

27 ERISA also permits the Secretary of Labor, a participant, a beneficiary, or a fiduciary to

bring civil action to enforce any ERISA requirements. 28This information is based on an annual registration statement that the plan administrator

is required to file under the Code with the Secretary of Treasury with respect to all participants

who meet these requirements for the plan year. The annual registration statement is filed by

means of Schedule SSA of the Form 5500. The Code and ERISA require that the plan administrator furnish an individual statement to the participant.

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

proper.27

Individual statements to participants on separation from service

A plan administrator must furnish an individual 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.28 The individual 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 individual statement no later than 180 days after the end of the plan

year in which the separation from service occurs. If the plan administrator fails to provide the individual statement, the Secretary

of Labor or the participant may bring a civil action for appropriate

relief.

Investment guidelines

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

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. In addition, 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 longterm 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.

EXPLANATION OF PROVISION

Pension benefit statements

In general

The provision provides new benefit statement requirements

under the Code and ERISA, depending in part on the type of plan

and the individual to whom the statement is provided.

Requirements for defined contribution plans

In the case of an applicable pension plan, the plan administrator

is required under the Code and ERISA to provide a benefit statement (1) to an applicable individual who has the right to direct the

investment of the assets in his or her account, at least quarterly,
20

29 An applicable pension plan includes a plan that is a governmental plan or a church plan,

and such a plan is subject to the benefit statement requirement under the Code. However, governmental plans (including an eligible deferred compensation plan of a governmental employer)

and church plans are generally exempt from ERISA. As a result, the ERISA benefit statement

requirement does not apply to such a plan. 30The 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.

(2) to other applicable individuals, at least annually, and (3) to a

beneficiary who is not an applicable individual, upon written request, but limited to one request during any 12-month period. An

applicable pension plan is defined (as under the provision relating

to notice of a transaction suspension period) as a qualified retirement plan or annuity, a tax-sheltered annuity plan, or an eligible

deferred compensation plan of a governmental employer that maintains accounts for participants and beneficiaries (other than a oneparticipant retirement plan).29 An applicable individual is defined

(as under the provision relating to notice of a transaction suspension period) as (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 benefit statement is required to indicate, on the basis of the

latest available information, (1) the total benefits accrued, and (2)

the vested accrued benefit or the earliest date on which the accrued

benefit will become vested. In addition, the statement must include

the value of investments allocated to the individual’s account (determined as of the plan’s most recent valuation date), including the

value of any employer securities (without regard to whether the securities were contributed by the employer or acquired at the direction of the individual), and an explanation of any limitations or restrictions on the right of the individual to direct investments.

Requirements for defined benefit plans

Under the provision, the administrator of a defined benefit plan

is generally required under ERISA either (1) to furnish a benefit

statement at least once every three years 30 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 notice 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 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.

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

latest available information, (1) the total benefits accrued, and (2)

the vested accrued benefit or the earliest date on which the accrued

benefit will become vested. 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.
21

31The ERISA requirement does not apply to a plan that is exempt from ERISA, such as a

governmental plan or a church plan.

Form of benefit statement

The benefit statement is required to be written in a manner calculated to be understood by the average plan participant. It is required to be provided in writing and may be delivered in electronic

or other form that is reasonably expected to result in receipt of the

statement by the applicable individual. 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 is directed 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.

Investment guidelines

In general

Under the provision, the plan administrator of an applicable pension plan is required under the Code and ERISA to provide at least

annually a model form relating to basic investment guidelines to

applicable individuals.31 ‘‘Applicable pension plan’’ and ‘‘applicable

individual’’ are defined as under the provision relating to required

benefit statements.

Model form

Under the provision, the Secretary of the Treasury is directed, in

consultation with the Secretary of Labor, to develop and make

available a model form containing basic guidelines for investing for

retirement. Such guidelines generally 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. In

addition, the Secretary has the authority to vary the required information depending on the type of plan. For example, some informa-
22

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

a tax-sheltered annuity program under section 403(b) that is not treated as established or maintained by the employer for purposes of ERISA, the excise tax is imposed on the plan administrator.

tion may be omitted in the case of a plan that does not provide for

investment direction by participants.

The model form must also include addresses for Internet sites,

and a worksheet, that an individual can use to calculate (1) the retirement age annuity value of the individual’s vested benefits

under the plan (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 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

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 Secretary of the Treasury 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.

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

understood by the average plan participant and must be in writing

and may be delivered in electronic or other form that is reasonably

expected to result in receipt by the applicable individual.

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 or an investment guideline model form as required under the Code. However, a reporting

penalty applies in the case of a failure related to a governmental

plan or a church plan.

The excise tax is generally imposed on the employer if a required

benefit statement or model form is not provided.32 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 or model

form requirement, the total excise tax imposed during a taxable

year will not exceed $500,000. The $500,000 annual limit will apply

separately to failures to provide required benefit statements and

failures to provide the model form.

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 or model form requirement. In addition, no tax will be imposed if the employer exercises reasonable diligence to comply and provides the required benefit statement or 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.
23

33The civil penalty under ERISA does not apply to a governmental plan or a church plan that

is exempt from ERISA.

The excise tax does not apply in the case of a failure to provide

a benefit statement or model form with respect to a governmental

plan or a church plan. In that case, on notice and demand by the

Secretary, a penalty applies of $100 per day for each applicable individual with respect to whom the failure occurs, until the benefit

statement or model form is provided or the failure is otherwise corrected. The limitations and exceptions to the excise tax apply also

to the penalty.

ERISA civil penalty

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

to provide a benefit statement under present law apply if the plan

administrator fails or refuses to furnish a benefit statement or

model form required under the provisions.33 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.

EFFECTIVE DATE

The provision is generally effective for plan years beginning after

December 31, 2003. 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, 2004, 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, 2005.

B. INFORMATION ON OPTIONAL FORMS OF BENEFIT

(Sec. 303 of the bill)

PRESENT LAW

Under a defined benefit plan, benefits 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. In the case of

a married participant, benefits must be paid 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 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. The participant and his or her spouse may waive the right to a QJSA provided certain requirements are satisfied, including a requirement

that a written explanation be provided of the effect of a waiver of

the annuity.

Defined benefit 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.
24

A defined benefit 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.

In addition, statutory actuarial assumptions must be used in determining the minimum value of certain optional forms of benefit,

such as a lump sum. 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 Internal Revenue Service) and an applicable interest rate.

REASONS FOR CHANGE

The Committee believes that a participant should have sufficient

information to evaluate the relative values of various optional

forms of benefit available to the participant under a plan before

making a decision as to which form of benefit to elect.

EXPLANATION OF PROVISION

Under the provision, the Secretary of the Treasury is directed to

issue (within 30 days of enactment of the provision) regulations requiring the plan administrator of a defined benefit plan that provides optional forms of benefit to provide a statement comparing

the relative values of optional forms of benefits payable under the

plan. The statement must be provided at a time specified by the

Secretary of the Treasury and must be written in a manner calculated to be understood by the average plan participant. The

statement must include such information as the Secretary determines appropriate to enable a plan participant, spouse, or surviving spouse to make an informed decision as to what form of benefit to elect. For example, in the case of a plan that provides a subsidized early retirement annuity benefit, it is intended that the information will include, at a minimum, a quantification of whether

and how the subsidy is included in determining other forms of benefit (e.g., a lump sum) payable at early retirement age.

EFFECTIVE DATE

The provision is effective on the date of enactment.

C. FIDUCIARY DUTY TO PROVIDE MATERIAL INFORMATION RELATING

TO INVESTMENT IN EMPLOYER STOCK

(Sec. 304 of the bill and sec. 404(c) of ERISA)

PRESENT LAW

ERISA contains general fiduciary duty standards that apply to

all fiduciary actions. Among them are requirements that plan fiduciaries generally discharge their duties solely in the interest of participants and beneficiaries and with care, prudence, and diligence.

A plan fiduciary that breaches any of the fiduciary responsibilities,

obligations, or duties imposed by ERISA is personally liable to
25

34 ERISA sec. 404(c).

make good to the plan any losses to the plan resulting from such

breach and to restore to the plan any profits the fiduciary has

made through the use of plan assets. A plan fiduciary may be liable

also for a breach of responsibility by another fiduciary in certain

circumstances.

ERISA provides a special rule for a defined contribution plan

that permits participants to exercise control over the assets in their

individual accounts.34 Under the special rule, if a participant or

beneficiary exercises control over the assets in his or her account,

the participant or beneficiary is not deemed to be a fiduciary by

reason of such exercise and no person who is otherwise a fiduciary

is liable for any loss, or by reason of any breach, that results from

the participant’s or beneficiary’s exercise of control.

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 sponsors and plan administrators should have a fiduciary duty to provide this information.

EXPLANATION OF PROVISION

The bill amends ERISA to provide that sponsors and administrators of defined contribution plans that permit participants and

beneficiaries to exercise control over the assets in their individual

accounts have a fiduciary duty to ensure that, in connection with

investments of such assets in employer stock, the participant or

beneficiary is provided with the same material investment information that would generally be required to be disclosed by the employer to investors under applicable securities laws. The provision

of misleading information by the plan sponsor or administrator is

a violation of this requirement.

In the case of a failure to provide material investment information, the Secretary of Labor is authorized to assess a civil penalty

of up to $1,000 per day. In addition, such a failure would violate

the fiduciary rules of ERISA. As a result, the fiduciary could be liable under present-law rules to make good to the plan any losses to

the plan resulting from such breach and to restore to the plan any

profits the fiduciary has made through the use of plan assets.

EFFECTIVE DATE

The provision is effective with respect to plan years beginning

after December 31, 2002.
26

D. ELECTRONIC DISCLOSURE OF INSIDER TRADING

(Sec. 305 of the bill and sec. 101 of ERISA)

PRESENT LAW

Disclosure rules under ERISA

ERISA contains rules requiring the provision of certain information to employee benefit plan participants and beneficiaries by

plans sponsors and administrators. For example, ERISA generally

requires distribution to plan participants and beneficiaries of written summaries of employee benefit plans as well as summaries of

any modifications to certain plan provisions. The required disclosures advise participants and beneficiaries of their rights and benefits under plans and applicable law, provide them access to plan financial information, and provide them opportunities to prevent or

redress any violations of their rights.

Elective deferrals

A defined contribution plan can accept varied types of contributions, depending on the design of the particular plan. In general,

defined contribution plans can accept elective deferrals, which are

contributions made under a qualified cash or deferred arrangement

(i.e., a ‘‘section 401(k) plan’’) that are made by reason of the employee’s election to have the employer make the contributions to

the plan rather than paying them directly to the employee in cash.

REASONS FOR CHANGE

Many defined contribution plans that accept elective deferrals

permit those deferrals to be invested in employer stock or real

property. Participants and beneficiaries in such plans have the

same interest as other investors in receiving information about any

sale or purchase of employer stock by an officer, director, or affiliate of the employer (‘‘insider trades’’). Thus, the Committee believes that any insider trade that is required to be disclosed to the

SEC should also be specifically disclosed to participants and beneficiaries in the plans. The Committee believes that the posting of

such information on a plan website (or providing it upon request

in another form) will not unreasonably burden employers and will

facilitate participants’ and beneficiaries’ access to the information.

EXPLANATION OF PROVISION

The provision amends ERISA to require that an employer that

sponsors a defined contribution plan that permits elective deferrals

to be invested in employer stock or real property must disclose to

participants and beneficiaries any insider trade that is required to

be disclosed to the SEC. Within a reasonable period after disclosure

to the SEC, the insider trade information must be posted on the

plan’s website or provided upon request, in the case of a participant

or beneficiary who does not have access to a plan website. It is intended that the Department of Labor will provide guidance with respect to requests for disclosure in the case of such a participant or

beneficiary. For example, participants could be permitted to make

standing requests to receive any insider trade disclosures in some

other form.
27

Under the provision, the SEC is permitted to accept electronic

disclosure in place of any form of disclosure otherwise required

with respect to participants and beneficiaries.

EFFECTIVE DATE

The provision is effective with respect to plan years beginning

after December 31, 2002.

E. FIDUCIARY RULES FOR PLAN SPONSORS DESIGNATING

INDEPENDENT INVESTMENT ADVISORS

(Sec. 306 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

qualified investment adviser. The provision applies to a defined

contribution plan that permits a participant or beneficiary to exercise investment control over 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 sec-
28

35See, 15 U.S.C. 80b–3a. Nothing in the proposal 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. 36 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.

tion 203A of the Investment Advisers Act 35) 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,36 (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 the fees to

be received by the investment adviser, and (3) documentation that

the investment advisor is 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 transaction 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.
29

37 Rev. Proc. 2002–47, 2002–29 I.R.B. 1.

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.

TITLE IV. OTHER PROVISIONS RELATING TO PENSIONS

A. EMPLOYEE PLANS COMPLIANCE RESOLUTION SYSTEM

(Sec. 401 of the bill)

PRESENT LAW

A retirement plan that is intended to be a tax-qualified plan provides retirement benefits on a tax-favored basis if the plan satisfies

all of the requirements of section 401(a). Similarly, an annuity that

is intended to be a tax-sheltered annuity provides retirement benefits on a tax-favored basis if the program satisfies all of the requirements of section 403(b). Failure to satisfy all of the applicable

requirements of section 401(a) or section 403(b) may disqualify a

plan or annuity for the intended tax-favored treatment.

The Internal Revenue Service (‘‘IRS’’) has established the Employee Plans Compliance Resolution System (‘‘EPCRS’’), which is a

comprehensive system of correction programs for sponsors of retirement plans and annuities that are intended, but have failed, to satisfy the requirements of section 401(a), section 403(a), or section

403(b), as applicable.37 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 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’’) program 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
30

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 of the Treasury 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, penalty or sanction is not excessive and bears a reasonable relationship to the nature, extent and severity of the failure.

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 APPLICABLE

TO STATE AND LOCAL GOVERNMENT PLANS

(Sec. 402 of the bill, sec. 1505 of the Taxpayer Relief Act of 1997,

and secs. 401(a) and 401(k) of the Code)

PRESENT LAW

A qualified retirement plan maintained by a State or local government is exempt from the rules concerning nondiscrimination

(sec. 401(a)(4)) and minimum participation (sec. 401(a)(26)). All

other governmental plans are not exempt from the nondiscrimination and minimum participation rules.
31

38The 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.

REASONS FOR CHANGE

The Committee believes that application of the nondiscrimination

and minimum participation rules to governmental plans is unnecessary and inappropriate in light of the unique circumstances

under which such plans and organizations operate. Further, the

Committee believes that it is appropriate to provide for consistent

application of the minimum coverage, nondiscrimination, and minimum participation rules for governmental plans.

EXPLANATION OF PROVISION

The provision exempts all governmental plans (as defined in sec.

414(d)) from the nondiscrimination and minimum participation

rules.

EFFECTIVE DATE

The provision is effective for plan years beginning after December 31, 2002.

C. NOTICE AND CONSENT PERIOD REGARDING DISTRIBUTIONS

(Sec. 403 of the bill, sec. 417 of the Code, and sec. 205 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 $5,000,38 the plan may not distribute the participant’s benefit without the written consent of the participant. The participant’s consent to a distribution is not valid unless the participant

has received from the plan a notice that contains a written explanation of (1) the material features and the relative values of the

optional forms of benefit available under the plan, (2) the participant’s right, if any, to have the distribution directly transferred to

another retirement plan or IRA, and (3) the rules concerning the

taxation of a distribution. If the joint and survivor annuity requirements apply to the participant, this notice also must contain a

written explanation of (1) the terms and conditions of the qualified

joint and survivor annuity (‘‘QJSA’’), (2) the participant’s right to

make, and the effect of, an election to waive the QJSA, (3) the

rights of the participant’s spouse with respect to a participant’s

waiver of the QJSA, and (4) the right to make, and the effect of,

a revocation of a waiver of the QJSA. The plan generally must provide this notice to the participant no less than 30 and no more than

90 days before the date distribution commences.
32

If the participant’s vested accrued benefit does not exceed $5,000,

the terms of the plan may provide for distribution without the participant’s consent. In that case, the plan must provide that, if the

amount of the distribution exceeds $1,000, the plan administrator

will transfer the distribution to a designated IRA unless the participant elects to receive the distribution directly or have it directly

transferred to another retirement plan or IRA. Before making a

distribution, the plan administrator generally is required to provide

to the participant a notice that contains a written explanation of

(1) the participant’s right, if any, to have the distribution directly

transferred to another retirement plan or IRA, (2) the fact that a

distribution that exceeds $1,000 will be transferred to a designated

IRA unless the participant elects otherwise, and (3) the rules concerning the taxation of a distribution. The plan generally must provide this notice to the participant no less than 30 and no more than

90 days before the date distribution commences.

REASONS FOR CHANGE

The Committee understands that an employee is not always able

to evaluate distribution alternatives, select the most appropriate

alternative, and notify the plan of the selection within a 90-day period. The Committee believes that requiring a plan to furnish multiple distribution notices to an employee who does not make a distribution election within 90 days is administratively burdensome.

In addition, the Committee believes that participants who are entitled to defer distributions should be informed of the impact of a decision not to defer distribution on the taxation and accumulation of

their retirement benefits.

EXPLANATION OF PROVISION

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 modifications made or required by the provision are effective

for years beginning after December 31, 2002. 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.
33

D. TECHNICAL CORRECTIONS TO SAVER ACT

(Sec. 404 of the bill and sec. 517 of ERISA)

PRESENT LAW

The Savings Are Vital to Everyone’s Retirement (‘‘SAVER’’) Act

initiated a public-private partnership to educate American workers

about retirement savings and directed the Department of Labor to

maintain an ongoing program of public information and outreach.

The Act also convened a National Summit on Retirement Savings

held June 4–5, 1998. A second National Summit on Retirement

Savings was held February 27 through March 1, 2002, co-hosted by

the President and the bipartisan Congressional leadership. The National Summit brings together experts in the fields of employee

benefits and retirement savings, key leaders of government, and interested parties from the private sector and general public. The

delegates are selected by the Congressional leadership and the

President. The National Summit is a public-private partnership, receiving substantial funding from private sector contributions. The

goals of the National Summits are to: (1) advance the public’s

knowledge and understanding of retirement savings and facilitate

the development of a broad-based, public education program; (2)

identify the barriers which hinder workers from setting aside adequate savings for retirement and impede employers, especially

small employers, from assisting their workers in accumulating retirement savings; and (3) develop specific recommendations for legislative, executive, and private sector actions to promote retirement

income savings among American workers.

REASONS FOR CHANGE

The Committee believes it is appropriate to make modifications

and clarifications regarding the administration of future National

Summits on Retirement Savings.

EXPLANATION OF PROVISION

Under the provision, future National Summits on Retirement

Savings are to be held in 2006 and 2010. To facilitate the administration of future National Summits, the Department of Labor is

given authority to enter into cooperative agreements (pursuant to

the Federal Grant and Cooperative Agreement Act of 1977) with

any appropriate, qualified entity.

Six new statutory delegates are added to future National Summits: the Chairman and Ranking Member of each of the following:

the Senate Committee on Finance, the House Committee on Ways

and Means, and the Subcommittee on Employer-Employee Relations of the House Committee on Education and the Workforce.

Further, the President, in consultation with the Congressional

leadership, is permitted to appoint additional Summit participants,

not to exceed the lesser of three percent of all additional participants or 10 participants, from a list of nominees provided by the

private sector partner in Summit administration. The provision

also clarifies that new delegates are to be appointed for each future

National Summit (as was the intent of the original legislation) and

sets deadlines for their appointment.
34

The provision also sets deadlines for the Department of Labor to

publish the Summit agenda, gives the Department of Labor limited

reception and representation authority, and specifies that the Department of Labor consult with the Congressional leadership in

drafting the post-Summit report.

EFFECTIVE DATE

The provision is effective on the date of enactment.

E. MISSING PARTICIPANTS

(Sec. 405 of the bill and secs. 206(f) and 4050 of ERISA)

PRESENT LAW

The plan administrator of a defined benefit pension plan that is

subject to Title IV of ERISA, is maintained by a single employer,

and terminates under a standard termination is required to distribute the assets of the plan. With respect to a participant whom

the plan administrator of a single employer plan cannot locate after

a diligent search, the plan administrator satisfies the distribution

requirement only by purchasing irrevocable commitments from an

insurer to provide all benefit liabilities under the plan 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.

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 for terminating multiemployer

plans rules 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

plans that have no more than 25 active participants and are main-
35

tained by professional service employers, and the portion of defined

benefit 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.

F. REDUCED PBGC PREMIUMS FOR SMALL AND NEW PLANS

(Secs. 406–407 of 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 plans.

The amount of the required annual PBGC premium for a singleemployer 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 small plans will reduce the administrative costs of

establishing and maintaining 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 is 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.
36

A new plan means a defined benefit 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.

Reduced variable-rate PBGC premium for new plans

The provision provides that the variable-rate premium is phased

in for new defined benefit plans over a six-year period starting with

the plan’s first plan year. The amount of the variable-rate premium

is a percentage of the variable premium otherwise due, as follows:

zero percent of the otherwise applicable variable-rate 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 plan is defined as described above under

the provision relating to flat-rate premiums for new small employer

plans.

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 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 taken into account in determining

whether the plan is 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 is effective with respect to plans first effective after December 31, 2002. The reduction of the variable-rate premium for small

plans is effective with respect to plan years beginning after December 31, 2002.

G. AUTHORIZATION FOR PBGC TO PAY INTEREST ON PREMIUM

OVERPAYMENT REFUNDS

(Sec. 408 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.
37

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.

EFFECTIVE DATE

The provision is effective with respect to interest accruing for periods beginning not earlier than the date of enactment.

H. RULES FOR SUBSTANTIAL OWNER BENEFITS IN TERMINATED

PLANS

(Sec. 409 of the bill and secs. 4022 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
38

39 ERISA sec. 203(a)(3)(B).

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 applies 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 proceedings for termination are instituted by the PBGC, after December 31, 2002.

I. BENEFIT SUSPENSION NOTICE

(Sec. 410 of the bill)

PRESENT LAW

Under present law,39 a plan will not fail to satisfy the vesting requirements with respect to a participant by reason of suspending

payment of the participant’s benefits while such participant is employed. Under the applicable Department of Labor (‘‘DOL’’) regulations, such a suspension is only permissible if the plan notifies the

participant during the first calendar month or payroll period in

which the plan withholds benefit payments. Such notice must provide certain information and must also include a copy of the plan’s

provisions relating to the suspension of payments.

In the case of a plan that does not pay benefits to active participants upon attainment of normal retirement age, the employer

must monitor plan participants to determine when any participant

who is still employed attains normal retirement age. In order to

suspend payment of such a participant’s benefits, generally a plan

must, as noted above, promptly provide the participant with a suspension notice.

REASONS FOR CHANGE

The Committee believes the regulations relating to the benefit

suspension notice should be amended to reduce the regulatory burden on plan administrators while at the same time assuring that

adequate information is provided to employees.

EXPLANATION OF PROVISION

Under the provision, the Secretary of Labor is required to modify

the regulations relating to the benefit suspension notice (1) to permit the information currently required to be set forth in a suspension notice generally to be included in the summary plan description, rather than in a separate notice, and (2) not to require that

the notice include a copy of relevant plan provisions. However, individuals reentering the workforce to resume work with a former employer after having begun to receive benefits would still receive the

notification of the suspension of benefits (and a copy of the plan’s

provisions relating to suspension of payments). Such notice is required to be provided during the first calendar month, or during
39

40The maximum funding requirement for a defined benefit plan is referred to as the full funding limitation. Additional contributions are not required if a plan has reached the full funding

limitation. 41Plans with no more than 100 participants on any day in the preceding plan year are not

subject to the special funding rule. Plans with more than 100 but not more than 150 participants are generally subject to lower contribution requirements under the special funding rule. 42 Under an alternative test, a plan is not considered underfunded if (1) the value of the plan

assets is at least 80 percent of current liability and (2) the value of the plan assets was at least

90 percent of current liability for each of the two immediately preceding years or each of the

second and third immediately preceding years.

the first four- or five-week payroll period ending in a calendar

month, in which the plan withholds payments.

EFFECTIVE DATE

The provision applies for plan years beginning after December

31, 2002.

J. INTEREST RATE RANGE FOR ADDITIONAL FUNDING REQUIREMENTS

(Sec. 411 of the bill, sec. 412 of the Code, and secs. 302 and 4006

of ERISA)

PRESENT LAW

In general

ERISA and the Code impose both minimum and maximum 40

funding requirements with respect to defined benefit pension plans.

The minimum funding requirements are designed to provide at

least a certain level of benefit security by requiring the employer

to make certain minimum contributions to the plan. The amount

of contributions required for a plan year 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.

Additional contributions for underfunded plans

Additional contributions are required under a special funding

rule if a single-employer defined benefit pension plan is underfunded.41 Under the special rule, a plan is considered underfunded

for a plan year if the value of the plan assets is less than 90 percent of the plan’s current liability.42 The value of plan assets as a

percentage of current liability is the plan’s ‘‘funded current liability

percentage.’’ If a plan is underfunded, the amount of additional required contributions is based on certain elements, including whether the plan

has an unfunded liability related to benefits accrued before 1988 or

1995 or to changes in the mortality table used to determine contributions, and whether the plan provides for unpredictable contingent event benefits (that is, benefits that depend on contingencies

that are not reliably and reasonably predictable, such as facility

shutdowns or reductions in workforce). However, the amount of additional contributions cannot exceed the amount needed to increase

the plan’s funded current liability percentage to 100 percent.

Required interest rate

In general, a plan’s current liability means all liabilities to employees and their beneficiaries under the plan. The interest rate

used to determine a plan’s current liability must be within a per-
40

43The interest rate used under the plan 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 (section 412(b)(5)(B)(iii)(II)). 44 No additional quarterly contributions are due once the plan’s funded current liability percentage for the plan year reaches 100 percent. 45Pub. L. No. 107–147.

missible range of the weighted average of the interest rates on 30-

year Treasury securities for the four-year period ending on the last

day before the plan year begins.43 The permissible range is from

90 percent to 105 percent. As a result of debt reduction, the Department of the Treasury does not currently issue 30-year Treasury

securities.

Timing of plan contributions

In general, plan contributions required to satisfy the funding

rules must be made within 81⁄2 months after the end of the plan

year. If the contribution is made by such due date, the contribution

is treated as if it were made on the last day of the plan year.

In the case of a plan with a funded current liability percentage

of less than 100 percent for the preceding plan year, estimated contributions for the current plan year must be made in quarterly installments during the current plan year. 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.44

PBGC premiums

Because benefits under a defined benefit pension plan may be

funded over a period of years, plan assets may not be sufficient to

provide the benefits owed under the plan to employees and their

beneficiaries if the plan terminates before all benefits are paid. In

order to protect employees and their beneficiaries, the Pension Benefit Guaranty Corporation (‘‘PBGC’’) generally insures the benefits

owed under defined benefit pension plans. Employers pay premiums to the PBGC for this insurance coverage.

In the case of an underfunded plan, additional PBGC premiums

are required based on the amount of unfunded vested benefits.

These premiums are referred to as ‘‘variable rate premiums.’’ In determining the amount of unfunded vested benefits, the interest rate

used is 85 percent of the interest rate on 30-year Treasury securities for the month preceding the month in which the plan year begins.

Special interest rate for 2002 and 2003

Section 405 of the Job Creation and Worker Assistance Act of

2002,45 enacted March 9, 2002, provides a special interest rate rule

applicable in determining the amount of additional contributions

for plan years beginning after December 31, 2001, and before January 1, 2004 (the ‘‘applicable plan years’’). The special rule expands

the permissible range of the statutory interest rate used in calculating a plan’s current liability for purposes of applying the additional contribution requirements for the applicable plan years. The

permissible range is from 90 percent to 120 percent for these years.

Under a related special rule, the interest rate used in determining the amount of unfunded vested benefits for PBGC variable
41

rate premium purposes is increased to 100 percent of the interest

rate on 30-year Treasury securities for the month preceding the

month in which the applicable plan year begins.

REASONS FOR CHANGE

Additional contributions are due within 81⁄2 months after the end

of the plan year if the plan was sufficiently funded for the preceding plan year. The Committee believes that the special interest

rate rule provided under the Job Creation and Worker Assistance

Act of 2002 should be phased in for contributions for the 2001 plan

year that are due within 81⁄2 months after the end of the plan year.

EXPLANATION OF PROVISION

The provision expands the permissible range of the statutory interest rate used in calculating a plan’s current liability for purposes

of determining the amount of additional contributions for a plan

year beginning in 2001 (the ‘‘2001 plan year’’) that must be contributed to the plan within 81⁄2 months after the end of the plan year

(e.g., by September 15, 2002, in the case of a plan that uses the

calendar year as the plan year). The permissible range is from 90

percent to 108 percent for this purpose.

In addition, with respect to the provision of the Job Creation and

Worker Assistance Act of 2002 providing a special rule for the interest rate used in determining the amount of unfunded vested

benefits for PBGC variable rate premium purposes, the provision

makes conforming changes so that the special rule applies for purposes of notices and reporting required with respect to underfunded

plans.

EFFECTIVE DATE

The provision is effective as if included in section 405 of the Job

Creation and Worker Assistance Act of 2002.

K. VOLUNTARY EARLY RETIREMENT INCENTIVE PLANS MAINTAINED

BY LOCAL EDUCATIONAL AGENCIES AND OTHER ENTITIES

(Sec. 412 of the bill, sec. 457 of the Code, sec. 3(2)(B) of ERISA,

and sec. 4(l)(1) of the Age Discrimination in Employment Act)

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, amounts that can be deferred

under section 457 cannot exceed certain dollar limits ($11,000 for

2002). 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). Subject to certain exceptions (e.g., a qualified retirement plan), 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
42

pay, disability pay, or death benefit plan. Additionally, section 457

does not apply to 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 depends 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. In addition, 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. An exemption is provided from certain restrictions in ADEA for certain defined benefit plans that offer early retirement benefits or social security supplements and for a voluntary early retirement incentive

plan that is consistent with the purposes of ADEA.

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 plan. If provided

under a defined benefit 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 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 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 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 tax-exempt education associations

EXPLANATION OF PROVISION

Early retirement incentive plans of local educational agencies and

education associations

The provision deals with the treatment of certain voluntary early

retirement incentive plans under section 457, ERISA, and ADEA.

The provision applies to 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 as

an early retirement benefit, a retirement-type subsidy, or a social

security supplement in coordination with a defined benefit plan
43

46The 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 plan; however, government plans are exempt from these rules.

maintained by a State or local government or by such an association.

Under the provision, a voluntary early retirement incentive plan

is treated as a bona fide severance plan for purposes of section 457,

and is therefore not subject to the limits under section 457, to the

extent the payments or supplements could otherwise be provided

under the defined benefit plan. For purposes of the provision, the

payments or supplements that could otherwise be provided under

the defined benefit plan are to be determined by applying the accrual and vesting rules for defined benefit plans.46

Under the provision, a voluntary early retirement incentive plan

is also treated as a welfare plan for purposes of ERISA (other than

a governmental plan that is exempt from ERISA). Additionally, for

purposes of ADEA, the bill provides that a voluntary early retirement incentive plan is treated as part of the defined benefit plan

and that payments or supplements under voluntary early retirement incentive plans 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 deals with 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 and tax-exempt education associations which

principally 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 dollar limit on deferrals under section

457 ($11,000 for 2002). 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 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. No inference is intended to be

drawn from the provision as to the application of any law to any
44

47 Rev. Rul. 2000–36, 2000–2 C.B. 140. 48Pub. L. No. 107–16.

arrangement to which the provision does not apply or for any period or year for which the provision does not apply.

L. AUTOMATIC ROLLOVERS OF CERTAIN INVOLUNTARY

DISTRIBUTIONS

(Sec. 413 of the bill and sec. 404(c) of ERISA)

PRESENT LAW

In general

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. Generally, a participant may roll over an involuntary distribution from a qualified plan to an individual retirement

account or annuity (an ‘‘IRA’’) or to another qualified plan. 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.

IRS guidance on default rollovers

Under a 2000 ruling issued by the IRS,47 a qualified retirement

plan may provide that the default form of payment of an involuntary distribution is a direct rollover to an IRA, unless the participant elects (1) a direct rollover to another qualified retirement plan

or IRA or (2) to receive the payment in cash. Under the plan described in the ruling, the plan administrator selected an IRA trustee, custodian or issuer, established the IRA on behalf of the participant, and made initial investment choices for the account.

The ruling noted that the Department of Labor had advised the

Treasury Department and the IRS that, in the context of a default

direct rollover as described in the ruling, the participant ceases to

be a participant covered under the plan within the meaning of

ERISA and the distributed assets cease to be plan assets for purposes of ERISA if the distribution constituted the entire benefit

rights of the participant. The ruling also noted that the Department of Labor had advised that the selection of an IRA trustee,

custodian, or issuer and IRA investment for purposes of a default

direct rollover would constitute a fiduciary act subject to the general fiduciary standards and prohibited transaction provisions of

ERISA. In addition, the Department of Labor noted that plan provisions governing the default direct rollover of distributions, including the participant’s ability to affirmatively opt out of the arrangement, must be described in the plan’s summary plan description

furnished to participants and beneficiaries.

Automatic rollover of involuntary distributions

Under the Economic Growth and Tax Relief Reconciliation Act of

2001 (‘‘EGTRRA’’),48 a direct rollover to an IRA must be automatic
45

49Section 401(a)(31)(B) of the Code, as added by section 657 of EGTRRA. 50 ERISA sec. 404(c). 51 ERISA sec. 404(c)(3), as added by section 657 of EGTRRA. Section 411(t) of the Job Creation

and Worker Assistance Act of 2002 made clerical corrections to the wording of this provision. 52 ERISA sec. 404(a).

for an involuntary distribution that exceeds $1,000 and that is an

eligible rollover distribution from a qualified retirement plan.49

That is, the distribution must be rolled over automatically to a designated IRA, unless the participant affirmatively elects to have the

distribution transferred to a different IRA or a qualified plan or to

receive it directly.

ERISA fiduciary rules

ERISA contains general fiduciary duty standards that apply to

all fiduciary actions related to employer-sponsored pension plans,

including actions related to the investment of plan assets. However, these fiduciary rules generally do not apply to IRAs.

ERISA provides a special rule for a defined contribution plan

that permits participants to exercise control over the assets in their

individual accounts.50 Under the special rule, if a participant exercises control over the assets in his or her account (as determined

under regulations), the participant is not deemed to be a fiduciary

by reason of such exercise and no person who is otherwise a fiduciary is liable for any loss, or by reason of any breach, that results

from the participant’s exercise of control.

In connection with the EGTRRA provisions relating to automatic

direct rollovers, the ERISA provision dealing with fiduciary liability when a participants exercises control over the assets in his or

her account was amended to provide that, in the case of an automatic direct rollover, the participant is treated as exercising control

over the assets in the IRA upon (1) the earlier of a rollover of all

or a portion of the amount to another IRA, or one year after the

automatic rollover is made, or (2) the making of an automatic rollover in a manner consistent with guidance provided by the Secretary of Labor.51 EGTRRA directed the Secretary of Labor to prescribe regulations, not later than three years after the date of enactment of EGTRRA, providing safe harbors under which the designation of an institution and investment of funds in accordance

with the automatic direct rollover provision are deemed to satisfy

the general fiduciary duty requirements of ERISA.52 The automatic

rollover provisions apply to distributions made after the Department of Labor has adopted final regulations providing the required

safe harbor. No such regulations have been adopted.

REASONS FOR CHANGE

The Committee recognizes that the provision added to ERISA in

connection with the automatic rollover requirement, under which

the individual is treated as exercising control over the assets in the

IRA, has caused concern as to whether the assets in the IRA would

be treated as plan assets that are subject to the fiduciary rules of

ERISA. Such treatment would be inconsistent with the Department

of Labor’s position that, in the case of a default direct rollover to

an IRA, the distributed assets cease to be plan assets. Confusion

over whether the fiduciary rules of ERISA would apply with respect to assets held in an IRA has made it difficult for the Depart-
46

53Sec. 404(a) of ERISA.

ment of Labor to issue guidance related to automatic rollovers, including safe harbors for the designation of an institution to hold

the distributed assets and the investment of the assets after distribution. The Committee believes it is appropriate to clarify the

operation of the automatic rollover provision. This will facilitate

the issuance of guidance by the Department of Labor and the implementation of the automatic rollover provision.

EXPLANATION OF PROVISION

The provision repeals the ERISA provision relating to when a

participant is considered to exercise control over the assets in an

IRA following an automatic rollover. The provision thus clarifies

that amounts transferred from a qualified retirement plan to an

IRA in an automatic rollover are no longer plan assets for ERISA

purposes, as indicated under the Department of Labor’s position

with respect to default direct rollovers before the enactment of

EGTRRA. In addition, the provision directs the Department of

Labor, not later than December 31, 2002, to issue interim final regulations, or other administrative guidance, under which the designation of an institution and investment of funds in accordance

with the automatic rollover provision are deemed to satisfy the

general fiduciary duty requirements of ERISA.53 The provision provides that the automatic rollover provision applies to distributions

made after December 31, 2003.

EFFECTIVE DATE

The provision is effective as if included in the provisions of

EGTRRA.

M. EXTENSION OF TRANSITION RULE TO PENSION FUNDING

REQUIREMENTS

(Sec. 414 of the bill and sec. 769(c) of the Retirement Protection Act

of 1994)

PRESENT LAW

Under present law, defined benefit pension plans are required to

meet certain minimum funding rules. In some cases, additional

contributions are required if a 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. Quarterly minimum funding

contributions are required in the case of certain underfunded plans.

The Pension Benefit Guaranty Corporation (‘‘PBGC’’) insures

benefits under most 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 plan underfunding.

Under present law, a special rule modifies the minimum funding

requirements in the case of certain plans. The special rule applies
47

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 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 2005 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 2005, the relief from the

minimum funding requirements applies only if certain specified

contributions are made.

For plan years beginning after 2004 and before 2010, the funded

current liability percentage 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 applies for a plan year beginning in 2005, 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 give 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 provide an extension of the special minimum

funding rules for these plans for two years.

EXPLANATION OF PROVISION

The provision modifies the special funding rules for plans sponsored by a company engaged primarily in interurban or interstate

passenger bus service by providing that, for plan years beginning

in 2004 and 2005, the funded current liability percentage of the

plan will be treated as at least 90 percent for purposes of determining the amount of required contributions (100 percent for purposes of determining the timing of plan contributions). In addition,

for these years, the mortality table used under the plan will be

used in determining the amount of unfunded vested benefits under

the plan.

EFFECTIVE DATE

The provision is effective with respect to plan years beginning

after December 31, 2002.
48

54 Under ERISA, a defined contribution plan is generally referred to as an individual account

plan.

N. STUDIES

(Secs. 421–425 of the bill)

PRESENT LAW

Present law does not require studies specifically relating to the

revitalization of defined benefit plans, floor-offset ESOPs, an insurance system for defined contribution plans, or fees related to the

investment of defined contribution plan assets.

REASONS FOR CHANGE

The Committee has a continuing interest in retirement income

security and in the roles that defined contribution plans and defined benefit plans play in providing that security. The Committee

believes it is appropriate to conduct studies of certain issues relating to defined contribution plans, specifically, the establishment of

an insurance arrangement for defined contribution plans, administrative and transactions fees charged in connection with the investment of defined contribution plan assets, and existing floor-offset

ESOP arrangements, as well as a study of possible ways to revitalize interest in defined benefit plans.

EXPLANATION OF PROVISION

Study regarding insurance system for individual account plans

The Pension Benefit Guaranty Corporation (the ‘‘PBGC’’) is required, as soon as practicable after the date of enactment, to undertake a study relating to the establishment of an insurance system for defined contribution plans 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 PBGC is required to consider the feasibility of such a system, the problem with insuring investments in

employer securities, and options for developing such a system.

Study regarding fees charged by individual account plans 54

The Department of Labor is required to undertake a study of the

administrative and transaction fees incurred by participants and

beneficiaries in connection with the investment of assets in their

accounts under defined contribution plans and to report the results

thereof, with recommendations for legislative changes, within one

year after the date of enactment, to the House Committees 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 Department of Labor is required

to consider how the fees compare to fees charged for similar services provided to investors not in defined contribution plans and

whether participants and beneficiaries are adequately notified of

the fees.
49

55 A floor-offset arrangement is an arrangement under which benefits payable to a participant

under a defined benefit plan are reduced by benefits under a defined contribution plan. Generally, in the case of a floor-offset arrangement, ERISA prohibits the defined contribution plan

from acquiring employer securities if, after the acquisition, more than 10 percent of the assets

of the plan would be invested in employer stock. However, under a special transition rule, this

prohibition does not apply to a defined contribution plan, including an ESOP, that is part of

a floor-offset arrangement established on or before December 17, 1987.

Study on revitalizing defined benefit plans

The Secretary of the Treasury is required to undertake a study

on ways to revitalize employer interest in defined benefit plans and

to report the results thereof, with recommendations for legislative

changes, within 18 months 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 is required 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 proposals to accomplish these objectives.

Study on floor-offset ESOPs 55

The PBGC is required 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 to the PBGC and to report the results thereof, with legislative

proposals, within 12 months 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.

EFFECTIVE DATE

The provision is effective on the date of enactment.

O. PLAN AMENDMENTS

(Sec. 431 of the bill)

PRESENT LAW

Plan amendments to reflect amendments to the law generally

must be made by the time prescribed by law for filing the income

tax return of the employer for the employer’s taxable year in which

the change in law occurs.

REASONS FOR CHANGE

The Committee believes that employers should have adequate

time to amend their plans to reflect amendments to the law while

operating their plans in compliance with such amendments.

EXPLANATION OF PROVISION

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 (the ‘‘2001 Act’’), or regulations issued thereunder, to be retroactively effective. If the plan

amendment meets the requirements of the provision, then the plan
50

56See 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 the 2001 Act, in the case of a plan that incorporated the section 415 limits by reference

on June 7, 2001, the date of enactment of the 2001 Act.

will be treated as being operated in accordance with its terms and

the amendment will not violate the prohibition of reductions of accrued benefits for purposes of the Internal Revenue Code. 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, 2005 (January 1, 2007, in the case of a governmental plan). 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 the 2001 Act (or applicable regulations)

could be made retroactive 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 the 2001 Act (or applicable regulations) if it has an effective

date before the effective date of the provision of the bill or Act (or

regulations) to which it relates. Similarly, the provision does not

provide relief from section 411(d)(6) for periods prior to the effective date of the relevant provision (or regulations) or the plan

amendment.

The Secretary 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 of the bill or the 2001 Act. 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 the 2001 Act.56 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 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 the 2001

Act. 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 the 2001 Act, the plan

is not be 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 the 2001 Act.

EFFECTIVE DATE

The provision is effective on the date of enactment.
51

57Treas. Reg. sec. 1.83–3(e). This definition in part reflects previous IRS rulings on nonqualified deferred compensation.

TITLE V. PROVISIONS RELATING TO EXECUTIVES AND

STOCK OPTIONS

A. REPEAL OF LIMITATION ON ISSUANCE OF TREASURY GUIDANCE

REGARDING NONQUALIFIED DEFERRED COMPENSATION

(Sec. 501 of the bill)

PRESENT LAW

General tax treatment of nonqualified deferred compensation

The determination of when amounts deferred under a nonqualified deferred compensation arrangement are includible in the

gross income of the individual earning the compensation depends

on the facts and circumstances of the arrangement. A variety of tax

principles and Code provisions may be relevant in making this determination, including the doctrine of constructive receipt, the economic benefit doctrine, the provisions of section 83 relating generally to transfers of property in connection with the performance

of services, and provisions relating specifically to nonexempt employee trusts (sec. 402(b)) and nonqualified annuities (sec. 403(c)).

In general, the time for inclusion of nonqualified deferred compensation depends on whether the arrangement is unfunded or

funded. If the arrangement is unfunded, then the compensation is

generally includible in income when it is actually or constructively

received. If the arrangement is funded, then income is includible

for the year in which the individual’s rights are transferable or not

subject to a substantial risk of forfeiture.

In general, an arrangement is considered funded if there has

been a transfer of property under section 83. Under that section,

a transfer of property occurs when a person acquires a beneficial

ownership interest in such property. The term ‘‘property’’ is defined

very broadly for purposes of section 83.57 Property includes real

and personal property other than money or an unfunded and unsecured promise to pay money in the future. Property also includes

a beneficial interest in assets (including money) that are transferred or set aside from claims of the creditors of the transferor, for

example, in a trust or escrow account. Accordingly, if, in connection

with the performance of services, vested contributions are made to

a trust on an individual’s behalf and the trust assets may be used

solely to provide future payments to the individual, the payment of

the contributions to the trust constitutes a transfer of property to

the individual that is taxable under section 83. On the other hand,

deferred amounts are generally not includible in income in situations where nonqualified deferred compensation is payable from

general corporate funds that are subject to the claims of general

creditors, as such amounts are treated as unfunded and unsecured

promises to pay money or property in the future.

As discussed above, if the arrangement is unfunded, then the

compensation is generally includible in income when it is actually

or constructively received under section 451. Income is constructively received when it is credited to an individuals’ account, set

apart, or otherwise made available so that it can be drawn on at
52

58Secs. 404(a)(5), (b) and (d) and sec. 83(h). 59The seminal ruling dealing with nonqualified deferred compensation is Rev. Rul. 60–31,

1960–1 C.B. 174. 60 Rev. Rul. 69–650, 1969–2 C.B. 106; Rev. Rul. 69–49, 1969–1 C.B. 138. 61 Rev. Rul. 72–25, 1972–1 C.B. 127. See also, Rev. Rul. 68–99, 1968–1 C.B. 193, in which the

employer’s purchase of an insurance contract on the life of the employee did not result in an

economic benefit to the employee if all rights to any benefits under the contract were solely the

property of the employer and the proceeds of the contract were payable only to the employer. 62Prop. Treas. Reg. 1.61–16, 43 Fed. Reg. 4638 (1978). 63Pub. L. No. 95–600.

any time. Income is not constructively received if the taxpayer’s

control of its receipt is subject to substantial limitations or restrictions. A requirement to relinquish a valuable right in order to

make withdrawals is generally treated as a substantial limitation

or restriction.

Special statutory provisions govern the timing of the deduction

for nonqualified deferred compensation, regardless of whether the

arrangement covers employees or nonemployees and regardless of

whether the arrangement is funded or unfunded.58 Under these

provisions, the amount of nonqualified deferred compensation that

is includible in the income of the individual performing services is

deductible by the service recipient for the taxable year in which the

amount is includible in the individual’s income.

Rulings on nonqualified deferred compensation

In the 1960’s and early 1970’s, various IRS revenue rulings considered the tax treatment of nonqualified deferred compensation

arrangements.59 Under these rulings, a mere promise to pay, not

represented by notes or secured in any way, was not regarded as

the receipt of income for tax purposes. However, if an amount was

contributed to an escrow account or trust on the individual’s behalf,

to be paid to the individual in future years with interest, the

amount was held to be includible in income under the economic

benefit doctrine. Deferred amounts were not currently includible in

income in situations in which nonqualified deferred compensation

was payable from general corporate funds that were subject to the

claims of general creditors and the plan was not funded by a trust,

or any other form of asset segregation to which individuals had any

prior or privileged claim.60 Similarly, current income inclusion did

not result when the employer purchased an annuity contract to

provide a source of funds for its deferred compensation liability if

the employer was the applicant, owner and beneficiary of the annuity contract, and the annuity contract was subject to the general

creditors of the employer.61 In these situations, deferred compensation amounts were held to be includible in income when actually

received or otherwise made available.

Proposed Treasury regulation 1.61–16, published in the Federal

Register for February 3, 1978, provided that if a payment of an

amount of a taxpayer’s compensation is, at the taxpayer’s option,

deferred to a taxable year later than that in which such amount

would have been payable but for his exercise of such option, the

amount shall be treated as received by the taxpayer in such earlier

taxable year.62

Section 132 of the Revenue Act of 1978

Section 132 of the Revenue Act of 1978 63 was enacted in response to proposed Treasury regulation 1.61–16. Section 132 of the
53

64The legislative history to the provision states that the Congress believed that the doctrine

of constructive receipt should not be applied to employees of taxable employers as it would have

been under the proposed regulation. The Congress also believed that the uncertainty surrounding the status of deferred compensation plans of taxable organizations under the proposed

regulation was not desired and should not be permitted to continue.

Revenue Act of 1978 provides that the taxable year of inclusion in

gross income of any amount covered by a private deferred compensation plan is determined in accordance with the principles set

forth in regulations, rulings, and judicial decisions relating to deferred compensation which were in effect on February 1, 1978. The

term, ‘‘private deferred compensation plan’’ means a plan, agreement, or arrangement under which the person for whom service is

performed is not a State or a tax-exempt organization and under

which the payment or otherwise making available of compensation

is deferred. However, the provision does not apply to certain employer-provided retirement arrangements (e.g., a qualified retirement plan), a transfer of property under section 83, or an arrangement that includes a nonexempt employees trust under section

402(b). Section 132 was not intended to restrict judicial interpretation of the law relating to the proper tax treatment of deferred

compensation or interfere with judicial determinations of what

principles of law apply in determining the timing of income inclusion.64

REASONS FOR CHANGE

The Committee is aware of recent press reports of the popular

use of deferred compensation arrangements by executives to defer

current taxation of substantial amounts of income. It has been reported that executives often use arrangements which allow deferral

of income, but also provide security of future payment to the executive, even if the arrangement, on its face, says otherwise. The Committee is concerned that many nonqualified deferred compensation

arrangements have developed which allow improper deferral of income. The Committee believes that the Secretary of the Treasury

should issue guidance on nonqualified deferred compensation targeted to arrangements which result in improper deferral of income

and should not be bound by the restrictions imposed by Section 132

of the Revenue Act of 1978, which may impede the Treasury Department from issuing appropriate guidance to address such arrangements.

EXPLANATION OF PROVISION

The provision repeals section 132 of the Revenue Act of 1978. It

is intended that the Secretary of the Treasury issue guidance with

respect to the tax treatment of nonqualified deferred compensation

arrangements focusing on arrangements that improperly defer income. For example, it is intended that the Secretary address what

is considered a substantial limitation under the constructive receipt

doctrine and situations in which an individual’s right to receive

compensation is, at least in form, subject to substantial limitations,

but in fact is not so limited. It is also intended that the Secretary

address arrangements which purport to not be funded, but should

be treated as so. In addition, it is intended that the Secretary address arrangements in which assets, by the technical terms of the

arrangements, appear to be subject to the claims of an employer’s
54

65Treas. Reg. sec. 1.83–3(e). This definition in part reflects previous IRS rulings on nonqualified deferred compensation.

general creditors, but practically are unavailable to creditors. Arrangements that the Secretary is expected to address include the

following: the ability to receive funds on account of financial hardship, the use of trusts or other arrangements under which the

rights of general creditors to gain access to funds is limited, the use

of triggers and third-party guarantees to fund arrangements, and

the ability to receive funds subject to a forfeiture of some portion

of the participant’s deferred compensation (often referred to as a ‘‘haircut’’).

It is not intended that the Secretary take the position (as taken

in proposed Treasury regulation 1.61–16) that all elective nonqualified deferred compensation is currently includible in income.

No inference is intended that the Secretary is prohibited under

present law from issuing guidance with respect to nonqualified deferred compensation arrangements or that any existing nonqualified deferred compensation guidance issued by the Secretary

is invalid. In addition, no inference is intended that any arrangements covered by future guidance provide permissible deferrals of

income under present law.

EFFECTIVE DATE

The provision is effective for taxable years beginning after the

date of enactment.

B. TAXATION OF DEFERRED COMPENSATION PROVIDED THROUGH

OFFSHORE TRUSTS

(Sec. 502 of the bill and sec. 83 of the Code)

PRESENT LAW

The determination of when amounts deferred under a nonqualified deferred compensation arrangement are includible in the

gross income of the individual earning the compensation depends

on the facts and circumstances of the arrangement. A variety of tax

principles and Code provisions may be relevant in making this determination, including the doctrine of constructive receipt, the economic benefit doctrine, the provisions of section 83 relating generally to transfers of property in connection with the performance

of services, and provisions relating specifically to nonexempt employee trusts (sec. 402(b)) and nonqualified annuities (sec. 403(c)).

In general, the time for inclusion of nonqualified deferred compensation depends on whether the arrangement is unfunded or

funded. If the arrangement is unfunded, then the compensation is

generally includible in income when it is actually or constructively

received (i.e., when it is paid or otherwise made available). If the

arrangement is funded, then income is includible for the year in

which the individual’s rights are transferable or not subject to a

substantial risk of forfeiture.

In general, an arrangement is considered funded if there has

been a transfer of property under section 83. Under that section,

a transfer of property occurs when a person acquires a beneficial

ownership interest in such property. The term ‘‘property’’ is defined

very broadly for purposes of section 83.65 Property includes real
55

66This conclusion was first provided in a 1980 private ruling issued by the IRS with respect

to an arrangement covering a rabbi; hence the popular name ‘‘rabbi trust.’’ Priv. Ltr. Rul.

8113107 (Dec. 31, 1980). 67 Rev. Proc. 92–64, 1992–2 C.B. 422, modified in part by Notice 2000–56, 2000–2 C.B. 393.

and personal property other than money or an unfunded and unsecured promise to pay money in the future. Property also includes

a beneficial interest in assets (including money) that are transferred or set aside from claims of the creditors of the transferor, for

example, in a trust or escrow account. Accordingly, if, in connection

with the performance of services, vested contributions are made to

a trust on an individual’s behalf and the trust assets may be used

solely to provide future payments to the individual, the payment of

the contributions to the trust constitutes a transfer of property to

the individual that is taxable under section 83. On the other hand,

deferred amounts are generally not includible in income in situations where nonqualified deferred compensation is payable from

general corporate funds that are subject to the claims of general

creditors, as such amounts are treated as unfunded and unsecured

promises to pay money or property in the future.

Rabbi trusts

A ‘‘rabbi trust’’ is a trust or other fund established by the employer to hold assets from which nonqualified deferred compensation payments will be made. The trust or fund is generally irrevocable and does not permit the employer to use the assets for purposes other than to provide nonqualified deferred compensation.

However, the terms of the trust or fund provide that the assets are

subject to the claims of the employer’s creditors in the case of bankruptcy.

As discussed above, for purposes of section 83, property includes

a beneficial interest in assets set aside from the claims of creditors,

such as in a trust or fund, but does not include an unfunded and

unsecured promise to pay money in the future. In the case of a

rabbi trust, terms providing that the assets are subject to the

claims of creditors of the employer in the case of bankruptcy have

been the basis for the conclusion that the creation of a rabbi trust

does not cause the related nonqualified deferred compensation arrangement to be funded for income tax purposes.66 As a result, no

amount is included in income by reason of the rabbi trust; generally income inclusion occurs as payments are made from the

trust.

The Internal Revenue Service has issued guidance setting forth

model rabbi trust provisions.67 Revenue Procedure 92–64 provides

a safe harbor for taxpayers who adopt and maintain grantor trusts

in connection with unfunded deferred compensation arrangements.

The model trust language requires that the trust provide that all

assets of the trust are subject to the claims of the general creditors

of the company.

REASONS FOR CHANGE

The Committee is aware of recent press reports of the popular

use of deferred compensation arrangements by executives to defer

current taxation of substantial amounts of income. It has been reported that executives often use arrangements which allow deferral

of income, but also provide security of future payment to the execu-
56

tive, even if the arrangement, on its face, says otherwise. Since the

concept of a rabbi trust was developed, techniques have developed

that attempt to protect the assets from creditors despite the terms

of the trust. For example, the trust or fund may be located in a foreign jurisdiction, making it difficult or impossible for creditors to

reach the assets. Amounts used to provide deferred compensation

that are held in a trust located in a foreign jurisdiction are difficult

to reach by creditors, in many cases so difficult that the assets are

effectively out of the reach of general creditors. The Committee believes that except in limited situations, the primary purpose of

such arrangements is to protect the assets from the claims of general creditors. Thus, such assets should not be considered to be

subject to the claims of creditors under U.S. tax laws.

EXPLANATION OF PROVISION

The provision provides that assets that are designated or otherwise available for the use of providing nonqualified deferred compensation and are located outside the United States (e.g., in a foreign trust, arrangement or account) are not treated as subject to

the claims of general creditors. Therefore, to the extent of such assets, nonqualified deferred compensation amounts are not treated

as unfunded and unsecured promises to pay, but are treated as

property under section 83 and includible in income when the right

to the compensation is no longer subject to a substantial risk of forfeiture, regardless of when the compensation is paid. No inference

is intended that nonqualified deferred compensation assets located

outside of the U.S. would be treated as subject to the claims of

creditors under present law.

The provision does not apply to assets located in a foreign jurisdiction if substantially all of the services to which the nonqualified

deferred compensation relates are performed in such foreign jurisdiction.

The provision is specifically intended to apply to foreign trusts

and arrangements that effectively shield from the claims of general

creditors any assets intended to satisfy nonqualified deferred compensation obligations. The provision provides the Secretary of the

Treasury authority to prescribe regulations as are necessary to

carry out the provision and to provide additional exceptions for specific arrangements which do not result in improper deferral of U.S.

tax if the assets involved in the arrangement are readily accessible

in any insolvency or bankruptcy proceeding.

EFFECTIVE DATE

The provision is effective for amounts deferred after the date of

enactment in taxable years ending after such date.

C. TREATMENT OF LOANS TO EXECUTIVES

(Sec. 503 of the bill and new sec. 7872A and sec. 7872 of the Code)

PRESENT LAW

In general, gross income includes all income from any source, including compensation for past, present or future services, unless an

exclusion applies. The proceeds of a bona fide loan are not income

for Federal tax purposes, because the recipient is obligated to repay
57

the loan. The issue of whether a payment is a bona fide loan or

represents income to the payee may arise in various contexts (including in an employment context) and depends on the facts and

circumstances. In analyzing whether there is an obligation to repay

an amount, relevant factors include the existence of (1) a promissory note or other evidence of indebtedness, (2) a schedule for repayment of a sum certain in the reasonably foreseeable future, (3)

collateral or security, and (4) the payee’s ability to repay, as well

as the actual practice of the parties with respect to enforcing repayment obligations.

Under present law, a loan that provides for the payment of interest at a rate below the applicable Federal rate (a ‘‘below-marketrate loan’’) between certain parties is recharacterized as a transaction in which the lender made a loan to the borrower in exchange

for a note requiring the payment of interest at the applicable Federal rate. In the case of compensation-related loans, this rule results in the parties being treated as if: (1) the borrower paid interest to the lender at the applicable Federal rate which is includible

in income by the lender, and (2) the lender paid compensation to

the employee or other person performing services. A compensationrelated loan is a below-market loan directly or indirectly between

an employer and an employee or between an independent contractor and a person for whom such independent contractor provides services.

In general, a below-market-rate loan is either a demand loan, the

interest on which is payable at less than the applicable Federal

rate, or a term loan, under which the amount of the loan exceeds

the present value of all payments due under the loan, using a discount rate equal to the applicable Federal rate. A demand loan is

any loan which is payable on demand of the lender; a term loan

is any loan other than a demand loan.

REASONS FOR CHANGE

The Committee is aware of recent press reports regarding loans

made to executives by corporations. In some cases, the total

amount loaned to a single individual has been extraordinary. For

example, loans totaling over $90 million and even several billions

of dollars have been reported publicly. In some cases such loans

could not have been obtained from a commercial lender on similar

terms. The Committee is concerned that there is no business purpose for such loans, other than to provide a benefit to the executive, and that such loans are in essence compensatory in nature.

Thus, the Committee believes that loans to executives and certain

other individuals in connection with the performance of services

should be treated as compensation unless certain requirements are

satisfied.

In addition, the Committee believes that the present-law rules

regarding below-market-rate loans do not require the imputation of

an adequate rate of interest in the case of very large loans. Thus,

the Committee believes the imputed interest rate on such loans

should be increased.
58

68For example, a loan from the employer to a child or other family member of the employee

would be considered a loan to the employee. 69 All directors are treated as employees for purposes of the provision. 70 An arrangement that would otherwise be treated as a loan will not be treated as compensation under the provision merely because the loan is a below-market-rate loan. In such cases,

the arrangement is treated as a loan and the below-market-rate loan rules (as modified under

the provision) will apply to impute interest.

EXPLANATION OF PROVISION

Certain loans treated as compensation

Under the provision, an arrangement that would otherwise be a

direct or indirect loan 68 made to an applicable employee of a C corporation is treated as compensation (and therefore includible in

gross income and wages for payroll tax purposes) unless certain requirements are satisfied. An applicable employee is an officer, director,69 five-percent owner of the employer, or any employee of the

employer if outstanding loans from the employer exceed $1 million.

In the case of a person who is an applicable employee solely by reason of having outstanding loans in excess of $1 million, only the

amount of outstanding loans in excess of such amount is treated

as compensation. Amounts treated as compensation under the provision are treated as a supplemental wage payment on the date the

loan was made.

A direct or indirect loan is treated as compensation under the

provision unless (1) there is a promissory note or other written evidence of indebtedness, (2) there is adequate collateral or security

for the debt, and (3) there is a fixed schedule for repayment providing for substantially equal payments (or such other form as permitted by the Secretary) over a period not to exceed 10 years.70 The

following may not be taken into account in determining whether

there is adequate collateral or security for the loan: (1) any stock

or capital or profits interest in the employer, (2) any option or other

contract to purchase such stock or interests, (3) any restricted stock

or ownership interest, (4) any nonqualified deferred compensation,

or (5) other similar assets to the extent provided by the Secretary.

Loans from qualified plans and relocation loans are not subject

to the provision. A relocation loan is a loan the proceeds of which

are used by the employee to purchase a principal residence if the

purchase is in connection with the commencement of work by an

employee or a change in the principal place of work of an employee

to which section 217 applies (relating to the deduction for moving

expenses).

The provision also does not apply to a loan which, without regard

to the provision, is recharacterized as compensation or dividends

with respect to which amounts are otherwise includible in gross income. The provision is not intended to impose tax on amounts otherwise includible in gross income.

Except in the case of repayments, as described below, the belowmarket-rate loan rules do not apply to an arrangement to the extent that it is treated as compensation under the provision. In addition, to the extent that a loan is treated as compensation under

the provision, the rules relating to interest on certain deferred payments (sec. 483), loans from foreign trusts (sec. 643(i)), and the determination of issue price in the case of certain debt instruments

issued for property (sec. 1274) do not apply.
59

71 All loans from the employer (whether or not below-market-rate loans) are taken into account in determining whether the $1 million threshold is exceeded.

The Secretary is directed to prescribe rules for the application of

the Federal tax laws in the event an applicable employee repays

any amount of a loan which was includible in income under the

provision. To the extent the Secretary determines appropriate, such

rules are to provide that (1) the employee is allowed a deduction

(and the employer is to include in gross income) for the taxable

year of the repayment any portion of the amount repaid that was

included in income of the employee (or allowed as a deduction to

the employer), and (2) the amount treated as compensation for employment tax purposes (other than income tax withholding) for the

calendar year of the repayment are reduced by the portion of any

amount repaid that was previously treated as compensation. It is

intended that any deduction provided to an applicable employee

with respect to a repayment is to be subject to the two-percent floor

on itemized deductions. It is also intended that the Secretary prescribe rules, to the extent appropriate, providing for application of

and adjustments to the below-market-rate loan rules in the case of

repayments.

The Secretary is authorized to issue such regulations as are necessary or appropriate to carry out the provision. It is expected that

such rules will address situations such as the payment of a bonus

that coincides with a payment under the loan agreement, and rules

specifying the proper treatment of an arrangement treated as a

loan when made if the employee subsequently fails to make scheduled payments when due.

Imputed interest rate for below-market-rate loans

If the amount of all outstanding loans of an applicable individual

(not taking into account loans treated as compensation) with respect to the same service recipient exceeds $1 million,71 then the

interest rate imputed under the below-market-rate loan rules is the

applicable Federal rate plus three percentage points. This increased interest rate applies on the outstanding balance in excess

of $1 million. Such amount is treated as a separate loan for this

purpose.

EFFECTIVE DATE

The provision is effective for loans made or refinanced after the

date of enactment. Except as provided by the Secretary, modifications to a loan after the effective date are considered a new loan.

It is intended that a demand loan outstanding on the effective date

is not treated as a new loan after the effective date merely because

it is a demand loan.

D. REQUIRED WAGE WITHHOLDING AT TOP MARGINAL RATE FOR

SUPPLEMENTAL WAGE PAYMENTS IN EXCESS OF $1 MILLION

(Sec. 504 of the bill and sec. 13273 of the Revenue Reconciliation

Act of 1993)

PRESENT LAW

An employer must withhold income taxes from wages paid to employees; there are several possible methods for determining the
60

72Sec. 13273 of the Revenue Reconciliation Act of 1993. 73Sec. 101(c)(11) of the Economic Growth and Tax Relief Reconciliation Act of 2001. 74Sec. 6062. 75Sec. 7206.

amount of income tax to be withheld. The IRS publishes tables

(Publication 15, ‘‘Circular E’’) to be used in determining the amount

of income tax to be withheld. The tables generally reflect the income tax rates under the Code so that withholding approximates

the ultimate tax liability with respect to the wage payments. In

some cases, ‘‘supplemental’’ wage payments (e.g., bonuses or commissions) may be subject to withholding at a flat rate,72 based on

the third lowest income tax rate under the Code (27 percent for

2002).73

REASONS FOR CHANGE

The Committee believes that because most employees who receive annual supplemental wage payments in excess of $1 million

will ultimately be taxed at the highest marginal rate, it is appropriate to raise the withholding rate on such payments so that withholding more closely approximates the ultimate tax liability with

respect to these payments.

EXPLANATION OF PROVISION

Under the provision, once annual supplemental wage payments

to an employee exceed $1 million, any additional supplemental

wage payments to the employee in that year are subject to withholding at the highest income tax rate (38.6 percent for 2002), regardless of any other withholding rules and regardless of the employee’s Form W–4.

This rule applies only for purposes of wage withholding; other

types of withholding (such as pension withholding and backup

withholding) are not affected.

EFFECTIVE DATE

The provision is effective with respect to wage payments made

after December 31, 2002.

E. CHIEF EXECUTIVE OFFICER REQUIRED TO SIGN CORPORATE

INCOME TAX RETURNS

(Sec. 511 of the bill and sec. 6062 of the Code)

PRESENT LAW

The Code requires 74 that the income tax return of a corporation

must be signed by either the president, the vice-president, the

treasurer, the assistant treasurer, the chief accounting officer, or

any other officer of the corporation authorized by the corporation

to sign the return.

The Code also imposes 75 a criminal penalty on any person who

willfully signs any tax return under penalties of perjury that that

person does not believe to be true and correct with respect to every

material matter at the time of filing. If convicted, the person is

guilty of a felony; the Code imposes a fine of not more than
61

76Pursuant to 18 U.S.C. 3571, the maximum fine for an individual convicted of a felony is $250,000. 77Sec. 421.

$100,000 76 ($500,000 in the case of a corporation) or imprisonment

of not more than three years, or both, together with the costs of

prosecution.

REASONS FOR CHANGE

The Committee believes that the filing of accurate tax returns is

essential to the proper functioning of the tax system. The Committee believes that requiring that the chief executive officer of a

corporation sign its corporate income tax returns will elevate the

level of care given to the preparation of those returns.

EXPLANATION OF PROVISION

The bill requires that the chief executive officer of a corporation

sign that corporation’s income tax returns. If the corporation does

not have a chief executive officer, the IRS may designate another

officer of the corporation; otherwise, no other person is permitted

to sign the income tax return of a corporation. The Committee intends that the IRS issue general guidance, such as a revenue procedure, to (1) address situations when a corporation does not have

a chief executive officer, and (2) define who the chief executive officer is, in situations (for example) when the primary official bears

a different title or when a corporation has multiple chief executive

officers. The Committee intends that, in every instance, the highest

ranking corporate officer (regardless of title) sign the tax return.

EFFECTIVE DATE

The provision is effective for returns filed after the date of enactment.

F. EXCLUSION OF INCENTIVE STOCK OPTIONS AND EMPLOYEE STOCK

PURCHASE PLAN STOCK OPTIONS FROM WAGES

(Sec. 521 of the bill and secs. 421(b), 423(c), 3121(a), 3231, and

3306(b) of the Code)

PRESENT LAW

Generally, when an employee exercises a compensatory option on

employer stock, the difference between the option price and the fair

market value of the stock (i.e., the ‘‘spread’’) is includible in income

as compensation. In the case of an incentive stock option or an option to purchase stock under an employee stock purchase plan (collectively referred to as ‘‘statutory stock options’’), the spread is not

included in income at the time of exercise.77

If the statutory holding period requirements are satisfied with

respect to stock acquired through the exercise of a statutory stock

option, the spread, and any additional appreciation, will be taxed

as capital gain upon disposition of such stock. Compensation income is recognized, however, if there is a disqualifying disposition

(i.e., if the statutory holding period is not satisfied) of stock acquired pursuant to the exercise of a statutory stock option.

Federal Insurance Contribution Act (‘‘FICA’’) and Federal Unemployment Tax Act (‘‘FUTA’’) taxes (collectively referred to as ‘‘em-
62

78Secs. 3101, 3111 and 3301. 79Secs. 3121 and 3306. 80 Notice 2002–47, 2002–28 I.R.B. 1. 81The provision also provides a similar exclusion for wages under the Railroad Retirement

Tax Act.

ployment taxes’’) are generally imposed in an amount equal to a

percentage of wages paid by the employer with respect to employment.78 The applicable Code provisions 79 do not provide an exception from FICA and FUTA taxes for wages paid to an employee

arising from the exercise of a statutory stock option.

There has been uncertainty in the past as to employer withholding obligations upon the exercise of statutory stock options. On

June 25, 2002, the IRS announced in Notice 2002–47 80 that until

further guidance is issued, it would not assess FICA or FUTA

taxes, or impose Federal income tax withholding obligations, upon

either the exercise of a statutory stock option or the disposition of

the stock acquired pursuant to the exercise of a statutory stock option.

REASONS FOR CHANGE

The Committee agrees with the position taken by the IRS in Notice 2002–47 and believes that it is appropriate to clarify statutorily the treatment of statutory stock options for employment tax

and income tax withholding purposes. The Committee believes that

it is appropriate to provide specific exclusions from withholding requirements for wages attributable to statutory stock options.

EXPLANATION OF PROVISION

The provision provides specific exclusions from FICA and FUTA

wages for remuneration on account of the transfer of stock pursuant to the exercise of an incentive stock option or under an employee stock purchase plan, or any disposition of such stock. Thus,

under the provision, FICA and FUTA taxes do not apply upon the

exercise of a statutory stock option.81 The provision also provides

that such remuneration is not taken into account for purposes of

determining Social Security benefits.

Additionally, the provision provides that Federal income tax

withholding is not required on a disqualifying disposition, nor

when compensation is recognized in connection with an employee

stock purchase plan discount. Present law reporting requirements

continue to apply.

EFFECTIVE DATE

The provision is effective on the date of enactment.

G. CAPITAL GAIN TREATMENT ON SALE OF STOCK ACQUIRED FROM

EXERCISE OF STATUTORY STOCK OPTIONS TO COMPLY WITH CON- FLICT OF INTEREST REQUIREMENTS

(Sec. 522 of the bill and sec. 421 of the Code)

PRESENT LAW

Statutory stock options

Generally, when an employee exercises a compensatory option on

employer stock, the difference between the option price and the fair
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82Sec. 421. 83Sec. 1043.

market value of the stock (i.e., the ‘‘spread’’) is includible in income

as compensation. Upon such exercise, an employer is allowed a corresponding compensation deduction. In the case of an incentive

stock option or an option to purchase stock under an employee

stock purchase plan (collectively referred to as ‘‘statutory stock options’’), the spread is not included in income at the time of exercise.82

If an employee disposes of stock acquired upon the exercise of a

statutory option, the employee generally is taxed at capital gains

rates with respect to the excess of the fair market value of the

stock on the date of disposition over the option price, and no compensation expense deduction is allowable to the employer, unless

the employee fails to meet a holding period requirement. The employee fails to meet this holding period requirement if the disposition occurs within two years after the date the option is granted

or one year after the date the option is exercised. A disposition that

occurs prior to the expiration of the applicable holding period(s) (a

‘‘disqualifying disposition’’) does not qualify for capital gains treatment. In the event of a disqualifying disposition, the income attributable to the disposition is treated by the employee as income received in the taxable year in which the disposition occurs, and a

corresponding deduction is allowable to the employer for the taxable year in which the disposition occurs.

Sale of property to comply with conflict of interest requirements

The Code provides special rules for recognizing gain on sales of

property which are required in order to comply with certain conflict

of interest requirements imposed by the Federal government.83

Certain executive branch Federal employees (and their spouses and

minor or dependent children) who are required to divest property

in order to comply with conflict of interest requirements may elect

to postpone the recognition of resulting gains by investing in certain replacement property within a 60-day period. The basis of the

replacement property is reduced by the amount of the gain not recognized. Permitted replacement property is limited to any obligation of the United States or any diversified investment fund approved by regulations issued by the Office of Government Ethics.

The rule applies only to sales under certificates of divestiture

issued by the President or the Director of the Office of Government

Ethics.

REASONS FOR CHANGE

To comply with Federal conflict of interest requirements, executive branch personnel may be required, before the statutory holding

period requirements have been satisfied, to divest holdings of stock

acquired pursuant to the exercise of statutory stock options. Because Federal conflict of interest requirements mandate the sale of

such shares, the Committee believes that such individuals should

be afforded the tax treatment that would be imposed had the individual held the stock for the required holding period.
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EXPLANATION OF PROVISION

Under the provision, an eligible person who, in order to comply

with Federal conflict of interest requirements, is required to sell

shares of stock acquired pursuant to the exercise of a statutory

stock option is treated as satisfying the statutory holding period requirements, regardless of how long the stock was actually held. An

eligible person generally includes an officer or employee of the executive branch of the Federal Government (and any spouse or

minor or dependent children whose ownership in property is attributable to the officer or employee). Because the sale is not treated

as a disqualifying disposition, the individual is afforded capital

gain treatment on any resulting gains. Such gains are eligible for

deferral treatment under section 1043.

The employer granting the option is not allowed a deduction

upon the sale of the stock by the individual.

EFFECTIVE DATE

The provision is effective for sales after July 1, 2002.

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 committee

amendment to the bill as reported.
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66
67
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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 revenue provisions of the committee amendment to the bill do not involve new or increased budget authority.

Tax expenditures

In compliance with section 308(a)(2) of the Budget Act, the Committee states that the revenue-reducing provisions of the committee

amendment to the bill involve increased tax expenditures (see revenue table in Part III.A., above). The revenue increasing provisions

of the Committee amendment to 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 committee amendment to 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 amendment to the bill.

Rollcall votes

No rollcall votes were taken on the amendment to the bill.

Motion to report the committee amendment

The amendment to the bill was ordered favorably reported by

voice vote, a quorum being present, on July 11, 2002.

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 Committee amendment to 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, and (3) clarifying fiduciary requirements under ERISA. The Committee amendment to

the bill also includes a variety of provisions intended to reduce administrative burdens on employers with regard to pension plans,

including provisions relating to required funding contributions, re-
69

ductions of Pension Benefit Guaranty Corporation premiums for

certain plans, and other plan administration issues. The Committee amendment also includes directives for a number of studies

relating to specific issues that affect retirement income security.

Some of these 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 Committee amendment also includes provisions relating to

certain executive compensation arrangements and the proper tax

treatment of such arrangements. The Committee amendment requires that tax returns be signed by a company’s chief executive officer. This provision is not expected to affect paperwork burdens.

The Committee amendment provides that certain stock options

are not subject to withholding and provides for the treatment of

stock acquired pursuant to the exercise of stock options to comply

with Federal conflict-of-interest requirements.

Impact on personal privacy and paperwork

The provisions of the Committee amendment to 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 currently apply withholding to these options. The provision relating to the sale of stock

to comply with conflict of interest rules may require individuals

who seek to take advantage of the tax benefits provided by the provision to maintain records to demonstrate eligibility for the tax

benefits.

B. UNFUNDED MANDATES STATEMENT

This information is provided in accordance with section 423 of

the Unfunded Mandates Reform Act of 1995 (P.L. 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
70

amends the Internal Revenue Code (the ‘‘Code’’) and has widespread applicability to individuals or small businesses.

The staff of the Joint Committee on Taxation has determined

that a complexity analysis is not required under section 4022(b) of

the IRS Reform Act because the bill contains no provisions that

amend the Code and that have ‘‘widespread applicability’’ to individuals or small businesses.

VI. CHANGES IN EXISTING LAW MADE BY THE BILL AS

REPORTED

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