DESCRIPTION OF H.R. 6757,

THE “FAMILY SAVINGS ACT OF 2018”

Scheduled for Markup

by the

HOUSE COMMITTEE ON WAYS AND MEANS

on September 13, 2018

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

September 12, 2018

JCX-73-18
i

CONTENTS

Page

INTRODUCTION .......................................................................................................................... 1

TITLE I ─ EXPANDING AND PRESERVING RETIREMENT SAVINGS............................... 2

A. Multiple Employer Plans; Pooled Employer Plans.......................................................... 2

B. Rules Relating to Election of Safe Harbor 401(k) Status .............................................. 14

C. Certain Taxable Non-Tuition Fellowship and Stipend Payments Treated as 

Compensation For IRA Purposes................................................................................... 18

D. Repeal of Maximum Age for Traditional IRA Contributions........................................ 20

E. Qualified Employer Plans Prohibited From Making Loans Through Credit Cards

and Other Similar Arrangements.................................................................................... 21

F. Portability of Lifetime Income Investments................................................................... 22

G. Treatment of Custodial Accounts on Termination of Section 403(b) Plans.................. 26

H. Clarification of Retirement Income Account Rules Relating to Church-Controlled 

Organizations ................................................................................................................. 29

I. Exemption from Required Minimum Distribution Rules for Individuals with

Certain Account Balances.............................................................................................. 31

J. Clarification of Treatment of Certain Retirement Plan Contributions Picked Up

by Governmental Employers For New or Existing Employees..................................... 35

K. Elective Deferrals by Members of the Ready Reserve of a Reserve Component

of the Armed Forces....................................................................................................... 39

TITLE II ─ ADMINISTRATIVE IMPROVEMENTS ................................................................ 41

A. Plan Adopted by Filing Due Date for Year May be Treated as in Effect as of Close

of Year............................................................................................................................ 41

B. Modification of Nondiscrimination Rules to Protect Older, Longer Service

Participants..................................................................................................................... 43

C. Study of Appropriate PBGC Premiums......................................................................... 54

TITLE III ─ OTHER SAVINGS PROVISIONS ......................................................................... 57

A. Universal Savings Accounts .......................................................................................... 57

B. Expansion of 529 Plans.................................................................................................. 61

C. Penalty-Free Withdrawals from Retirement Plans for Individuals in Case of Birth

of Child or Adoption ...................................................................................................... 64
1

INTRODUCTION

The House Committee on Ways and Means has scheduled a markup on September 13,

2018, of the “Family Savings Act of 2018.” This document,1 prepared by the staff of the Joint 

Committee on Taxation, provides a description of the bill. 

 1

 This document may be cited as follows: Joint Committee on Taxation, Description of H.R. 6757, the 

“Family Savings Act of 2018,” (JCX-73-18), September 12, 2018. This document can also be found on the Joint 

Committee on Taxation website at www.jct.gov. All section references herein are to the Internal Revenue Code of 

1986, as amended, unless otherwise indicated.
2

TITLE I ─ EXPANDING AND PRESERVING RETIREMENT SAVINGS

A. Multiple Employer Plans; Pooled Employer Plans 

Present Law

Retirement savings under the Code and ERISA

Tax-favored arrangements

The Internal Revenue Code (“Code”) provides two general vehicles for tax-favored 

retirement savings: employer-sponsored plans and individual retirement arrangements (“IRAs”). 

Code provisions are generally within the jurisdiction of the Secretary of the Treasury 

(“Secretary”), through his or her delegate, the Internal Revenue Service (“IRS”). 

The most common type of tax-favored employer-sponsored retirement plan is a qualified 

retirement plan,2 which may be a defined contribution plan or a defined benefit plan. Under a 

defined contribution plan, separate individual accounts are maintained for participants, to which 

accumulated contributions, earnings and losses are allocated, and participants’ benefits are based 

on the value of their accounts.3

 Defined contribution plans commonly allow participants to 

direct the investment of their accounts, usually by choosing among investment options offered 

under the plan. Under a defined benefit plan, benefits are determined under a plan formula and 

paid from general plan assets, rather than individual accounts.4 Besides qualified retirement 

plans, certain tax-exempt employers and public schools may maintain tax-deferred annuity 

plans.5 

An IRA is generally established by the individual for whom the IRA is maintained.6 

However, in some cases, an employer may establish IRAs on behalf of employees and provide 

 2

 Sec. 401(a). A qualified annuity plan under section 403(a) is similar to and subject to requirements 

similar to those applicable to qualified retirement plans.

3

 Sec. 414(i). Defined contribution plans generally provide for contributions by employers and may 

include a qualified cash or deferred arrangement under a section 401(k) plan, under which employees may elect to 

contribute to the plan.

4

 Sec. 414(j).

5

 Sec. 403(b). Private and governmental employers that are exempt from tax under section 501(c)(3), 

including tax-exempt private schools, may maintain tax-deferred annuity plans. State and local governmental 

employers may maintain another type of tax-favored retirement plan, an eligible deferred compensation plan under 

section 457(b).

6

 Sections 219, 408 and 408A provide rules for IRAs. Under section 408(a)(2) and (n), only certain 

entities are permitted to be the trustee of an IRA. The trustee of an IRA generally must be a bank, an insured credit 

union, or a corporation subject to supervision and examination by the Commissioner of Banking or other officer in 

charge of the administration of the banking laws of the State in which it is incorporated. Alternatively, an IRA 

trustee may be another person who demonstrates to the satisfaction of the Secretary that the manner in which the 

person will administer the IRA will be consistent with the IRA requirements.
3

retirement contributions to the IRAs.7

 In addition, IRA treatment may apply to accounts 

maintained for employees under a trust created by an employer (or an employee association) for 

the exclusive benefit of employees or their beneficiaries, provided that the trust complies with 

the relevant IRA requirements and separate accounting is maintained for the interest of each 

employee or beneficiary (referred to herein as an “IRA trust”).8 In that case, the assets of the 

trust may be held in a common fund for the account of all individuals who have an interest in the 

trust.

ERISA

Retirement plans of private employers, including qualified retirement plans and 

tax-deferred annuity plans, are generally subject to requirements under the Employee Retirement 

Income Security Act of 1974 (“ERISA”).9 A plan covering only business owners (or business 

owners and their spouses) - that is, it covers no other employees - is exempt from ERISA.10 

Thus, a plan covering only self-employed individuals is exempt from ERISA. Tax-deferred 

annuity plans that provide solely for salary reduction contributions by employees may be exempt 

from ERISA.11 IRAs are generally exempt from ERISA.

The provisions of Title I of ERISA are under the jurisdiction of the Secretary of Labor.12 

Many of the requirements under Title I of ERISA parallel Code requirements for qualified 

retirement plans. Under ERISA, in carrying out provisions relating to the same subject matter, 

the Secretary (of the Treasury) and the Secretary of Labor are required to consult with each other 

and develop rules, regulations, practices, and forms which, to the extent appropriate for efficient 

administration, are designed to reduce duplication of effort, duplication of reporting, conflicting 

or overlapping requirements, and the burden of compliance by plan administrators, employers, 

and participants and beneficiaries.13 In addition, interpretive jurisdiction over parallel Code and 

 7

 Simplified employee pension (“SEP”) plans under section 408(k) and SIMPLE IRA plans under 

section 408(p) are employer-sponsored retirement plans funded using IRAs for employees.

8

 Sec. 408(c).

9

 ERISA applies to employee welfare benefit plans, such as health plans, of private employers, as well as 

to employer-sponsored retirement (or pension) plans. Employer-sponsored welfare and pension plans are both 

referred to under ERISA as employee benefit plans. Under ERISA sec. 4(b)(1) and (2), governmental plans and 

church plans are generally exempt from ERISA.

10 29 C.F.R. 2510.3-3(b)-(c).

11 29 C.F.R. 2510.3-2(f).

12 The provisions of Title I of ERISA are codified at 29 U.S.C. 1001-734. Under Title IV of ERISA, 

defined benefit plans of private employers are generally covered by the Pension Benefit Guaranty Corporation’s 

pension insurance program. 

13 ERISA sec. 3004. 
4

ERISA provisions relating to retirement plans is divided between the two Secretaries by 

Executive Order, referred to as the Reorganization Plan No. 4 of 1978.14

Multiple employer plans under the Code

In general

Qualified retirement plans, either defined contribution or defined benefit plans, are 

categorized as single-employer plans or multiple employer plans. A single-employer plan is a 

plan maintained by one employer. For this purpose, businesses and organizations that are 

members of a controlled group of corporations, a group under common control, or an affiliated 

service group are treated as one employer (referred to as “aggregation”).15 

A multiple employer plan generally is a single plan maintained by two or more unrelated 

employers (that is, employers that are not treated as a single employer under the aggregation 

rules).16 Multiple employer plans are commonly maintained by employers in the same industry 

and are used also by professional employer organizations (“PEOs”) to provide qualified 

retirement plan benefits to employees working for PEO clients.17

Application of Code requirements to multiple employer plans and EPCRS

Some requirements are applied to a multiple employer plan on a plan-wide basis.18 For 

example, all employees covered by the plan are treated as employees of all employers 

participating in the plan for purposes of the exclusive benefit rule. Similarly, an employee’s 

service with all participating employers is taken into account in applying the minimum 

participation and vesting requirements. In applying the limits on contributions and benefits, 

compensation, contributions and benefits attributable to all employers are taken into account.19 

Other requirements are applied separately, including the minimum coverage requirements, 

nondiscrimination requirements (both the general requirements and the special tests for section 

 14 43 Fed. Reg. 47713 (October 17, 1978).

15 Secs. 414(b), (c), (m) and (o).

16 Sec. 413(c). Multiple employer status does not apply if the plan is a multiemployer plan. 

Multiemployer plans are different from single employer plans and multiple employer plans. A multiemployer plan 

is defined under sec. 414(f) as a plan maintained pursuant to one or more collective bargaining agreements with two 

or more unrelated employers and to which the employers are required to contribute under the collective bargaining 

agreement(s). Multiemployer plans are also known as Taft-Hartley plans.

17 Rev. Proc. 2003-86, 2003-2 C.B. 1211, and Rev. Proc. 2002-21, 2002-1 C.B. 911, address the 

application of the multiple employer plan rules to qualified defined contribution plans maintained by PEOs.

18 Sec. 413(c).

19 Treas. Reg. sec. 1.415(a)-1(e).
5

401(k) plans) and the top-heavy rules.20 However, the qualified status of the plan as a whole is 

determined with respect to all employers maintaining the plan, and the failure by one employer 

(or by the plan itself) to satisfy an applicable qualification requirement may result in 

disqualification of the plan with respect to all employers (sometimes referred to as the “one bad 

apple” rule).

21

Because of the complexity of the requirements for qualified retirement plans, errors in 

plan documents, as well as plan operation and administration, commonly occur. Under a strict 

application of these requirements, such an error would cause a plan to lose its tax-favored status, 

which would fall most heavily on plan participants because of the resulting current income 

inclusion of vested amounts under the plan. As a practical matter, therefore, the IRS rarely 

disqualifies a plan. Instead, the IRS has established the Employee Plans Compliance Resolution 

System (“EPCRS”), a formal program under which employers and other plan sponsors can 

correct compliance failures and continue to provide their employees with retirement benefits on a 

tax-favored basis.22

EPCRS has three components, providing for self-correction, voluntary correction with 

IRS approval, and correction on audit. The Self-Correction Program (“SCP”) generally permits 

a plan sponsor that has established compliance practices and procedures to correct certain 

insignificant failures at any time (including during an audit), and certain significant failures 

generally within a two-year period, without payment of any fee or sanction. The Voluntary 

Correction Program (“VCP”) permits an employer, at any time before an audit, to pay a limited 

fee and receive IRS approval of a correction. For a failure that is discovered on audit and 

corrected, the Audit Closing Agreement Program (“Audit CAP”) provides for a sanction that 

bears a reasonable relationship to the nature, extent, and severity of the failure and that takes into 

account the extent to which correction occurred before audit.

Multiple employer plans are eligible for EPCRS, and certain special procedures apply.23 

A VCP request with respect to a multiple employer plan must be submitted to the IRS by the 

plan administrator, rather than an employer maintaining the plan, and must be made with respect 

to the entire plan, rather than a portion of the plan affecting any particular employer. In addition, 

if a failure applies to fewer than all of the employers under the plan, the plan administrator may

choose to have a VCP compliance fee or audit CAP sanction calculated separately for each 

employer based on the participants attributable to that employer, rather than having the 

compliance fee calculated based on the participants of the entire plan. For example, the plan 

administrator may choose this option when the failure is attributable to the failure of an employer 

to provide the plan administrator with full and complete information.

 20 Treas. Reg. secs. 1.413-2(a)(3)(ii)-(iii) and 1.416-1, G-2.

21 Treas. Reg. secs. 1.413-2(a)(3)(iv) and 1.416-1, G-2.

22 Rev. Proc. 2016-51. 2016-42 I.R.B. 465, October 17, 2016.

23 Section 10.11 of Rev. Proc. 2016-51.
6

ERISA

Fiduciary and bonding requirements

Among other requirements, ERISA requires a plan to be established and maintained 

pursuant to a written instrument (that is, a plan document) that contains certain terms.24 The 

terms of the plan must provide for one or more named fiduciaries that jointly or severally have 

authority to control and manage the operation and administration of the plan.25 Among other 

required plan terms are a procedure for the allocation of responsibilities for the operation and 

administration of the plan and a procedure for amending the plan and for identifying the persons 

who have authority to amend the plan. Among other permitted terms, a plan may provide also 

that any person or group of persons may serve in more than one fiduciary capacity with respect 

to the plan (including service both as trustee and administrator) and that a person who is a named 

fiduciary with respect to the control or management of plan assets may appoint an investment 

manager or managers to manage plan assets.

In general, a plan fiduciary is responsible for the investment of plan assets. However, 

ERISA section 404(c) provides a special rule in the case of a defined contribution plan that 

permits participants to direct the investment of their individual accounts.26 Under the special 

rule, if various requirements are met, a participant is not deemed to be a fiduciary by reason of 

directing the investment of the participant’s account 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 investments. 

Defined contribution plans that provide for participant-directed investments commonly offer a 

set of investment options among which participants may choose. The selection of investment 

options to be offered under a plan is subject to ERISA fiduciary requirements.

Under ERISA, any plan fiduciary or person that handles plan assets is required to be 

bonded, generally for an amount not to exceed $500,000.27 In some cases, the maximum bond 

amount is $1 million, rather than $500,000.

Multiple employer plan status under ERISA

Like the Code, ERISA contains rules for multiple employer retirement plans.28 However, 

a different concept of multiple employer plan applies under ERISA.

 24 ERISA sec. 402.

25 Fiduciary is defined in ERISA section 3(21), and named fiduciary is defined in ERISA 

section 402(a)(2).

26 ERISA sec. 404(c). Under ERISA, a defined contribution plans is also referred to as an individual 

account plan.

27 ERISA sec. 412.

28 ERISA sec. 210(a).
7

Under ERISA, an employee benefit plan (whether a pension plan or a welfare plan) must 

be sponsored by an employer, by an employee organization, or by both.29 The definition of 

employer is any person acting directly as an employer, or indirectly in the interest of an 

employer, in relation to an employee benefit plan, and includes a group or association of 

employers acting for an employer in such capacity.30

These definitional provisions of ERISA are interpreted as permitting a multiple employer 

plan to be established or maintained by a cognizable, bona fide group or association of 

employers, acting in the interests of its employer members to provide benefits to their 

employees.31 This approach is based on the premise that the person or group that maintains the 

plan is tied to the employers and employees that participate in the plan by some common 

economic or representational interest or genuine organizational relationship unrelated to the 

provision of benefits. Based on the facts and circumstances, the employers that participate in the 

benefit program must, either directly or indirectly, exercise control over that program, both in 

form and in substance, in order to act as a bona fide employer group or association with respect 

to the program, or the plan is sponsored by one or more employers as defined in section 3(5) of 

ERISA.

32 However, an employer association does not exist where several unrelated employers 

merely execute participation agreements or similar documents as a means to fund benefits, in the 

absence of any genuine organizational relationship between the employers. In that case, each 

participating employer establishes and maintains a separate employee benefit plan for the benefit 

of its own employees, rather than a multiple employer plan.

Form 5500 reporting 

Under the Code, an employer maintaining a qualified retirement plan generally is 

required to file an annual return containing information required under regulations with respect 

to the qualification, financial condition, and operation of the plan.33 ERISA requires the plan 

administrator of certain pension and welfare benefit plans to file annual reports disclosing certain 

 29 ERISA sec. 3(1) and (2).

30 ERISA sec. 3(5).

31 See, for example, Department of Labor Advisory Opinions 2012-04A, 2003-17A, 2001-04A, and 

1994-07A, and other authorities cited therein.

32 See, for example, Department of Labor Advisory Opinion 2017-02AC.

33 Sec. 6058. In addition, under section 6059, the plan administrator of a defined benefit plan subject to the 

minimum funding requirements is required to file an annual actuarial report. Under Code section 414(g) and ERISA 

section 3(16), plan administrator generally means the person specifically so designated by the terms of the plan 

document. In the absence of a designation, the plan administrator generally is (1) in the case of a plan maintained by 

a single employer, the employer, (2) in the case of a plan maintained by an employee organization, the employee 

organization, or (3) in the case of a plan maintained by two or more employers or jointly by one or more employers 

and one or more employee organizations, the association, committee, joint board of trustees, or other similar group 

of representatives of the parties that maintain the plan. Under ERISA, the party described in (1), (2) or (3) is 

referred to as the “plan sponsor.”
8

information to the Department of Labor (“DOL”).34 These filing requirements are met by filing 

a completed Form 5500, Annual Return/Report of Employee Benefit Plan. Forms 5500 are filed 

with DOL, and information from Forms 5500 is shared with the IRS.35 In the case of a multiple 

employer plan, the annual report must include a list of participating employers and a good faith 

estimate of the percentage of total contributions made by the participating employers during the 

plan year. Certain small plans, that is, plans covering fewer than 100 participants, are eligible for 

simplified reporting requirements, which are met by filing Form 5500-SF, Short Form Annual 

Return/Report of Small Employee Benefit Plan.36 

Description of Proposal

In general

The proposal amends the Code rules relating to multiple employer plans to provide relief 

from the “one bad apple” rule for certain plans (referred to herein as “covered multiple employer 

plans”). A covered multiple employer plan is a multiple employer qualified defined contribution 

plan37 or a plan that consists of IRAs (referred to herein as an “IRA plan”), including under an 

IRA trust,38 that either (1) is maintained by employers which have a common interest other than 

having adopted the plan, or (2) in the case of a plan not described in (1), has a pooled plan 

provider (referred to herein as a “pooled provider plan”), and which meets certain other 

requirements as described below. 

The proposal outlines various requirements that apply to a pooled provider plan under the 

Code. It also outlines various requirements that apply under ERISA to a qualified defined 

contribution plan that is established or maintained for the purpose of providing benefits to the 

employees of two or more employers and that meets certain requirements to be a “pooled 

employer plan,” and provides that a pooled employer plan is treated for purposes of ERISA as a 

single plan that is a multiple employer plan.39 

 34 ERISA secs. 103 and 104. Under ERISA section 4065, the plan administrator of certain defined benefit 

plans must provide information to the PBGC.

35 Information is shared also with the PBGC, as applicable. Form 5500 filings are also publicly released in 

accordance with section 6104(b) and Treas. Reg. sec. 301.6104(b)-1 and ERISA secs. 104(a)(1) and 106(a).

36 ERISA sec. 104(b).

37 To which section 413(c) applies.

38 Under the proposal, in applying the exclusive benefit requirement under section 408(c) to an IRA plan 

with an IRA trust covering employees of unrelated employers, all employees covered by the plan are treated as 

employees of all employers participating in the plan.

39 With respect to plans described under proposed section 413(e)(1)(A), other than providing relief from 

the “one bad apple” rule if certain requirements are met and adding certain reporting requirements, the proposal 

generally does not change present law and related guidance applicable to such multiple employer plans under the 

Code or ERISA.
9

Tax-favored status under the Code 

In general

The proposal provides relief from disqualification (or other loss of tax-favored status) of 

the entire plan merely because one or more participating employers fail to take actions required 

with respect to the plan (that is, relief from the “one bad apple” rule).

Such relief under the proposal does not apply to a plan unless the terms of the plan 

provide that, in the case of any employer in the plan failing to take required actions (referred to 

herein as a “noncompliant employer)”─

• plan assets attributable to employees of the noncompliant employer (or beneficiaries 

of such employees) will be transferred to a plan maintained only by that employer (or 

its successor), to a tax-favored retirement plan for each individual whose account is 

transferred,40 or to any other arrangement that the Secretary determines is 

appropriate, unless the Secretary determines it is in the best interests of the employees 

of the noncompliant employer (and beneficiaries of such employees) to retain the 

assets in the plan, and

• the noncompliant employer (and not the plan with respect to which the failure 

occurred or any other employer in the plan) is, except to the extent provided by the 

Secretary, liable for any plan liabilities attributable to employees of the noncompliant 

employer (or beneficiaries of such employees).

In addition, in the case of a pooled provider plan, if the pooled plan provider does not 

perform substantially all the administrative duties required of the provider (as described below) 

for any plan year, the Secretary may provide that the determination as to whether the plan meets 

the Code requirements for tax-favored treatment will be made in the same manner as would be 

made without regard to the relief under the proposal.

Pooled plan provider

Under the proposal, “pooled plan provider” with respect to a plan means a person that─

• is designated by the terms of the plan as a named fiduciary under ERISA,41 as the 

plan administrator, and as the person responsible to perform all administrative duties 

(including conducting proper testing with respect to the plan and the employees of 

each employer in the plan) that are reasonably necessary to ensure that the plan meets 

the Code requirements for tax-favored treatment and the requirements of ERISA and 

to ensure that each employer in the plan takes actions as the Secretary or the pooled 

plan provider determines necessary for the plan to meet Code and ERISA 

 40 For this purpose, a tax-favored retirement plan means an eligible retirement plan as defined in section 

402(c)(8)(B), that is, an IRA, a qualified retirement plan, a tax-deferred annuity plan under section 403(b), or an 

eligible deferred compensation plan of a State or local governmental employer under section 457(b).

41 Within the meaning of ERISA section 402(a)(2).
10

requirements, including providing to the pooled plan provider any disclosures or other 

information that the Secretary may require or that the pooled plan provider otherwise 

determines are necessary to administer the plan or to allow the plan to meet Code and 

ERISA requirements,

• registers with the Secretary as a pooled plan provider and provides any other 

information that the Secretary may require, before beginning operations as a pooled 

plan provider,

• acknowledges in writing its status as a named fiduciary under ERISA and as the plan 

administrator, and

• is responsible for ensuring that all persons who handle plan assets or are plan 

fiduciaries are bonded in accordance with ERISA requirements.

The proposal specifies that the Secretary may perform audits, examinations, and 

investigations of pooled plan providers as may be necessary to enforce and carry out the 

purposes of the proposal.

In addition, the proposal provides that in determining whether a person meets the 

requirements to be a pooled plan provider with respect to any plan, all persons who perform 

services for the plan and who are treated as a single employer42 are treated as one person.

Plan sponsor

The proposal also provides that, except with respect to the administrative duties (as a 

named fiduciary, as the plan administrator, and as the person responsible for the performance of 

all administrative duties) for which the pooled plan provider is responsible as described above, 

each employer in a plan which has a pooled plan provider will be treated as the plan sponsor with 

respect to the portion of the plan attributable to that employer’s employees (or beneficiaries of 

such employees).

Guidance

The proposal directs the Secretary to issue guidance that the Secretary determines 

appropriate to carry out the proposal, including guidance (1) to identify the administrative duties 

and other actions required to be performed by a pooled plan provider, (2) that describes the 

procedures to be taken to terminate a plan that fails to meet the requirements to be a covered 

multiple employer plan, including the proper treatment of, and actions needed to be taken by, any 

employer in the plan and plan assets and liabilities attributable to employees of that employer (or 

beneficiaries of such employees), and (3) to identify appropriate cases in which corrective action 

will apply with respect to noncompliant employers. For purposes of (3), the Secretary is to take 

into account whether the failure of an employer or pooled plan provider to provide any 

disclosures or other information, or to take any other action, necessary to administer a plan or to 

 42 Under subsection (b), (c), (m), or (o) of section 414.
11

allow a plan to meet the Code requirements for tax-favored treatment, has continued over a 

period of time that demonstrates a lack of commitment to compliance. 

The proposal also directs the Secretary to publish model plan language that meets the 

Code and ERISA requirements under the proposal and that may be adopted in order to be treated 

as a pooled employer plan under ERISA.

Pooled employer plans under ERISA

In general

As described above, under the proposal, a pooled employer plan is treated for purposes of 

ERISA as a single plan that is a multiple employer plan. A “pooled employer plan” is defined as 

a plan (1) that is an individual account plan established or maintained for the purpose of 

providing benefits to the employees of two or more employers, (2) that is a qualified retirement 

plan or an IRA plan, and (3) the terms of which meet the requirements described below. A 

pooled employer plan does not include a plan maintained by employers which have a common 

interest other than having adopted the plan.

In order for a plan to be a pooled employer plan, the plan terms must─

• designate a pooled plan provider and provide that the pooled plan provider is a named 

fiduciary of the plan,

• designate one or more trustees (other than an employer in the plan)

43 to be 

responsible for collecting contributions to, and holding the assets of, the plan, and 

require the trustees to implement written contribution collection procedures that are 

reasonable, diligent, and systematic,

• provide that each employer in the plan retains fiduciary responsibility for the 

selection and monitoring, in accordance with ERISA fiduciary requirements, of the 

person designated as the pooled plan provider and any other person who is also 

designated as a named fiduciary of the plan, and, to the extent not otherwise delegated 

to another fiduciary by the pooled plan provider (and subject to the ERISA rules 

relating to self-directed investments), the investment and management of the portion 

of the plan’s assets attributable to the employees of that employer (or beneficiaries of 

such employees) in the plan,

• provide that employers in the plan, and participants and beneficiaries, are not subject 

to unreasonable restrictions, fees, or penalties with regard to ceasing participation, 

receipt of distributions, or otherwise transferring assets of the plan in accordance with 

applicable rules for plan mergers and transfers,

• require the pooled plan provider to provide to employers in the plan any disclosures 

or other information that the Secretary of Labor may require, including any 

disclosures or other information to facilitate the selection or any monitoring of the 

 43 Any trustee must meet the requirements under the Code to be an IRA trustee.
12

pooled plan provider by employers in the plan, and require each employer in the plan 

to take any actions that the Secretary of Labor or pooled plan provider determines are 

necessary to administer the plan or to allow for the plan to meet the ERISA and Code 

requirements applicable to the plan, including providing any disclosures or other 

information that the Secretary of Labor may require or that the pooled plan provider 

otherwise determines are necessary to administer the plan or to allow the plan to meet 

such ERISA and Code requirements, and

• provide that any disclosure or other information required to be provided as described 

above may be provided in electronic form and will be designed to ensure only 

reasonable costs are imposed on pooled plan providers and employers in the plan.

In the case of a fiduciary of a pooled employer plan or a person handling assets of a 

pooled employer plan, the maximum bond amount under ERISA is $1 million.

The term “pooled employer plan” does not include a multiemployer plan. Such term also 

does not include a plan established before the date of enactment of the Family Savings Act of 

2018 unless the plan administrator elects to have the plan treated as a pooled employer plan and 

the plan meets the ERISA requirements applicable to a pooled employer plan established on or 

after such date.

Pooled plan provider

The definition of pooled plan provider for ERISA purposes is generally similar to the 

definition under the Code portion of the proposal, described above.44 The ERISA definition 

requires a person to register as a pooled plan provider with the Secretary of Labor and provide 

any other information that the Secretary of Labor may require, before beginning operations as a 

pooled plan provider.

The proposal specifies that the Secretary of Labor may perform audits, examinations, and 

investigations of pooled plan providers as may be necessary to enforce and carry out the 

purposes of the proposal.

Plan sponsor

The proposal also provides that except with respect to the administrative duties (as a 

named fiduciary, as the plan administrator, and as the person responsible for the performance of 

all administrative duties) for which the pooled plan provider is responsible as described above, 

each employer in a pooled employer plan will be treated as the plan sponsor with respect to the 

portion of the plan attributable to that employer’s employees (or beneficiaries of such 

employees).

 44 In determining whether a person meets the requirements to be a pooled plan provider with respect to a 

plan, all persons who perform services for the plan and who are treated as a single employer under subsection (b), 

(c), (m), or (o) of section 414 are treated as one person.
13

Guidance

The proposal directs the Secretary of Labor to issue guidance that such Secretary 

determines appropriate to carry out the proposal, including guidance (1) to identify the 

administrative duties and other actions required to be performed by a pooled plan provider, and 

(2) that requires, in appropriate cases of a noncompliant employer, plan assets attributable to 

employees of the noncompliant employer (or beneficiaries of such employees) to be transferred 

to a plan maintained only by that employer (or its successor), to a tax-favored retirement plan for 

each individual whose account is transferred, or to any other arrangement that the Secretary of 

Labor determines in the guidance is appropriate,45 and the noncompliant employer (and not the 

plan with respect to which the failure occurred or any other employer in the plan) to be liable for 

any plan liabilities attributable to employees of the noncompliant employer (or beneficiaries of 

such employees), except to the extent provided in the guidance. For purposes of (2), the 

Secretary of Labor is to take into account whether the failure of an employer or pooled plan 

provider to provide any disclosures or other information, or to take any other action, necessary to 

administer a plan or to allow a plan to meet the requirements of ERISA and the Code 

requirements for tax-favored treatment, has continued over a period of time that demonstrates a 

lack of commitment to compliance. 

Form 5500 reporting

Under the proposal, the Form 5500 filing for a multiple employer plan (including a 

pooled employer plan) must include a list of the employers in the plan, a good faith estimate of 

the percentage of total contributions made by such employers during the plan year, and the 

aggregate account balances attributable to each employer in the plan (determined as the sum of 

the account balances of the employees of each employer (and the beneficiaries of such 

employees)); and with respect to a pooled employer plan, the identifying information for the 

person designated under the terms of the plan as the pooled plan provider. In addition, the 

proposal adds, to the list of pension plans to which simplified reporting may be prescribed by the 

Secretary of Labor, a multiple employer plan that covers fewer than 1,000 participants, but only 

if no single employer in the plan has 100 or more participants covered by the plan.

Effective Date

The proposal applies to plan years beginning after December 31, 2019, including 

reporting for purposes of Forms 5500 for plan years beginning after December 31, 2019.

Nothing in the Code amendments made by the proposal is to be construed as limiting the 

authority of the Secretary (or the Secretary’s delegate) to provide for the proper treatment of a 

failure to meet any Code requirement with respect to any employer (and its employees) in a 

multiple employer plan.

 45 The Secretary of Labor may waive the requirement to transfer assets to another plan or arrangement in 

appropriate circumstances if the Secretary of Labor determines it is in the best interests of the employees of the 

noncompliant employer (and the beneficiaries of such employees) to retain the assets in the pooled employer plan.
14

B. Rules Relating to Election of Safe Harbor 401(k) Status

Present Law

Section 401(k) plans

A qualified defined contribution plan may include a qualified cash or deferred 

arrangement, under which employees may elect to have contributions made to the plan (referred 

to as “elective deferrals”) rather than receive the same amount as current compensation (referred 

to as a “section 401(k) plan”).46 The maximum annual amount of elective deferrals that can be 

made by an employee for a year is $18,500 (for 2018) or, if less, the employee’s compensation.47 

For an employee who attains age 50 by the end of the year, the dollar limit on elective deferrals 

is increased by $6,000 (for 2018) (called catch-up contributions).48 The dollar limits for elective 

deferrals, including catch-up contributions, are subject to indexing; after any increase, an amount 

that is not a multiple of $500 is rounded to the next lowest multiple of $500. An employee’s 

elective deferrals must be fully vested (nonforfeitable to the employee). A section 401(k) plan 

may also provide for employer matching and nonelective contributions, which may be subject to 

vesting conditions. A matching contribution is conditioned on the employee making elective 

deferrals,49 while a nonelective contribution is not conditioned on whether an employee has 

elected to make contributions to the plan. 

Automatic enrollment

A section 401(k) plan must provide each eligible employee with an effective opportunity 

to make or change an election to make elective deferrals at least once each plan year.50 Whether 

an employee has an effective opportunity is determined based on all the relevant facts and 

circumstances, including the adequacy of notice of the availability of the election, the period of 

time during which an election may be made, and any other conditions on elections. 

Section 401(k) plans are generally designed so that an employee will receive cash 

compensation unless the employee affirmatively elects to make elective deferrals to the 

section 401(k) plan. Alternatively, a plan may provide that elective deferrals are made at a 

specified rate when an employee becomes eligible to participate unless the employee elects 

 46 Elective deferrals are generally made on a pretax basis and distributions attributable to elective deferrals 

are includible in income. However, a section 401(k) plan is permitted to include a “qualified Roth contribution 

program” that permits a participant to elect to have all or a portion of the participant’s elective deferrals under the 

plan treated as after-tax Roth contributions. Certain distributions from a designated Roth account are excluded from 

income, even though they include earnings not previously taxed. 

47 Sec. 402(g).

48 Sec. 414(v).

49 Matching contributions may also be conditioned on the employee making Roth contributions or after-tax 

contributions.

50 Treas. Reg. sec. 1.401(k)-1(e)(2)(ii).
15

otherwise (that is, affirmatively elects not to make contributions or to make contributions at a 

different rate). This plan design is referred to as automatic enrollment. 

Nondiscrimination test 

General rule and design-based safe harbors

An annual nondiscrimination test, called the actual deferral percentage test (the “ADP”

test) applies to elective deferrals under a section 401(k) plan.51 The ADP test generally 

compares the average rate of deferral for highly compensated employees to the average rate of 

deferral for nonhighly compensated employees and requires that the average deferral rate for 

highly compensated employees not exceed the average rate for nonhighly compensated 

employees by more than certain specified amounts. If a plan fails to satisfy the ADP test for a 

plan year based on the deferral elections of highly compensated employees, the plan is permitted 

to distribute deferrals to highly compensated employees (“excess deferrals”) in a sufficient 

amount to correct the failure. The distribution of the excess deferrals must be made by the close 

of the following plan year.52

The ADP test is deemed to be satisfied if a section 401(k) plan includes certain minimum 

matching or nonelective contributions under either of two plan designs (“401(k) safe harbor 

plan”), described below, as well as certain required rights and features and satisfies a notice

requirement.53

Safe harbor contributions 

Under one type of 401(k) safe harbor plan (“basic 401(k) safe harbor plan”), the plan 

either (1) satisfies a matching contribution requirement (“matching contribution basic 401(k) 

safe harbor plan”) or (2) provides for a nonelective contribution to a defined contribution plan of 

at least three percent of an employee’s compensation on behalf of each nonhighly compensated 

employee who is eligible to participate in the plan (“nonelective basic 401(k) safe harbor plan”). 

The matching contribution requirement under the matching contribution basic 401(k) safe harbor 

requires a matching contribution equal to at least 100 percent of elective contributions of the 

employee for contributions not in excess of three percent of compensation, and 50 percent of 

elective contributions for contributions that exceed three percent of compensation but do not 

exceed five percent, for a total matching contribution of up to four percent of compensation. 

The required matching contributions and the three percent nonelective contribution under the 

basic 401(k) safe harbor must be immediately nonforfeitable (that is, 100 percent vested) when 

made. 

 51 Sec. 401(k)(3). 

52 Sec. 401(k)(8).

53 Secs. 401(k)(12) and (13). If certain additional requirements are met, matching contributions under 

401(k) safe harbor plan may also satisfy a nondiscrimination test applicable under section 401(m).
16

Another safe harbor applies for a section 401(k) plan that include automatic enrollment 

(“automatic enrollment 401(k) safe harbor”). Under an automatic enrollment 401(k) safe harbor, 

unless an employee elects otherwise, the employee is treated as electing to make elective 

deferrals equal to a percentage of compensation as stated in the plan, not in excess of 10 percent 

and at least (1) three percent of compensation for the first year the deemed election applies to the 

participant, (2) four percent during the second year, (3) five percent during the third year, and 

(4) six percent during the fourth year and thereafter.54 Under the automatic enrollment 401(k) 

safe harbor, the matching contribution requirement is 100 percent of elective contributions of the 

employee for contributions not in excess of one percent of compensation, and 50 percent of 

elective contributions for contributions that exceed one percent of compensation but do not 

exceed six percent, for a total matching contribution of up to 3.5 percent of compensation 

(“matching contribution automatic enrollment 401(k) safe harbor”). The rate of nonelective 

contribution under the automatic enrollment 401(k) safe harbor plan is three percent, as under the 

basic 401(k) safe harbor (“nonelective contribution automatic enrollment 401(k) safe harbor”). 

However, under the automatic enrollment 401(k) safe harbors, the matching and nonelective 

contributions are required to become 100 percent vested only after two years of service (rather 

than being required to be immediately vested when made). 

Safe harbor notice

The notice requirement for a 401(k) safe harbor plan is satisfied if each employee eligible 

to participate is given, within a reasonable period before any year, written notice of the 

employee’s rights and obligations under the arrangement and the notice meets certain content 

and timing requirements (“safe harbor notice”). To meet the content requirements, a safe harbor 

notice must be sufficiently accurate and comprehensive to inform an employee of the employee’s 

rights and obligations under the plan, and be written in a manner calculated to be understood by 

the average employee eligible to participate in the plan. A safe harbor notice must provide 

certain information, including the plan’s safe harbor contributions, any other plan contributions, 

the type and amount of compensation that may be deferred under the plan, how to make cash or 

deferred elections, the plan’s withdrawal and vesting provisions, and specified contact 

information. In addition, a safe harbor notice for an automatic enrollment 401(k) safe harbor 

must describe certain additional information items, including the deemed deferral elections under 

the plan if the employee does not make an affirmative election and how contributions will be 

invested. 

Delay in adopting nonelective 401(k) safe harbor

Generally the plan provisions for the requirements that must be satisfied to be a 401(k) 

safe harbor plan must be adopted before the first day of the plan year and remain in effect for an 

entire 12-month plan year. However, in the case of a nonelective 401(k) safe harbor plan (but 

not the matching contribution 401(k) safe harbor), a plan may be amended after the first day of 

the plan year but no later than 30 days before the end of the plan year to adopt the safe harbor 

plan provisions including providing the 3 percent of compensation nonelective contribution. The 

 54 These automatic increases in default contribution rates are required for plans using the safe harbor. Rev. 

Rul. 2009–30, 2009-39 I.R.B. 391, provides guidance for including automatic increases in other plans using 

automatic enrollment, including under a plan that includes an eligible automatic contribution arrangement.
17

plan must also provide a contingent and follow-up notice. The contingent notice must be 

provided before the beginning of the plan year and specify that the plan may be amended to 

include the safe harbor nonelective contribution and, if it is so amended, a follow-up notice will 

be provided. If the plan is amended, the follow-up notice must be provided no later than 30 days 

before the end of the plan year stating that the safe harbor nonelective contribution will be 

provided.

Description of Proposal

In general

The proposal makes certain changes to the rules for the nonelective contribution 401(k) 

safe harbor. 

Elimination of notice requirement

The proposal eliminates the safe harbor notice requirement with respect to nonelective 

401(k) safe harbor plans. However, the general rule under present law requiring a section 401(k) 

plan to provide each eligible employee with an effective opportunity to make or change an 

election to make elective deferrals at least once each plan year still applies. As described above, 

relevant factors used in determining if this requirement is satisfied include the adequacy of notice 

of the availability of the election and the period of time during which an election may be made.

Delay in adopting provisions for nonelective 401(k) safe harbor

Under the proposal, unless a plan provided at any time during the plan year that 401(k) 

safe harbor matching contributions applied to the plan year, a plan can be amended to become a 

nonelective 401(k) safe harbor plan for a plan year (that is, amended to provide the required 

nonelective contributions and thereby satisfy the safe harbor requirements) at any time before the 

30th day before the close of the plan year. 

Further, unless a plan provided at any time during the plan year that 401(k) safe harbor 

matching contributions applied to the plan year, the proposal allows a plan to be amended after 

the 30th day before the close of the plan year to become a nonelective contribution 401(k) safe 

harbor plan for the plan year if (1) the plan is amended to provide for a nonelective contribution 

of at least four percent of compensation (rather than at least three percent) for all eligible 

employees for that plan year and (2) the plan is amended no later than the last day for 

distributing excess contributions for the plan year, that is, by the close of following plan year. 

Effective Date

The proposal applies to plan years beginning after December 31, 2018.
18

C. Certain Taxable Non-Tuition Fellowship and Stipend Payments

Treated as Compensation For IRA Purposes

Present Law

There are two general types of IRAs: traditional IRAs and Roth IRAs.55 The total 

amount that an individual may contribute to one or more IRAs for a year is generally limited to 

the lesser of: (1) a dollar amount ($5,500 for 2018); and (2) the amount of the individual’s 

compensation that is includible in gross income for the year. 56 In the case of an individual who 

has attained age 50 by the end of the year, the dollar amount is increased by $1,000. For a 

married couple, contributions can be made up to the dollar limit for each spouse if the combined 

compensation of the spouses that is includible in gross income is at least equal to the contributed 

amount. 

An individual may make contributions to a traditional IRA (up to the contribution limit) 

without regard to his or her adjusted gross income. An individual may deduct his or her 

contributions to a traditional IRA if neither the individual nor the individual’s spouse is an active 

participant in an employer-sponsored retirement plan. If an individual or the individual’s spouse 

is an active participant in an employer-sponsored retirement plan, the deduction is phased out for 

taxpayers with adjusted gross income over certain levels.57

Individuals with adjusted gross income below certain levels may make contributions to a 

Roth IRA (up to the contribution limit).58 Contributions to a Roth IRA are not deductible. As 

described above, an individual’s IRA contributions cannot exceed the amount of his or her 

compensation that is includible in gross income. Subject to the rule for spouses, described 

above, an individual who has no compensation income generally is not eligible to make IRA

contributions, even if the individual has other income that is includible in gross income.59

Description of Proposal

Under the proposal, an amount that is included in gross income and paid to an individual 

to aid the individual in the pursuit of graduate or postdoctoral study or research is treated as 

compensation taken into account for IRA contribution purposes.

 55 Secs. 408 and 408A.

56 Sec. 219(b)(1)(A) and (5), as referenced in secs. 408(a)(1) and (b)(2)(B) and 408A(c)(2). Under 

section 4973, IRA contributions in excess of the applicable limit are generally subject to an excise tax of six percent 

per year until withdrawn.

57 Sec. 219(g).

58 Sec. 408A(c)(3).

59 Under a special rule in section 219(f)(1), alimony that is includible in gross income under section 71 is 

treated as compensation for IRA contribution purposes.
19

Effective Date

This proposal is effective for taxable years beginning after December 31, 2018.
20

D. Repeal of Maximum Age for Traditional IRA Contributions

Present Law

Under present law, an individual may make deductible contributions to a traditional IRA 

up to the IRA contribution limit if neither the individual nor the individual’s spouse is an active 

participant in an employer-sponsored retirement plan.60 If an individual (or the individual’s 

spouse) is an active participant in an employer-sponsored retirement plan, the deduction is 

phased out for taxpayers with adjusted gross income (“AGI”) for the taxable year over certain 

indexed levels.61 To the extent an individual cannot or does not make deductible contributions to 

a traditional IRA, the individual may make nondeductible contributions to a traditional IRA 

(without regard to AGI limits). Alternatively, subject to AGI limits, an individual may make 

nondeductible contributions to a Roth IRA.62

An individual who has attained age 701⁄2 by the close of a year is not permitted to make 

contributions to a traditional IRA.63 This restriction does not apply to contributions to a Roth 

IRA.64 In addition, employees over age 701⁄2 are not precluded from contributing to 

employer-sponsored plans.

Description of Proposal

The proposal repeals the prohibition on contributions to a traditional IRA by an 

individual who has attained age 701⁄2. 

Effective Date

The proposal applies to contributions made for taxable years beginning after 

December 31, 2018.

 60 Sec. 219.

61 Sec. 219(g).

62 Sec. 408(o). The annual contribution limit for IRAs is coordinated so that the maximum amount that 

can be contributed to all of an individual’s IRAs (both traditional and Roth) for a taxable year is the lesser of a 

certain dollar amount ($5,500 for 2018) or the individual’s compensation. 

63 Sec. 219(d)(1).

64 Sec. 408A(c)(4).
21

E. Qualified Employer Plans Prohibited From Making Loans

Through Credit Cards and Other Similar Arrangements

Present Law

Qualified employer-sponsored retirement plans may provide loans to participants. Unless 

the loan satisfies certain requirements in both form and operation, the amount of a retirement 

plan loan is a deemed distribution from the retirement plan.65 These requirements include the 

following: the amount of the loan must not exceed the lesser of 50 percent of the participant’s 

account balance or $50,000 (generally taking into account outstanding balances of previous 

loans); the terms of the loan must provide for a repayment period of not more than five years66

and provide for level amortization of loan payments (with payments not less frequently than 

quarterly); and the terms of the loan must be legally enforceable. Subject to the limit on the 

amount of loans, which precludes any additional loan that would cause the limit to be exceeded, 

the rules relating to loans do not limit the number of loans an employee may obtain from a plan. 

Some arrangements have developed under which an employee can access plan loans through the 

use of a credit card or similar mechanism.

Description of Proposal

Under the proposal, a plan loan that is made through the use of a credit card or similar 

arrangement does not meet the requirements for loan treatment and is therefore a deemed 

distribution. 

Effective Date

The proposal applies to loans made after the date of enactment.

 65 Sec. 72(p). Pub. L. No. 115-97 extends the period during which a qualified plan loan offset amount may 

be contributed to an eligible retirement plan as a rollover contribution from 60 days after the date of the offset to the 

due date (including extensions) for filing the Federal income tax return for the taxable year in which the plan loan 

offset occurs (that is, the taxable year in which the amount is treated as distributed from the plan). A qualified plan 

loan offset amount is a plan loan offset amount that is treated as distributed from a qualified retirement plan, a 

section 403(b) plan, or a governmental section 457(b) plan solely by reason of the termination of the plan or the 

failure to meet the repayment terms of the loan because of the employee’s severance from employment. A loan 

offset amount is the amount by which an employee’s account balance under the plan is reduced to repay a loan from 

the plan.

66 Loans specifically for home purchases may be repaid over a longer period.
22

F. Portability of Lifetime Income Investments

Present Law

Distribution restrictions for accounts under employer-sponsored plans

Types of plans and contributions

Tax-favored employer-sponsored retirement plans under which individual accounts are 

maintained for employees include qualified defined contribution plans, tax-deferred annuity 

plans (referred to as “section 403(b)” plans), and eligible deferred compensation plans of State 

and local government employers (referred to as “governmental section 457(b)” plans).67

Contributions to a qualified defined contribution plan or section 403(b) plan may include 

some or all of the following types of contributions:

• pretax elective deferrals (that is, pretax contributions made at the election of an 

employee in lieu of receiving cash compensation),

• after-tax designated Roth contributions (that is, elective deferrals made on an after-tax 

basis to a Roth account under the plan),

• after-tax employee contributions (other than designated Roth contributions), 

• pretax employer matching contributions (that is, employer contributions made as a 

result of an employee’s elective deferrals, designated Roth contributions, or after-tax 

contributions), and

• pretax employer nonelective contributions (that is, employer contributions made 

without regard to whether an employee makes elective deferrals, designated Roth 

contributions, or after-tax contributions).

Contributions to a governmental section 457(b) plan generally consist of pretax elective

deferrals and, if provided for under the plan, designated Roth contributions.

Restrictions on in-service distributions

The terms of an employer-sponsored retirement plan generally determine when 

distributions are permitted. However, in some cases, statutory restrictions on distributions may 

apply.

Elective deferrals under a qualified defined contribution plan are subject to statutory 

restrictions on distribution before severance from employment, referred to as “in-service”

 67 Secs. 401(a), 403(a), 403(b), 457(b) and (e)(1)(A). 
23

distributions.68 In-service distributions of elective deferrals (and related earnings) generally are 

permitted only after attainment of age 591⁄2 or termination of the plan. In-service distributions of 

elective deferrals (but not related earnings) are also permitted in the case of hardship.69

Other distribution restrictions may apply to contributions under certain types of qualified 

defined contribution plans. A profit-sharing plan generally may allow an in-service distribution 

of an amount contributed to the plan only after a fixed number of years (not less than two).70 A 

money purchase pension plan generally may not allow an in-service distribution before 

attainment of age 62 (or attainment of normal retirement age under the plan if earlier) or 

termination of the plan.71

Elective deferrals under a section 403(b) plan are subject to in-service distribution 

restrictions similar to those applicable to elective deferrals under a qualified defined contribution 

plan, and, in some cases, other contributions to a section 403(b) plan are subject to similar 

restrictions.72 Deferrals under a governmental section 457(b) plan are subject to in-service 

distribution restrictions similar to those applicable to elective deferrals under a qualified defined 

contribution plan, except that in-service distributions under a governmental section 457(b) plan 

apply until age 701⁄2 (rather than age 591⁄2).73

Distributions and rollovers

A distribution from an employer-sponsored retirement plan is generally includible in 

income except for any portion attributable to after-tax contributions, which result in basis.74 

Unless an exception applies, in the case of a distribution before age 591⁄2 from a qualified 

 68 Sec. 401(k)(2)(B). Similar restrictions apply to certain other contributions, such as employer matching 

or nonelective contributions required under the nondiscrimination safe harbors under section 401(k).

69 The Bipartisan Budget Act of 2018, Pub. L. No. 115-123 (“BBA”), amends certain hardship distribution 

rules applicable to 401(k) plans, effective for plan years beginning after December 31, 2018. One such amendment 

under BBA section 41114 permits earnings on elective deferrals under a section 401(k) plan, as well as qualified 

nonelective contributions and qualified matching contributions (and attributable earnings), to be distributed on 

account of hardship. 

70 Rev. Rul. 71-295, 1971-2 C.B. 184, and Treas. Reg. sec. 1.401-1(b)(1)(ii). Similar rules apply to a stock 

bonus plan. Treas. Reg. sec. 1.401-1(b)(1)(iii).

71 Sec. 401(a)(36) and Treas. Reg. secs. 1.401-1(b)(1)(i) and 1.401(a)-1(b).

72 Secs. 403(b)(7)(A)(ii) and 403(b)(11).

73 Sec. 457(d)(1)(A).

74 Secs. 402(a), 403(b)(1) and 457(a)(1). Under section 402A(d), a qualified distribution from a designated 

Roth account under an employer-sponsored plan is not includible in income.
24

retirement plan or a section 403(b) plan, any amount included in income is subject to an 

additional 10-percent tax, referred to as the “early withdrawal” tax.75

A distribution from an employer-sponsored retirement plan generally may be rolled over 

on a nontaxable basis to another such plan or to an individual retirement arrangement (“IRA”), 

either by a direct transfer to the recipient plan or IRA or by contributing the distribution to the 

recipient plan or IRA within 60 days of receiving the distribution.76 If the distribution from an 

employer-sponsored retirement plan consists of property, the rollover is accomplished by a 

transfer or contribution of the property to the recipient plan or IRA.

Investment of accounts under employer-sponsored plans

Qualified defined contribution plans, section 403(b) plans, and governmental 

section 457(b) plans commonly allow employees to direct the manner in which their accounts are 

invested. Employees may be given a choice among specified lifetime investments, such as a 

choice of specified mutual funds, and, in some cases, may be able to direct the investment of 

their accounts in any product, instrument or investment offered in the market.

The investment options under a particular employer-sponsored retirement plan may 

change at times.77 Similarly, a plan that allows employees to direct the investment of their 

accounts in any product, instrument or investment offered in the market may be amended to limit 

the investments that can be held in the plan. In these cases, employees may be required to 

change the investments held within their accounts. 

The terms of some investments impose a charge or fee when the investment is liquidated, 

particularly if the investment is liquidated within a particular period after acquisition. For 

example, a lifetime income product, such as an annuity contract, may impose a surrender charge 

if the investment is discontinued. 

If an employee has to liquidate an investment held in an employer-sponsored retirement 

plan because of a change in investment options or a limit on investments held in the plan, the 

employee may be subject to a charge or fee as described above. In addition, restrictions on 

in-service distributions may prevent the employee from preserving the investment through a 

rollover.

 75 Sec. 72(t).

76 Secs. 402(c), 402A(c)(3), 403(b)(8) and 457(e)(16). 

77 In the case of a plan subject to ERISA, a participant’s exercise of control over the investment of the 

assets in his or her account by choosing among the investment options offered under the plan does not relieve a plan 

fiduciary from the duty to prudently select and monitor the investment options offered to participants. 29 C.F.R. 

sec. 2550.404c-1(d)(2)(iv) (2010); Tibble v. Edison International, No. 13-550, 135 S. Ct. 1823 (2015). The duty to 

monitor investment options may result in a change in the options offered.
25

Description of Proposal

Under the proposal, if a lifetime income investment is no longer authorized to be held as 

an investment option under a qualified defined contribution plan, section 403(b) plan, or 

governmental section 457(b) plan, except as otherwise provided in guidance, the plan does not 

fail to satisfy the Code requirements applicable to the plan solely by reason of allowing 

(1) qualified distributions of a lifetime income investment, or (2) distributions of a lifetime 

income investment in the form of a qualified plan distribution annuity contract. Such a 

distribution must be made within the 90-day period ending on the date when the lifetime income 

investment is no longer authorized to be held as an investment option under the plan.

For purposes of the proposal, a qualified distribution is a direct trustee-to-trustee transfer 

to another employer-sponsored retirement plan or IRA.78 A lifetime income investment is an 

investment option designed to provide an employee with election rights (1) that are not 

uniformly available with respect to other investment options under the plan and (2) that are rights 

to a lifetime income feature available through a contract or other arrangement offered under the 

plan (or under another employer-sponsored retirement plan or IRA through a direct trustee-totrustee transfer). A lifetime income feature is (1) a feature that guarantees a minimum level of 

income annually (or more frequently) for at least the remainder of the life of the employee or the 

joint lives of the employee and the employee’s designated beneficiary, or (2) an annuity payable 

on behalf of the employee under which payments are made in substantially equal periodic 

payments (not less frequently than annually) over the life of the employee or the joint lives of the 

employee and the employee’s designated beneficiary. Finally, a qualified plan distribution 

annuity contract is an annuity contract purchased for a participant and distributed to the 

participant by an employer-sponsored retirement plan or an employer-sponsored retirement plan 

contract.79

Effective Date

The proposal applies to plan years beginning after December 31, 2018.

 78 For this purpose, an employer-sponsored retirement plan or IRA means such a plan or IRA that is an 

eligible retirement plan under section 402(c)(8)(B).

79 For this purpose, an employer-sponsored retirement plan contract is an annuity contract distributed from 

an eligible retirement plan described in section 402(c)(8)(B) other than an IRA or individual retirement annuity.
26

G. Treatment of Custodial Accounts on Termination of Section 403(b) Plans

Present Law

Tax-sheltered annuities (section 403(b) plans)

Section 403(b) plans are a form of tax-favored employer-sponsored plan that provide tax 

benefits similar to qualified retirement plans. Section 403(b) plans may be maintained only by 

(1) charitable tax-exempt organizations, and (2) educational institutions of State or local 

governments (that is, public schools, including colleges and universities). Many of the rules that 

apply to section 403(b) plans are similar to the rules applicable to qualified retirement plans, 

including section 401(k) plans. Employers may make nonelective or matching contributions to 

such plans on behalf of their employees, and the plan may provide for employees to make pretax elective deferrals, designated Roth contributions (held in designated Roth accounts)80 or 

other after-tax contributions. Generally section 403(b) plans provide for contributions toward 

the purchase of annuity contracts or provide for contributions to be held in custodial accounts for 

each employee. In the case of contributions to custodial accounts under a section 403(b) plan, 

the amounts must be invested only in regulated investment company stock.81 Contributions to a 

custodial account are not permitted to be distributed before the employee dies, attains age 591⁄2, 

has a severance from employment, or, in the case of elective deferrals, encounters financial 

hardship. 

A section 403(b) plan is permitted to contain provision for plan termination and that 

allow accumulated benefits to be distributed on termination.82 In order for a plan termination to 

be effectuated, however, all plan assets must be distributed to participants.

Rollovers

A distribution from a section 403(b) plan that is an eligible rollover distribution may be 

rolled over to an eligible retirement plan (which include another 403(b) plan, a qualified 

retirement plan, and an IRA).83 The rollover generally can be achieved by direct rollover (direct 

payment from the distributing plan to the recipient plan) or by contributing the distribution to the 

eligible retirement plan within 60 days of receiving the distribution (“60-day rollover”).84 

 80 Sec. 402A.

81 Sec. 403(b)(7).

82 Treas. Reg. sec. 1.403(b)-10(a).

83 Sec. 403(b)(8). Similar rules apply to distributions from qualified retirement plans and governmental 

section 457(b) plans. 

84 Under section 402(c)(11), any distribution to a beneficiary other than the participant’s surviving spouse 

is only permitted to be rolled over to an IRA using a direct rollover; 60-day rollovers are not available to nonspouse 

beneficiaries.
27

Amounts that are rolled over are usually not included in gross income. Generally, a 

distribution of any portion of the balance to the credit of a participant is an eligible rollover 

distribution with exceptions, for example, certain periodic payments, required minimum 

distributions, and hardship distributions.85 

Roth conversions

Distributions from section 403(b) plans may be rolled into a Roth IRA.86 Distributions 

from these plans that are rolled over into a Roth IRA and that are not distributions from a 

designated Roth account must be included in gross income. Further, a section 403(b) plan that 

allows employees to make designated Roth contributions may also allow employees to elect to 

transfer amounts held in accounts that are not designated Roth accounts into designated Roth 

accounts, but the amount transferred must be included in income as though it were distributed.87

Approved nonbank trustees required for IRAs

An IRA can be a trust, a custodial account, or an annuity contract. The Code requires 

that the trustee or custodian of an IRA be a bank (which is generally subject to Federal or State 

supervision) or an IRS approved nonbank trustee, that an annuity contract be issued by an 

insurance company (which is subject to State supervision), and that an IRA trust or custodial 

account be created and organized in the United States. 

In order for a trustee or custodian that is not a bank to be an IRA trustee or custodian, the 

entity must apply to the IRS for approval. Treasury Regulations list a number of factors that are 

taken into account in approving an applicant to be a nonbank trustee.88 The applicant must 

demonstrate fiduciary ability (ability to act within accepted rules of fiduciary conduct including 

continuity and diversity of ownership), capacity to account (experience and competence with 

other activities normally associated with handling of retirement funds), and ability to satisfy 

other rules of fiduciary conduct which includes a net worth requirement. Because it is an 

objective requirement that may be difficult for some applicants to satisfy, the net worth 

requirement is the most significant of the requirements for nonbank trustees. 

To be approved, the entity must have a net worth of at least $250,000 at the time of the 

application. There is a maintenance rule that varies depending on whether the trustee is an active 

trustee or a passive trustee and that includes minimum dollar amounts and minimum amounts as 

 85 Sec. 402(c)(4). Treas. Reg. sec. 1.402(c)-1 identifies certain other payments that are not eligible for 

rollover, including, for example, certain corrective distributions, loans that are treated as deemed distributions under 

section 72(p), and dividends on employer securities as described in section 404(k). 

86 Sec. 408A(d)(3). Similar rules apply to qualified retirement plans and governmental section 457(b) 

plans.

87 Sec. 402A(d)(4). Similar rules apply to qualified retirement plans and governmental section 457(b) 

plans. 

88 Treas. Reg. sec. 1.408-2(e).
28

a percentage of assets held in fiduciary accounts. A special rule is provided for nonbank trustees 

that are members of the Security Investor Protection Corporation (“SIPC”).

Description of Proposal

Under the proposal, if an employer terminates a section 403(b) plan under which amounts 

are contributed to custodial accounts, and the person holding the assets of the accounts is an IRS 

approved nonbank trustee, then, as of the date of the termination, the custodial accounts are 

deemed to be IRAs. Only a custodial account under a section 403(b) plan that is a designated 

Roth account is treated as a Roth IRA upon termination of the section 403(b) plan. 

Effective Date

The proposal applies to plan terminations occurring after December 31, 2018.
29

H. Clarification of Retirement Income Account Rules Relating to

Church-Controlled Organizations

Present Law

Assets of a tax-sheltered annuity plan (“section 403(b)” plan), generally must be invested 

in annuity contracts or mutual funds.89 However, the restrictions on investments do not apply to 

a retirement income account, which is a defined contribution program established or maintained 

by a church, or a convention or association of churches, to provide benefits under the plan to 

employees of a religious, charitable or similar tax-exempt organization.90

Certain rules prohibiting discrimination in favor of highly compensated employees, 

which apply to section 403(b) plans generally, do not apply to a plan maintained by a church or 

qualified church-controlled organization.91 For this purpose, church means a church, a 

convention or association of churches, or an elementary or secondary school that is controlled, 

operated, or principally supported by a church or by a convention or association of churches, and 

includes a qualified church-controlled organization. A qualified church-controlled organization 

is any church-controlled tax-exempt organization other than an organization that (1) offers 

goods, services, or facilities for sale, other than on an incidental basis, to the general public, 

other than goods, services, or facilities that are sold at a nominal charge substantially less than 

the cost of providing the goods, services, or facilities, and (2) normally receives more than 25 

percent of its support from either governmental sources, or receipts from admissions, sales of 

merchandise, performance of services, or furnishing of facilities, in activities that are not 

unrelated trades or businesses, or from both. Church-controlled organizations that are not 

qualified church-controlled organizations are generally referred to as “nonqualified churchcontrolled organizations.”

In recent years, a question has arisen as to whether employees of nonqualified churchcontrolled organizations may be covered under a section 403(b) plan that consists of a retirement 

income account.

Description of Proposal

The proposal clarifies that a retirement income account may cover a duly ordained, 

commissioned, or licensed minister of a church in the exercise of his ministry, regardless of the 

source of his compensation; an employee of an organization, whether a civil law corporation or 

 89 Sec. 403(b)(1)(A) and (7).

90 Sec. 403(b)(9)(B), referring to organizations exempt from tax under section 501(c)(3). For this purpose, 

a church or a convention or association of churches includes an organization described in section 414(e)(3)(A), that 

is, an organization, the principal purpose or function of which is the administration or funding of a plan or program 

for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or 

association of churches, provided that the organization is controlled by or associated with a church or a convention 

or association of churches.

91 Sec. 403(b)(1)(D) and (12).
30

otherwise, that is exempt from tax under section 501 and is controlled by or associated with a 

church or a convention or association of churches; and an employee who is included in a church 

plan under certain circumstances after separation from the service of a church, a convention or 

association of churches, or an organization described above.92

Effective Date

The proposal applies to plan years beginning after December 31, 2008.

 92 These individuals are described in sections 414(e)(3)(B) and (E).
31

I. Exemption from Required Minimum Distribution Rules for Individuals

with Certain Account Balances

Present law

Required minimum distributions

Employer-provided qualified retirement plans, traditional IRAs, and individual retirement 

annuities are subject to required minimum distribution rules. A qualified retirement plan for this 

purpose means a tax-qualified plan described in section 401(a) (such as a defined benefit pension 

plan or a section 401(k) plan), employee retirement annuities described in section 403(a), taxsheltered annuities described in section 403(b), and a plan described in section 457(b) that is 

maintained by a governmental employer.93 An employer-provided qualified retirement plan that 

is a defined contribution plan is a plan which provides (1) an individual account for each 

participant and (2) for benefits based on the amount contributed to the participant’s account, and 

any income, expenses, gains, losses, and forfeitures of accounts of other participants which may 

be allocated to such participant’s account.94

Required minimum distributions generally must begin by April 1 of the calendar year 

following the calendar year in which the individual (employee or IRA owner) reaches age 701⁄2. 

However, in the case of an employer-provided qualified retirement plan, the required minimum 

distribution date for an individual who is not a 5-percent owner of the employer maintaining the 

plan may be delayed to April 1 of the year following the year in which the individual retires if 

the plan provides for this later distribution date. For all subsequent years, including the year in 

which the individual was paid the first required minimum distribution by April 1, the individual 

must take the required minimum distribution by December 31 of the year.

For IRAs and defined contributions plans, the required minimum distribution for each 

year generally is determined by dividing the account balance as of the end of the prior year by a 

distribution period,95 generally a number in the uniform lifetime table.96 This table is based on 

joint life expectancies of the individual and a hypothetical beneficiary 10 years younger than the 

individual. For an individual with a spouse as designated beneficiary who is more than 10 years 

younger (and thus the number of years in the couple’s joint life expectancy is greater than the 

uniform life time table), the joint life expectancy of the couple is used. There are special rules in 

the case of annuity payments from an insurance contract.

If an individual dies on or after the individual’s required beginning date, the required 

minimum distribution is also determined by dividing the account balance as of the end of the 

 93 The required minimum distribution rules also apply to section 457(b) plans maintained by tax-exempt 

employers other than governmental employers.

94 Sec. 414(i).

95 Treas. Reg. sec. 1.401(a)(9)-5.

96 Treas. Reg. sec. 1.401(a)(9)-9.
32

prior year by a distribution period. The distribution period is equal to the remaining years of the 

beneficiary’s life expectancy or, if there is no designated beneficiary, a distribution period equal 

to the remaining years of the deceased individual’s single life expectancy, using the age of the 

deceased individual in the year of death.97

In the case of an individual who dies before the individual’s required beginning date, 

there are two methods for satisfying the after death required minimum distribution rules, the life 

expectancy rule or the five year rule. Under the life expectancy rule, annual required minimum 

distributions must begin no later than December 31 of the calendar year immediately following 

the calendar year in which the individual died. This rule is only available if the designated 

beneficiary is an individual (e.g., not the individual’s estate or a charity). If the designated 

beneficiary is the individual’s spouse, commencement of distributions can be delayed until 

December 31 of the calendar year in which the deceased individual would have attained age 

701⁄2. The required minimum distribution for each year is also determined by dividing the 

account balance as of the end of the prior year by a distribution period, which is determined by 

reference to the beneficiary’s life expectancy.98 Under the five-year rule, the individual’s entire 

account must be distributed no later than December 31 of the calendar year containing the fifth 

anniversary of the individual’s death.99

A special after-death rule applies for an IRA if the beneficiary of the IRA is the surviving 

spouse. The surviving spouse is permitted to choose to calculate required minimum distributions 

while the spouse is alive, and after the spouse’s death, as though the spouse is the IRA owner, 

rather than a beneficiary. 

Roth IRAs are not subject to the minimum distribution rules during the IRA owner’s 

lifetime. However, Roth IRAs are subject to the post-death minimum distribution rules that 

apply to traditional IRAs. For Roth IRAs, the IRA owner is treated as having died before the 

individual’s required beginning date. Thus only the life expectancy rule and the five year rule 

apply.

Failure to make a required minimum distribution triggers a 50-percent excise tax, payable 

by the individual or the individual’s beneficiary. The tax is imposed during the taxable year that 

begins with or within the calendar year during which the distribution was required.100 The tax 

may be waived if the distribution did not occur because of reasonable error and reasonable steps 

are taken to remedy the violation.101 

 97 Treas. Reg. sec. 1.401(a)(9)-5, A-5(a).

98 Treas. Reg. sec. 1.401(a)(9)-5, A-5(b).

99 Treas. Reg. sec. 1.401(a)(9)-3, Q&As 1, 2.

100 Sec. 4974(a).

101 Sec. 4974(d).
33

Eligible rollover distributions

With certain exceptions, distributions from an employer-provided qualified retirement 

plan are eligible to be rolled over tax free into another employer-provided qualified retirement 

plan or an IRA. This can be achieved by contributing the amount of the distribution to the other 

plan or IRA within 60 days of the distribution, or by a direct payment by the plan to the other 

plan or IRA (referred to as a “direct rollover”). Distributions that are not eligible for rollover 

include (i) any distribution that is one of a series of periodic payments generally for a period of 

10 years or more (or, if a shorter period, certain life expectancies) and (ii) any distribution to the 

extent that the distribution is a required minimum distribution.102

For any distribution that is eligible for rollover, an employer-provided tax-qualified 

retirement plan must offer the distributee the right to have the distribution made in a direct 

rollover103 and, before making the distribution, the plan administrator must provide the 

distributee with a written explanation of the direct rollover right and related tax consequences.104 

If a distributee does not choose to have the distribution made in a direct rollover, the distribution 

is generally subject to mandatory 20-percent income tax withholding.105

Description of Proposal

Under the proposal, if on the last day of any calendar year, the aggregate value of an 

individual’s entire interest under all applicable eligible retirement plans does not exceed an 

applicable dollar limit in effect for that year, then the required minimum distribution 

requirements with respect to a distribution relating to such year shall not apply to that individual. 

The applicable dollar limit is $50,000 and is subject to indexing; if the dollar amount after any 

increase is not a multiple of $5,000, it is rounded to the next lowest multiple of $5,000. For this 

purpose, an applicable eligible retirement plan means a tax-qualified plan described in section 

401(a) (other than a defined benefit plan), IRAs and individual retirement annuities under section 

408, employee retirement annuities described in section 403(a), tax-sheltered annuities described 

in section 403(b), and a plan described in section 457(b) that is maintained by a governmental 

employer. 

If the aggregate value of an individual’s entire interest under all applicable eligible 

retirement plans does exceed the applicable dollar limit, the amount to be distributed as a 

required minimum distribution for that individual will not exceed an amount equal to the excess 

of the aggregate value of that individual’s entire interest under such plans on the last day of the 

 102 Sec. 402(c)(4). Distributions that are not eligible rollover distributions also include distributions made 

upon hardship of the employee and any qualified disaster relief distribution (within the meaning of section 

72(t)(2)(G)). 

103 Sec. 401(a)(31)

104 Sec. 402(f).

105 Sec. 3405(c). This mandatory withholding does not apply to a distributee that is a beneficiary other 

than a surviving spouse of an employee.
34

calendar year to which such distribution relates, over the applicable dollar limit in effect for that 

calendar year.

The proposal provides that in the case of an employer plan which is an applicable eligible 

retirement plan, the plan will not be treated as failing to meet these requirements in the case of 

any failure to make a required minimum distribution for a calendar year if the aggregate value of 

an employee’s interest under all such plans of the employer on the last day of the preceding 

calendar year does not exceed the applicable dollar limit in effect for that year, and the employee 

certifies that the aggregate value of the employee’s interest under all applicable retirement plans 

on the last day of such preceding calendar year held by the employee did not exceed the 

applicable dollar limit in effect for that year.

In addition, the proposal provides that not later than January 31 of each year, the plan 

administrator (or as applicable, the trustee of an IRA or the issuer of an individual retirement 

annuity) of each applicable eligible retirement plan will report to the Secretary and to each 

participant in each plan (or as applicable, each individual owner of an account or annuity) who 

has attained age 69 as of the end of the preceding calendar year (1) the name and plan number of 

the plan, account or annuity; (2) the name and address of the plan administrator, trustee, or 

issuer; (3) the name, address and taxpayer identification number of the participant or individual; 

and (4) the account balance of the participant or individual as of the end of the preceding 

calendar year.

Effective Date

The proposal is effective for distributions required to be made after the first calendar year 

beginning at least 120 days after the date of enactment. 
35

J. Clarification of Treatment of Certain Retirement Plan Contributions Picked Up

by Governmental Employers For New or Existing Employees

Present Law

Taxation of contributions to qualified retirement plans

Contributions to qualified retirement plans generally fall into three categories: employer 

contributions, employee contributions, and elective deferrals. Generally, the type or types of 

contributions made to a plan is determined by the terms of the plan.

Employer contributions to a qualified retirement plan are not includible in an employee’s 

income at the time of contribution and are not wages for purposes of tax under the Federal

Insurance Contributions Act (“FICA”).106

An amount contributed to a qualified retirement plan at the election of an employee is 

generally treated as an employee after-tax contribution and thus is includible in income.

Employee contributions are also generally wages for FICA tax purposes.

A qualified defined contribution plan may include a section 401(k) plan, under which 

employees may choose to make elective deferrals rather than receive the same amount as current 

compensation.107 Elective deferrals are subject to certain rules. For example, elective deferrals 

must be fully vested and may not exceed an annual limit ($18,500 for 2018).108 Elective deferrals 

are not includible in income at the time of contribution; however, they are wages for FICA tax 

purposes.

A distribution of benefits from a qualified retirement plan generally is includible in gross 

income in the year it is paid or distributed, except to the extent the amount distributed represents 

a return of the employee’s after-tax contributions (i.e., basis).

 106 Secs. 3101-3128. FICA tax consists of two parts: (1) old age, survivor, and disability insurance 

(“OASDI”) and (2) Medicare hospital insurance (“HI”). The OASDI tax rate is 6.2 percent for each the employee 

and employer (for a total rate of 12.4 percent). The OASDI tax rate applies to employee wages up to the OASDI 

wage base ($128,400 for calendar year 2018). The HI tax rate is 1.45 percent on each the employee and the 

employer (for a total rate of 2.9 percent) and applies to all wages. The employee portion of the HI tax (not the 

employer portion) is increased by an additional tax of 0.9 percent on wages received in excess of a threshold 

amount. The threshold amount is $250,000 in the case of a joint return, $125,000 in the case of a married individual 

filing a separate return, and $200,000 in any other case.

107 Elective deferrals are generally made on a pretax basis and distributions attributable to elective deferrals 

are includible in income. However, a section 401(k) plan is permitted to include a “qualified Roth contribution 

program” that permits a participant to elect to have all or a portion of the participant’s elective deferrals under the 

plan treated as after-tax Roth contributions. Certain distributions from a designated Roth account are excluded from 

income, even though they include earnings not previously taxed. 

108 A State or local governmental employer may not maintain a 401(k) plan unless it maintained a 401(k) 

plan before May 6, 1986. However, other arrangements similar to 401(k) plans are available to State and local 

governmental employers, such as eligible deferred compensation plans (section 457). 
36

Special rules for State and local governmental plans

Some defined benefit pension plans require employee contributions. In many cases, 

governmental employees are required to participate in and contribute to a defined benefit pension 

plan as a condition of employment.109 In such cases, the required employee contributions are 

generally withheld from employees’ salaries. In some cases, a governmental plan may cover 

employees of different governmental entities. For example, a plan established by a State may 

cover employees of various State agencies or employees of the State and of local governments 

within the State. In such cases, the plan may provide employers with the option of paying 

required employee contributions on behalf of their employees, rather than withholding the 

required contributions from employees’ salaries.

Under a special rule, in the case of a plan maintained by a State or local government, if 

contributions are designated as employee contributions, but the State or local governmental 

employer “picks up” (i.e., pays) the contributions, contributions so picked up (“pick-up 

contributions”) are treated as employer contributions.110 As a result of being treated as employer 

contributions, pick-up contributions are not includible in employees’ income at the time of 

contribution.

Legislative history indicates that the pick-up rules were intended to apply to situations in 

which amounts are designated as employee contributions under a State or local governmental 

plan, but the governmental employer pays all or a part of the employee’s contribution without 

withholding the amount from the employee’s salary. In this situation, the portion of the 

contribution that is “picked up” by the government was viewed as, in substance, an employer 

contribution for Federal tax purposes, even though designated as an employee contribution for 

purposes of State law. 111

Although pick-up contributions are treated as employer contributions for income tax 

purposes, pick-up contributions made pursuant to a salary reduction agreement are wages for 

FICA tax purposes.112 However, compensation of State and local government employees who 

are covered by a qualified retirement plan may be generally exempt from FICA tax.113

 109 A governmental plan may also allow an employee to purchase additional service credit (such as credit 

for military service) by making additional employee contributions.

110 Sec. 414(h)(2).

111 See H.R. Rep. No. 93-807, at 145 (1974).

112 Sec. 3121(v)(1)(B). For this purpose, a salary reduction agreement includes any arrangement in which 

there is a reduction in the employee’s salary in connection with the employer’s contribution of a corresponding 

amount to a pension plan on the employee’s behalf, regardless of whether the employee approves or chooses 

participation in the plan or whether participation is mandatory. See H.R. Rep. No. 98-861, at 1415 (1984), and State 

of New Mexico v. Shalala, 153 F.3d 1160 (10th Cir. 1998).

113 Sec. 3121(b)(7)(F).
37

IRS guidance has applied pick-up treatment in situations in which employees’ salaries are 

reduced by the amount of the contribution as long as individual employees are not given the

option of choosing to receive amounts directly instead of having them paid by the employer to 

the plan.114 The IRS has issued numerous private letter rulings to taxpayers that deal with the 

application of the pick-up rules to particular arrangements. Many of these rulings apply pick-up

treatment to employee contributions to a State or local governmental pension plan that are 

required as a condition of employment and withheld from employees’ salary. The IRS also has 

ruled favorably on arrangements that allow individual employees to make an irrevocable election 

to have contributions made to a plan on their behalf by payroll deduction if a State statute or 

similar provision provides that the contributions are being paid by the employer in lieu of 

contributions by the employee.115 The rulings conclude that, in these circumstances, the 

employee does not have the option of receiving the amounts directly and that pick-up treatment 

applies.

Rev. Rul. 2006-43116 provides that a contribution to a qualified plan established by a 

State government will not be treated as picked up by the employing unit unless the employing 

unit (1) specifies that contributions, although designated as employee contributions, are being 

paid by the employer (which is taken by formal action by a duly authorized person which must 

only apply prospectively and be evidenced by a contemporaneous written document); and (2) 

does not permit a participating employee from and after the date of the “pick-up” to have a cash 

or deferred election right with respect to designated employee contributions. 

Description of Proposal

Under the proposal, a contribution shall not fail to be treated as picked up by an 

employing unit merely because the employee may make an irrevocable election between the 

application of two alternative benefit formulas involving the same or different levels of 

 114 See, e.g., Rev. Rul. 81-36, 1981-1 C.B. 255. (The employer must also specify that the contributions are 

being paid by the employer in lieu of contributions by the employee.) Compare Rev. Rul. 81-35, 1981-1 C.B. 255, 

which denies pick-up treatment to contributions made pursuant to an individual employment agreement under which 

the employer contributes a certain percentage of the employee’s salary to the State’s pension plan on behalf of the 

employee. In Priv. Ltr. Rul. 201417025 (Jan. 28, 2014), the IRS ruled that where a state retirement system had 

added a qualified defined contribution plan to its qualified defined benefit plan and provided employees who 

participated in or were eligible to participate in the defined benefit plan a one-time opportunity to move to the 

defined contribution plan and continue to have their employee contributions treated as “picked up” by the employer, 

and also provided employees with an additional opportunity to move to the defined contribution plan (1) the 

amounts transferred, either time, were not distributions, and the transfers did not result in currently taxable income 

to the participant and (2) neither election to transfer between plans constituted a cash or deferred arrangement under 

sec. 401(k).

115 See, e.g., Priv. Ltr. Rul. 200423040 (March 9, 2004) (employees may elect whether to participate in a 

defined benefit pension plan that requires employee contributions) and Priv. Ltr. Rul. 200317034 (October 10, 2002) 

(employees may elect to have contributions made to a defined benefit pension plan by payroll reduction to purchase 

additional service credit). In addition, under Priv. Ltr. Rul. 200317024 (September 30, 2002), pick-up treatment 

applies to contributions made to a defined contribution plan at the election of employees. This ruling suggests that 

the pick-up rules may be used to make pretax employee contributions to a defined contribution plan without 

complying with the rules applicable to elective deferrals. 

116 2006-35 I.R.B. 329, August 28, 2006.
38

employee contributions. The proposal leads to a different result than the conclusion reached in 

Rev. Rul. 2006-43 by permitting an employee contribution to be treated as having been picked 

up by a State or local governmental employer (and treated as an employer contribution) where 

the employee makes an irrevocable election between the application of two alternative benefit 

formulas involving the same or different levels of employee contributions.

Effective Date

The proposal applies to plan years beginning after the date of enactment.
39

K. Elective Deferrals by Members of the Ready Reserve

of a Reserve Component of the Armed Forces

Present Law

Elective deferrals

Tax-favored employer-sponsored retirement plans may allow an employee to make an 

election between cash and an employer contribution to the plan pursuant to a qualified cash or 

deferred arrangement or a salary reduction agreement.117 Amounts contributed pursuant to these 

qualified cash or deferred arrangements and salary reduction agreements are referred to as 

elective deferrals. The total elective deferrals that may be made by an individual for a year are 

subject to a dollar limit, generally $18,500 for 2018.118 An employee age 50 or over may make 

additional elective deferrals, referred to as catch-up contributions, generally limited to $6,000 for 

2018.119 These limits apply to the total amount of elective deferrals that an individual may 

contribute for the year, whether to a single plan or to multiple plans, for example, plans of 

different employers for whom the individual works during the year.

Thrift Savings Plan and the Ready Reserve

The Thrift Savings Plan (“TSP”) is a tax-favored retirement plan sponsored by the 

Federal government under which Federal employees may contribute elective deferrals.120 

Elective deferrals made to the TSP are subject to the same limits as elective deferrals made to 

other employer-sponsored retirement plans, including elective deferrals made to plans of 

different employers for whom the individual works during the year.

The Armed Forces of the United States include seven reserve components: the Army 

National Guard, the Army Reserve, the Navy Reserve, the Marine Corps Reserve, the Air 

National Guard, the Air Force Reserve, and the Coast Guard Reserve. The Ready Reserve 

consists of members of the reserve components who are usually called to active duty before other 

members. A member of the Ready Reserve who is in pay status may make elective deferrals to 

the TSP. In the case of a member of the Ready Reserve who is eligible to contribute elective 

deferrals to the TSP in that capacity and to another plan in connection with other employment, 

the general limit on elective deferrals applies to the total elective deferrals made to the TSP and 

the other plan. In the case of a member of the Ready Reserve who is also a civilian Federal 

employee and eligible to make elective deferrals to the TSP in that capacity, the general limit on 

elective deferrals applies to the total elective deferrals made to the TSP in both capacities.

 117 See, for example, sections 401(k) and 403(b).

118 Sec. 402(g).

119 Sec. 414(v). The total of an employee’s elective deferrals for a year, including catch-up contributions, 

cannot exceed the employee’s compensation for the year. 

120 Sec. 7701(j). The provisions of TSP are governed also by 5 U.S.C. 8430 through 8440f.
40

Description of Proposal

Under the proposal, if an individual who is a member of the Ready Reserve makes 

elective deferrals to the TSP in that capacity, a separate limit (including a separate catch-up 

contribution limit) applies to all other elective deferrals that may be made by that individual. 

This separate limit applies only to one other plan or to the TSP in connection with other 

employment (that is, employment other than that as a member of the Ready Reserve) of that 

individual based on the individual’s compensation in that other employment. Accordingly, if a

member of the Ready Reserve makes elective deferrals to the TSP both as a Reservist and also as 

a civilian Federal employee, separate limits (including a separate catch-up contribution limit) 

will apply to the elective deferrals made to the TSP by the individual as a member of the Ready 

Reserve and in the individual’s capacity as a civilian Federal employee. If a member of the 

Ready Reserve makes elective deferrals to the TSP as a Reservist and also makes elective 

deferrals to a private sector plan as a private sector employee, separate limits (including a 

separate catch-up contribution limit) will apply to the elective deferrals made to the TSP by the 

individual as a member of the Ready Reserve and to the elective deferrals made to the private 

sector plan in the individual’s capacity as a private sector employee.

Effective Date

The proposal is effective for plan years beginning after December 31, 2018.
41

TITLE II ─ ADMINISTRATIVE IMPROVEMENTS

A. Plan Adopted by Filing Due Date for Year May be Treated 

as in Effect as of Close of Year

Present Law

In order for a qualified retirement plan to be treated as maintained for a taxable year, the 

plan must be adopted by the last day of the taxable year.121 However, the trust under the plan 

will not fail to be treated as in existence due to lack of corpus merely because it holds no assets 

on the last day of the taxable year.122 Contributions made by the due date (plus extensions) of 

the tax return for the employer maintaining the plan for a taxable year are treated as contributed 

on account of that taxable year.123 Thus a plan can be established on the last day of a taxable 

year even though the first contribution is not made until the due date of the employer’s return of 

tax for the taxable year. Further, if the terms of a plan adopted during an employer’s taxable 

year fail to satisfy the qualification requirements that apply to the plan for the year, the plan may 

also be amended retroactively by the due date (including extensions) of the employer’s return, 

provided that the amendment is made retroactively effective.124 However, this provision does 

not allow a plan to be adopted after the end of a taxable year and made retroactively effective, 

for qualification purposes, for the taxable year prior to the taxable year in which the plan was 

adopted by the employer.125

Description of Proposal

Under the proposal, if an employer adopts a qualified retirement plan after the close of a 

taxable year but before the time prescribed by law for filing the return of tax of the employer for 

the taxable year (including extensions thereof), the employer may elect to treat the plan as having 

been adopted as of the last day of the taxable year.

The proposal does not override rules requiring certain plan provisions to be in effect 

during a plan year, such as the provision for elective deferrals under a qualified cash or deferral 

arrangement (“generally referred to as a 401(k) plan”).126

 121 Rev. Rul. 76-28, 1976-1 C.B. 106.

122 Rev. Rul. 81-114, 1981-1 C.B. 207.

123 Sec. 404(a)(6). 

124 Sec. 401(b).

125 Treas. Reg. sec. 1.401(b)-1(a). 

126 Treas. Reg. sec. 1.401(k)-1(e)(2)(ii).
42

Effective Date

The proposal applies to plans adopted for taxable years beginning after December 31, 

2018.
43

B. Modification of Nondiscrimination Rules to Protect Older,

Longer Service Participants

Present Law

In general

Qualified retirement plans are subject to nondiscrimination requirements, under which 

the group of employees covered by a plan (“plan coverage”) and the contributions or benefits 

provided to employees, including benefits, rights, and features under the plan, must not 

discriminate in favor of highly compensated employees.127 The timing of plan amendments must 

also not have the effect of discriminating significantly in favor of highly compensated 

employees. In addition, in the case of a defined benefit plan, the plan must benefit at least the 

lesser of (1) 50 employees of the employer, or (2) the greater of (a) 40 percent of all employees 

of the employer or (b) two employees (or one employee if there is only one employee), referred 

to as the “minimum participation” requirements.128 These requirements are designed to help 

ensure that qualified retirement plans achieve the goal of retirement security for both lower and 

higher paid employees. 

For nondiscrimination purposes, an employee generally is treated as highly compensated 

if the employee (1) was a five-percent owner of the employer at any time during the year or the 

preceding year, or (2) had compensation for the preceding year in excess of $120,000 (for 

2018).129 Employees who are not highly compensated are referred to as nonhighly compensated 

employees. 

Nondiscriminatory plan coverage

Whether plan coverage of employees is nondiscriminatory is determined by calculating a 

plan’s ratio percentage, that is, the ratio of the percentage of nonhighly compensated employees 

covered under the plan to the percentage of highly compensated employees covered. For this 

purpose, certain portions of a defined contribution plan are treated as separate plans to which the 

plan coverage requirements are applied separately, referred to as mandatory disaggregation. 

Specifically, the following, if provided under a plan, are treated as separate plans: the portion of 

a plan consisting of employee elective deferrals, the portion consisting of employer matching 

contributions, the portion consisting of employer nonelective contributions, and the portion 

 127 Secs. 401(a)(3)-(5) and 410(b). Detailed rules are provided in Treas. Reg. secs. 1.401(a)(4)-1 

through -13 and secs. 1.410(b)-2 through -10. In applying the nondiscrimination requirements, certain employees, 

such as those under age 21 or with less than a year of service, generally may be disregarded. In addition, employees 

of controlled groups and affiliated service groups under the aggregation rules of section 414(b), (c), (m) and (o) are 

treated as employed by a single employer.

128 Sec. 401(a)(26).

129 Section 414(q). At the election of the employer, employees who are highly compensated based on the 

amount of their compensation may be limited to employees who were among the top 20 percent of employees based 

on compensation.
44

consisting of an employee stock ownership plan (“ESOP”).130 Subject to mandatory 

disaggregation, different qualified retirement plans may otherwise be aggregated and tested 

together as a single plan, provided that they use the same plan year. The plan determined under 

these rules for plan coverage purposes generally is also treated as the plan for purposes of 

applying the other nondiscrimination requirements.

A plan’s coverage is nondiscriminatory if the ratio percentage, as determined above, is 70 

percent or greater. If a plan’s ratio percentage is less than 70 percent, a multi-part test applies, 

referred to as the average benefit test. First, the plan must meet a “nondiscriminatory 

classification requirement,” that is, it must cover a group of employees that is reasonable and 

established under objective business criteria and the plan’s ratio percentage must be at or above a 

level specified in the regulations, which varies depending on the percentage of nonhighly 

compensated employees in the employer’s workforce. In addition, the average benefit 

percentage test must be satisfied. 

Under the average benefit percentage test, in general, the average rate of 

employer-provided contributions or benefit accruals for all nonhighly compensated employees 

under all plans of the employer must be at least 70 percent of the average contribution or accrual 

rate of all highly compensated employees.131 In applying the average benefit percentage test, 

elective deferrals made by employees, as well as employer matching and nonelective 

contributions, are taken into account. Generally, all plans maintained by the employer are taken 

into account, including ESOPs, regardless of whether plans use the same plan year.

Under a transition rule applicable in the case of the acquisition or disposition of a 

business, or portion of a business, or a similar transaction, a plan that satisfied the plan coverage 

requirements before the transaction is deemed to continue to satisfy them for a period after the 

 130 Elective deferrals are contributions that an employee elects to have made to a defined contribution plan 

that includes a qualified cash or deferred arrangement (a section 401(k) plan) rather than receive the same amount as 

current compensation. Employer matching contributions are contributions made by an employer only if an 

employee makes elective deferrals or after-tax employee contributions. Employer nonelective contributions are 

contributions made by an employer regardless of whether an employee makes elective deferrals or after-tax 

employee contributions. Under section 4975(e)(7), an ESOP is a defined contribution plan, or portion of a defined 

contribution plan, that is designated as an ESOP and is designed to invest primarily in employer stock.

131 Contribution and benefit rates are generally determined under the rules for nondiscriminatory 

contributions or benefit accruals, described below. These rules are generally based on benefit accruals under a 

defined benefit plan, other than accruals attributable to after-tax employee contributions, and contributions allocated 

to participants’ accounts under a defined contribution plan, other than allocations attributable to after-tax employee 

contributions. (Under these rules, contributions allocated to participants’ accounts are referred to as “allocations,” 

with the related rates referred to as “allocation rates,” but “contribution rates” is used herein for convenience.) 

However, as discussed below, benefit accruals can be converted to actuarially equivalent contributions, and 

contributions can be converted to actuarially equivalent benefit accruals.
45

transaction,

132 provided coverage under the plan is not significantly changed during that 

period.133

Nondiscriminatory contributions or benefit accruals

In general

There are three general approaches to testing the amount of benefits under qualified 

retirement plans: (1) design-based safe harbors under which the plan’s contribution or benefit 

accrual formula satisfies certain uniformity standards, (2) a general test, described below, and 

(3) cross-testing of equivalent contributions or benefit accruals. Employee elective deferrals and 

employer matching contributions under defined contribution plans are subject to special testing 

rules and generally are not permitted to be taken into account in determining whether other 

contributions or benefits are nondiscriminatory.134

The nondiscrimination rules allow contributions and benefit accruals to be provided to 

highly compensated and nonhighly compensated employees at the same percentage of 

compensation.135 Thus, the various testing approaches described below are generally applied to 

the amount of contributions or accruals provided as a percentage of compensation, referred to as 

a contribution rate or accrual rate. In addition, under the “permitted disparity” rules, in 

calculating an employee’s contribution or accrual rate, credit may be given for the employer paid 

portion of Social Security taxes or benefits.

136 The permitted disparity rules do not apply in 

testing whether elective deferrals, matching contributions, or ESOP contributions are 

nondiscriminatory.

The general test is generally satisfied by measuring the rate of contribution or benefit 

accrual for each highly compensated employee to determine if the group of employees with the 

same or higher rate (a “rate” group) is a nondiscriminatory group, using the nondiscriminatory 

plan coverage standards described above. For this purpose, if the ratio percentage of a rate group 

is less than 70 percent, a simplified standard applies, which includes disregarding the reasonable 

classification requirement, but requires satisfaction of the average benefit percentage test.

 132 It is for the period beginning on date of the transaction and ending on the last day of the first plan year 

beginning after the date of the transaction.

133 Sec. 410(b)(6)(C).

134 Secs. 401(k) and (m), the latter of which applies also to after-tax employee contributions under a 

defined contribution plan.

135 For this purpose, under section 401(a)(17), annual compensation generally is limited to $275,000 per 

year (for 2018).

136 See sections 401(a)(5)(C) and (D) and 401(l) and Treas. Reg. section 1.401(a)(4)-7 and 1.401(l)-1 

through -6 for rules for determining the amount of contributions or benefits that can be attributed to the 

employer-paid portion of Social Security taxes or benefits. 
46

Cross-testing

Cross-testing involves the conversion of contributions under a defined contribution plan 

or benefit accruals under a defined benefit plan to actuarially equivalent accruals or 

contributions, with the resulting equivalencies tested under the general test. However, employee 

elective deferrals and employer matching contributions under defined contribution plans are not 

permitted to be taken into account for this purpose, and cross-testing of contributions under a 

defined contribution plan, or cross-testing of a defined contribution plan aggregated with a 

defined benefit plan, is permitted only if certain threshold requirements are satisfied.

In order for a defined contribution plan to be tested on an equivalent benefit accrual basis, 

one of the following three threshold conditions must be met:

The plan has broadly available allocation rates, that is, each allocation rate under the plan 

is available to a nondiscriminatory group of employees (disregarding certain permitted additional 

contributions provided to employees as a replacement for benefits under a frozen defined benefit 

plan, as discussed below);

The plan provides allocations that meet prescribed designs under which allocations 

gradually increase with age or service or are expected to provide a target level of annuity benefit; 

or

The plan satisfies a minimum allocation gateway, under which each nonhighly 

compensated employee has an allocation rate of (a) at least one-third of the highest rate for any 

highly compensated employee, or (b) if less, at least five percent.

In order for an aggregated defined contribution and defined benefit plan to be tested on 

an aggregate equivalent benefit accrual basis, one of the following three threshold conditions 

must be met:

The plan must be primarily defined benefit in character, that is, for more than fifty 

percent of the nonhighly compensated employees under the plan, their accrual rate under the 

defined benefit plan exceeds their equivalent accrual rate under the defined contribution plan;

The plan consists of broadly available separate defined benefit and defined contribution 

plans, that is, the defined benefit plan and the defined contribution plan would separately satisfy 

simplified versions of the minimum coverage and nondiscriminatory amount requirements; or

The plan satisfies a minimum aggregate allocation gateway, under which each nonhighly 

compensated employee has an aggregate allocation rate (consisting of allocations under the 

defined contribution plan and equivalent allocations under the defined benefit plan) of (a) at least 

one-third of the highest aggregate allocation rate for any nonhighly compensated employee, or 

(b) if less, at least five percent in the case of a highest nonhighly compensated employee’s rate 

up to 25 percent, increased by one percentage point for each five-percentage-point increment (or 

portion thereof) above 25 percent, subject to a maximum of 7.5 percent.
47

Benefits, rights, and features

Each benefit, right, or feature offered under the plan generally must be available to a 

group of employees that has a ratio percentage that satisfies the minimum coverage 

requirements, including the reasonable classification requirement if applicable, except that the 

average benefit percentage test does not have to be met, even if the ratio percentage is less than 

70 percent.

Multiple employer and section 403(b) plans 

A multiple employer plan generally is a single plan maintained by two or more unrelated 

employers, that is, employers that are not treated as a single employer under the aggregation 

rules for related entities.137 The plan coverage and other nondiscrimination requirements are 

applied separately to the portions of a multiple employer plan covering employees of different 

employers.138

Certain tax-exempt charitable organizations may offer their employees a tax-deferred 

annuity plan (“section 403(b) plan”).139 The nondiscrimination requirements, other than the 

requirements applicable to elective deferrals, generally apply to section 403(b) plans of private 

tax-exempt organizations. For purposes of applying the nondiscrimination requirements to a 

section 403(b) plan, subject to mandatory disaggregation, a qualified retirement plan may be 

combined with the section 403(b) plan and treated as a single plan.140 However, a section 403(b) 

plan and qualified retirement plan may not be treated as a single plan for purposes of applying 

the nondiscrimination requirements to the qualified retirement plan. 

Closed and frozen defined benefit plans

A defined benefit plan may be amended to limit participation in the plan to individuals 

who are employees as of a certain date. That is, employees hired after that date are not eligible 

to participate in the plan. Such a plan is sometimes referred to as a “closed” defined benefit plan 

(that is, closed to new entrants). In such a case, it is common for the employer also to maintain a 

defined contribution plan and to provide employer matching or nonelective contributions only to 

employees not covered by the defined benefit plan or at a higher rate to such employees.

 137 Sec. 413(c). Multiple employer status does not apply if the plan is a multiemployer plan, defined under 

sec. 414(f) as a plan maintained pursuant to one or more collective bargaining agreements with two or more 

unrelated employers and to which the employers are required to contribute under the collective bargaining 

agreement(s). Multiemployer plans are also known as Taft-Hartley plans.

138 Treas. Reg. sec. 1.413-2(a)(3)(ii)-(iii).

139 Sec. 403(b). These plans are available to employers that are tax-exempt under section 501(c)(3), as 

well as to employers that are educational institutions of State or local governments.

140 Treas. Reg. sec. 1.410(b)-7(f).
48

Over time, the group of employees continuing to accrue benefits under the defined 

benefit plan may come to consist more heavily of highly compensated employees, for example, 

because of greater turnover among nonhighly compensated employees or because increasing 

compensation causes nonhighly compensated employees to become highly compensated. In that 

case, the defined benefit plan may have to be combined with the defined contribution plan and 

tested on a benefit accrual basis. However, under the regulations, if none of the threshold 

conditions is met, testing on a benefits basis may not be available. Notwithstanding the 

regulations, recent IRS guidance provides relief for a limited period, allowing certain closed 

defined benefit plans to be aggregated with a defined contribution plan and tested on an 

aggregate equivalent benefits basis without meeting any of the threshold conditions.141 When 

the group of employees continuing to accrue benefits under a closed defined benefit plan consists 

more heavily of highly compensated employees, the benefits, rights, and features provided under 

the plan may also fail the tests under the existing nondiscrimination rules.

In some cases, if a defined benefit plan is amended to cease future accruals for all 

participants, referred to as a “frozen” defined benefit plan, additional contributions to a defined 

contribution plan may be provided for participants, in particular for older participants, in order to 

make up in part for the loss of the benefits they expected to earn under the defined benefit plan 

(“make-whole” contributions). As a practical matter, testing on a benefit accrual basis may be 

required in that case, but may not be available because the defined contribution plan does not 

meet any of the threshold conditions.

Description of Proposal

Closed or frozen defined benefit plans

In general

The proposal provides nondiscrimination relief with respect to benefits, rights, and 

features for a closed class of participants (“closed class”),142 and with respect to benefit accruals 

for a closed class, under a defined benefit plan that meets the requirements described below 

(referred to herein as an “applicable” defined benefit plan). In addition, the proposal treats a 

closed or frozen applicable defined benefit plan as meeting the minimum participation 

requirements if the plan met the requirements as of the effective date of the plan amendment by 

which the plan was closed or frozen.

If a portion of an applicable defined benefit plan eligible for relief under the proposal is 

spun off to another employer, and if the spun-off plan continues to satisfy any ongoing 

 141 Notice 2014-5, 2014-2 I.R.B. 276, December 13, 2013 extended by Notice 2015-28, 2015-14 I.R.B. 

848, March 19, 2015, Notice 2016-57, 2016-40 I.R.B. 432, September 19, 2016, and most recently by Notice 2017-

45, 2017-38 I.R.B. 232, August 31, 2017. Proposed regulations revising the nondiscrimination requirements for 

closed plans were also issued in 2016, subject to various conditions. 81 Fed. Reg. 4976 (January 29, 2016).

142 References under the proposal to a closed class of participants and similar references to a closed class 

include arrangements under which one or more classes of participants are closed, except that one or more classes of 

participants closed on different dates are not aggregated for purposes of determining the date any such class was 

closed.
49

requirements applicable for the relevant relief as described below, the relevant relief for the 

spun-off plan will continue with respect to the other employer.

Benefits, rights, or features for a closed class

Under the proposal, an applicable defined benefit plan that provides benefits, rights, or 

features to a closed class does not fail the nondiscrimination requirements by reason of the 

composition of the closed class, or the benefits, rights, or features provided to the closed class, if 

(1) for the plan year as of which the class closes and the two succeeding plan years, the benefits, 

rights, and features satisfy the nondiscrimination requirements without regard to the relief under 

the proposal, but taking into account the special testing rules described below,143 and (2) after the 

date as of which the class was closed, any plan amendment modifying the closed class or the 

benefits, rights, and features provided to the closed class does not discriminate significantly in 

favor of highly compensated employees.

For purposes of requirement (1) above, the following special testing rules apply:

• In applying the plan coverage transition rule for business acquisitions, dispositions, 

and similar transactions, the closing of the class of participants is not treated as a 

significant change in coverage; 

• Two or more plans do not fail to be eligible to be a treated as a single plan solely by 

reason of having different plan years;144 and

• Changes in employee population are disregarded to the extent attributable to 

individuals who become employees or cease to be employees, after the date the class 

is closed, by reason of a merger, acquisition, divestiture, or similar event.

Benefit accruals for a closed class

Under the proposal, an applicable defined benefit plan that provides benefits to a closed 

class may be aggregated, that is, treated as a single plan, and tested on a benefit accrual basis 

with one or more defined contribution plans (without having to satisfy the threshold conditions 

under present law) if (1) for the plan year as of which the class closes and the two succeeding 

plan years, the plan satisfies the plan coverage and nondiscrimination requirements without 

regard to the relief under the proposal, but taking into account the special testing rules described 

above,145 and (2) after the date as of which the class was closed, any plan amendment modifying 

the closed class or the benefits provided to the closed class does not discriminate significantly in 

favor of highly compensated employees.

 143 Other testing options available under present law are also available for this purpose.

144 This rule applies also for purposes of applying the plan coverage and other nondiscrimination 

requirements to an applicable defined benefit plan and one or more defined contributions that, under the proposal, 

may be treated as a single plan as described below.

145 Other testing options available under present law are also available for this purpose.
50

Under the proposal, defined contribution plans that may be aggregated with an applicable 

defined benefit plan and treated as a single plan include the portion of one or more defined 

contribution plans consisting of matching contributions, an ESOP, or matching or nonelective

contributions under a section 403(b) plan. If an applicable defined benefit plan is aggregated 

with the portion of a defined contribution plan consisting of matching contributions, any portion 

of the defined contribution plan consisting of elective deferrals must also be aggregated. In 

addition, the matching contributions are treated in the same manner as nonelective contributions, 

including for purposes of permitted disparity.

Applicable defined benefit plan

An applicable defined benefit plan to which relief under the proposal applies is a defined 

benefit plan under which the class was closed (or the plan frozen) before April 5, 2017, or that 

meets the following alternative conditions: (1) taking into account any predecessor plan, the 

plan has been in effect for at least five years as of the date the class is closed (or the plan is 

frozen) and (2) under the plan, during the five-year period preceding that date, (a) for purposes of 

the relief provided with respect to benefits, rights, and features for a closed class, there has not 

been a substantial increase in the coverage or value of the benefits, rights, or features, or (b) for 

purposes of the relief provided with respect to benefit accruals for a closed class or the minimum 

participation requirements, there has not been a substantial increase in the coverage or benefits 

under the plan.

For purposes of (2)(a) above, a plan is treated as having a substantial increase in coverage 

or value of benefits, rights, or features only if, during the applicable five-year period, either the 

number of participants covered by the benefits, rights, or features on the date the period ends is 

more than 50 percent greater than the number on the first day of the plan year in which the 

period began, or the benefits, rights, and features have been modified by one or more plan 

amendments in such a way that, as of the date the class is closed, the value of the benefits, rights, 

and features to the closed class as a whole is substantially greater than the value as of the first 

day of the five-year period, solely as a result of the amendments. 

For purposes of (2)(b) above, a plan is treated as having had a substantial increase in 

coverage or benefits only if, during the applicable five-year period, either the number of 

participants benefiting under the plan on the date the period ends is more than 50 percent greater 

than the number of participants on the first day of the plan year in which the period began, or the 

average benefit provided to participants on the date the period ends is more than 50 percent 

greater than the average benefit provided on the first day of the plan year in which the period 

began. In applying this requirement, the average benefit provided to participants under the plan 

is treated as having remained the same between the two relevant dates if the benefit formula 

applicable to the participants has not changed between the dates and, if the benefit formula has 

changed, the average benefit under the plan is considered to have increased by more than 50 

percent only if the target normal cost for all participants benefiting under the plan for the plan 

year in which the five-year period ends exceeds the target normal cost for all such participants 

for that plan year if determined using the benefit formula in effect for the participants for the first 
51

plan year in the five-year period by more than 50 percent.146 In applying these rules, a multiple 

employer plan is treated as a single plan, rather than as separate plans separately covering the 

employees of each participating employer.

In applying these standards, any increase in coverage or value, or in coverage or benefits, 

whichever is applicable, is generally disregarded if it is attributable to coverage and value, or 

coverage and benefits, provided to employees who (1) became participants as a result of a 

merger, acquisition, or similar event that occurred during the 7-year period preceding the date the 

class was closed, or (2) became participants by reason of a merger of the plan with another plan 

that had been in effect for at least five years as of the date of the merger and, in the case of 

benefits, rights, or features for a closed class, under the merger, the benefits, rights, or features 

under one plan were conformed to the benefits, rights, or features under the other plan 

prospectively. 

Make-whole contributions under a defined contribution plan

Under the proposal, a defined contribution plan is permitted to be tested on an equivalent 

benefit accrual basis (without having to satisfy the threshold conditions under present law) if the 

following requirements are met:

• The plan provides make-whole contributions to a closed class of participants whose 

accruals under a defined benefit plan have been reduced or ended (“make-whole 

class”);

• For the plan year of the defined contribution plan as of which the make-whole class 

closes and the two succeeding plan years, the make-whole class satisfies the 

nondiscriminatory classification requirement under the plan coverage rules, taking 

into account the special testing rules described above;

• After the date as of which the class was closed, any amendment to the defined 

contribution plan modifying the make-whole class or the allocations, benefits, rights, 

and features provided to the make-whole class does not discriminate significantly in 

favor of highly compensated employees; and 

• Either the class was closed before April 5, 2017, or the defined benefit plan is an 

applicable defined benefit plan under the alternative conditions applicable for 

purposes of the relief provided with respect to benefit accruals for a closed class.

With respect to one or more defined contribution plans meeting the requirements above, 

in applying the plan coverage and nondiscrimination requirements, the portion of the plan 

providing make-whole or other nonelective contributions may also be aggregated and tested on 

 146 Under the funding requirements applicable to defined benefit plans, target normal cost for a plan year 

(defined in section 430(b)(1)(A)(i)) is generally the sum of the present value of the benefits expected to be earned 

under the plan during the plan year plus the amount of plan-related expenses to be paid from plan assets during the 

plan year. Under the proposal, in applying this average benefit rule to certain defined benefit plans maintained by 

cooperative organizations and charities, referred to as CSEC plans (defined in section 414(y)), which are subject to 

different funding requirements, the CSEC plan’s normal cost under section 433(j)(1)(B) is used instead of target 

normal cost. 
52

an equivalent benefit accrual basis with the portion of one or more other defined contribution 

plans consisting of matching contributions, an ESOP, or matching or nonelective contributions 

under a section 403(b) plan. If the plan is aggregated with the portion of a defined contribution 

plan consisting of matching contributions, any portion of the defined contribution plan consisting 

of elective deferrals must also be aggregated. In addition, the matching contributions are treated 

in the same manner as nonelective contributions, including for purposes of permitted disparity.

Under the proposal, “make-whole contributions” generally means nonelective 

contributions for each employee in the make-whole class that are reasonably calculated, in a 

consistent manner, to replace some or all of the retirement benefits that the employee would have 

received under the defined benefit plan and any other plan or qualified cash or deferred 

arrangement under a section 401(k) plan if no change had been made to the defined benefit plan 

and other plan or arrangement.147 However, under a special rule, in the case of a defined 

contribution plan that provides benefits, rights, or features to a closed class of participants whose 

accruals under a defined benefit plan have been reduced or eliminated, the plan will not fail to 

satisfy the nondiscrimination requirements solely by reason of the composition of the closed 

class, or the benefits, rights, or features provided to the closed class, if the defined contribution 

plan and defined benefit plan otherwise meet the requirements described above but for the fact 

that the make-whole contributions under the defined contribution plan are made in whole or in 

part through matching contributions.

If a portion of a defined contribution plan eligible for relief under the proposal is spun off 

to another employer, and if the spun-off plan continues to satisfy any ongoing requirements 

applicable for the relevant relief as described above, the relevant relief for the spun-off plan will 

continue with respect to the other employer.

Effective Date

The proposal is generally effective on the date of enactment, without regard to whether 

any plan modifications referred to in the proposal are adopted or effective before, on, or after the 

date of enactment. 

However, at the election of a plan sponsor, the proposal will apply to plan years 

beginning after December 31, 2013. For purposes of the proposal, a closed class of participants 

under a defined benefit plan is treated as being closed before April 5, 2017, if the plan sponsor’s 

intention to create the closed class is reflected in formal written documents and communicated to 

participants before that date. In addition, a plan does not fail to be eligible for the relief under 

the proposal solely because (1) in the case of benefits, rights, or features for a closed class under 

a defined benefit plan, the plan was amended before the date of enactment to eliminate one or 

more benefits, rights, or features and is further amended after the date of enactment to provide 

the previously eliminated benefits, rights, or features to a closed class of participants, or (2) in 

the case of benefit accruals for a closed class under a defined benefit plan or application of the 

minimum benefit requirements to a closed or frozen defined benefit plan, the plan was amended 

before the date of the enactment to cease all benefit accruals and is further amended after the 

 147 For this purpose, consistency is not required with respect to employees who were subject to different 

benefit formulas under the defined benefit plan.
53

date of enactment to provide benefit accruals to a closed class of participants. In either case, the 

relevant relief applies only if the plan otherwise meets the requirements for the relief, and, in 

applying the relevant relief, the date the class of participants is closed is the effective date of the 

later amendment.
54

C. Study of Appropriate PBGC Premiums 

Present Law

Minimum funding rules

The Code and ERISA apply minimum funding requirements to defined benefit retirement 

plans maintained by private-sector employers for their employees (referred to as “singleemployer” plans), for purposes of which employers that are members of a controlled group are 

considered a single employer. For purposes of minimum funding requirements, generally each 

participating employer in a multiple employer plan is treated as maintaining a separate single 

plan,148 and a CSEC plan149 is treated as if all participants in the plan are employed by a single 

employer.150

The amount of contributions required for a plan year under the minimum funding rules is 

generally the amount needed to fund benefits earned during that year plus that year’s portion of 

other liabilities that are amortized over a period of years, such as benefits resulting from a grant 

of past service credit. A minimum contribution is required for a plan year if the value of the 

plan’s assets is less than the plan’s “funding target,” that is, the present value, determined 

actuarially, of all benefits earned as of the beginning of the year. If the value of plan assets is 

less than the plan’s funding target, such that the plan has a funding shortfall, the shortfall is 

generally required to be funded by contributions, with interest, over seven years, taking into 

account the remaining installments attributable to shortfalls from preceding years. If participants 

earn additional benefits for the year, the required contribution must include the amount of the 

plan’s “target normal cost,” that is, the present value, determined actuarially, of benefits 

expected to be earned for the year. In the case of a plan funded below a certain level, referred to 

as an “at-risk” plan, specified assumptions must be used in determining the plan’s funding target 

and target normal cost. 

The PBGC 

Even if a defined benefit plan is fully funded, the assets may not be sufficient to purchase 

annuities on a market basis. Thus, it is possible that a plan may be terminated at a time when 

plan assets are not sufficient to provide all benefits accrued by employees under the plan. In 

order to protect plan participants from losing retirement benefits in such circumstances, the 

Pension Benefit Guaranty Corporation (“PBGC”), a corporation within the Department of Labor, 

was created in 1974 under ERISA to provide an insurance program for benefits under most 

defined benefit plans maintained by private employers. 

 148 Sec. 413(c)(4)(A).

149 As defined in section 414(y). See footnote 146, supra.

150 Sec. 413(d)(1).
55

PBGC premiums

In general

Under ERISA, the PBGC is funded solely by assets in terminated plans, amounts 

recovered from employers who terminate underfunded plans, premiums paid with respect to 

covered plans, and investment earnings. All covered single employer (including multiple 

employer) plans are required to pay a flat per-participant premium; underfunded plans are 

subject to an additional rate variable premium based on the level of underfunding. The amount 

of both the flat rate premium and the variable rate premium are set by statute. 

Under ERISA and PBGC’s regulations, a termination premium must be paid to the PBGC 

annually for three years after plan termination for certain distress and involuntary pension plan 

terminations. The amount of the termination premium is $1,250 per participant except for 

certain airline-related plans. 

Flat rate premiums

In 2018, the annual flat rate per participant premium is $74 per participant. By statute, 

the 2019 flat rate premium will go up by $6 to $80.151 In addition, with the exception of the 

single employer flat rate premium for 2019, all rates and caps are indexed to inflation based on 

the National Average Wage Index.152

Variable rate premiums

In 2018, the variable rate premium is equal to $38 per $1,000 of unfunded vested 

benefits, and is indexed to inflation based on the National Average Wage Index. By statute, the 

2019 variable rate premium will go up by $4 to $42 per $1,000 of unfunded vested benefits.

153 

The term “unfunded vested benefits” means the amount which would be the unfunded current 

liability (as defined under the minimum funding rules) if only vested (nonforfeitable) benefits 

were taken into account and if benefits were valued at the variable premium interest rate. No 

variable rate premium is imposed for a year if contributions to the plan for the prior year were at 

least equal to the full funding limit for that year. 

2005 Congressional Budget Office (“CBO”) Report

A CBO report published in 2005, “The Risk Exposure of the Pension Benefit Guaranty 

Corporation,” concluded that the market value of the PBGC’s Fiscal Year 2004 financial position 

was a deficit of $86.7 billion. The PBGC reported its financial position for Fiscal Year 2004 as a 

deficit of $23.3 billion.

 151 ERISA sec. 4006, 29 U.S.C. 1306.

152 Sec. 209(k)(1) of the Social Security Act (42 U.S.C. 409(k)(1)).

153 ERISA sec. 4006, 29 U.S.C. 1306.
56

Description of Proposal

Under the proposal, the PBGC is required to contract with an appropriate agency or 

organization (to be selected by the PBGC’s Board of Directors) to conduct an independent study 

of the PBGC’s Single-Employer Pension Insurance Modeling System (PIMS). 

The study, which is required to begin no later than six months after the date of 

enactment, will:

• examine the current structure and level of PBGC premiums required to be paid by 

single employer plans (including fixed, variable and termination premiums) to 

evaluate whether such premiums are sufficient to pay PBGC guaranteed benefits;

• evaluate whether alternative structures and levels of premiums would better account 

for the risks posed by various categories of single employer plans, including on the 

basis of (A) industry, ownership structure, or size of the plan sponsor, (B) plan 

funded status, risk or volatility of plan investments, or the credit worthiness of the 

plan sponsor, or (C) a combination of the factors described in (A) and (B); 

• evaluate whether other methods of estimating the value of assets and liabilities should 

be used in the PBGC’s financial statements such as those described by the CBO in its 

September 2005 report, “The Risk Exposure of the Pension Benefit Guaranty 

Corporation,” and in its August 2016 report, “Options to Improve the Financial 

Condition of the Pension Benefit Guaranty Corporation’s Multiemployer Program;”

• evaluate whether multiple employer plans (including CSEC plans) have 

characteristics that warrant a separate structure and level of PBGC premiums; and

• include an explanation of the assumptions underlying each analysis involved in 

conducting such study.

Effective Date

The proposal is effective on the date of enactment.
57

TITLE III ─ OTHER SAVINGS PROVISIONS

A. Universal Savings Accounts

Present Law

Savings plans and accounts under the Code

Tax-favored retirement arrangements

The Code provides two general vehicles for tax-favored retirement savings: 

employer-sponsored plans and IRAs. Code provisions are generally within the jurisdiction of the 

Secretary of the Treasury).154

The most common type of tax-favored employer-sponsored retirement plan is a qualified 

retirement plan,155 which may be a defined contribution plan or a defined benefit plan. Under a 

defined contribution plan, separate individual accounts are maintained for participants, to which 

accumulated contributions, earnings and losses are allocated, and participants’ benefits are based 

on the value of their accounts.156 Defined contribution plans commonly allow participants to 

direct the investment of their accounts, usually by choosing among investment options offered 

under the plan. Under a defined benefit plan, benefits are determined under a plan formula and 

paid from general plan assets, rather than individual accounts.157 Besides qualified retirement 

plans, certain tax-exempt employers and public schools may maintain tax-deferred annuity 

plans.158

An IRA is generally established by the individual for whom the IRA is maintained.159 

However, in some cases, an employer may establish IRAs on behalf of employees and provide 

 154 Retirement plans of private employers, including qualified retirement plans and tax-deferred annuity 

plans, are generally subject to requirements under ERISA, and are generally within the jurisdiction of the Secretary 

of Labor.

155 Sec. 401(a). A qualified annuity plan under section 403(a) is similar to and subject to requirements 

similar to those applicable to qualified retirement plans.

156 Sec. 414(i). Defined contribution plans generally provide for contributions by employers and may 

include a qualified cash or deferred arrangement under a section 401(k) plan, under which employees may elect to 

contribute to the plan.

157 Sec. 414(j).

158 Sec. 403(b). Private and governmental employers that are exempt from tax under section 501(c)(3), 

including tax-exempt private schools, may maintain tax-deferred annuity plans. State and local governmental 

employers may maintain another type of tax-favored retirement plan, an eligible deferred compensation plan under 

section 457(b).

159 Sections 219, 408 and 408A provide rules for IRAs. Under section 408(a)(2) and (n), only certain 

entities are permitted to be the trustee of an IRA. The trustee of an IRA generally must be a bank, an insured credit 

union, or a corporation subject to supervision and examination by the Commissioner of Banking or other officer in 

charge of the administration of the banking laws of the State in which it is incorporated. Alternatively, an IRA 
58

retirement contributions to the IRAs.160 An individual retirement account (“IRA”) is a taxexempt trust or account established for the exclusive benefit of an individual and his or her 

beneficiaries.161 There are two general types of IRAs: traditional IRAs, to which both 

deductible and nondeductible contributions may be made, and Roth IRAs, contributions to which 

are not deductible. In general, amounts held in a traditional IRA are includible in income when 

withdrawn (except to the extent the withdrawal is a return of nondeductible contributions). 

Amounts held in a Roth IRA that are withdrawn as a qualified distribution are not includible in 

income; distributions from a Roth IRA that are not qualified distributions are includible in 

income to the extent attributable to earnings. A qualified distribution is a distribution that is 

made (1) after the five-taxable year period beginning with the first taxable year for which the 

individual made a contribution to a Roth IRA, and (2) after attainment of age 591⁄2, on account of 

death or disability, or for first-time homebuyer expenses of up to $10,000.

Other tax-favored savings arrangements

The Code provides for certain other tax-advantaged savings arrangements, allowing 

taxpayers to save both for education and for expenses associated with a disability.

A qualified tuition program (known as a “529 plan”) is a program established and 

maintained by a State or agency or instrumentality thereof, under which a person may make 

contributions to an account that is established for the purpose of satisfying the qualified higher 

education expenses of the designated beneficiary of the account.162 Similarly, Coverdell 

education savings accounts are trusts or custodial accounts established on behalf of a designated 

beneficiary for the purpose of saving for the education expenses of the designated beneficiary.163 

For both of these accounts, contributions are not tax deductible for Federal income tax purposes, 

but qualified distributions (generally distributions made for the purpose of meeting the 

designated beneficiary’s education expenses) are not subject to tax.

A qualified ABLE program is a program established and maintained by a State or agency 

or instrumentality thereof, under which individuals may open accounts (an “ABLE account”) for 

 trustee may be another person who demonstrates to the satisfaction of the Secretary that the manner in which the 

person will administer the IRA will be consistent with the IRA requirements.

160 SEP plans under section 408(k) and SIMPLE IRA plans under section 408(p) are employer-sponsored 

retirement plans funded using IRAs for employees. In addition, IRA treatment may apply to accounts maintained 

for employees under a trust created by an employer (or an employee association) for the exclusive benefit of

employees or their beneficiaries, provided that the trust complies with the relevant IRA requirements and separate 

accounting is maintained for the interest of each employee or beneficiary. Sec. 408(c). In that case, the assets of the 

trust may be held in a common fund for the account of all individuals who have an interest in the trust.

161 Secs. 408 and 408A.

162 Sec. 529.

163 Sec. 530.
59

the purpose of meeting the account owner’s qualified disability expenses.164 Limitations apply 

on eligibility to establish an ABLE account, the number of ABLE accounts any individual may 

own, and to the maximum annual contributions an ABLE account may receive in a given year. 

Amounts contributed to an ABLE account are not deductible for Federal income tax purposes, 

but qualified distributions (generally distributions made for the purpose of meeting the 

designated beneficiary’s qualified disability expenses) are not subject to tax.

Description of Proposal

The proposal permits a universal savings account to be established by an individual for 

whom the account is maintained, through a trust arrangement subject to substantially all of the 

same requirements that apply to trust arrangements under IRAs. For each taxable year, an 

individual may contribute cash in an amount up to $2,500, not to exceed the individual’s 

compensation165 includible in the individual’s gross income for the taxable year. The 

individual’s account balance is nonforfeitable. Contributions are not permitted for dependents; 

thus, if an individual is a dependent of another taxpayer, the dollar limit for contributions for 

such individual is zero. The dollar limit is subject to indexing; if the dollar amount after any 

increase is applied is not a multiple of $100, it is rounded to the next lower multiple of $100. 

In the case of taxpayers who file a joint income tax return, if an individual’s 

compensation includible in gross income for the taxable year is less than such compensation of 

the individual’s spouse, the compensation on which the contribution limit is based for that 

individual may include the spouse’s compensation includible in gross income for the taxable 

year reduced (but not below zero) by the amount the spouse contributed for the taxable year to 

universal savings accounts of the spouse. For example, if the joint income tax return for the 

individual and the spouse results in $4,000 of compensation includible in gross income for the 

taxable year (all of which was earned by the spouse), and the spouse contributed $2,500 for the 

taxable year to the spouse’s universal savings accounts, then the individual may contribute a 

maximum of $1,500 for the taxable year to the individual’s universal savings accounts.

Distributions from universal savings accounts are generally not includible in gross 

income. Distributions may be made in cash or in other property that has a readily ascertainable 

fair market value as identified by the Secretary. Excess contributions (along with any 

attributable net income) must be corrected by the due date of the tax return for the taxable year, 

in order to avoid being subject to the excess contribution excise tax of 6 percent. Any related net 

income on such excess contributions is includible in gross income for such taxable year.

Rollovers are not permitted into or from a universal savings account, other than qualified 

rollovers. For this purpose, a qualified rollover is a contribution to a universal savings account 

from another universal savings account of the same individual, if such amount is contributed not 

later than 60 days after the distribution from the other universal savings account. Qualified 

 164 Sec. 529A.

165 Within the meaning of section 219.
60

rollovers are not taken into account with respect to the contribution limit applicable to universal 

savings accounts. 

If an individual acquires a spouse’s universal savings account by reason of the spouse’s 

death, the individual is treated as the account holder of the deceased spouse’s universal savings 

account. In any other case, when an account holder of a universal savings account dies, the 

account ceases to be treated as a universal savings account and all amounts in the account are 

treated as distributed on the date of death of the account holder. 

Prohibited transaction rules apply to universal savings accounts. In addition, the trustee 

of a universal savings account is required to make a report with respect to the account to the 

account holder not later than January 31 of the calendar year following the calendar year to 

which the report relates and to the IRS as specified by the Secretary, in a manner similar to IRA 

reporting. 

Effective Date

The proposal is effective for taxable years beginning after December 31, 2018.
61

B. Expansion of 529 Plans 

Present Law

In general

A qualified tuition program (often referred to as a “529 plan”) is a program established 

and maintained by a State or agency or instrumentality thereof, or by one or more eligible 

educational institutions, which satisfies certain requirements and under which a person may 

purchase tuition credits or certificates on behalf of a designated beneficiary that entitle the 

beneficiary to the waiver or payment of qualified higher education expenses of the beneficiary (a 

“prepaid tuition program”). Section 529 provides specified income tax and transfer tax rules for 

the treatment of accounts and contracts established under qualified tuition programs.166 In the 

case of a program established and maintained by a State or agency or instrumentality thereof, a 

qualified tuition program also includes a program under which a person may make contributions 

to an account that is established for the purpose of satisfying the qualified higher education 

expenses of the designated beneficiary of the account, provided it satisfies certain specified 

requirements (a “savings account program”). Under both types of qualified tuition programs, a 

contributor establishes an account for the benefit of a particular designated beneficiary to provide 

for that beneficiary’s higher education expenses.

In general, prepaid tuition contracts and tuition savings accounts established under a 

qualified tuition program involve prepayments or contributions made by one or more individuals 

for the benefit of a designated beneficiary. Decisions with respect to the contract or account are 

typically made by an individual who is not the designated beneficiary. Qualified tuition accounts 

or contracts generally require the designation of a person (generally referred to as an “account 

owner”)167 whom the program administrator (oftentimes a third-party administrator retained by 

the State or by the educational institution that established the program) may look to for decisions, 

recordkeeping, and reporting with respect to the account established for a designated beneficiary. 

The person or persons who make the contributions to the account need not be the same person 

who is regarded as the account owner for purposes of administering the account. Under many 

qualified tuition programs, the account owner generally has control over the account or contract, 

including the ability to change designated beneficiaries and to withdraw funds at any time and 

for any purpose. Thus, in practice, qualified tuition accounts or contracts generally involve a 

contributor, a designated beneficiary, an account owner (who oftentimes is not the contributor or 

the designated beneficiary), and an administrator of the account or contract.

Qualified higher education expenses

Distributions for the purpose of meeting the designated beneficiary’s higher education 

expenses are generally not subject to tax. For purposes of receiving a distribution from a 

 166 For purposes of this description, the term “account” is used interchangeably to refer to a prepaid tuition 

benefit contract or a tuition savings account established pursuant to a qualified tuition program.

167 Section 529 refers to contributors and designated beneficiaries, but does not define or otherwise refer to 

the term “account owner,” which is a commonly used term among qualified tuition programs.
62

qualified tuition program that qualifies for this favorable tax treatment, the term qualified higher 

education expenses means tuition, fees, books, supplies, and equipment required for the 

enrollment or attendance of a designated beneficiary at an eligible educational institution, and 

expenses for special needs services in the case of a special needs beneficiary that are incurred in 

connection with such enrollment or attendance. Qualified higher education expenses generally 

also include room and board for students who are enrolled at least half-time. Qualified higher 

education expenses include the purchase of any computer technology or equipment, or Internet 

access or related services, if such technology or services are to be used primarily by the 

beneficiary during any of the years a beneficiary is enrolled at an eligible institution.

For distributions made after December 31, 2017, a designated beneficiary may, on an 

annual basis, receive up to $10,000 in aggregate 529 distributions to be used in connection with 

expenses for tuition in connection with enrollment or attendance at an elementary or secondary 

public, private, or religious school. To the extent such distributions do not exceed $10,000, they 

are treated in the same manner as distributions for qualified higher education expenses.

Contributions to qualified tuition programs

Contributions to a qualified tuition program must be made in cash. Section 529 does not 

impose a specific dollar limit on the amount of contributions, account balances, or prepaid tuition 

benefits relating to a qualified tuition account; however, the program is required to have 

adequate safeguards to prevent contributions in excess of amounts necessary to provide for the 

beneficiary’s qualified higher education expenses. Contributions generally are treated as a 

completed gift eligible for the gift tax annual exclusion. Contributions are not tax deductible for 

Federal income tax purposes, although they may be deductible for State income tax purposes. 

Amounts in the account accumulate on a tax-free basis (i.e., income on accounts in the plan is 

not subject to current income tax).

A qualified tuition program may not permit any contributor to, or designated beneficiary 

under, the program to direct (directly or indirectly) the investment of any contributions (or 

earnings thereon) more than two times in any calendar year, and must provide separate 

accounting for each designated beneficiary. A qualified tuition program may not allow any 

interest in an account or contract (or any portion thereof) to be used as security for a loan. 

Description of Proposal

The proposal makes four modifications to section 529 plans.

First, the proposal allows tax-free treatment applicable to distributions for higher 

education expenses to apply to expenses for books, supplies, equipment and fees required for the 

participation of a designated beneficiary in an apprenticeship program. The apprenticeship 

program must be registered and certified with the Secretary of Labor under section 1 of the 

National Apprenticeship Act.168

 168 29 U.S.C. 50.
63

Second, the proposal allows tax-free treatment to apply to distributions made for 

expenses in connection with a homeschool. Under the proposal, distributions for certain 

homeschool expenses are treated in the same manner as distributions for qualified higher 

education expenses, and like distributions for elementary and secondary school tuition, are also 

subject to an annual limit of $10,000 in aggregate 529 distributions, per beneficiary.169 For these 

purposes, qualifying homeschool expenses are those expenses, with respect to a beneficiary, 

which are incurred in connection with a homeschool and are for: (i) curriculum and curricular 

materials; (ii) books or other instructional materials; (iii) online educational materials; (iv) tuition 

for tutoring or educational classes outside of the home; (v) dual enrollment in an institution of 

higher education; and (vi) educational therapies for students with disabilities.

Third, the proposal adds additional qualifying expenses for distributions made on behalf 

of designated beneficiaries attending elementary or secondary school. Under the proposal, in 

addition to tuition, a distribution may be made for expenses for fees, academic tutoring, special 

needs services, books, supplies, and other equipment, incurred in connection with enrollment or 

attendance at such elementary or secondary school.

Fourth, the proposal treats as a qualified distribution certain amounts used to make 

payments on principal or interest of a qualified education loan. No individual may receive more 

than $10,000 of such distributions, in aggregate, over the course of the individual’s lifetime.170 

To the extent that an individual receives in excess of $10,000 of such distributions, they are 

subject to the usual tax treatment of 529 distributions (i.e., the earnings are included in income 

and subject to a 10-percent penalty). The proposal contains a special rule allowing such amounts 

to be distributed to a sibling of a designated beneficiary (i.e., a brother, sister, stepbrother, or 

stepsister). This rule allows a 529 account holder to make a student loan distribution to a sibling 

of the designated beneficiary without changing the designated beneficiary of the account. For 

purposes of the $10,000 lifetime limit on student loan distributions, a distribution to a sibling of a 

designated beneficiary is applied towards the sibling’s lifetime limit, and not the designated 

beneficiary’s lifetime limit. 

Effective Date

The proposal applies to distributions made after December 31, 2018.

 169 The $10,000 per beneficiary limit applies to the combined distributions used for either (i) elementary 

and secondary school tuition or (ii) homeschool expenses.

170 This limitation applies to such distributions from all 529 accounts. Thus, an individual may not avoid 

the limitation by receiving separate $10,000 distributions from multiple 529 accounts.
64

C. Penalty-Free Withdrawals from Retirement Plans for Individuals

in Case of Birth of Child or Adoption

Present Law

Distributions from tax-favored retirement plans

A distribution from a qualified retirement plan, a tax-sheltered annuity plan (a 

“section 403(b) plan”), an eligible deferred compensation plan of a State or local government 

employer (a “governmental section 457(b) plan”), or an an IRA generally is included in income 

for the year distributed.171 These plans are referred to collectively as “eligible retirement plans.” 

In addition, unless an exception applies, a distribution from a qualified retirement plan, a 

section 403(b) plan, or an IRA received before age 591⁄2 is subject to a 10-percent additional tax 

(referred to as the “early withdrawal tax”) on the amount includible in income.172

In general, a distribution from an eligible retirement plan may be rolled over to another 

eligible retirement plan within 60 days, in which case the amount rolled over generally is not 

includible in income. The IRS has the authority to waive the 60-day requirement if failure to 

waive the requirement would be against equity or good conscience, including cases of casualty, 

disaster or other events beyond the reasonable control of the individual.

The terms of a qualified retirement plan, section 403(b) plan, or governmental 

section 457(b) plan generally determine when distributions are permitted. However, in some 

cases, restrictions may apply to distributions before an employee’s termination of employment, 

referred to as “in-service” distributions. Despite such restrictions, an in-service distribution may 

be permitted in the case of financial hardship or an unforeseeable emergency.

Description of Proposal

In general

Under the proposal, an exception to the 10-percent early withdrawal tax applies in the 

case of a qualified birth or adoption distribution from an applicable eligible retirement plan (as 

defined). In addition, qualified birth or adoption distributions may be recontributed to an 

individual’s applicable eligible retirement plans, subject to certain requirements.

 171 Secs. 401(a), 403(a), 403(b), 457(b) and 408. Under section 3405, distributions from these plans are 

generally subject to income tax withholding unless the recipient elects otherwise. In addition, certain distributions 

from a qualified retirement plan, a section 403(b) plan, or a governmental section 457(b) plan are subject to 

mandatory income tax withholding at a 20-percent rate unless the distribution is rolled over.

172 Sec. 72(t). Under present law, the 10-percent early withdrawal tax does not apply to distributions from 

a governmental section 457(b) plan.
65

Distributions from applicable eligible retirement plans 

A qualified birth or adoption distribution is a permissible distribution from an applicable 

eligible retirement plan which, for this purpose, encompasses eligible retirement plans other than 

defined benefit plans, including qualified retirement plans, section 403(b) plans, governmental 

section 457(b) plans, and IRAs.173 

A qualified birth or adoption distribution is a distribution from an applicable eligible 

retirement plan to an individual if made during the one-year period beginning on the date on 

which a child of the individual is born or on which the legal adoption by the individual of an 

eligible child is finalized. An eligible child means any individual (other than a child of the 

taxpayer’s spouse) who has not attained age 18 or is physically or mentally incapable of selfsupport. The proposal requires the name, age, and taxpayer identification number of the child or 

eligible child to which any qualified birth or adoption distribution relates to be provided on the 

tax return of the individual taxpayer for the taxable year. 

The maximum aggregate amount which may be treated as qualified birth or adoption 

distributions by any individual with respect to a birth or adoption is $7,500. The maximum 

aggregate amount applies on an individual basis. Therefore, each spouse separately may receive 

a maximum aggregate amount of $7,500 of qualified birth or adoption distributions (with respect 

to a birth or adoption) from applicable eligible retirement plans in which each spouse participates 

or holds accounts. 

An employer plan is not treated as violating any Code requirement merely because it 

treats a distribution (that would otherwise be a qualified birth or adoption distribution) to an 

individual as a qualified birth or adoption distribution, provided that the aggregate amount of 

such distributions to that individual from plans maintained by the employer and members of the 

employer’s controlled group174 does not exceed $7,500. Thus, under such circumstances an 

employer plan is not treated as violating any Code requirement merely because an individual 

might receive total distributions in excess of $7,500 as a result of distributions from plans of 

other employers or IRAs.

Recontributions to applicable eligible retirement plans

Generally, any portion of a qualified birth or adoption distribution may, at any time after 

the date on which the distribution was received, be recontributed to an applicable eligible 

retirement plan to which a rollover can be made. Such a recontribution is treated as a rollover 

and thus is not includible in income. If an employer adds the ability for plan participants to 

receive qualified birth or adoption distributions from a plan, the plan must permit an employee 

who has received qualified birth or adoption distributions from that plan to recontribute only up 

to the amount that was distributed from that plan to that employee, provided the employee 

 173 A qualified birth or adoption distribution is subject to income tax withholding unless the recipient elects 

otherwise. Mandatory 20-percent withholding does not apply.

174 The term “controlled group” means any group treated as a single employer under subsection (b), (c), 

(m), or (o) of section 414.
66

otherwise is eligible to make contributions (other than recontributions of qualified birth or 

adoption distributions) to that plan. Any portion of a qualified birth or adoption distribution 

from an individual’s applicable eligible retirement plans (whether employer plans or IRAs) may 

be recontributed to an IRA held by such an individual which is an applicable eligible retirement 

plan to which a rollover can be made. 

Effective Date

The proposal applies to distributions made after December 31, 2018.