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[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[S. 1359 Introduced in Senate (IS)]

  1st Session
                                S. 1359

   To amend the Internal Revenue Code of 1986 to increase retirement 
    savings and security, to facilitate the provision of guaranteed 
   retirement income for life, and to make the retirement plan rules 
          simpler and more equitable, and for other purposes.

_______________________________________________________________________

                   IN THE SENATE OF THE UNITED STATES

                             June 30, 2005

 Mr. Smith (for himself and Mr. Conrad) introduced the following bill; 
     which was read twice and referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL

 
   To amend the Internal Revenue Code of 1986 to increase retirement 
    savings and security, to facilitate the provision of guaranteed 
   retirement income for life, and to make the retirement plan rules 
          simpler and more equitable, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Retirement Savings and Security Act 
of 2005''.

          TITLE I--INCREASING RETIREMENT SAVINGS AND SECURITY

SEC. 101. INCREASING PARTICIPATION THROUGH AUTOMATIC CONTRIBUTION 
              ARRANGEMENTS.

    (a) In General.--Section 401(k) of the Internal Revenue Code of 
1986 (relating to cash or deferred arrangement) is amended by adding at 
the end the following new paragraph:
            ``(13) Nondiscrimination requirements for automatic 
        contribution trusts.--
                    ``(A) In general.--A cash or deferred arrangement 
                shall be treated as meeting the requirements of 
                paragraph (3)(A)(ii) if such arrangement constitutes an 
                automatic contribution trust.
                    ``(B) Automatic contribution trust.--
                            ``(i) In general.--For purposes of this 
                        paragraph, the term `automatic contribution 
                        trust' means an arrangement--
                                    ``(I) except as provided in clause 
                                (ii), under which each employee 
                                eligible to participate in the 
                                arrangement is treated in a consistent 
                                manner as having elected to have the 
                                employer make elective contributions in 
                                an amount not less than the applicable 
                                percentage of the employee's 
                                compensation, and
                                    ``(II) which meets the requirements 
                                of subparagraphs (C), (D), and (E).
                            ``(ii) Exceptions.--
                                    ``(I) Existing employees.--Clause 
                                (i) shall not apply to any employee who 
                                was eligible to participate in the 
                                arrangement (or a predecessor 
                                arrangement) immediately before the 
                                first date on which the arrangement is 
                                an automatic contribution trust.
                                    ``(II) Election out.--Each employee 
                                eligible to participate in the 
                                arrangement may elect not to have 
                                contributions made under clause (i) or 
                                to have elective contributions made at 
                                a specified level, and such clause 
                                shall cease to apply to compensation 
                                paid on or after the effective date of 
                                the election.
                            ``(iii) Applicable percentage.--For 
                        purposes of this subparagraph--
                                    ``(I) In general.--Except as 
                                provided in this clause, the applicable 
                                percentage with respect to any employee 
                                is 3 percent.
                                    ``(II) Increase in percentage.--In 
                                the case of the second plan year 
                                beginning after the first date the 
                                election under clause (i)(I) is in 
                                effect with respect to the employee and 
                                each subsequent plan year, the 
                                applicable percentage with respect to 
                                the employee shall be equal to the sum 
                                of the applicable percentage for the 
                                employee as of the close of the 
                                preceding plan year plus 1 percentage 
                                point. Under rules prescribed by the 
                                Secretary, the employer sponsoring the 
                                plan (or the plan administrator on 
                                behalf of the employer) may elect to 
                                provide that each such increase shall 
                                occur after each annual increase in an 
                                employee's compensation occurring 
                                during each of the plan years to which 
                                this subclause applies.
                                    ``(III) Maximum percentage.--The 
                                applicable percentage with respect to 
                                any employee for any plan year shall 
                                not exceed 10 percent.
                    ``(C) Matching or nonelective contributions.--
                            ``(i) In general.--The requirements of this 
                        subparagraph are met if, under the arrangement, 
                        the employer--
                                    ``(I) makes matching contributions 
                                on behalf of each employee who is not a 
                                highly compensated employee in an 
                                amount equal to 50 percent of the 
                                elective contributions of the employee 
                                to the extent such elective 
                                contributions do not exceed 6 percent 
                                of compensation, or
                                    ``(II) is required, without regard 
                                to whether the employee makes an 
                                elective contribution or employee 
                                contribution, to make a contribution to 
                                a defined contribution plan on behalf 
                                of each employee who is not a highly 
                                compensated employee and who is 
                                eligible to participate in the 
                                arrangement in an amount equal to at 
                                least 2 percent of the employee's 
                                compensation.
                        The rules of clauses (ii) and (iii) of 
                        paragraph (12)(B) shall apply for purposes of 
                        subclause (I). The rules of clause (ii) of 
                        paragraph (12)(E) shall apply for purposes of 
                        subclauses (I) and (II).
                            ``(ii) Other plans.--An arrangement shall 
                        be treated as meeting the requirements under 
                        clause (i) if any other plan maintained by the 
                        employer meets such requirements with respect 
                        to employees eligible under the arrangement.
                    ``(D) Vesting.--The requirements of this 
                subparagraph are met if an employee who has completed 
                at least 2 years of service (within the meaning of 
                section 411(a)) has a nonforfeitable right to 100 
                percent of the employee's accrued benefit derived from 
                employer contributions taken into account in 
                determining whether the requirements of subparagraph 
                (C) are met.
                    ``(E) Notice requirements.--
                            ``(i) In general.--The requirements of this 
                        subparagraph are met if the requirements of 
                        clauses (ii) and (iii) are met.
                            ``(ii) Reasonable period to make 
                        election.--The requirements of this clause are 
                        met if each employee to whom subparagraph 
                        (B)(i) applies--
                                    ``(I) receives a notice explaining 
                                the employee's right under the 
                                arrangement to elect not to have 
                                elective contributions made on the 
                                employee's behalf and how contributions 
                                made under the arrangement will be 
                                invested in the absence of any 
                                investment election by the employee, 
                                and
                                    ``(II) has a reasonable period of 
                                time after receipt of such notice and 
                                before the first elective contribution 
                                is made to make either such election.
                            ``(iii) Annual notice of rights and 
                        obligations.--The requirements of this clause 
                        are met if each employee eligible to 
                        participate in the arrangement is given notice 
                        of the employee's rights and obligations under 
                        the arrangement within a reasonable period 
                        before any year (or, if the increase in the 
                        applicable percentage occurs after an annual 
                        increase in an employee's compensation, before 
                        such increase).
                The requirements of clauses (i) and (ii) of paragraph 
                (12)(D) shall be met with respect to the notices 
                described in clauses (ii) and (iii) of this 
                subparagraph.''.
    (b) Matching Contributions.--Section 401(m) of the Internal Revenue 
Code of 1986 (relating to nondiscrimination test for matching 
contributions and employee contributions) is amended by redesignating 
paragraph (12) as paragraph (13) and by inserting after paragraph (11) 
the following new paragraph:
            ``(12) Alternative method for automatic contribution 
        trusts.--
                    ``(A) In general.--A defined contribution plan 
                shall be treated as meeting the requirements of 
                paragraph (2) with respect to matching contributions if 
                the plan--
                            ``(i) meets the contribution requirements 
                        of subparagraphs (B)(i) and (C) of subsection 
                        (k)(13),
                            ``(ii) meets the vesting and notice 
                        requirements of subparagraphs (D) and (E) of 
                        subsection (k)(13), and
                            ``(iii) meets the requirements of clauses 
                        (ii) and (iii) of paragraph (11)(B).
                    ``(B) Matching contributions.--An annuity contract 
                under section 403(b) shall be treated as meeting the 
                requirements of paragraph (2) with respect to matching 
                contributions if such contract meets requirements 
                similar to the requirements under subparagraph (A).''.
    (c) Exclusion From Definition of Top-Heavy Plans.--
            (1) Elective contribution rule.--Clause (i) of section 
        416(g)(4)(H) of the Internal Revenue Code of 1986 is amended by 
        inserting ``or 401(k)(13)'' after ``section 401(k)(12)''.
            (2) Matching contribution rule.--Clause (ii) of section 
        416(g)(4)(H) of such Code is amended by inserting ``or 
        401(m)(12)'' after ``section 401(m)(11)''.
    (d) Definition of Compensation.--
            (1) Base pay or rate of pay.--The Secretary of the Treasury 
        shall, by no later than December 31, 2006, modify Treasury 
        Regulation section 1.414(s)-1(d)(3) to facilitate the use of 
        the safe harbors in sections 401(k)(12), 401(k)(13), 
        401(m)(11), and 401(m)(12) of the Internal Revenue Code of 
        1986, and in Treasury Regulation section 1.401(a)(4)-3(b), by 
        plans that use base pay or rate of pay in determining 
        contributions or benefits. Such facilitation shall include 
        increased flexibility in satisfying section 414(s) of such Code 
        in any case where the amount of overtime compensation payable 
        in a year can vary significantly.
            (2) Application of requirements to separate payroll 
        periods.--Not later than December 31, 2005, the Secretary of 
        the Treasury shall issue rules under subparagraphs (B)(i) and 
        (C)(i) of section 401(k)(13) of such Code and under clause (i) 
        of section 401(m)(12)(A) of such Code that, effective for plan 
        years beginning after December 31, 2005, permit such 
        requirements to be applied separately to separate payroll 
        periods based on rules similar to the rules described in 
        Treasury Regulation sections 1.401(k)-3(c)(5)(ii) and 1.401(m)-
        3(d)(4).
    (e) Section 403(b) Contracts.--Paragraph (11) of section 401(m) of 
such Code is amended by adding at the end the following:
                    ``(C) Section 403(b) contracts.--An annuity 
                contract under section 403(b) shall be treated as 
                meeting the requirements of paragraph (2) with respect 
                to matching contributions if such contract meets 
                requirements similar to the requirements under 
                subparagraph (A).''.
    (f) Investments and Preemption.--
            (1) Control deemed to have been exercised with respect to 
        amount of automatic contributions.--Section 404(c) of the 
        Employee Retirement Income Security Act of 1974 (29 U.S.C. 
        1104(c)) is amended by adding at the end the following new 
        paragraphs:
            ``(4) Automatic contribution arrangement.--
                    ``(A) In general.--A participant or beneficiary in 
                an individual account plan shall, for purposes of 
                paragraph (1), be treated as exercising control over 
                the assets in the account with respect to the 
                contributions made under an automatic contribution 
                arrangement.
                    ``(B) Automatic contribution arrangement defined.--
                For purposes of this paragraph, the term `automatic 
                contribution arrangement' means an arrangement--
                            ``(i) which meets the requirements of 
                        subparagraph (C),
                            ``(ii) under which a participant may elect 
                        to have the employer make payments as 
                        contributions under the plan on behalf of the 
                        participant, or to the participant directly in 
                        cash,
                            ``(iii) under which the participant is 
                        treated as having elected to have the employer 
                        make such contributions in an amount equal to a 
                        specified percentage of compensation provided 
                        under the plan until the participant 
                        affirmatively elects not to have such 
                        contributions made (or affirmatively elects to 
                        have such contributions made at a different 
                        percentage), and
                            ``(iv) under which contributions described 
                        in clause (iii) are invested in accordance with 
                        regulations prescribed by the Secretary which 
                        provide for the investment of the contributions 
                        in 1 or more investment options which include a 
                        range of asset classes, but only if the 
                        investment options--
                                    ``(I) vary the emphasis and 
                                exposure among the asset classes as the 
                                participant approaches a target 
                                retirement date with the expectation 
                                that the participant will take 
                                distributions on or near such target 
                                retirement date, including model 
                                portfolios, life-cycle funds, 
                                retirement target date funds, managed 
                                accounts, and other similar investment 
                                options,
                                    ``(II) provide for a blend of 
                                capital preservation and long-term 
                                appreciation through balanced 
                                portfolios or balanced funds, or
                                    ``(III) are otherwise approved in 
                                the regulations.
                    ``(C) Notice requirements.--
                            ``(i) Time for notice.--The administrator 
                        of an individual account plan shall, within a 
                        reasonable period before each plan year and 
                        before the first contribution made on the 
                        participant's behalf under subparagraph (B), 
                        give to each participant to whom an automatic 
                        contribution arrangement applies for such plan 
                        year notice of the participant's rights and 
                        obligations under the arrangement which--
                                    ``(I) is sufficiently accurate and 
                                comprehensive to apprise the 
                                participant of such rights and 
                                obligations, and
                                    ``(II) is written in a manner 
                                calculated to be understood by the 
                                average participant to whom the 
                                arrangement applies.
                            ``(ii) Form of notice; response.--A notice 
                        shall not be treated as meeting the 
                        requirements of clause (i) with respect to a 
                        participant unless--
                                    ``(I) the notice includes a notice 
                                explaining the participant's right 
                                under the arrangement to elect not to 
                                have elective contributions made on the 
                                participant's behalf (or to elect to 
                                have such contributions made at a 
                                different percentage),
                                    ``(II) the notice explains how 
                                contributions made under the 
                                arrangement will be invested in the 
                                absence of any investment election by 
                                the participant or beneficiary, and
                                    ``(III) the participant or 
                                beneficiary has a reasonable period of 
                                time after receipt of the notice 
                                described in subclause (I) or (II) and 
                                before the making of the first elective 
                                contribution to which the notice 
                                relates to make either such election.
            ``(5) Contributions to which paragraph (4) does not 
        apply.--
                    ``(A) In general.--A participant or beneficiary in 
                an individual account plan (including a plan to which 
                the requirements of this subsection do not otherwise 
                apply) who does not make an investment election with 
                respect to contributions described in subparagraph (B) 
                shall, for purposes of paragraph (1), be treated as 
                exercising control over the assets in the account with 
                respect to such contributions.
            ``(B) Applicable contributions.--Contributions are 
        described in this subparagraph if--
                    ``(i) the contributions are not described in 
                paragraph (4),
                    ``(ii) the plan administrator satisfies rules 
                similar to the rules of paragraph (4)(C), to the extent 
                the rules relate to the explanation described in 
                paragraph (4)(B)(ii)(II), and
                    ``(iii) the contributions are invested pursuant to 
                the regulations under paragraph (4)(B)(iv).''.
            (2) Preemption of conflicting state regulation.--Section 
        514 of such Act (29 U.S.C. 1144(b)) is amended by adding at the 
        end the following new subsection:
    ``(e) Automatic Contribution Arrangements.--Notwithstanding any 
other provision of this section, any law of a State which would 
directly or indirectly prohibit or restrict the inclusion in any plan 
of an automatic contribution arrangement (as defined in section 
404(c)(4)(B)) shall be superseded. The Secretary may prescribe 
regulations which would establish minimum standards that such 
arrangements would be required to satisfy in order for this paragraph 
to apply.''.
    (g) Corrective Distributions.--
            (1) In general.--Section 414 of the Internal Revenue Code 
        of 1986 (relating to definitions and special rules) is amended 
        by adding at the end the following new subsection:
    ``(w) Automatic Contribution Arrangements.--
            ``(1) In general.--For purposes of this title, the amount 
        of any corrective distribution from a plan shall be treated as 
        if the amount had never been held in such plan and shall be 
        treated as a payment of compensation from the employer 
        maintaining the plan to the employee receiving the 
        distribution.
            ``(2) Corrective distribution.--For purposes of this 
        subsection, the term `corrective distribution' means a 
        distribution from an applicable employer plan of all amounts 
        attributable to an erroneous automatic contribution.
            ``(3) Erroneous automatic contribution.--For purposes of 
        this subsection, the term `erroneous automatic contribution' 
        means an elective contribution made on behalf of an employee 
        under any applicable employer plan pursuant to a plan provision 
        treating the employee as having elected to have the employer 
        make such elective contribution until the employee 
        affirmatively elects not to have such contribution made or 
        affirmatively elects to make contributions at a specified 
        level, if the following requirements are satisfied:
                    ``(A) Within the applicable period, the employee 
                notifies the plan administrator that the employee 
                elects to have the elective contribution treated as an 
                erroneous automatic contribution.
                    ``(B) The sum of the elective contributions that 
                are treated as erroneous automatic contributions with 
                respect to an employee does not exceed $500.
            ``(4) Applicable employer plan.--For purposes of this 
        subsection, the term `applicable employer plan' has the meaning 
        given such term by subsection (v)(6)(A).
            ``(5) Applicable period.--For purposes of this subsection, 
        the term `applicable period' means, with respect to an 
        employee, the 3-month period which begins on the first date 
        that an amount is withheld from compensation payable to the 
        employee in order to make a plan contribution pursuant to a 
        plan provision described in paragraph (3).''.
            (2) Vesting conforming amendments.--
                    (A) Internal revenue code of 1986.--
                            (i) Section 411(a)(3)(G) of such Code is 
                        amended by inserting ``an erroneous automatic 
                        contribution under section 414(w),'' after 
                        ``402(g)(2)(A),''.
                            (ii) The heading of section 411(a)(3)(G) of 
                        such Code is amended by inserting ``or 
                        erroneous automatic contribution'' before the 
                        period.
                            (iii) Section 401(k)(8)(E) of such Code is 
                        amended by inserting ``an erroneous automatic 
                        contribution under section 414(w),'' after 
                        ``402(g)(2)(A),''.
                            (iv) The heading of section 401(k)(8)(E) of 
                        such Code is amended by inserting ``or 
                        erroneous automatic contribution'' before the 
                        period.
                    (B) Employee retirement income security act of 
                1974.--Section 203(a)(3)(F) of the Employee Retirement 
                Income Security Act of 1974 (29 U.S.C. 1053(a)(3)(F)) 
                is amended by inserting ``an erroneous automatic 
                contribution under section 414(w) of such Code,'' after 
                ``402(g)(2)(A) of such Code,''.
    (h) Sense of Congress.--It is the sense of Congress that--
            (1) automatic contribution arrangements and automatic 
        contribution increase arrangements are a powerful means of 
        increasing savings and retirement security;
            (2) implementation of such arrangements should be 
        considered broadly by employers, including employers that are 
        not subject to the Employee Retirement Income Security Act of 
        1974; and
            (3) to the extent that there are remaining obstacles 
        preventing employers from adopting such arrangements, there 
        should be a public dialogue regarding ways to address such 
        obstacles.
    (i) Effective Date.--
            (1) In general.--Except as provided by paragraph (2), the 
        amendments made by this section shall apply to plan years 
        beginning after December 31, 2005.
            (2) Section 403(b) contracts.--The amendments made by 
        subsection (e) shall apply to years beginning after December 
        31, 1998.
            (3) Regulations.--Final regulations under section 
        404(c)(4)(B)(iv) of the Employee Retirement Income Security Act 
        of 1974 shall be issued no later than 6 months after the date 
        of the enactment of this Act.

SEC. 102. EXTENSION AND EXPANSION OF SAVER'S CREDIT.

    (a) Extension.--Section 25B(h) of the Internal Revenue Code of 1986 
(relating to termination) is amended by striking ``2006'' and inserting 
``2010''.
    (b) Expansion.--Section 25B(b) of such Code (relating to applicable 
percentage) is amended to read as follows:
    ``(b) Applicable Percentage.--For purposes of this section--
            ``(1) In general.--The applicable percentage is the 
        percentage determined in accordance with the following table:

    ``If the adjusted
                                                         The applicable
    gross income is:
                                                         percentage is:
            Not over $15,000.........................            50    
            Over $15,000 but not over $20,000........            20    
            Over $20,000 but not over $25,000........            10    
            Over $25,000.............................            0.    
            ``(2) Special rule for joint returns and head of 
        households.--Paragraph (1) shall be applied for any taxable 
        year by substituting for each dollar amount otherwise in effect 
        under the table for the taxable year the following:
                    ``(A) In the case of a joint return, twice the 
                dollar amount.
                    ``(B) In the case of a head of a household, 1\1/2\ 
                times the dollar amount.''.
    (c) Adjustment for Inflation.--Section 25B of such Code is amended 
by redesignating subsection (h) as subsection (i) and by inserting 
after subsection (g) the following new subsection:
    ``(h) Adjustment for Inflation.--In the case of any taxable year 
beginning after December 31, 2008, each dollar amount in the table 
contained in subsection (b)(1) shall be increased by an amount equal 
to--
            ``(1) such dollar amount, multiplied by
            ``(2) the cost-of-living adjustment determined under 
        section 1(f)(3) for such calendar year by substituting 
        `calendar year 2007' for `calendar year 1992' in subparagraph 
        (B) thereof.
If any increase under the preceding sentence is not a multiple of 
$1,000, such increase shall be rounded to the nearest multiple of 
$1,000.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.

SEC. 103. DISPOSITION OF UNUSED HEALTH BENEFITS IN FLEXIBLE SPENDING 
              ARRANGEMENTS.

    (a) In General.--Section 125 of the Internal Revenue Code of 1986 
(relating to cafeteria plans) is amended by redesignating subsections 
(h) and (i) as subsections (i) and (j), respectively, and by inserting 
after subsection (g) the following:
    ``(h) Contributions of Certain Unused Health Benefits.--
            ``(1) In general.--For purposes of this title, a plan or 
        other arrangement shall not fail to be treated as a cafeteria 
        plan solely because qualified benefits of a participant under 
        such plan include a health flexible spending arrangement under 
        which not more than $500 of unused health benefits may be 
        contributed on behalf of the participant to--
                    ``(A) a qualified retirement plan (as defined in 
                section 4974(c)), or
                    ``(B) an eligible deferred compensation plan (as 
                defined in section 457(b)) maintained by an eligible 
                employer described in section 457(e)(1)(A).
            ``(2) Treatment of contribution of unused health 
        benefits.--
                    ``(A) In general.--For purposes of this title, 
                contributions described in paragraph (1) shall be 
                treated as elective contributions made pursuant to an 
                election by the participant between such contributions 
                and compensation which would otherwise be includible in 
                the gross income of the employee.
                    ``(B) Exclusion or deduction.--Contributions 
                described in paragraph (1) shall be excluded from gross 
                income, or included in gross income and allowed as a 
                deduction, to the same extent that elective 
                contributions would be so treated under this title.
            ``(3) Health flexible spending arrangement.--For purposes 
        of this subsection, the term `health flexible spending 
        arrangement' means a flexible spending arrangement (as defined 
        in section 106(c)) which is a qualified benefit and only 
        permits reimbursement for expenses for medical care (as defined 
        in section 213(d)(1) without regard to subparagraphs (C) and 
        (D) thereof).
            ``(4) Unused health benefits.--For purposes of this 
        subsection, the term `unused health benefits' means, with 
        respect to a participant, the excess of--
                    ``(A) the maximum amount of reimbursement allowable 
                to the participant with respect to a plan year under a 
                health flexible spending arrangement, taking into 
                account any election by the participant, over
                    ``(B) the actual amount of reimbursement with 
                respect to such year under such arrangement.''.
    (b) Special Rules.--The Secretary of the Treasury shall prescribe 
such rules as are appropriate to carry out the purposes of the 
amendments made by this section. Such rules may permit elections by 
plan sponsors with respect to the year to which the contributions 
relate and may provide for special treatment for purposes of applying 
the requirements applicable to such contributions.
    (c) Effective Date.--The amendment made by subsection (a) shall 
apply to years beginning after December 31, 2005.

SEC. 104. DIRECT PAYMENT OF TAX REFUNDS TO INDIVIDUAL RETIREMENT PLANS.

    (a) In General.--Paragraph (3) of section 219(f) of the Internal 
Revenue Code of 1986 is amended to read as follows:
            ``(3) Time when contributions made.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), for purposes of this subsection, a 
                taxpayer shall be deemed to have made a contribution to 
                an individual retirement plan on the last day of the 
                preceding taxable year if the contribution is made on 
                account of such taxable year and is made not later than 
                the time prescribed by law for filing the return for 
                such taxable year (not including extensions thereof).
                    ``(B) Direct payment of tax refunds to individual 
                retirement plans.--
                            ``(i) In general.--To the extent provided 
                        in rules prescribed by the Secretary, a tax 
                        refund owed to a taxpayer and paid directly to 
                        an individual retirement plan shall be deemed a 
                        contribution made by the taxpayer--
                                    ``(I) on the last day of the 
                                taxable year to which such refund 
                                relates, and
                                    ``(II) on account of such taxable 
                                year.
                            ``(ii) Limitation.--This subparagraph shall 
                        not apply to a tax refund unless such refund is 
                        shown on a return filed not later than the time 
                        prescribed by law for filing the return for the 
                        taxable year to which such refund relates (not 
                        including extensions thereof).
                            ``(iii) Direct payment.--For purposes of 
                        this subparagraph, a tax refund is paid 
                        directly to an individual retirement plan if it 
                        is paid in the form of a direct transfer from 
                        the Secretary to the trustee or issuer of the 
                        individual retirement plan.
                            ``(iv) Tax refund.--For purposes of this 
                        subparagraph, the term `tax refund' means any 
                        overpayment of an internal revenue tax under 
                        section 6401 which the Secretary may credit or 
                        refund under section 6402 (after application of 
                        subsections (c), (d), and (e) thereof).''.
    (b) Regulations.--
            (1) In general.--Not later than 1 year after the date of 
        enactment of this Act, the Secretary of the Treasury shall 
        issue rules which permit a taxpayer--
                    (A) to elect to have all or any portion of a tax 
                refund owed to the taxpayer paid directly to an 
                individual retirement plan,
                    (B) to specify the individual retirement plan to 
                which such tax refund is to be paid (and the investment 
                option in which such tax refund is to be invested), and
                    (C) to the extent provided in rules prescribed by 
                the Secretary, to specify the taxable year on account 
                of which such payment is made,
        except that the Secretary may require that the amount subject 
        to such an election exceed a dollar threshold determined by the 
        Secretary as necessary or appropriate to ensure the 
        administrability of such elections.
            (2) Information.--The Secretary may require that the 
        taxpayer provide, and agree to the disclosure of, any 
        information necessary to pay the tax refund to the individual 
        retirement plan specified by the taxpayer.
            (3) Special rule.--The Secretary may provide that if, for 
        any reason, the trustee or issuer does not accept payment of a 
        tax refund, the tax refund shall instead be paid as if the 
        taxpayer had not elected a direct payment to an individual 
        retirement plan.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years the due date for which (without regard to any 
extension) occurs after the date on which final rules implementing the 
amendments made by this section are prescribed.

           TITLE II--FACILITATING GUARANTEED INCOME FOR LIFE

SEC. 201. EXCLUSION OF CERTAIN QUALIFIED ANNUITY PAYMENTS.

    (a) Exclusion.--
            (1) Qualified plans.--Section 402(e) of the Internal 
        Revenue Code of 1986 (relating to exempt trusts) is amended by 
        adding at the end the following new paragraph:
            ``(7) Exclusion of percentage of lifetime annuity 
        payments.--
                    ``(A) In general.--In the case of a lifetime 
                annuity payment to a qualified distributee from a 
                qualified trust (within the meaning of subsection 
                (c)(8)(A)) maintained in connection with a defined 
                contribution plan, gross income shall not include 10 
                percent of the amount otherwise includible in gross 
                income (determined without regard to this paragraph). 
                For purposes of this paragraph, payments from an 
                annuity contract distributed by the qualified trust 
                shall be treated as payments from the qualified trust.
                    ``(B) Limitation.--
                            ``(i) In general.--If--
                                    ``(I) the aggregate amount of 
                                lifetime annuity payments to the 
                                distributee during the taxable year 
                                which are includible in gross income 
                                (determined without regard to this 
                                paragraph) and which are subject to 
                                this paragraph or to rules similar to 
                                the rules of this paragraph (other than 
                                section 72(b)(5) or 101(d)(4)), exceeds
                                    ``(II) 50 percent of the applicable 
                                amount for the taxable year under 
                                section 415(a),
                        then the aggregate amount otherwise excludable 
                        under subparagraph (A) for the taxable year 
                        shall be reduced by 10 percent of the portion 
                        of such excess which is allocable under clause 
                        (ii) to payments which are subject to this 
                        paragraph.
                            ``(ii) Allocation rule.--Any excess 
                        described in clause (i) for any taxable year 
                        shall be allocated ratably among all lifetime 
                        annuity payments to the qualified distributee 
                        described in clause (i)(I).
                    ``(C) Definitions.--For purposes of this 
                paragraph--
                            ``(i) Lifetime annuity payment.--
                                    ``(I) In general.--Except as 
                                provided in this clause, the term 
                                `lifetime annuity payment' means a 
                                distribution from an annuity contract 
                                which is a part of a series of 
                                substantially equal periodic payments 
                                (not less frequently than annually) 
                                made over the life of the qualified 
                                distributee or the joint lives of the 
                                qualified distributee and the qualified 
                                distributee's designated beneficiary. 
                                For purposes of this paragraph, the 
                                term `annuity contract' means a 
                                commercial annuity (as defined in 
                                section 3405(e)(6)), other than an 
                                endowment or life insurance contract.
                                    ``(II) Certain fluctuating 
                                payments.--Annuity payments shall not 
                                fail to be treated as part of a series 
                                of substantially equal periodic 
                                payments merely because the amount of 
                                the periodic payments may vary in 
                                accordance with investment experience, 
                                reallocations among investment options, 
                                actuarial gains or losses, cost of 
                                living indices, a constant percentage 
                                (not less than zero) applied not less 
                                frequently than annually, or similar 
                                fluctuating criteria.
                                    ``(III) Certain changes in the mode 
                                of payment.--Annuity payments shall not 
                                fail to be treated as part of a series 
                                of substantially equal periodic 
                                payments merely because the period 
                                between each such payment is lengthened 
                                or shortened, but only if at all times 
                                such period is not longer than 1 year.
                                    ``(IV) Permitted reductions.--
                                Annuity payments shall not fail to be 
                                treated as part of a series of 
                                substantially equal periodic payments 
                                merely because, in the case of an 
                                annuity payable over the lives of the 
                                qualified distributee and the qualified 
                                distributee's designated beneficiary, 
                                the amounts paid after the death of the 
                                qualified distributee or the qualified 
                                distributee's designated beneficiary 
                                are less than the amounts payable 
                                during their joint lives.
                                    ``(V) Certain contract benefits.--
                                The availability of a commutation 
                                benefit or other feature permitting 
                                acceleration of annuity payments (or a 
                                modification of the period during which 
                                such a benefit is available), a minimum 
                                period of payments or a minimum amount 
                                to be paid in any event shall not 
                                affect the treatment of a distribution 
                                as a lifetime annuity payment.
                                    ``(VI) Trust payments.--In the case 
                                of lifetime annuity payments being made 
                                to a qualified trust, payments by the 
                                qualified trust to a qualified 
                                distributee of the entire amount 
                                received by the qualified trust with 
                                respect to the qualified distributee 
                                shall constitute lifetime annuity 
                                payments if such payments are made 
                                within a reasonable period after 
                                receipt by the qualified trust.
                                    ``(VII) Qualified domestic 
                                relations orders.--Annuity payments 
                                shall not fail to be treated as a 
                                series of substantially equal periodic 
                                payments merely because the payments 
                                are reduced on account of a qualified 
                                domestic relations order (within the 
                                meaning of section 414(p)) that becomes 
                                effective after the commencement of the 
                                annuity payments.
                            ``(ii) Qualified distributee.--The term 
                        `qualified distributee' means the employee, the 
                        surviving spouse of the employee, and an 
                        alternate payee who is the spouse or former 
                        spouse of the employee.
                    ``(D) Recapture tax.--
                            ``(i) In general.--If--
                                    ``(I) an amount is not includible 
                                in gross income by reason of 
                                subparagraph (A), and
                                    ``(II) the series of payments of 
                                which such payment is a part is 
                                subsequently modified (other than by 
                                reason of death or disability) so that 
                                some or all future payments are not 
                                lifetime annuity payments,
                        the qualified distributee's gross income for 
                        the first taxable year in which such 
                        modification occurs shall be increased by an 
                        amount, determined under rules prescribed by 
                        the Secretary, equal to the amount which (but 
                        for subparagraph (A)) would have been 
                        includible in the qualified distributee's gross 
                        income if the modification had been in effect 
                        at all times, plus interest for the deferral 
                        period at the underpayment rate established 
                        under section 6621.
                            ``(ii) Deferral period.--For purposes of 
                        this subparagraph, the term `deferral period' 
                        means, with respect to any amount, the period 
                        beginning with the taxable year in which 
                        (without regard to subparagraph (A)) the amount 
                        would have been includible in gross income and 
                        ending with the taxable year in which the 
                        modification described in clause (i)(II) 
                        occurs.
                    ``(E) Investment in the contract.--For purposes of 
                section 72, the investment in the contract shall be 
                determined without regard to this paragraph.''.
            (2) Qualified annuity plans.--Section 403(a) of such Code 
        (relating to qualified annuity plans) is amended by adding at 
        the end the following new paragraph:
            ``(6) Exclusion of percentage of lifetime annuity 
        payments.--Rules similar to the rules of section 402(e)(7) 
        shall apply to distributions under any annuity contract to 
        which this subsection applies.''.
            (3) Purchased annuities.--Section 403(b) of such Code 
        (relating to purchased annuities) is amended by adding at the 
        end the following new paragraph:
            ``(14) Exclusion of percentage of lifetime annuity 
        payments.--Rules similar to the rules of section 402(e)(7) 
        shall apply to distributions under any annuity contract or 
        custodial account to which this subsection applies.''.
            (4) IRAs.--Section 408(d) of such Code (relating to tax 
        treatment of distributions) is amended by adding at the end the 
        following new paragraph:
            ``(8) Exclusion of percentage of lifetime annuity 
        payments.--Rules similar to the rules of section 402(e)(7) 
        shall apply to distributions out of an individual retirement 
        plan.''.
            (5) Section 457 plans.--Section 457(e) of such Code 
        (relating to special rules for deferred compensation plans) is 
        amended by adding at the end the following new paragraph:
            ``(18) Exclusion of percentage of lifetime annuity 
        payments.--Rules similar to the rules of section 402(e)(7) 
        shall apply to distributions from an eligible deferred 
        compensation plan of an eligible employer described in 
        subsection (e)(1)(A).''.
    (b) Effective Date.--The amendments made by this section shall 
apply to distributions made after December 31, 2005.

SEC. 202. EXCLUSION FOR LIFETIME ANNUITY PAYMENTS.

    (a) Lifetime Annuity Payments Under Annuity Contracts.--Section 
72(b) of the Internal Revenue Code of 1986 (relating to exclusion 
ratio) is amended by adding at the end the following new paragraph:
            ``(5) Exclusion for lifetime annuity payments.--
                    ``(A) In general.--In the case of lifetime annuity 
                payments received as an annuity under 1 or more annuity 
                contracts in any taxable year, gross income shall not 
                include the lesser of--
                            ``(i) 50 percent of the portion of the 
                        lifetime annuity payments which (without regard 
                        to this paragraph) is includible in gross 
                        income under this section for the taxable year, 
                        or
                            ``(ii) $20,000.
                    ``(B) Cost-of-living adjustment.--In the case of 
                taxable years beginning after December 31, 2006, the 
                $20,000 amount in subparagraph (A)(ii) shall be 
                increased by an amount equal to--
                            ``(i) such dollar amount, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for the 
                        calendar year in which the taxable year begins, 
                        determined by substituting `calendar year 2005' 
                        for `calendar year 1992' in subparagraph (B) 
                        thereof.
                If any amount as increased under the preceding sentence 
                is not a multiple of $500, such amount shall be rounded 
                to the next lower multiple of $500.
                    ``(C) Application of paragraph.--Subparagraph (A) 
                shall not apply to--
                            ``(i) any amount received under an eligible 
                        deferred compensation plan (as defined in 
                        section 457(b)) or under a qualified retirement 
                        plan (as defined in section 4974(c)),
                            ``(ii) any amount paid under an annuity 
                        contract which is received by the beneficiary 
                        under the contract--
                                    ``(I) after the death of the 
                                annuitant in the case of payments 
                                described in subsection 
                                (c)(5)(A)(ii)(III), unless the 
                                beneficiary is the surviving spouse of 
                                the annuitant, or
                                    ``(II) after the death of the 
                                annuitant and joint annuitant in the 
                                case of payments described in 
                                subsection (c)(5)(A)(ii)(IV), unless 
                                the beneficiary is the surviving spouse 
                                of the last to die of the annuitant and 
                                the joint annuitant, or
                            ``(iii) any annuity contract that is a 
                        qualified funding asset (as defined in section 
                        130(d)), but without regard to whether there is 
                        a qualified assignment.
                    ``(D) Investment in the contract.--For purposes of 
                this section, the investment in the contract shall be 
                determined without regard to this paragraph.''.
    (b) Definitions.--Section 72(c) of the Internal Revenue Code of 
1986 is amended by adding at the end the following new paragraph:
            ``(5) Lifetime annuity payment.--
                    ``(A) In general.--For purposes of subsection 
                (b)(5), the term `lifetime annuity payment' means any 
                amount received as an annuity under any portion of an 
                annuity contract, but only if--
                            ``(i) the only person (or persons in the 
                        case of payments described in subclause (II) or 
                        (IV) of clause (ii)) legally entitled (by 
                        operation of the contract, a trust, or other 
                        legally enforceable means) to receive such 
                        amount during the life of the annuitant or 
                        joint annuitant is such annuitant or joint 
                        annuitant, and
                            ``(ii) such amount is part of a series of 
                        substantially equal periodic payments made not 
                        less frequently than annually over--
                                    ``(I) the life of the annuitant,
                                    ``(II) the lives of the annuitant 
                                and a joint annuitant, but only if the 
                                annuitant is the spouse of the joint 
                                annuitant as of the annuity starting 
                                date or the difference in age between 
                                the annuitant and joint annuitant is 15 
                                years or less,
                                    ``(III) the life of the annuitant 
                                with a minimum period of payments or 
                                with a minimum amount that must be paid 
                                in any event, or
                                    ``(IV) the lives of the annuitant 
                                and a joint annuitant with a minimum 
                                period of payments or with a minimum 
                                amount that must be paid in any event, 
                                but only if the annuitant is the spouse 
                                of the joint annuitant as of the 
                                annuity starting date or the difference 
                                in age between the annuitant and joint 
                                annuitant is 15 years or less.
                            ``(iii) Exceptions.--For purposes of clause 
                        (ii), annuity payments shall not fail to be 
                        treated as part of a series of substantially 
                        equal periodic payments--
                                    ``(I) because the amount of the 
                                periodic payments may vary in 
                                accordance with investment experience, 
                                reallocations among investment options, 
                                actuarial gains or losses, cost-of-
                                living indices, a constant percentage 
                                (not less than zero) applied not less 
                                frequently than annually, or similar 
                                fluctuating criteria,
                                    ``(II) due to the existence of, or 
                                modification of the duration of, a 
                                provision in the contract permitting a 
                                lump-sum withdrawal after the annuity 
                                starting date, or
                                    ``(III) because the period between 
                                each such payment is lengthened or 
                                shortened, but only if at all times 
                                such period is no longer than 1 
                                calendar year.
                    ``(B) Annuity contract.--For purposes of 
                subparagraph (A) and subsections (b)(5) and (x), the 
                term `annuity contract' means a commercial annuity (as 
                defined by section 3405(e)(6)), other than an endowment 
                or life insurance contract.
                    ``(C) Minimum period of payments.--For purposes of 
                subparagraph (A), the minimum period of payments is a 
                guaranteed term of payments which does not exceed the 
                greater of--
                            ``(i) 10 years, or
                            ``(ii) the life expectancy of--
                                    ``(I) the annuitant as of the 
                                annuity starting date, in the case of 
                                lifetime annuity payments described in 
                                subparagraph (A)(ii)(III), or
                                    ``(II) the annuitant and joint 
                                annuitant as of the annuity starting 
                                date, in the case of lifetime annuity 
                                payments described in subparagraph 
                                (A)(ii)(IV).
                For purposes of this subparagraph, life expectancy 
                shall be computed with reference to the tables 
                prescribed by the Secretary under paragraph (3). For 
                purposes of subsection (x)(1)(C)(ii), the permissible 
                minimum period of payments shall be determined as of 
                the annuity starting date and reduced by one for each 
                subsequent year.
                    ``(D) Minimum amount that must be paid in any 
                event.--For purposes of subparagraph (A), the minimum 
                amount that must be paid in any event is an amount 
                payable to the designated beneficiary under an annuity 
                contract which is in the nature of a refund and does 
                not exceed the greater of the amount applied to produce 
                the lifetime annuity payments under the contract or the 
                amount, if any, available for withdrawal under the 
                contract on the date of death.''.
    (c) Recapture Tax for Lifetime Annuity Payments.--Section 72 of the 
Internal Revenue Code of 1986 is amended by redesignating subsection 
(x) as subsection (y) and by inserting after subsection (x) the 
following new subsection:
    ``(x) Recapture Tax for Modifications to or Reductions in Lifetime 
Annuity Payments.--
            ``(1) In general.--If--
                    ``(A) any amount received under an annuity contract 
                is excluded from income by reason of subsection (b)(5) 
                (relating to lifetime annuity payments) for any taxable 
                year, and
                    ``(B) a recapture event described in paragraph (2) 
                occurs in any subsequent taxable year,
        then gross income for the first taxable year in which the 
        recapture event occurs shall be increased by the recapture 
        amount.
            ``(2) Recapture event.--For purposes of paragraph (1), a 
        recapture event occurs if--
                    ``(A) the series of payments under an annuity 
                contract is subsequently modified so any future 
                payments are not lifetime annuity payments,
                    ``(B) after the date of receipt of the first 
                lifetime annuity payment under the contract an 
                annuitant receives a lump sum and thereafter is to 
                receive annuity payments in a reduced amount under the 
                contract, or
                    ``(C) after the date of receipt of the first 
                lifetime annuity payment under the contract the dollar 
                amount of any subsequent annuity payment is reduced and 
                a lump sum is not paid in connection with the 
                reduction, unless such reduction is--
                            ``(i) due to an event described in 
                        subsection (c)(5)(A)(iii), or
                            ``(ii) due to the addition of, or increase 
                        in, a minimum period of payments (within the 
                        meaning of subsection (c)(5)(C)) or a minimum 
                        amount that must be paid in any event (within 
                        the meaning of subsection (c)(5)(D)).
            ``(3) Recapture amount.--
                    ``(A) In general.--For purposes of this subsection, 
                the recapture amount shall be the amount, determined 
                under rules prescribed by the Secretary, equal to the 
                amount which (but for subsection (b)(5)) would have 
                been includible in the taxpayer's gross income if the 
                modification or reduction described in subparagraph 
                (A), (B), or (C) of paragraph (2) had been in effect at 
                all times, plus interest for the deferral period at the 
                underpayment rate established by section 6621.
                    ``(B) Deferral period.--For purposes of this 
                subsection, the term `deferral period' means, with 
                respect to any amount, the period beginning with the 
                taxable year in which (without regard to subsection 
                (b)(5)) the amount would have been includible in gross 
                income and ending with the taxable year in which the 
                modification or reduction described in subparagraph 
                (A), (B), or (C) of paragraph (2) occurs.
            ``(4) Exceptions to recapture tax.--Paragraph (1) shall not 
        apply in the case of any recapture event which occurs because 
        an annuitant--
                    ``(A) dies or becomes disabled (within the meaning 
                of subsection (m)(7)),
                    ``(B) becomes a chronically ill individual within 
                the meaning of section 7702B(c)(2), or
                    ``(C) encounters hardship.''.
    (d) Lifetime Distributions of Life Insurance Death Benefits.--
            (1) In general.--Section 101(d) of such Code (relating to 
        payment of life insurance proceeds at a date later than death) 
        is amended by adding at the end the following new paragraph:
            ``(4) Exclusion for lifetime annuity payments.--
                    ``(A) In general.--In the case of amounts to which 
                this subsection applies, gross income for any taxable 
                year shall not include the lesser of--
                            ``(i) 50 percent of the portion of lifetime 
                        annuity payments which (without regard to this 
                        paragraph) is includible in gross income under 
                        this section, or
                            ``(ii) the amount in effect under section 
                        72(b)(5)(A)(ii) for the taxable year.
                    ``(B) Rules of section 72(b)(5) to apply.--For 
                purposes of this paragraph, rules similar to the rules 
                of section 72(b)(5) and section 72(x) shall apply, 
                except that the term `beneficiary of the life insurance 
                contract' shall be substituted for the term `annuitant' 
                each place it appears, and the term `life insurance 
                contract' shall be substituted for the term `annuity 
                contract' each place it appears.''.
            (2) Conforming amendment.--Section 101(d)(1) of such Code 
        is amended by inserting ``or paragraph (4)'' after ``to the 
        extent not excluded by the preceding sentence''.
    (e) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to amounts received in calendar years beginning after the 
        date of the enactment of this Act.
            (2) Special rule for existing contracts.--In the case of a 
        contract in force on the date of the enactment of this Act that 
        does not satisfy the requirements of section 72(c)(5)(A) of the 
        Internal Revenue Code of 1986 (as added by this section), or 
        requirements similar to such section 72(c)(5)(A) in the case of 
        a life insurance contract, any modification to such contract 
        (including a change in ownership) or to the payments under such 
        contract that is made to satisfy the requirements of such 
        section (or similar requirements) shall not result in the 
        recognition of any gain or loss, any amount being included in 
        gross income, or any addition to tax that otherwise might 
        result from such modification, but only if the modification is 
        completed before the date which is 2 years after the date of 
        the enactment of this Act.

SEC. 203. FACILITATION UNDER FIDUCIARY RULES OF CERTAIN ROLLOVERS AND 
              ANNUITY DISTRIBUTIONS.

    (a) In General.--Section 404(c) of the Employee Retirement Income 
Security Act of 1974 (29 U.S.C. 1104(c)), as amended by this Act, is 
amended by adding at the end the following new paragraph:
            ``(6) Treatment of rollovers and annuity distributions.--
                    ``(A) In general.--In the case of an individual 
                account plan which makes a transfer under section 
                401(a)(31)(A) of the Internal Revenue Code of 1986 to 
                an individual retirement plan (as defined in section 
                7701(a)(37) of such Code) in connection with a 
                participant or beneficiary, or makes a distribution to 
                a participant or beneficiary of an annuity contract 
                described in subparagraph (B), the participant or 
                beneficiary shall, for purposes of paragraph (1), be 
                treated as exercising control over the transfer or 
                distribution if--
                    ``(i) the participant or beneficiary elected such 
                transfer or distribution, and
                    ``(ii) except as otherwise provided by the 
                Secretary, the participant or beneficiary was, in 
                connection with the election, given an opportunity to 
                designate any other individual retirement plan in the 
                case of a transfer or any other annuity contract 
                described in subparagraph (B) in the case of a 
                distribution.
            ``(B) Applicable annuity contracts.--An annuity contract is 
        described in this subparagraph if it provides, either on an 
        immediate or deferred basis, a series of substantially equal 
        periodic payments (not less frequently than annually) for the 
        life of the participant or beneficiary or the joint lives of 
        the participant or beneficiary and such individual's designated 
        beneficiary. The rules of subclauses (II), (III), (IV), and (V) 
        of section 402(e)(7)(C)(i) of the Internal Revenue Code of 1986 
        shall apply for purposes of this subparagraph.
            ``(C) Identification of plans or contracts disregarded.--
        Under regulations prescribed by the Secretary, this paragraph 
        shall apply without regard to whether the individual retirement 
        plan receiving the transfer or the annuity contract being 
        distributed is specifically identified by the individual 
        account plan as available to the participant or beneficiary.
            ``(D) Exception.--Notwithstanding the preceding provisions 
        of this paragraph, paragraph (1)(B) shall not apply with 
        respect to liability under section 406 in connection with the 
        specific identification of any individual retirement plan or 
        annuity contract as being available to the participant or 
        beneficiary.''.
    (b) Effective Date and Related Rules.--
            (1) Effective date.--The amendment made by this section 
        shall take effect on the date of the enactment of this Act.
            (2) Issuance of final regulations.--Final regulations under 
        section 404(c)(6) of the Employee Retirement Income Security 
        Act of 1974 (added by this section) shall be issued no later 
        than 1 year after the date of the enactment of this Act.

SEC. 204. CLARIFICATION OF TREATMENT OF DISTRIBUTIONS OF ANNUITY 
              CONTRACTS.

    (a) In General.--Clause (i) of section 402(e)(4)(D) is amended by 
adding after the second sentence the following new sentence: ``A 
distribution of an annuity contract from a trust or plan referred to in 
the first sentence of this clause may be treated as a part of a lump-
sum distribution.''.
    (b) Effective Date.--The amendment made by this section shall take 
effect as if included in section 1401(b)(1) of the Small Business Job 
Protection Act of 1996.

                  TITLE III--SIMPLIFICATION AND EQUITY

SEC. 301. CLARIFICATION OF TREATMENT OF INDIAN TRIBAL GOVERNMENTS.

    (a) Definition of Governmental Plan.--
            (1) Amendment to internal revenue code of 1986.--Section 
        414(d) of the Internal Revenue Code of 1986 (definition of 
        governmental plan) is amended by adding at the end the 
        following: ``The term `governmental plan' includes a plan 
        established or maintained for its employees by an Indian tribal 
        government (as defined in section 7701(a)(40)), a subdivision 
        of an Indian tribal government (determined in accordance with 
        section 7871(d)), an agency or instrumentality (or subdivision) 
        of an Indian tribal government, or an entity established under 
        Federal, State, or tribal law which is wholly owned or 
        controlled by any of the foregoing.''.
            (2) Amendment to employee retirement income security act of 
        1974.--Section 3(32) of the Employee Retirement Income Security 
        Act of 1974 (29 U.S.C. 1002(32)) is amended by adding at the 
        end the following: ``The term `governmental plan' includes a 
        plan established or maintained for its employees by an Indian 
        tribal government (as defined in section 7701(a)(40) of the 
        Internal Revenue Code of 1986), a subdivision of an Indian 
        tribal government (determined in accordance with section 
        7871(d) of such Code), an agency or instrumentality (or 
        subdivision) of an Indian tribal government, or an entity 
        established under Federal, State, or tribal law that is wholly 
        owned or controlled by any of the foregoing.''.
    (b) Extension to All Governmental Plans of Current Moratorium on 
Application of Certain Nondiscrimination Rules Applicable to State and 
Local Plans.--
            (1) In general.--
                    (A) Subparagraph (G) of section 401(a)(5) and 
                subparagraph (G) of section 401(a)(26) of such Code are 
                each amended by striking ``section 414(d))'' and all 
                that follows and inserting ``section 414(d)).''.
                    (B) Subparagraph (G) of section 401(k)(3) of such 
                Code and paragraph (2) of section 1505(d) of the 
                Taxpayer Relief Act of 1997 (Public Law 105-34; 111 
                Stat. 1063) are each amended by striking ``maintained 
                by a State or local government or political subdivision 
                thereof (or agency or instrumentality thereof)''.
            (2) Conforming amendments.--
                    (A) The heading of subparagraph (G) of section 
                401(a)(5) of such Code is amended by striking ``State 
                and local governmental'' and inserting 
                ``Governmental''.
                    (B) The heading of subparagraph (G) of section 
                401(a)(26) of such Code is amended by striking 
                ``Exception for state and local'' and inserting 
                ``Exception for''.
            (3) Section 401(k)(3)(G) of such Code is amended by 
        inserting ``Governmental plans.--'' after ``(G)''.
    (c) Clarification That Tribal Governments Are Subject to the Same 
Plan Rules and Regulations Applied to State and Other Local Governments 
and Their Police and Firefighters.--
            (1) Amendments to internal revenue code of 1986.--
                    (A) Police and firefighters.--Subparagraph (H) of 
                section 415(b)(2) of such Code (defining participant) 
                is amended--
                            (i) in clause (i), by striking ``State or 
                        political subdivision'' and inserting ``State, 
                        Indian tribal government (as defined in section 
                        7701(a)(40)), or any political subdivision''; 
                        and
                            (ii) in clause (ii)(I), by striking ``State 
                        or political subdivision'' each place it 
                        appears and inserting ``State, Indian tribal 
                        government (as so defined), or any political 
                        subdivision thereof''.
                    (B) State and local government plans.--
                            (i) In general.--Subparagraph (A) of 
                        section 415(b)(10) of such Code (relating to 
                        limitation to equal accrued benefit) is 
                        amended--
                                    (I) by inserting ``, Indian tribal 
                                government (as defined in section 
                                7701(a)(40)),'' after ``State'';
                                    (II) by inserting ``any'' before 
                                ``political subdivision''; and
                                    (III) by inserting ``any of'' 
                                before ``the foregoing''.
                            (ii) Conforming amendment.--The heading of 
                        paragraph (10) of section 415(b) of such Code 
                        is amended by striking ``Special rule for state 
                        and'' and inserting ``Special rule for state, 
                        indian tribal, and''.
                    (C) Government pickup contributions.--Paragraph (2) 
                of section 414(h) of such Code (relating to designation 
                by units of government) is amended by striking ``State 
                or political subdivision'' and inserting ``State, 
                Indian tribal government (as defined in section 
                7701(a)(40)), or any political subdivision''.
            (2) Amendments to employee retirement income security act 
        of 1974.--Section 4021(b) of the Employee Retirement Income 
        Security Act of 1974 (29 U.S.C. 1321(b)) is amended--
                    (A) in paragraph (12), by striking ``or'' at the 
                end;
                    (B) in paragraph (13), by striking ``plan.'' and 
                inserting ``plan; or''; and
                    (C) by adding at the end the following:
            ``(14) established and maintained for its employees by an 
        Indian tribal government (as defined in section 7701(a)(40) of 
        the Internal Revenue Code of 1986), a subdivision of an Indian 
        tribal government (determined in accordance with section 
        7871(d) of such Code), an agency or instrumentality of an 
        Indian tribal government or subdivision thereof, or an entity 
        established under Federal, State, or tribal law that is wholly 
        owned or controlled by any of the foregoing.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to any year beginning before, on, or after the date of the 
enactment of this Act.

SEC. 302. EXCESS CONTRIBUTIONS.

    (a) Expansion of Corrective Distribution Period.--Subsection (f) of 
section 4979 of the Internal Revenue Code of 1986 is amended--
            (1) by striking ``2\1/2\ months'' in paragraph (1) and 
        inserting ``6 months'', and
            (2) by striking ``2\1/2\ Months'' in the heading and 
        inserting ``6 Months''.
    (b) Year of Inclusion.--Paragraph (2) of section 4979(f) of such 
Code is amended to read as follows:
            ``(2) Year of inclusion.--Any amount distributed as 
        provided in paragraph (1) shall be treated as earned and 
        received by the recipient in the recipient's taxable year in 
        which such distributions were made.''.
    (c) Simplification of Allocable Earnings.--
            (1) Section 4979.--Subsection (f) of section 4979 of such 
        Code is amended--
                    (A) by adding ``through the end of the plan year 
                for which the contribution was made'' after ``thereto'' 
                in paragraph (1), and
                    (B) by adding ``through the end of the plan year 
                for which the contributions were made'' after 
                ``thereto'' in paragraph (2)(B).
            (2) Section 401(k) and 401(m).--
                    (A) Clause (i) of section 401(k)(8)(A) is amended 
                by adding ``through the end of such year'' after ``such 
                contributions''.
                    (B) Subparagraph (A) of section 401(m)(6) of such 
                Code is amended by adding ``through the end of such 
                year'' after ``to such contributions''.
    (d) Effective Date.--The amendments made by this section shall 
apply to years beginning after December 31, 2005.

SEC. 303. FIDUCIARY RELIEF IN CONNECTION WITH CHANGE IN INVESTMENT 
              OPTIONS.

    Section 404(c) of the Employee Retirement Income Security Act of 
1974 (29 U.S.C. 1104(c)(1)), as amended by this Act, is amended by 
adding at the end the following new paragraph:
            ``(7) Change in investment options.--In the case of a 
        change in the investment options under a plan, a participant or 
        beneficiary shall be deemed to have exercised control over the 
        assets in his or her account, if, after reasonable notice of 
        the change in investment options is given to such participant 
        or beneficiary, assets in the account of the participant or 
        beneficiary--
                    ``(A) are transferred to plan investment options in 
                accordance with the affirmative election of the 
                participant or beneficiary which otherwise meets the 
                conditions of this subsection; or
                    ``(B) in the absence of such an election and in the 
                case in which fiduciary relief was provided under this 
                subsection for prior investment options, are 
                transferred to plan investment options with reasonably 
                comparable risk and return characteristics, and in 
                accordance with procedures set forth in such notice.''.
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