II 

109TH CONGRESS 

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. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Retirement Savings 

5 and Security Act of 2005’’. 
2

•S 1359 IS 

1 TITLE I—INCREASING RETIRE2 MENT SAVINGS AND SECU3 RITY 

4 SEC. 101. INCREASING PARTICIPATION THROUGH AUTO5 MATIC CONTRIBUTION ARRANGEMENTS. 

6 (a) IN GENERAL.—Section 401(k) of the Internal 

7 Revenue Code of 1986 (relating to cash or deferred ar8 rangement) is amended by adding at the end the following 

9 new paragraph: 

10 ‘‘(13) NONDISCRIMINATION REQUIREMENTS

11 FOR AUTOMATIC CONTRIBUTION TRUSTS.— 

12 ‘‘(A) IN GENERAL.—A cash or deferred ar13 rangement shall be treated as meeting the re14 quirements of paragraph (3)(A)(ii) if such ar15 rangement constitutes an automatic contribu16 tion trust. 

17 ‘‘(B) AUTOMATIC CONTRIBUTION TRUST.— 

18 ‘‘(i) IN GENERAL.—For purposes of 

19 this paragraph, the term ‘automatic con20 tribution trust’ means an arrangement— 

21 ‘‘(I) except as provided in clause 

22 (ii), under which each employee eligi23 ble to participate in the arrangement 

24 is treated in a consistent manner as 

25 having elected to have the employer 
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•S 1359 IS 

1 make elective contributions in an 

2 amount not less than the applicable 

3 percentage of the employee’s com4 pensation, and 

5 ‘‘(II) which meets the require6 ments of subparagraphs (C), (D), and 

7 (E). 

8 ‘‘(ii) EXCEPTIONS.—

9 ‘‘(I) EXISTING EMPLOYEES.—

10 Clause (i) shall not apply to any em11 ployee who was eligible to participate 

12 in the arrangement (or a predecessor 

13 arrangement) immediately before the 

14 first date on which the arrangement is 

15 an automatic contribution trust. 

16 ‘‘(II) ELECTION OUT.—Each em17 ployee eligible to participate in the ar18 rangement may elect not to have con19 tributions made under clause (i) or to 

20 have elective contributions made at a 

21 specified level, and such clause shall 

22 cease to apply to compensation paid 

23 on or after the effective date of the 

24 election. 
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•S 1359 IS 

1 ‘‘(iii) APPLICABLE PERCENTAGE.—

2 For purposes of this subparagraph—

3 ‘‘(I) IN GENERAL.—Except as 

4 provided in this clause, the applicable 

5 percentage with respect to any em6 ployee is 3 percent. 

7 ‘‘(II) INCREASE IN PERCENT8 AGE.—In the case of the second plan 

9 year beginning after the first date the 

10 election under clause (i)(I) is in effect 

11 with respect to the employee and each 

12 subsequent plan year, the applicable 

13 percentage with respect to the em14 ployee shall be equal to the sum of the 

15 applicable percentage for the employee 

16 as of the close of the preceding plan 

17 year plus 1 percentage point. Under 

18 rules prescribed by the Secretary, the 

19 employer sponsoring the plan (or the 

20 plan administrator on behalf of the 

21 employer) may elect to provide that 

22 each such increase shall occur after 

23 each annual increase in an employee’s 

24 compensation occurring during each 
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•S 1359 IS 

1 of the plan years to which this sub2 clause applies. 

3 ‘‘(III) MAXIMUM PERCENTAGE.—

4 The applicable percentage with re5 spect to any employee for any plan 

6 year shall not exceed 10 percent. 

7 ‘‘(C) MATCHING OR NONELECTIVE CON8 TRIBUTIONS.— 

9 ‘‘(i) IN GENERAL.—The requirements 

10 of this subparagraph are met if, under the 

11 arrangement, the employer— 

12 ‘‘(I) makes matching contribu13 tions on behalf of each employee who 

14 is not a highly compensated employee 

15 in an amount equal to 50 percent of 

16 the elective contributions of the em17 ployee to the extent such elective con18 tributions do not exceed 6 percent of 

19 compensation, or 

20 ‘‘(II) is required, without regard 

21 to whether the employee makes an 

22 elective contribution or employee con23 tribution, to make a contribution to a 

24 defined contribution plan on behalf of 

25 each employee who is not a highly 
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•S 1359 IS 

1 compensated employee and who is eli2 gible to participate in the arrange3 ment in an amount equal to at least 

4 2 percent of the employee’s compensa5 tion. 

6 The rules of clauses (ii) and (iii) of para7 graph (12)(B) shall apply for purposes of 

8 subclause (I). The rules of clause (ii) of 

9 paragraph (12)(E) shall apply for purposes 

10 of subclauses (I) and (II). 

11 ‘‘(ii) OTHER PLANS.—An arrange12 ment shall be treated as meeting the re13 quirements under clause (i) if any other 

14 plan maintained by the employer meets 

15 such requirements with respect to employ16 ees eligible under the arrangement. 

17 ‘‘(D) VESTING.—The requirements of this 

18 subparagraph are met if an employee who has 

19 completed at least 2 years of service (within the 

20 meaning of section 411(a)) has a nonforfeitable 

21 right to 100 percent of the employee’s accrued 

22 benefit derived from employer contributions 

23 taken into account in determining whether the 

24 requirements of subparagraph (C) are met. 

25 ‘‘(E) NOTICE REQUIREMENTS.— 
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•S 1359 IS 

1 ‘‘(i) IN GENERAL.—The requirements 

2 of this subparagraph are met if the re3 quirements of clauses (ii) and (iii) are met. 

4 ‘‘(ii) REASONABLE PERIOD TO MAKE

5 ELECTION.—The requirements of this 

6 clause are met if each employee to whom 

7 subparagraph (B)(i) applies— 

8 ‘‘(I) receives a notice explaining 

9 the employee’s right under the ar10 rangement to elect not to have elective 

11 contributions made on the employee’s 

12 behalf and how contributions made 

13 under the arrangement will be in14 vested in the absence of any invest15 ment election by the employee, and 

16 ‘‘(II) has a reasonable period of 

17 time after receipt of such notice and 

18 before the first elective contribution is 

19 made to make either such election. 

20 ‘‘(iii) ANNUAL NOTICE OF RIGHTS

21 AND OBLIGATIONS.—The requirements of 

22 this clause are met if each employee eligi23 ble to participate in the arrangement is 

24 given notice of the employee’s rights and 

25 obligations under the arrangement within a 
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•S 1359 IS 

1 reasonable period before any year (or, if 

2 the increase in the applicable percentage 

3 occurs after an annual increase in an em4 ployee’s compensation, before such in5 crease). 

6 The requirements of clauses (i) and (ii) of para7 graph (12)(D) shall be met with respect to the 

8 notices described in clauses (ii) and (iii) of this 

9 subparagraph.’’. 

10 (b) MATCHING CONTRIBUTIONS.—Section 401(m) of 

11 the Internal Revenue Code of 1986 (relating to non12 discrimination test for matching contributions and em13 ployee contributions) is amended by redesignating para14 graph (12) as paragraph (13) and by inserting after para15 graph (11) the following new paragraph: 

16 ‘‘(12) ALTERNATIVE METHOD FOR AUTOMATIC

17 CONTRIBUTION TRUSTS.— 

18 ‘‘(A) IN GENERAL.—A defined contribution 

19 plan shall be treated as meeting the require20 ments of paragraph (2) with respect to match21 ing contributions if the plan— 

22 ‘‘(i) meets the contribution require23 ments of subparagraphs (B)(i) and (C) of 

24 subsection (k)(13), 
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1 ‘‘(ii) meets the vesting and notice re2 quirements of subparagraphs (D) and (E) 

3 of subsection (k)(13), and 

4 ‘‘(iii) meets the requirements of 

5 clauses (ii) and (iii) of paragraph (11)(B). 

6 ‘‘(B) MATCHING CONTRIBUTIONS.—An an7 nuity contract under section 403(b) shall be 

8 treated as meeting the requirements of para9 graph (2) with respect to matching contribu10 tions if such contract meets requirements simi11 lar to the requirements under subparagraph 

12 (A).’’. 

13 (c) EXCLUSION FROM DEFINITION OF TOP-HEAVY

14 PLANS.— 

15 (1) ELECTIVE CONTRIBUTION RULE.—Clause 

16 (i) of section 416(g)(4)(H) of the Internal Revenue 

17 Code of 1986 is amended by inserting ‘‘or 

18 401(k)(13)’’ after ‘‘section 401(k)(12)’’. 

19 (2) MATCHING CONTRIBUTION RULE.—Clause 

20 (ii) of section 416(g)(4)(H) of such Code is amended 

21 by inserting ‘‘or 401(m)(12)’’ after ‘‘section 

22 401(m)(11)’’. 

23 (d) DEFINITION OF COMPENSATION.— 

24 (1) BASE PAY OR RATE OF PAY.—The Sec25 retary of the Treasury shall, by no later than De-
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1 cember 31, 2006, modify Treasury Regulation sec2 tion 1.414(s)–1(d)(3) to facilitate the use of the safe 

3 harbors in sections 401(k)(12), 401(k)(13), 

4 401(m)(11), and 401(m)(12) of the Internal Rev5 enue Code of 1986, and in Treasury Regulation sec6 tion 1.401(a)(4)–3(b), by plans that use base pay or 

7 rate of pay in determining contributions or benefits. 

8 Such facilitation shall include increased flexibility in 

9 satisfying section 414(s) of such Code in any case 

10 where the amount of overtime compensation payable 

11 in a year can vary significantly. 

12 (2) APPLICATION OF REQUIREMENTS TO SEPA13 RATE PAYROLL PERIODS.—Not later than December 

14 31, 2005, the Secretary of the Treasury shall issue 

15 rules under subparagraphs (B)(i) and (C)(i) of sec16 tion 401(k)(13) of such Code and under clause (i) 

17 of section 401(m)(12)(A) of such Code that, effec18 tive for plan years beginning after December 31, 

19 2005, permit such requirements to be applied sepa20 rately to separate payroll periods based on rules 

21 similar to the rules described in Treasury Regulation 

22 sections 1.401(k)–3(c)(5)(ii) and 1.401(m)–3(d)(4). 

23 (e) SECTION 403(b) CONTRACTS.—Paragraph (11) of 

24 section 401(m) of such Code is amended by adding at the 

25 end the following: 
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•S 1359 IS 

1 ‘‘(C) SECTION 403(b) CONTRACTS.—An 

2 annuity contract under section 403(b) shall be 

3 treated as meeting the requirements of para4 graph (2) with respect to matching contribu5 tions if such contract meets requirements simi6 lar to the requirements under subparagraph 

7 (A).’’. 

8 (f) INVESTMENTS AND PREEMPTION.— 

9 (1) CONTROL DEEMED TO HAVE BEEN EXER10 CISED WITH RESPECT TO AMOUNT OF AUTOMATIC

11 CONTRIBUTIONS.—Section 404(c) of the Employee 

12 Retirement Income Security Act of 1974 (29 U.S.C. 

13 1104(c)) is amended by adding at the end the fol14 lowing new paragraphs: 

15 ‘‘(4) AUTOMATIC CONTRIBUTION ARRANGE16 MENT.—

17 ‘‘(A) IN GENERAL.—A participant or bene18 ficiary in an individual account plan shall, for 

19 purposes of paragraph (1), be treated as exer20 cising control over the assets in the account 

21 with respect to the contributions made under an 

22 automatic contribution arrangement. 

23 ‘‘(B) AUTOMATIC CONTRIBUTION AR24 RANGEMENT DEFINED.—For purposes of this 
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•S 1359 IS 

1 paragraph, the term ‘automatic contribution ar2 rangement’ means an arrangement— 

3 ‘‘(i) which meets the requirements of 

4 subparagraph (C), 

5 ‘‘(ii) under which a participant may 

6 elect to have the employer make payments 

7 as contributions under the plan on behalf 

8 of the participant, or to the participant di9 rectly in cash, 

10 ‘‘(iii) under which the participant is 

11 treated as having elected to have the em12 ployer make such contributions in an 

13 amount equal to a specified percentage of 

14 compensation provided under the plan 

15 until the participant affirmatively elects 

16 not to have such contributions made (or 

17 affirmatively elects to have such contribu18 tions made at a different percentage), and 

19 ‘‘(iv) under which contributions de20 scribed in clause (iii) are invested in ac21 cordance with regulations prescribed by the 

22 Secretary which provide for the investment 

23 of the contributions in 1 or more invest24 ment options which include a range of 
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•S 1359 IS 

1 asset classes, but only if the investment op2 tions—

3 ‘‘(I) vary the emphasis and expo4 sure among the asset classes as the 

5 participant approaches a target retire6 ment date with the expectation that 

7 the participant will take distributions 

8 on or near such target retirement 

9 date, including model portfolios, life10 cycle funds, retirement target date 

11 funds, managed accounts, and other 

12 similar investment options, 

13 ‘‘(II) provide for a blend of cap14 ital preservation and long-term appre15 ciation through balanced portfolios or 

16 balanced funds, or 

17 ‘‘(III) are otherwise approved in 

18 the regulations. 

19 ‘‘(C) NOTICE REQUIREMENTS.—

20 ‘‘(i) TIME FOR NOTICE.—The admin21 istrator of an individual account plan shall, 

22 within a reasonable period before each plan 

23 year and before the first contribution made 

24 on the participant’s behalf under subpara25 graph (B), give to each participant to 
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•S 1359 IS 

1 whom an automatic contribution arrange2 ment applies for such plan year notice of 

3 the participant’s rights and obligations 

4 under the arrangement which— 

5 ‘‘(I) is sufficiently accurate and 

6 comprehensive to apprise the partici7 pant of such rights and obligations, 

8 and 

9 ‘‘(II) is written in a manner cal10 culated to be understood by the aver11 age participant to whom the arrange12 ment applies. 

13 ‘‘(ii) FORM OF NOTICE; RESPONSE.—

14 A notice shall not be treated as meeting 

15 the requirements of clause (i) with respect 

16 to a participant unless— 

17 ‘‘(I) the notice includes a notice 

18 explaining the participant’s right 

19 under the arrangement to elect not to 

20 have elective contributions made on 

21 the participant’s behalf (or to elect to 

22 have such contributions made at a dif23 ferent percentage), 

24 ‘‘(II) the notice explains how con25 tributions made under the arrange-
15

•S 1359 IS 

1 ment will be invested in the absence of 

2 any investment election by the partici3 pant or beneficiary, and 

4 ‘‘(III) the participant or bene5 ficiary has a reasonable period of time 

6 after receipt of the notice described in 

7 subclause (I) or (II) and before the 

8 making of the first elective contribu9 tion to which the notice relates to 

10 make either such election. 

11 ‘‘(5) CONTRIBUTIONS TO WHICH PARAGRAPH (4)

12 DOES NOT APPLY.—

13 ‘‘(A) IN GENERAL.—A participant or bene14 ficiary in an individual account plan (including 

15 a plan to which the requirements of this sub16 section do not otherwise apply) who does not 

17 make an investment election with respect to 

18 contributions described in subparagraph (B) 

19 shall, for purposes of paragraph (1), be treated 

20 as exercising control over the assets in the ac21 count with respect to such contributions. 

22 ‘‘(B) APPLICABLE CONTRIBUTIONS.—Contribu23 tions are described in this subparagraph if— 

24 ‘‘(i) the contributions are not described in 

25 paragraph (4), 
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1 ‘‘(ii) the plan administrator satisfies rules 

2 similar to the rules of paragraph (4)(C), to the 

3 extent the rules relate to the explanation de4 scribed in paragraph (4)(B)(ii)(II), and 

5 ‘‘(iii) the contributions are invested pursu6 ant to the regulations under paragraph 

7 (4)(B)(iv).’’. 

8 (2) PREEMPTION OF CONFLICTING STATE REG9 ULATION.—Section 514 of such Act (29 U.S.C. 

10 1144(b)) is amended by adding at the end the fol11 lowing new subsection: 

12 ‘‘(e) AUTOMATIC CONTRIBUTION ARRANGEMENTS.—

13 Notwithstanding any other provision of this section, any 

14 law of a State which would directly or indirectly prohibit 

15 or restrict the inclusion in any plan of an automatic con16 tribution arrangement (as defined in section 404(c)(4)(B)) 

17 shall be superseded. The Secretary may prescribe regula18 tions which would establish minimum standards that such 

19 arrangements would be required to satisfy in order for this 

20 paragraph to apply.’’. 

21 (g) CORRECTIVE DISTRIBUTIONS.— 

22 (1) IN GENERAL.—Section 414 of the Internal 

23 Revenue Code of 1986 (relating to definitions and 

24 special rules) is amended by adding at the end the 

25 following new subsection: 
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•S 1359 IS 

1 ‘‘(w) AUTOMATIC CONTRIBUTION ARRANGEMENTS.— 

2 ‘‘(1) IN GENERAL.—For purposes of this title, 

3 the amount of any corrective distribution from a 

4 plan shall be treated as if the amount had never 

5 been held in such plan and shall be treated as a pay6 ment of compensation from the employer maintain7 ing the plan to the employee receiving the distribu8 tion. 

9 ‘‘(2) CORRECTIVE DISTRIBUTION.—For pur10 poses of this subsection, the term ‘corrective dis11 tribution’ means a distribution from an applicable 

12 employer plan of all amounts attributable to an erro13 neous automatic contribution. 

14 ‘‘(3) ERRONEOUS AUTOMATIC CONTRIBU15 TION.—For purposes of this subsection, the term 

16 ‘erroneous automatic contribution’ means an elective 

17 contribution made on behalf of an employee under 

18 any applicable employer plan pursuant to a plan pro19 vision treating the employee as having elected to 

20 have the employer make such elective contribution 

21 until the employee affirmatively elects not to have 

22 such contribution made or affirmatively elects to 

23 make contributions at a specified level, if the fol24 lowing requirements are satisfied: 
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•S 1359 IS 

1 ‘‘(A) Within the applicable period, the em2 ployee notifies the plan administrator that the 

3 employee elects to have the elective contribution 

4 treated as an erroneous automatic contribution. 

5 ‘‘(B) The sum of the elective contributions 

6 that are treated as erroneous automatic con7 tributions with respect to an employee does not 

8 exceed $500. 

9 ‘‘(4) APPLICABLE EMPLOYER PLAN.—For pur10 poses of this subsection, the term ‘applicable em11 ployer plan’ has the meaning given such term by 

12 subsection (v)(6)(A). 

13 ‘‘(5) APPLICABLE PERIOD.—For purposes of 

14 this subsection, the term ‘applicable period’ means, 

15 with respect to an employee, the 3-month period 

16 which begins on the first date that an amount is 

17 withheld from compensation payable to the employee 

18 in order to make a plan contribution pursuant to a 

19 plan provision described in paragraph (3).’’. 

20 (2) VESTING CONFORMING AMENDMENTS.— 

21 (A) INTERNAL REVENUE CODE OF 1986.— 

22 (i) Section 411(a)(3)(G) of such Code 

23 is amended by inserting ‘‘an erroneous 

24 automatic contribution under section 

25 414(w),’’ after ‘‘402(g)(2)(A),’’. 
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•S 1359 IS 

1 (ii) The heading of section 

2 411(a)(3)(G) of such Code is amended by 

3 inserting ‘‘OR ERRONEOUS AUTOMATIC

4 CONTRIBUTION’’ before the period. 

5 (iii) Section 401(k)(8)(E) of such 

6 Code is amended by inserting ‘‘an erro7 neous automatic contribution under section 

8 414(w),’’ after ‘‘402(g)(2)(A),’’. 

9 (iv) The heading of section 

10 401(k)(8)(E) of such Code is amended by 

11 inserting ‘‘OR ERRONEOUS AUTOMATIC

12 CONTRIBUTION’’ before the period. 

13 (B) EMPLOYEE RETIREMENT INCOME SE14 CURITY ACT OF 1974.—Section 203(a)(3)(F) of 

15 the Employee Retirement Income Security Act 

16 of 1974 (29 U.S.C. 1053(a)(3)(F)) is amended 

17 by inserting ‘‘an erroneous automatic contribu18 tion under section 414(w) of such Code,’’ after 

19 ‘‘402(g)(2)(A) of such Code,’’. 

20 (h) SENSE OF CONGRESS.—It is the sense of Con21 gress that—

22 (1) automatic contribution arrangements and 

23 automatic contribution increase arrangements are a 

24 powerful means of increasing savings and retirement 

25 security; 
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1 (2) implementation of such arrangements 

2 should be considered broadly by employers, including 

3 employers that are not subject to the Employee Re4 tirement Income Security Act of 1974; and 

5 (3) to the extent that there are remaining ob6 stacles preventing employers from adopting such ar7 rangements, there should be a public dialogue re8 garding ways to address such obstacles. 

9 (i) EFFECTIVE DATE.— 

10 (1) IN GENERAL.—Except as provided by para11 graph (2), the amendments made by this section 

12 shall apply to plan years beginning after December 

13 31, 2005. 

14 (2) SECTION 403(b) CONTRACTS.—The amend15 ments made by subsection (e) shall apply to years 

16 beginning after December 31, 1998. 

17 (3) REGULATIONS.—Final regulations under 

18 section 404(c)(4)(B)(iv) of the Employee Retirement 

19 Income Security Act of 1974 shall be issued no later 

20 than 6 months after the date of the enactment of 

21 this Act. 

22 SEC. 102. EXTENSION AND EXPANSION OF SAVER’S CREDIT. 

23 (a) EXTENSION.—Section 25B(h) of the Internal 

24 Revenue Code of 1986 (relating to termination) is amend25 ed by striking ‘‘2006’’ and inserting ‘‘2010’’. 
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•S 1359 IS 

1 (b) EXPANSION.—Section 25B(b) of such Code (re2 lating to applicable percentage) is amended to read as fol3 lows: 

4 ‘‘(b) APPLICABLE PERCENTAGE.—For purposes of 

5 this section—

6 ‘‘(1) IN GENERAL.—The applicable percentage 

7 is the percentage determined in accordance with the 

8 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.

9 ‘‘(2) SPECIAL RULE FOR JOINT RETURNS AND

10 HEAD OF HOUSEHOLDS.—Paragraph (1) shall be ap11 plied for any taxable year by substituting for each 

12 dollar amount otherwise in effect under the table for 

13 the taxable year the following: 

14 ‘‘(A) In the case of a joint return, twice 

15 the dollar amount. 

16 ‘‘(B) In the case of a head of a household, 

11 17 ⁄2 times the dollar amount.’’. 

18 (c) ADJUSTMENT FOR INFLATION.—Section 25B of 

19 such Code is amended by redesignating subsection (h) as 

20 subsection (i) and by inserting after subsection (g) the fol21 lowing new subsection: 
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•S 1359 IS 

1 ‘‘(h) ADJUSTMENT FOR INFLATION.—In the case of 

2 any taxable year beginning after December 31, 2008, each 

3 dollar amount in the table contained in subsection (b)(1) 

4 shall be increased by an amount equal to— 

5 ‘‘(1) such dollar amount, multiplied by 

6 ‘‘(2) the cost-of-living adjustment determined 

7 under section 1(f)(3) for such calendar year by sub8 stituting ‘calendar year 2007’ for ‘calendar year 

9 1992’ in subparagraph (B) thereof. 

10 If any increase under the preceding sentence is not a mul11 tiple of $1,000, such increase shall be rounded to the near12 est multiple of $1,000.’’. 

13 (d) EFFECTIVE DATE.—The amendments made by 

14 this section shall apply to taxable years beginning after 

15 December 31, 2006. 

16 SEC. 103. DISPOSITION OF UNUSED HEALTH BENEFITS IN 

17 FLEXIBLE SPENDING ARRANGEMENTS. 

18 (a) IN GENERAL.—Section 125 of the Internal Rev19 enue Code of 1986 (relating to cafeteria plans) is amended 

20 by redesignating subsections (h) and (i) as subsections (i) 

21 and (j), respectively, and by inserting after subsection (g) 

22 the following: 

23 ‘‘(h) CONTRIBUTIONS OF CERTAIN UNUSED HEALTH

24 BENEFITS.— 
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•S 1359 IS 

1 ‘‘(1) IN GENERAL.—For purposes of this title, 

2 a plan or other arrangement shall not fail to be 

3 treated as a cafeteria plan solely because qualified 

4 benefits of a participant under such plan include a 

5 health flexible spending arrangement under which 

6 not more than $500 of unused health benefits may 

7 be contributed on behalf of the participant to—

8 ‘‘(A) a qualified retirement plan (as de9 fined in section 4974(c)), or 

10 ‘‘(B) an eligible deferred compensation 

11 plan (as defined in section 457(b)) maintained 

12 by an eligible employer described in section 

13 457(e)(1)(A). 

14 ‘‘(2) TREATMENT OF CONTRIBUTION OF UN15 USED HEALTH BENEFITS.—

16 ‘‘(A) IN GENERAL.—For purposes of this 

17 title, contributions described in paragraph (1) 

18 shall be treated as elective contributions made 

19 pursuant to an election by the participant be20 tween such contributions and compensation 

21 which would otherwise be includible in the gross 

22 income of the employee. 

23 ‘‘(B) EXCLUSION OR DEDUCTION.—Con24 tributions described in paragraph (1) shall be 

25 excluded from gross income, or included in 
24

•S 1359 IS 

1 gross income and allowed as a deduction, to the 

2 same extent that elective contributions would be 

3 so treated under this title. 

4 ‘‘(3) HEALTH FLEXIBLE SPENDING ARRANGE5 MENT.—For purposes of this subsection, the term 

6 ‘health flexible spending arrangement’ means a flexi7 ble spending arrangement (as defined in section 

8 106(c)) which is a qualified benefit and only permits 

9 reimbursement for expenses for medical care (as de10 fined in section 213(d)(1) without regard to sub11 paragraphs (C) and (D) thereof). 

12 ‘‘(4) UNUSED HEALTH BENEFITS.—For pur13 poses of this subsection, the term ‘unused health 

14 benefits’ means, with respect to a participant, the 

15 excess of— 

16 ‘‘(A) the maximum amount of reimburse17 ment allowable to the participant with respect 

18 to a plan year under a health flexible spending 

19 arrangement, taking into account any election 

20 by the participant, over 

21 ‘‘(B) the actual amount of reimbursement 

22 with respect to such year under such arrange23 ment.’’. 

24 (b) SPECIAL RULES.—The Secretary of the Treasury 

25 shall prescribe such rules as are appropriate to carry out 
25

•S 1359 IS 

1 the purposes of the amendments made by this section. 

2 Such rules may permit elections by plan sponsors with re3 spect to the year to which the contributions relate and may 

4 provide for special treatment for purposes of applying the 

5 requirements applicable to such contributions. 

6 (c) EFFECTIVE DATE.—The amendment made by 

7 subsection (a) shall apply to years beginning after Decem8 ber 31, 2005. 

9 SEC. 104. DIRECT PAYMENT OF TAX REFUNDS TO INDI10 VIDUAL RETIREMENT PLANS. 

11 (a) IN GENERAL.—Paragraph (3) of section 219(f) 

12 of the Internal Revenue Code of 1986 is amended to read 

13 as follows: 

14 ‘‘(3) TIME WHEN CONTRIBUTIONS MADE.— 

15 ‘‘(A) IN GENERAL.—Except as provided in 

16 subparagraph (B), for purposes of this sub17 section, a taxpayer shall be deemed to have 

18 made a contribution to an individual retirement 

19 plan on the last day of the preceding taxable 

20 year if the contribution is made on account of 

21 such taxable year and is made not later than 

22 the time prescribed by law for filing the return 

23 for such taxable year (not including extensions 

24 thereof). 
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•S 1359 IS 

1 ‘‘(B) DIRECT PAYMENT OF TAX REFUNDS

2 TO INDIVIDUAL RETIREMENT PLANS.— 

3 ‘‘(i) IN GENERAL.—To the extent pro4 vided in rules prescribed by the Secretary, 

5 a tax refund owed to a taxpayer and paid 

6 directly to an individual retirement plan 

7 shall be deemed a contribution made by 

8 the taxpayer— 

9 ‘‘(I) on the last day of the tax10 able year to which such refund re11 lates, and 

12 ‘‘(II) on account of such taxable 

13 year. 

14 ‘‘(ii) LIMITATION.—This subpara15 graph shall not apply to a tax refund un16 less such refund is shown on a return filed 

17 not later than the time prescribed by law 

18 for filing the return for the taxable year to 

19 which such refund relates (not including 

20 extensions thereof). 

21 ‘‘(iii) DIRECT PAYMENT.—For pur22 poses of this subparagraph, a tax refund is 

23 paid directly to an individual retirement 

24 plan if it is paid in the form of a direct 
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•S 1359 IS 

1 transfer from the Secretary to the trustee 

2 or issuer of the individual retirement plan. 

3 ‘‘(iv) TAX REFUND.—For purposes of 

4 this subparagraph, the term ‘tax refund’ 

5 means any overpayment of an internal rev6 enue tax under section 6401 which the 

7 Secretary may credit or refund under sec8 tion 6402 (after application of subsections 

9 (c), (d), and (e) thereof).’’. 

10 (b) REGULATIONS.— 

11 (1) IN GENERAL.—Not later than 1 year after 

12 the date of enactment of this Act, the Secretary of 

13 the Treasury shall issue rules which permit a tax14 payer— 

15 (A) to elect to have all or any portion of 

16 a tax refund owed to the taxpayer paid directly 

17 to an individual retirement plan, 

18 (B) to specify the individual retirement 

19 plan to which such tax refund is to be paid 

20 (and the investment option in which such tax 

21 refund is to be invested), and 

22 (C) to the extent provided in rules pre23 scribed by the Secretary, to specify the taxable 

24 year on account of which such payment is 

25 made, 
28

•S 1359 IS 

1 except that the Secretary may require that the 

2 amount subject to such an election exceed a dollar 

3 threshold determined by the Secretary as necessary 

4 or appropriate to ensure the administrability of such 

5 elections. 

6 (2) INFORMATION.—The Secretary may require 

7 that the taxpayer provide, and agree to the disclo8 sure of, any information necessary to pay the tax re9 fund to the individual retirement plan specified by 

10 the taxpayer. 

11 (3) SPECIAL RULE.—The Secretary may pro12 vide that if, for any reason, the trustee or issuer 

13 does not accept payment of a tax refund, the tax re14 fund shall instead be paid as if the taxpayer had not 

15 elected a direct payment to an individual retirement 

16 plan. 

17 (c) EFFECTIVE DATE.—The amendments made by 

18 this section shall apply to taxable years the due date for 

19 which (without regard to any extension) occurs after the 

20 date on which final rules implementing the amendments 

21 made by this section are prescribed. 
29

•S 1359 IS 

1 TITLE II—FACILITATING 

2 GUARANTEED INCOME FOR LIFE 

3 SEC. 201. EXCLUSION OF CERTAIN QUALIFIED ANNUITY 

4 PAYMENTS. 

5 (a) EXCLUSION.—

6 (1) QUALIFIED PLANS.—Section 402(e) of the 

7 Internal Revenue Code of 1986 (relating to exempt 

8 trusts) is amended by adding at the end the fol9 lowing new paragraph: 

10 ‘‘(7) EXCLUSION OF PERCENTAGE OF LIFETIME

11 ANNUITY PAYMENTS.— 

12 ‘‘(A) IN GENERAL.—In the case of a life13 time annuity payment to a qualified distributee 

14 from a qualified trust (within the meaning of 

15 subsection (c)(8)(A)) maintained in connection 

16 with a defined contribution plan, gross income 

17 shall not include 10 percent of the amount oth18 erwise includible in gross income (determined 

19 without regard to this paragraph). For pur20 poses of this paragraph, payments from an an21 nuity contract distributed by the qualified trust 

22 shall be treated as payments from the qualified 

23 trust. 

24 ‘‘(B) LIMITATION.— 

25 ‘‘(i) IN GENERAL.—If—
30

•S 1359 IS 

1 ‘‘(I) the aggregate amount of 

2 lifetime annuity payments to the dis3 tributee during the taxable year which 

4 are includible in gross income (deter5 mined without regard to this para6 graph) and which are subject to this 

7 paragraph or to rules similar to the 

8 rules of this paragraph (other than 

9 section 72(b)(5) or 101(d)(4)), ex10 ceeds 

11 ‘‘(II) 50 percent of the applicable 

12 amount for the taxable year under 

13 section 415(a), 

14 then the aggregate amount otherwise ex15 cludable under subparagraph (A) for the 

16 taxable year shall be reduced by 10 percent 

17 of the portion of such excess which is allo18 cable under clause (ii) to payments which 

19 are subject to this paragraph. 

20 ‘‘(ii) ALLOCATION RULE.—Any excess 

21 described in clause (i) for any taxable year 

22 shall be allocated ratably among all life23 time annuity payments to the qualified dis24 tributee described in clause (i)(I). 
31

•S 1359 IS 

1 ‘‘(C) DEFINITIONS.—For purposes of this 

2 paragraph—

3 ‘‘(i) LIFETIME ANNUITY PAYMENT.— 

4 ‘‘(I) IN GENERAL.—Except as 

5 provided in this clause, the term ‘life6 time annuity payment’ means a dis7 tribution from an annuity contract 

8 which is a part of a series of substan9 tially equal periodic payments (not 

10 less frequently than annually) made 

11 over the life of the qualified dis12 tributee or the joint lives of the quali13 fied distributee and the qualified 

14 distributee’s designated beneficiary. 

15 For purposes of this paragraph, the 

16 term ‘annuity contract’ means a com17 mercial annuity (as defined in section 

18 3405(e)(6)), other than an endowment 

19 or life insurance contract. 

20 ‘‘(II) CERTAIN FLUCTUATING

21 PAYMENTS.—Annuity payments shall 

22 not fail to be treated as part of a se23 ries of substantially equal periodic 

24 payments merely because the amount 

25 of the periodic payments may vary in 
32

•S 1359 IS 

1 accordance with investment experi2 ence, reallocations among investment 

3 options, actuarial gains or losses, cost 

4 of living indices, a constant percent5 age (not less than zero) applied not 

6 less frequently than annually, or simi7 lar fluctuating criteria. 

8 ‘‘(III) CERTAIN CHANGES IN THE

9 MODE OF PAYMENT.—Annuity pay10 ments shall not fail to be treated as 

11 part of a series of substantially equal 

12 periodic payments merely because the 

13 period between each such payment is 

14 lengthened or shortened, but only if at 

15 all times such period is not longer 

16 than 1 year. 

17 ‘‘(IV) PERMITTED REDUC18 TIONS.—Annuity payments shall not 

19 fail to be treated as part of a series 

20 of substantially equal periodic pay21 ments merely because, in the case of 

22 an annuity payable over the lives of 

23 the qualified distributee and the quali24 fied distributee’s designated bene25 ficiary, the amounts paid after the 
33

•S 1359 IS 

1 death of the qualified distributee or 

2 the qualified distributee’s designated 

3 beneficiary are less than the amounts 

4 payable during their joint lives. 

5 ‘‘(V) CERTAIN CONTRACT BENE6 FITS.—The availability of a commuta7 tion benefit or other feature permit8 ting acceleration of annuity payments 

9 (or a modification of the period dur10 ing which such a benefit is available), 

11 a minimum period of payments or a 

12 minimum amount to be paid in any 

13 event shall not affect the treatment of 

14 a distribution as a lifetime annuity 

15 payment. 

16 ‘‘(VI) TRUST PAYMENTS.—In the 

17 case of lifetime annuity payments 

18 being made to a qualified trust, pay19 ments by the qualified trust to a 

20 qualified distributee of the entire 

21 amount received by the qualified trust 

22 with respect to the qualified dis23 tributee shall constitute lifetime annu24 ity payments if such payments are 
34

•S 1359 IS 

1 made within a reasonable period after 

2 receipt by the qualified trust. 

3 ‘‘(VII) QUALIFIED DOMESTIC RE4 LATIONS ORDERS.—Annuity payments 

5 shall not fail to be treated as a series 

6 of substantially equal periodic pay7 ments merely because the payments 

8 are reduced on account of a qualified 

9 domestic relations order (within the 

10 meaning of section 414(p)) that be11 comes effective after the commence12 ment of the annuity payments. 

13 ‘‘(ii) QUALIFIED DISTRIBUTEE.—The 

14 term ‘qualified distributee’ means the em15 ployee, the surviving spouse of the em16 ployee, and an alternate payee who is the 

17 spouse or former spouse of the employee. 

18 ‘‘(D) RECAPTURE TAX.— 

19 ‘‘(i) IN GENERAL.—If— 

20 ‘‘(I) an amount is not includible 

21 in gross income by reason of subpara22 graph (A), and 

23 ‘‘(II) the series of payments of 

24 which such payment is a part is sub25 sequently modified (other than by rea-
35

•S 1359 IS 

1 son of death or disability) so that 

2 some or all future payments are not 

3 lifetime annuity payments, 

4 the qualified distributee’s gross income for 

5 the first taxable year in which such modi6 fication occurs shall be increased by an 

7 amount, determined under rules prescribed 

8 by the Secretary, equal to the amount 

9 which (but for subparagraph (A)) would 

10 have been includible in the qualified 

11 distributee’s gross income if the modifica12 tion had been in effect at all times, plus in13 terest for the deferral period at the under14 payment rate established under section 

15 6621. 

16 ‘‘(ii) DEFERRAL PERIOD.—For pur17 poses of this subparagraph, the term ‘de18 ferral period’ means, with respect to any 

19 amount, the period beginning with the tax20 able year in which (without regard to sub21 paragraph (A)) the amount would have 

22 been includible in gross income and ending 

23 with the taxable year in which the modi24 fication described in clause (i)(II) occurs. 
36

•S 1359 IS 

1 ‘‘(E) INVESTMENT IN THE CONTRACT.—

2 For purposes of section 72, the investment in 

3 the contract shall be determined without regard 

4 to this paragraph.’’. 

5 (2) QUALIFIED ANNUITY PLANS.—Section 

6 403(a) of such Code (relating to qualified annuity 

7 plans) is amended by adding at the end the following 

8 new paragraph: 

9 ‘‘(6) EXCLUSION OF PERCENTAGE OF LIFETIME

10 ANNUITY PAYMENTS.—Rules similar to the rules of 

11 section 402(e)(7) shall apply to distributions under 

12 any annuity contract to which this subsection ap13 plies.’’. 

14 (3) PURCHASED ANNUITIES.—Section 403(b) of 

15 such Code (relating to purchased annuities) is 

16 amended by adding at the end the following new 

17 paragraph: 

18 ‘‘(14) EXCLUSION OF PERCENTAGE OF LIFE19 TIME ANNUITY PAYMENTS.—Rules similar to the 

20 rules of section 402(e)(7) shall apply to distributions 

21 under any annuity contract or custodial account to 

22 which this subsection applies.’’. 

23 (4) IRAS.—Section 408(d) of such Code (relat24 ing to tax treatment of distributions) is amended by 

25 adding at the end the following new paragraph: 
37

•S 1359 IS 

1 ‘‘(8) EXCLUSION OF PERCENTAGE OF LIFETIME

2 ANNUITY PAYMENTS.—Rules similar to the rules of 

3 section 402(e)(7) shall apply to distributions out of 

4 an individual retirement plan.’’. 

5 (5) SECTION 457 PLANS.—Section 457(e) of 

6 such Code (relating to special rules for deferred 

7 compensation plans) is amended by adding at the 

8 end the following new paragraph: 

9 ‘‘(18) EXCLUSION OF PERCENTAGE OF LIFE10 TIME ANNUITY PAYMENTS.—Rules similar to the 

11 rules of section 402(e)(7) shall apply to distributions 

12 from an eligible deferred compensation plan of an el13 igible employer described in subsection (e)(1)(A).’’. 

14 (b) EFFECTIVE DATE.—The amendments made by 

15 this section shall apply to distributions made after Decem16 ber 31, 2005. 

17 SEC. 202. EXCLUSION FOR LIFETIME ANNUITY PAYMENTS. 

18 (a) LIFETIME ANNUITY PAYMENTS UNDER ANNUITY

19 CONTRACTS.—Section 72(b) of the Internal Revenue Code 

20 of 1986 (relating to exclusion ratio) is amended by adding 

21 at the end the following new paragraph: 

22 ‘‘(5) EXCLUSION FOR LIFETIME ANNUITY PAY23 MENTS.— 

24 ‘‘(A) IN GENERAL.—In the case of lifetime 

25 annuity payments received as an annuity under 
38

•S 1359 IS 

1 1 or more annuity contracts in any taxable 

2 year, gross income shall not include the lesser 

3 of—

4 ‘‘(i) 50 percent of the portion of the 

5 lifetime annuity payments which (without 

6 regard to this paragraph) is includible in 

7 gross income under this section for the 

8 taxable year, or 

9 ‘‘(ii) $20,000. 

10 ‘‘(B) COST-OF-LIVING ADJUSTMENT.—In 

11 the case of taxable years beginning after De12 cember 31, 2006, the $20,000 amount in sub13 paragraph (A)(ii) shall be increased by an 

14 amount equal to— 

15 ‘‘(i) such dollar amount, multiplied by 

16 ‘‘(ii) the cost-of-living adjustment de17 termined under section 1(f)(3) for the cal18 endar year in which the taxable year be19 gins, determined by substituting ‘calendar 

20 year 2005’ for ‘calendar year 1992’ in sub21 paragraph (B) thereof. 

22 If any amount as increased under the preceding 

23 sentence is not a multiple of $500, such amount 

24 shall be rounded to the next lower multiple of 

25 $500. 
39

•S 1359 IS 

1 ‘‘(C) APPLICATION OF PARAGRAPH.—Sub2 paragraph (A) shall not apply to— 

3 ‘‘(i) any amount received under an eli4 gible deferred compensation plan (as de5 fined in section 457(b)) or under a quali6 fied retirement plan (as defined in section 

7 4974(c)), 

8 ‘‘(ii) any amount paid under an annu9 ity contract which is received by the bene10 ficiary under the contract— 

11 ‘‘(I) after the death of the annu12 itant in the case of payments de13 scribed in subsection (c)(5)(A)(ii)(III), 

14 unless the beneficiary is the surviving 

15 spouse of the annuitant, or 

16 ‘‘(II) after the death of the annu17 itant and joint annuitant in the case 

18 of payments described in subsection 

19 (c)(5)(A)(ii)(IV), unless the bene20 ficiary is the surviving spouse of the 

21 last to die of the annuitant and the 

22 joint annuitant, or 

23 ‘‘(iii) any annuity contract that is a 

24 qualified funding asset (as defined in sec-
40

•S 1359 IS 

1 tion 130(d)), but without regard to wheth2 er there is a qualified assignment. 

3 ‘‘(D) INVESTMENT IN THE CONTRACT.—

4 For purposes of this section, the investment in 

5 the contract shall be determined without regard 

6 to this paragraph.’’. 

7 (b) DEFINITIONS.—Section 72(c) of the Internal 

8 Revenue Code of 1986 is amended by adding at the end 

9 the following new paragraph: 

10 ‘‘(5) LIFETIME ANNUITY PAYMENT.— 

11 ‘‘(A) IN GENERAL.—For purposes of sub12 section (b)(5), the term ‘lifetime annuity pay13 ment’ means any amount received as an annu14 ity under any portion of an annuity contract, 

15 but only if— 

16 ‘‘(i) the only person (or persons in the 

17 case of payments described in subclause 

18 (II) or (IV) of clause (ii)) legally entitled 

19 (by operation of the contract, a trust, or 

20 other legally enforceable means) to receive 

21 such amount during the life of the annu22 itant or joint annuitant is such annuitant 

23 or joint annuitant, and 

24 ‘‘(ii) such amount is part of a series 

25 of substantially equal periodic payments 
41

•S 1359 IS 

1 made not less frequently than annually 

2 over— 

3 ‘‘(I) the life of the annuitant, 

4 ‘‘(II) the lives of the annuitant 

5 and a joint annuitant, but only if the 

6 annuitant is the spouse of the joint 

7 annuitant as of the annuity starting 

8 date or the difference in age between 

9 the annuitant and joint annuitant is 

10 15 years or less, 

11 ‘‘(III) the life of the annuitant 

12 with a minimum period of payments 

13 or with a minimum amount that must 

14 be paid in any event, or 

15 ‘‘(IV) the lives of the annuitant 

16 and a joint annuitant with a minimum 

17 period of payments or with a min18 imum amount that must be paid in 

19 any event, but only if the annuitant is 

20 the spouse of the joint annuitant as of 

21 the annuity starting date or the dif22 ference in age between the annuitant 

23 and joint annuitant is 15 years or 

24 less. 
42

•S 1359 IS 

1 ‘‘(iii) EXCEPTIONS.—For purposes of 

2 clause (ii), annuity payments shall not fail 

3 to be treated as part of a series of substan4 tially equal periodic payments— 

5 ‘‘(I) because the amount of the 

6 periodic payments may vary in accord7 ance with investment experience, re8 allocations among investment options, 

9 actuarial gains or losses, cost-of-living 

10 indices, a constant percentage (not 

11 less than zero) applied not less fre12 quently than annually, or similar fluc13 tuating criteria, 

14 ‘‘(II) due to the existence of, or 

15 modification of the duration of, a pro16 vision in the contract permitting a 

17 lump-sum withdrawal after the annu18 ity starting date, or 

19 ‘‘(III) because the period between 

20 each such payment is lengthened or 

21 shortened, but only if at all times 

22 such period is no longer than 1 cal23 endar year. 

24 ‘‘(B) ANNUITY CONTRACT.—For purposes 

25 of subparagraph (A) and subsections (b)(5) and 
43

•S 1359 IS 

1 (x), the term ‘annuity contract’ means a com2 mercial annuity (as defined by section 

3 3405(e)(6)), other than an endowment or life 

4 insurance contract. 

5 ‘‘(C) MINIMUM PERIOD OF PAYMENTS.—

6 For purposes of subparagraph (A), the min7 imum period of payments is a guaranteed term 

8 of payments which does not exceed the greater 

9 of—

10 ‘‘(i) 10 years, or 

11 ‘‘(ii) the life expectancy of—

12 ‘‘(I) the annuitant as of the an13 nuity starting date, in the case of life14 time annuity payments described in 

15 subparagraph (A)(ii)(III), or 

16 ‘‘(II) the annuitant and joint an17 nuitant as of the annuity starting 

18 date, in the case of lifetime annuity 

19 payments described in subparagraph 

20 (A)(ii)(IV). 

21 For purposes of this subparagraph, life expect22 ancy shall be computed with reference to the ta23 bles prescribed by the Secretary under para24 graph (3). For purposes of subsection 

25 (x)(1)(C)(ii), the permissible minimum period of 
44

•S 1359 IS 

1 payments shall be determined as of the annuity 

2 starting date and reduced by one for each sub3 sequent year. 

4 ‘‘(D) MINIMUM AMOUNT THAT MUST BE

5 PAID IN ANY EVENT.—For purposes of subpara6 graph (A), the minimum amount that must be 

7 paid in any event is an amount payable to the 

8 designated beneficiary under an annuity con9 tract which is in the nature of a refund and 

10 does not exceed the greater of the amount ap11 plied to produce the lifetime annuity payments 

12 under the contract or the amount, if any, avail13 able for withdrawal under the contract on the 

14 date of death.’’. 

15 (c) RECAPTURE TAX FOR LIFETIME ANNUITY PAY16 MENTS.—Section 72 of the Internal Revenue Code of 

17 1986 is amended by redesignating subsection (x) as sub18 section (y) and by inserting after subsection (x) the fol19 lowing new subsection: 

20 ‘‘(x) RECAPTURE TAX FOR MODIFICATIONS TO OR

21 REDUCTIONS IN LIFETIME ANNUITY PAYMENTS.— 

22 ‘‘(1) IN GENERAL.—If—

23 ‘‘(A) any amount received under an annu24 ity contract is excluded from income by reason 
45

•S 1359 IS 

1 of subsection (b)(5) (relating to lifetime annuity 

2 payments) for any taxable year, and 

3 ‘‘(B) a recapture event described in para4 graph (2) occurs in any subsequent taxable 

5 year, 

6 then gross income for the first taxable year in which 

7 the recapture event occurs shall be increased by the 

8 recapture amount. 

9 ‘‘(2) RECAPTURE EVENT.—For purposes of 

10 paragraph (1), a recapture event occurs if—

11 ‘‘(A) the series of payments under an an12 nuity contract is subsequently modified so any 

13 future payments are not lifetime annuity pay14 ments, 

15 ‘‘(B) after the date of receipt of the first 

16 lifetime annuity payment under the contract an 

17 annuitant receives a lump sum and thereafter is 

18 to receive annuity payments in a reduced 

19 amount under the contract, or 

20 ‘‘(C) after the date of receipt of the first 

21 lifetime annuity payment under the contract the 

22 dollar amount of any subsequent annuity pay23 ment is reduced and a lump sum is not paid in 

24 connection with the reduction, unless such re25 duction is— 
46

•S 1359 IS 

1 ‘‘(i) due to an event described in sub2 section (c)(5)(A)(iii), or 

3 ‘‘(ii) due to the addition of, or in4 crease in, a minimum period of payments 

5 (within the meaning of subsection 

6 (c)(5)(C)) or a minimum amount that 

7 must be paid in any event (within the 

8 meaning of subsection (c)(5)(D)). 

9 ‘‘(3) RECAPTURE AMOUNT.— 

10 ‘‘(A) IN GENERAL.—For purposes of this 

11 subsection, the recapture amount shall be the 

12 amount, determined under rules prescribed by 

13 the Secretary, equal to the amount which (but 

14 for subsection (b)(5)) would have been includ15 ible in the taxpayer’s gross income if the modi16 fication or reduction described in subparagraph 

17 (A), (B), or (C) of paragraph (2) had been in 

18 effect at all times, plus interest for the deferral 

19 period at the underpayment rate established by 

20 section 6621. 

21 ‘‘(B) DEFERRAL PERIOD.—For purposes 

22 of this subsection, the term ‘deferral period’ 

23 means, with respect to any amount, the period 

24 beginning with the taxable year in which (with25 out regard to subsection (b)(5)) the amount 
47

•S 1359 IS 

1 would have been includible in gross income and 

2 ending with the taxable year in which the modi3 fication or reduction described in subparagraph 

4 (A), (B), or (C) of paragraph (2) occurs. 

5 ‘‘(4) EXCEPTIONS TO RECAPTURE TAX.—Para6 graph (1) shall not apply in the case of any recap7 ture event which occurs because an annuitant— 

8 ‘‘(A) dies or becomes disabled (within the 

9 meaning of subsection (m)(7)), 

10 ‘‘(B) becomes a chronically ill individual 

11 within the meaning of section 7702B(c)(2), or 

12 ‘‘(C) encounters hardship.’’. 

13 (d) LIFETIME DISTRIBUTIONS OF LIFE INSURANCE

14 DEATH BENEFITS.— 

15 (1) IN GENERAL.—Section 101(d) of such Code 

16 (relating to payment of life insurance proceeds at a 

17 date later than death) is amended by adding at the 

18 end the following new paragraph: 

19 ‘‘(4) EXCLUSION FOR LIFETIME ANNUITY PAY20 MENTS.— 

21 ‘‘(A) IN GENERAL.—In the case of 

22 amounts to which this subsection applies, gross 

23 income for any taxable year shall not include 

24 the lesser of— 
48

•S 1359 IS 

1 ‘‘(i) 50 percent of the portion of life2 time annuity payments which (without re3 gard to this paragraph) is includible in 

4 gross income under this section, or 

5 ‘‘(ii) the amount in effect under sec6 tion 72(b)(5)(A)(ii) for the taxable year. 

7 ‘‘(B) RULES OF SECTION 72(b)(5) TO

8 APPLY.—For purposes of this paragraph, rules 

9 similar to the rules of section 72(b)(5) and sec10 tion 72(x) shall apply, except that the term 

11 ‘beneficiary of the life insurance contract’ shall 

12 be substituted for the term ‘annuitant’ each 

13 place it appears, and the term ‘life insurance 

14 contract’ shall be substituted for the term ‘an15 nuity contract’ each place it appears.’’. 

16 (2) CONFORMING AMENDMENT.—Section 

17 101(d)(1) of such Code is amended by inserting ‘‘or 

18 paragraph (4)’’ after ‘‘to the extent not excluded by 

19 the preceding sentence’’. 

20 (e) EFFECTIVE DATE.— 

21 (1) IN GENERAL.—The amendments made by 

22 this section shall apply to amounts received in cal23 endar years beginning after the date of the enact24 ment of this Act. 
49

•S 1359 IS 

1 (2) SPECIAL RULE FOR EXISTING CON2 TRACTS.—In the case of a contract in force on the 

3 date of the enactment of this Act that does not sat4 isfy the requirements of section 72(c)(5)(A) of the 

5 Internal Revenue Code of 1986 (as added by this 

6 section), or requirements similar to such section 

7 72(c)(5)(A) in the case of a life insurance contract, 

8 any modification to such contract (including a 

9 change in ownership) or to the payments under such 

10 contract that is made to satisfy the requirements of 

11 such section (or similar requirements) shall not re12 sult in the recognition of any gain or loss, any 

13 amount being included in gross income, or any addi14 tion to tax that otherwise might result from such 

15 modification, but only if the modification is com16 pleted before the date which is 2 years after the date 

17 of the enactment of this Act. 

18 SEC. 203. FACILITATION UNDER FIDUCIARY RULES OF CER19 TAIN ROLLOVERS AND ANNUITY DISTRIBU20 TIONS. 

21 (a) IN GENERAL.—Section 404(c) of the Employee 

22 Retirement Income Security Act of 1974 (29 U.S.C. 

23 1104(c)), as amended by this Act, is amended by adding 

24 at the end the following new paragraph: 
50

•S 1359 IS 

1 ‘‘(6) TREATMENT OF ROLLOVERS AND ANNUITY

2 DISTRIBUTIONS.—

3 ‘‘(A) IN GENERAL.—In the case of an indi4 vidual account plan which makes a transfer 

5 under section 401(a)(31)(A) of the Internal 

6 Revenue Code of 1986 to an individual retire7 ment plan (as defined in section 7701(a)(37) of 

8 such Code) in connection with a participant or 

9 beneficiary, or makes a distribution to a partici10 pant or beneficiary of an annuity contract de11 scribed in subparagraph (B), the participant or 

12 beneficiary shall, for purposes of paragraph (1), 

13 be treated as exercising control over the trans14 fer or distribution if— 

15 ‘‘(i) the participant or beneficiary elected 

16 such transfer or distribution, and 

17 ‘‘(ii) except as otherwise provided by the 

18 Secretary, the participant or beneficiary was, in 

19 connection with the election, given an oppor20 tunity to designate any other individual retire21 ment plan in the case of a transfer or any other 

22 annuity contract described in subparagraph (B) 

23 in the case of a distribution. 

24 ‘‘(B) APPLICABLE ANNUITY CONTRACTS.—An 

25 annuity contract is described in this subparagraph if 
51

•S 1359 IS 

1 it provides, either on an immediate or deferred basis, 

2 a series of substantially equal periodic payments 

3 (not less frequently than annually) for the life of the 

4 participant or beneficiary or the joint lives of the 

5 participant or beneficiary and such individual’s des6 ignated beneficiary. The rules of subclauses (II), 

7 (III), (IV), and (V) of section 402(e)(7)(C)(i) of the 

8 Internal Revenue Code of 1986 shall apply for pur9 poses of this subparagraph. 

10 ‘‘(C) IDENTIFICATION OF PLANS OR CONTRACTS

11 DISREGARDED.—Under regulations prescribed by the 

12 Secretary, this paragraph shall apply without regard 

13 to whether the individual retirement plan receiving 

14 the transfer or the annuity contract being distrib15 uted is specifically identified by the individual ac16 count plan as available to the participant or bene17 ficiary. 

18 ‘‘(D) EXCEPTION.—Notwithstanding the pre19 ceding provisions of this paragraph, paragraph 

20 (1)(B) shall not apply with respect to liability under 

21 section 406 in connection with the specific identifica22 tion of any individual retirement plan or annuity 

23 contract as being available to the participant or ben24 eficiary.’’. 

25 (b) EFFECTIVE DATE AND RELATED RULES.— 
52

•S 1359 IS 

1 (1) EFFECTIVE DATE.—The amendment made 

2 by this section shall take effect on the date of the 

3 enactment of this Act. 

4 (2) ISSUANCE OF FINAL REGULATIONS.—Final 

5 regulations under section 404(c)(6) of the Employee 

6 Retirement Income Security Act of 1974 (added by 

7 this section) shall be issued no later than 1 year 

8 after the date of the enactment of this Act. 

9 SEC. 204. CLARIFICATION OF TREATMENT OF DISTRIBU10 TIONS OF ANNUITY CONTRACTS. 

11 (a) IN GENERAL.—Clause (i) of section 402(e)(4)(D) 

12 is amended by adding after the second sentence the fol13 lowing new sentence: ‘‘A distribution of an annuity con14 tract from a trust or plan referred to in the first sentence 

15 of this clause may be treated as a part of a lump-sum 

16 distribution.’’. 

17 (b) EFFECTIVE DATE.—The amendment made by 

18 this section shall take effect as if included in section 

19 1401(b)(1) of the Small Business Job Protection Act of 

20 1996. 

21 TITLE III—SIMPLIFICATION AND 

22 EQUITY 

23 SEC. 301. CLARIFICATION OF TREATMENT OF INDIAN TRIB24 AL GOVERNMENTS. 

25 (a) DEFINITION OF GOVERNMENTAL PLAN.— 
53

•S 1359 IS 

1 (1) AMENDMENT TO INTERNAL REVENUE CODE

2 OF 1986.—Section 414(d) of the Internal Revenue 

3 Code of 1986 (definition of governmental plan) is 

4 amended by adding at the end the following: ‘‘The 

5 term ‘governmental plan’ includes a plan established 

6 or maintained for its employees by an Indian tribal 

7 government (as defined in section 7701(a)(40)), a 

8 subdivision of an Indian tribal government (deter9 mined in accordance with section 7871(d)), an agen10 cy or instrumentality (or subdivision) of an Indian 

11 tribal government, or an entity established under 

12 Federal, State, or tribal law which is wholly owned 

13 or controlled by any of the foregoing.’’. 

14 (2) AMENDMENT TO EMPLOYEE RETIREMENT

15 INCOME SECURITY ACT OF 1974.—Section 3(32) of 

16 the Employee Retirement Income Security Act of 

17 1974 (29 U.S.C. 1002(32)) is amended by adding at 

18 the end the following: ‘‘The term ‘governmental 

19 plan’ includes a plan established or maintained for 

20 its employees by an Indian tribal government (as de21 fined in section 7701(a)(40) of the Internal Revenue 

22 Code of 1986), a subdivision of an Indian tribal gov23 ernment (determined in accordance with section 

24 7871(d) of such Code), an agency or instrumentality 

25 (or subdivision) of an Indian tribal government, or 
54

•S 1359 IS 

1 an entity established under Federal, State, or tribal 

2 law that is wholly owned or controlled by any of the 

3 foregoing.’’. 

4 (b) EXTENSION TO ALL GOVERNMENTAL PLANS OF

5 CURRENT MORATORIUM ON APPLICATION OF CERTAIN

6 NONDISCRIMINATION RULES APPLICABLE TO STATE AND

7 LOCAL PLANS.— 

8 (1) IN GENERAL.— 

9 (A) Subparagraph (G) of section 401(a)(5) 

10 and subparagraph (G) of section 401(a)(26) of 

11 such Code are each amended by striking ‘‘sec12 tion 414(d))’’ and all that follows and inserting 

13 ‘‘section 414(d)).’’. 

14 (B) Subparagraph (G) of section 401(k)(3) 

15 of such Code and paragraph (2) of section 

16 1505(d) of the Taxpayer Relief Act of 1997 

17 (Public Law 105–34; 111 Stat. 1063) are each 

18 amended by striking ‘‘maintained by a State or 

19 local government or political subdivision thereof 

20 (or agency or instrumentality thereof)’’. 

21 (2) CONFORMING AMENDMENTS.— 

22 (A) The heading of subparagraph (G) of 

23 section 401(a)(5) of such Code is amended by 

24 striking ‘‘STATE AND LOCAL GOVERNMENTAL’’ 

25 and inserting ‘‘GOVERNMENTAL’’. 
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1 (B) The heading of subparagraph (G) of 

2 section 401(a)(26) of such Code is amended by 

3 striking ‘‘EXCEPTION FOR STATE AND LOCAL’’ 

4 and inserting ‘‘EXCEPTION FOR’’. 

5 (3) Section 401(k)(3)(G) of such Code is 

6 amended by inserting ‘‘GOVERNMENTAL PLANS.—’’ 

7 after ‘‘(G)’’. 

8 (c) CLARIFICATION THAT TRIBAL GOVERNMENTS

9 ARE SUBJECT TO THE SAME PLAN RULES AND REGULA10 TIONS APPLIED TO STATE AND OTHER LOCAL GOVERN11 MENTS AND THEIR POLICE AND FIREFIGHTERS.— 

12 (1) AMENDMENTS TO INTERNAL REVENUE

13 CODE OF 1986.— 

14 (A) POLICE AND FIREFIGHTERS.—Sub15 paragraph (H) of section 415(b)(2) of such 

16 Code (defining participant) is amended— 

17 (i) in clause (i), by striking ‘‘State or 

18 political subdivision’’ and inserting ‘‘State, 

19 Indian tribal government (as defined in 

20 section 7701(a)(40)), or any political sub21 division’’; and 

22 (ii) in clause (ii)(I), by striking ‘‘State 

23 or political subdivision’’ each place it ap24 pears and inserting ‘‘State, Indian tribal 
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1 government (as so defined), or any political 

2 subdivision thereof’’. 

3 (B) STATE AND LOCAL GOVERNMENT

4 PLANS.— 

5 (i) IN GENERAL.—Subparagraph (A) 

6 of section 415(b)(10) of such Code (relat7 ing to limitation to equal accrued benefit) 

8 is amended— 

9 (I) by inserting ‘‘, Indian tribal 

10 government (as defined in section 

11 7701(a)(40)),’’ after ‘‘State’’; 

12 (II) by inserting ‘‘any’’ before 

13 ‘‘political subdivision’’; and 

14 (III) by inserting ‘‘any of’’ before 

15 ‘‘the foregoing’’. 

16 (ii) CONFORMING AMENDMENT.—The 

17 heading of paragraph (10) of section 

18 415(b) of such Code is amended by strik19 ing ‘‘SPECIAL RULE FOR STATE AND’’ and 

20 inserting ‘‘SPECIAL RULE FOR STATE, IN21 DIAN TRIBAL, AND’’. 

22 (C) GOVERNMENT PICKUP CONTRIBU23 TIONS.—Paragraph (2) of section 414(h) of 

24 such Code (relating to designation by units of 

25 government) is amended by striking ‘‘State or 
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1 political subdivision’’ and inserting ‘‘State, In2 dian tribal government (as defined in section 

3 7701(a)(40)), or any political subdivision’’. 

4 (2) AMENDMENTS TO EMPLOYEE RETIREMENT

5 INCOME SECURITY ACT OF 1974.—Section 4021(b) of 

6 the Employee Retirement Income Security Act of 

7 1974 (29 U.S.C. 1321(b)) is amended— 

8 (A) in paragraph (12), by striking ‘‘or’’ at 

9 the end; 

10 (B) in paragraph (13), by striking ‘‘plan.’’ 

11 and inserting ‘‘plan; or’’; and 

12 (C) by adding at the end the following: 

13 ‘‘(14) established and maintained for its em14 ployees by an Indian tribal government (as defined 

15 in section 7701(a)(40) of the Internal Revenue Code 

16 of 1986), a subdivision of an Indian tribal govern17 ment (determined in accordance with section 

18 7871(d) of such Code), an agency or instrumentality 

19 of an Indian tribal government or subdivision there20 of, or an entity established under Federal, State, or 

21 tribal law that is wholly owned or controlled by any 

22 of the foregoing.’’. 

23 (d) EFFECTIVE DATE.—The amendments made by 

24 this section shall apply to any year beginning before, on, 

25 or after the date of the enactment of this Act. 
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1 SEC. 302. EXCESS CONTRIBUTIONS. 

2 (a) EXPANSION OF CORRECTIVE DISTRIBUTION PE3 RIOD.—Subsection (f) of section 4979 of the Internal Rev4 enue Code of 1986 is amended— 

(1) by striking ‘‘21 5 ⁄2 months’’ in paragraph (1) 

6 and inserting ‘‘6 months’’, and 

(2) by striking ‘‘21 7 ⁄2 MONTHS’’ in the heading 

8 and inserting ‘‘6 MONTHS’’. 

9 (b) YEAR OF INCLUSION.—Paragraph (2) of section 

10 4979(f) of such Code is amended to read as follows: 

11 ‘‘(2) YEAR OF INCLUSION.—Any amount dis12 tributed as provided in paragraph (1) shall be treat13 ed as earned and received by the recipient in the re14 cipient’s taxable year in which such distributions 

15 were made.’’. 

16 (c) SIMPLIFICATION OF ALLOCABLE EARNINGS.— 

17 (1) SECTION 4979.—Subsection (f) of section 

18 4979 of such Code is amended— 

19 (A) by adding ‘‘through the end of the 

20 plan year for which the contribution was made’’ 

21 after ‘‘thereto’’ in paragraph (1), and 

22 (B) by adding ‘‘through the end of the 

23 plan year for which the contributions were 

24 made’’ after ‘‘thereto’’ in paragraph (2)(B). 

25 (2) SECTION 401(k) AND 401(m).— 
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1 (A) Clause (i) of section 401(k)(8)(A) is 

2 amended by adding ‘‘through the end of such 

3 year’’ after ‘‘such contributions’’. 

4 (B) Subparagraph (A) of section 

5 401(m)(6) of such Code is amended by adding 

6 ‘‘through the end of such year’’ after ‘‘to such 

7 contributions’’. 

8 (d) EFFECTIVE DATE.—The amendments made by 

9 this section shall apply to years beginning after December 

10 31, 2005. 

11 SEC. 303. FIDUCIARY RELIEF IN CONNECTION WITH 

12 CHANGE IN INVESTMENT OPTIONS. 

13 Section 404(c) of the Employee Retirement Income 

14 Security Act of 1974 (29 U.S.C. 1104(c)(1)), as amended 

15 by this Act, is amended by adding at the end the following 

16 new paragraph: 

17 ‘‘(7) CHANGE IN INVESTMENT OPTIONS.—In 

18 the case of a change in the investment options under 

19 a plan, a participant or beneficiary shall be deemed 

20 to have exercised control over the assets in his or 

21 her account, if, after reasonable notice of the change 

22 in investment options is given to such participant or 

23 beneficiary, assets in the account of the participant 

24 or beneficiary—
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1 ‘‘(A) are transferred to plan investment 

2 options in accordance with the affirmative elec3 tion of the participant or beneficiary which oth4 erwise meets the conditions of this subsection; 

5 or 

6 ‘‘(B) in the absence of such an election 

7 and in the case in which fiduciary relief was 

8 provided under this subsection for prior invest9 ment options, are transferred to plan invest10 ment options with reasonably comparable risk 

11 and return characteristics, and in accordance 

12 with procedures set forth in such notice.’’.

Æ