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[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[S. 1590 Introduced in Senate (IS)]

109th CONGRESS
  1st Session
                                S. 1590

 To amend the Internal Revenue Code of 1986 to increase participation 
 and savings in cash or deferred plans through automatic contribution 
      and default investment arrangements, and for other purposes.

_______________________________________________________________________

                   IN THE SENATE OF THE UNITED STATES

                             July 29, 2005

   Mr. Bayh 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 participation 
 and savings in cash or deferred plans through automatic contribution 
      and default investment arrangements, 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 ``Making Savings Automatic Act of 
2005''.

SEC. 2. INCREASING PARTICIPATION AND SAVINGS IN CASH OR DEFERRED PLANS 
              THROUGH AUTOMATIC CONTRIBUTION ARRANGEMENTS.

    (a) Automatic Contribution Arrangements Required for Section 401(k) 
Safe Harbor.--Section 401(k)(12)(A) of the Internal Revenue Code of 
1986 (relating to alternative methods of meeting nondiscrimination 
requirements) is amended by striking ``and'' at the end of clause (i), 
by striking the period at the end of clause (ii), and by adding at the 
end the following new clause:
                            ``(iii) constitutes an automatic 
                        contribution trust under paragraph (13).''.
    (b) Automatic Contribution Trust.--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) Automatic contribution trust.--
                    ``(A) Automatic contribution trust defined.--
                            ``(i) In general.--For purposes of 
                        paragraph (12)(A)(iii), 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 as having 
                                elected to have the employer make 
                                elective contributions in an amount 
                                equal to the applicable percentage of 
                                the employee's compensation, and
                                    ``(II) which meets the requirements 
                                of subparagraph (B).
                            ``(ii) Exceptions.--
                                    ``(I) Exception for existing 
                                employees.--Clause (i)(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 specifically elect not 
                                to have contributions made under clause 
                                (i), 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.--The term 
                                `applicable percentage' means, with 
                                respect to any employee, the percentage 
                                (not less than 3 percent) determined 
                                under the arrangement.
                                    ``(II) Increase in percentage.--In 
                                the case of the second plan year 
                                beginning after the first date on which 
                                the election under clause (i)(I) is in 
                                effect with respect to the employee and 
                                any succeeding plan year, the 
                                applicable percentage shall be a 
                                percentage equal to the sum of the 
                                applicable percentage for the employee 
                                as of the close of the preceding plan 
                                year plus the number of percentage 
                                points (not less than 1 percentage 
                                point) specified by the plan. Such 
                                increase shall continue until the 
                                applicable percentage is at least 10 
                                percent or such higher percentage 
                                specified by the plan.
                    ``(B) 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 
                        (A)(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 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, within a 
                        reasonable period before any year, given notice 
                        of the employee's rights and obligations under 
                        the arrangement.
                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.''
    (c) Matching Contributions.--Section 401(m)(11)(A) of the Internal 
Revenue Code of 1986 (relating to additional alternative method of 
satisfying nondiscrimination test for matching contributions and 
employee contributions) is amended by striking ``and'' at the end of 
clause (ii), by striking the period at the end of clause (iii) and 
inserting ``, and'' and by adding at the end the following new clause:
                            ``(iii) meets the requirements of 
                        subsection (k)(12)(A)(iii).''.
    (d) Investments and Preemption.--
            (1) Control deemed to have been exercised with respect to 
        default investment arrangements.--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 
        paragraph:
            ``(4) Treatment of default investment arrangement.--
                    ``(A) In general.--A participant 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 amount of contributions 
                made under a default investment arrangement.
                    ``(B) Default investment arrangement defined.--For 
                purposes of this paragraph, the term `default 
                investment arrangement' means an arrangement--
                            ``(i) which meets the requirements of 
                        subparagraph (C),
                            ``(ii) under which the participant is 
                        treated as having elected to have the employer 
                        exercise control over the assets in his account 
                        until the participant specifically elects to 
                        exercise such control, and
                            ``(iii) under which assets described in 
                        clause (ii) are invested in accordance with 
                        regulations prescribed by the Secretary.
                Such regulations shall provide guidance on the 
                appropriateness of designating default investments that 
                include a mix of asset classes consistent with long-
                term capital appreciation. The regulations shall also 
                provide guidance on the designation of default 
                investments in individual account plans that are not 
                designed to meet the requirements of this section.
                    ``(C) Notice requirements.--
                            ``(i) Time for notice.--The administrator 
                        of a default investment arrangement shall, 
                        within a reasonable period before each plan 
                        year, give to each employee to whom a default 
                        investment arrangement applies for such plan 
                        year notice of the employee's rights and 
                        obligations under the arrangement which--
                                    ``(I) is sufficiently accurate and 
                                comprehensive to apprise the employee 
                                of such rights and obligations, and
                                    ``(II) is written in a manner 
                                calculated to be understood by the 
                                average employee 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 an 
                        employee unless--
                                    ``(I) the notice includes a notice 
                                explaining the employee's right under 
                                the arrangement to elect to exercise 
                                control over the assets in his account,
                                    ``(II) the employee has a 
                                reasonable period of time after receipt 
                                of the notice described in subclause 
                                (I) and before the assets are first 
                                invested to make such election, and
                                    ``(III) the notice explains how 
                                contributions made under the 
                                arrangement will be invested in the 
                                absence of any investment election by 
                                the employee.''.
            (2) Preemption of conflicting state regulation.--Section 
        514 of such Act (29 U.S.C. 1144) is amended by adding at the 
        end the following new subsection:
    ``(e) Automatic Contribution Arrangements.--
            ``(1) In general.--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 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 subsection to apply.
            ``(2) Automatic contribution arrangement defined.--For 
        purposes of this subsection, the term `automatic contribution 
        arrangement' means an arrangement--
                    ``(A) which meets the requirements of paragraph 
                (3),
                    ``(B) 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,
                    ``(C) under which the participant is treated as 
                having elected to have the employer make such 
                contributions in an amount equal to a uniform 
                percentage of compensation provided under the plan 
                until the participant specifically elects not to have 
                such contributions made (or specifically elects to have 
                such contributions made at a different percentage), and
                    ``(D) under which contributions described in 
                subparagraph (C) are invested in accordance with 
                regulations prescribed by the Secretary.
        Such regulations shall provide guidance on the appropriateness 
        of designating default investments that include a mix of asset 
        classes consistent with long-term capital appreciation.
            ``(3) Notice requirement.--
                    ``(A) In general.--The administrator of an 
                individual account plan shall, within a reasonable 
                period before each plan year, give to each employee to 
                whom an automatic contribution arrangement applies for 
                such plan year notice of the employee's rights and 
                obligations under the arrangement which--
                            ``(i) is sufficiently accurate and 
                        comprehensive to apprise the employee of such 
                        rights and obligations, and
                            ``(ii) is written in a manner calculated to 
                        be understood by the average employee to whom 
                        the arrangement applies.
                    ``(B) Other requirements.--A notice shall not be 
                treated as meeting the requirements of subparagraph (A) 
                with respect to an employee unless--
                            ``(i) the notice includes a notice 
                        explaining the employee's right under the 
                        arrangement to elect not to have elective 
                        contributions made on the employee's behalf (or 
                        to elect to have such contributions made at a 
                        different percentage),
                            ``(ii) the employee has a reasonable period 
                        of time after receipt of the notice described 
                        in clause (i) and before the first elective 
                        contribution is made to make such election, and
                            ``(iii) the notice explains how 
                        contributions made under the arrangement will 
                        be invested in the absence of any investment 
                        election by the employee.''.
    (e) 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 such 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 such 
        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 the greater of--
                            ``(i) $400, or
                            ``(ii) the amount of the elective 
                        contributions described in paragraph (3) with 
                        respect to the employee which where made during 
                        the first 4 payroll periods to which the 
                        arrangement applies.
            ``(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 that 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,''.
    (f) Application of Automatic Contribution Requirement to Federal 
Thrift Savings Plan.--Section 8432(a) of title 5, United States Code, 
is amended by adding at the end the following:
            ``(4)(A) An employee who begins employment after January 1, 
        2006, or any Member who is elected or appointed to office after 
        that date (regardless of whether that employee (or Member) has 
        prior periods of service covered under this chapter or chapter 
        83) shall be treated as having made an election to make 
        contributions under subsection (b) in an amount equal to the 
        applicable percentage of the employees compensation unless the 
        employee specifically elects not to have such contributions 
        made
            ``(B)(i) For purposes of this paragraph, the term 
        `applicable percentage' means, with respect to any employee, 3 
        percent.
            ``(ii) In the case of the second plan year beginning after 
        the first date on which the election under subparagraph (A) is 
        in effect with respect to the employee and any succeeding plan 
        year, the applicable percentage shall be a percentage equal to 
        the sum of the applicable percentage for the employee as of the 
        close of the preceding plan year plus the number of percentage 
        points (not less than 1 percentage point) specified by the 
        plan. Such increase shall continue until the applicable 
        percentage is 10 percent.
            ``(C) Each employee to whom subparagraph (A) applies 
        shall--
                    ``(i) receive a notice explaining the employee's 
                right under the Thrift Savings Plan to elect not to 
                have elective contributions made on the employee's 
                behalf, and how contributions made under the Thrift 
                Savings Plan will be invested in the absence of any 
                investment election by the employee, and
                    ``(ii) have a reasonable period of time after 
                receipt of such notice and before the first elective 
                contribution is made to make such election.
        A similar notice shall be provided within a reasonable period 
        of time before each calendar year.
            ``(D) In the case of an employee who does not make an 
        investment election, the Thrift Savings Plan shall invest the 
        contributions in accordance with the regulations prescribed by 
        the Secretary of Labor under section 404(c)(4)(B) of the 
        Employee Retirement Income Security Act of 1974.''.
    (g) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to plan years 
        beginning after December 31, 2005.
            (2) Regulations.--Final regulations under section 
        404(c)(4)(B)(iii) of the Employee Retirement Income Security 
        Act of 1974 (added by this section) shall be issued no later 
        than 6 months after the date of enactment of this Act.

SEC. 3. 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.

SEC. 4. CREDIT TO ENCOURAGE UNIVERSAL ACCESS TO OPT OUT DIRECT DEPOSIT 
              RETIREMENT SAVINGS.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
of the Internal Revenue Code of 1986 (relating to business related 
credits) is amended by adding at the end the following new section:

``SEC. 45J. EMPLOYER SALARY REDUCTION COSTS.

    ``(a) General Rule.--For purposes of section 38, in the case of the 
first taxable year which includes the date that a qualified salary 
reduction arrangement of the eligible employer becomes effective, the 
employer salary reduction cost credit determined under this section for 
such taxable year is the amount determined under subsection (b).
    ``(b) Amount of Credit.--The amount of the credit determined under 
this section for any taxable year with respect to an eligible employer 
shall be equal to 50 percent of the costs paid or incurred by the 
taxpayer in establishing the qualified salary reduction arrangement 
referred to in subsection (a).
    ``(c) Eligible Employer.--For purposes of this section, the term 
`eligible employer' means, with respect to any calendar year in which 
the taxable year begins, an employer which maintains a qualified salary 
reduction arrangement meeting the requirements of subsection (d) and 
which did not maintain a qualified plan or arrangement (within the 
meaning of subsection (d)(8)) for the preceding 2 calendar years.
    ``(d) Employee Access to Opt Out Salary Reduction Contributions to 
Individual Retirement Plans.--
            ``(1) In general.--Every employer which does not maintain a 
        qualified plan or arrangement for a calendar year may provide a 
        qualified salary reduction arrangement for the calendar year.
            ``(2) Qualified salary reduction arrangement.--For purposes 
        of this section, the term `qualified salary reduction 
        arrangement' means a salary reduction arrangement which meets 
        the requirements of paragraphs (4) and (5).
            ``(3) Salary reduction arrangement.--For purposes of this 
        section, the term `salary reduction arrangement' means a 
        written arrangement of an employer under which--
                    ``(A) an employee eligible to participate in the 
                arrangement may elect to--
                            ``(i) contribute to an individual 
                        retirement plan established by or on behalf of 
                        the employee by having the employer make direct 
                        deposit payments to the plan by payroll 
                        deduction, or
                            ``(ii) receive the amounts directly as cash 
                        compensation,
                    ``(B) no other contributions may be made under the 
                arrangement,
                    ``(C) each employee eligible to participate in the 
                arrangement is treated as having elected to have the 
                employer make elective contributions under subparagraph 
                (A)(i) in an amount equal to the applicable percentage 
                (within the meaning of section 401(k)(13)(A)(iii)) of 
                the employee's compensation unless the employee 
                specifically elects not to have such contributions 
                made, and
                    ``(D) there is established the methods by which 
                contributions made under the arrangement will be 
                invested in the absence of any investment election by 
                the employee.
            ``(4) Participation requirements.--
                    ``(A) In general.--The requirements of this 
                paragraph are met with respect to a salary reduction 
                arrangement for a year only if, under the arrangement, 
                all employees of the employer are eligible to make the 
                election under paragraph (3)(A).
                    ``(B) Excludable employees.--An employer may 
                exclude from the requirement under paragraph (3) 
                employees described in section 410(b)(3) and any 
                employee who has not completed hours of service for the 
                employer on a regular basis during a period of at least 
                30 consecutive days during the calendar year.
            ``(5) Administrative requirements.--The requirements of 
        this paragraph are met with respect to any salary reduction 
        arrangement if, under the arrangement--
                    ``(A) the employer must make the payments elected 
                under paragraph (3)(A) or required under paragraph 
                (3)(C) not later than the close of the 30-day period 
                following the last day of the month with respect to 
                which the contributions are to be made, or, if later, 
                the deadline under applicable rules and regulations for 
                the employer to deposit tax under section 3102 for 
                wages paid in that month,
                    ``(B) an employee may elect to terminate 
                participation in the arrangement at any time during the 
                year, except that if an employee so terminates, the 
                arrangement may provide that the employee may not elect 
                to resume participation until the beginning of the next 
                year,
                    ``(C) each employee eligible to participate may 
                elect, during the 60-day period before the beginning of 
                any year (and the 60-day period before the first day 
                the employee is eligible to participate), to 
                participate in the arrangement, or to modify the 
                amounts subject to the arrangement, for such year, and
                    ``(D) immediately before the period for which an 
                election described in paragraph (3)(A) may be made, the 
                employer provides a notice to each employee of the 
                employee's opportunity to make the election and the 
                maximum amount which may be contributed to an 
                individual retirement plan on an annual basis.
            ``(6) Use of designated financial institution.--An employer 
        shall not be treated as failing to satisfy the requirements of 
        this subsection or any other provision of this title merely 
        because the employer makes all contributions (or all 
        contributions on behalf of employees who do not specify an 
        individual retirement plan, trustee, or issuer to receive the 
        contributions) to individual retirement plans of a designated 
        trustee or issuer. The preceding sentence shall not apply 
        unless each participant is notified in writing that the 
        participant's balance may be transferred without cost or 
        penalty to another individual retirement plan in accordance 
        with subsection (d)(3).
            ``(7) Model notice.--The Secretary shall provide a model 
        notice, written in a manner calculated to be understandable to 
        the average worker, that employers may use to satisfy the 
        requirement of paragraphs (5)(D) and (6). Model notices shall 
        be provided in English, in Spanish, and in any other language 
        deemed appropriate by the Secretary.
            ``(8) Qualified plan or arrangement.--For purposes of this 
        section, an employer is treated as maintaining a qualified plan 
        or arrangement for a calendar year if the employer maintains 
        for such year a plan, contract, pension, or trust described in 
        subparagraph (A) or (B) of section 219(g)(5) or an eligible 
        deferred compensation plan (within the meaning of section 
        457(b)) with respect to which contributions are made, or 
        benefits are accrued, for service in such year.
    ``(e) Salary Reduction Contributions Treated Like Other 
Contributions to Individual Retirement Plans.--
            ``(1) Tax treatment unaffected.--The fact that a 
        contribution to an individual retirement plan is made on behalf 
        of an employee under a qualified salary reduction arrangement 
        instead of being made directly by the employee shall not affect 
        the deductibility or other income tax treatment of the 
        contribution or of other amounts under this title.
            ``(2) Salary reduction contributions taken into account.--
        Any contribution made on behalf of an employee under a 
        qualified salary reduction arrangement shall be taken into 
        account in applying the limitations on contributions to 
        individual retirement plans and the other provisions of this 
        title applicable to individual retirement plans as if the 
        contribution had been made to the plan directly by the 
        employee.''.
    (b) Credit Allowed as Part of General Business Credit.--Section 
38(b) of the Internal revenue Code of 1986 (defining current year 
business credit) is amended by striking ``plus'' at the end of 
paragraph (18), by striking the period at the end of paragraph (19) and 
inserting ``, plus'', and by adding at the end the following new 
paragraph:
            ``(20) in the case of an eligible employer (as defined in 
        section 45J(c)), the employer salary reduction cost credit 
        determined under section 45J(a).''.
    (c) Treatment as Default Investment Arrangement.--Section 
404(c)(4)(B) of the Employee Retirement Income security Act of 1974, as 
added by section 2 of this Act, is amended by adding at the end the 
following new sentence: ``For purposes of this subsection, an 
arrangement described in section 45J(d) shall be treated as a default 
investment arrangement.''
    (d) Clerical Amendment.--The table of sections for subpart D of 
part IV of subchapter A of chapter 1 of the Internal Revenue Code of 
1986 is amended by adding at the end the following new item:

``Sec. 45J. Employer salary reduction costs.''.
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2005.
                                 <all>
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