II 

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. 

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 ‘‘Making Savings Auto5 matic Act of 2005’’. 
2 

•S 1590 IS

1 SEC. 2. INCREASING PARTICIPATION AND SAVINGS IN 

2 CASH OR DEFERRED PLANS THROUGH AUTO3 MATIC CONTRIBUTION ARRANGEMENTS. 

4 (a) AUTOMATIC CONTRIBUTION ARRANGEMENTS RE5 QUIRED FOR SECTION 401(k) SAFE HARBOR.—Section 

6 401(k)(12)(A) of the Internal Revenue Code of 1986 (re7 lating to alternative methods of meeting nondiscrimination 

8 requirements) is amended by striking ‘‘and’’ at the end 

9 of clause (i), by striking the period at the end of clause 

10 (ii), and by adding at the end the following new clause: 

11 ‘‘(iii) constitutes an automatic con12 tribution trust under paragraph (13).’’. 

13 (b) AUTOMATIC CONTRIBUTION TRUST.—Section 

14 401(k) of the Internal Revenue Code of 1986 (relating to 

15 cash or deferred arrangement) is amended by adding at 

16 the end the following new paragraph: 

17 ‘‘(13) AUTOMATIC CONTRIBUTION TRUST.— 

18 ‘‘(A) AUTOMATIC CONTRIBUTION TRUST

19 DEFINED.— 

20 ‘‘(i) IN GENERAL.—For purposes of 

21 paragraph (12)(A)(iii), the term ‘automatic 

22 contribution trust’ means an arrange23 ment— 

24 ‘‘(I) except as provided in clause 

25 (ii), under which each employee eligi26 ble to participate in the arrangement 
3 

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1 is treated as having elected to have 

2 the employer make elective contribu3 tions in an amount equal to the appli4 cable percentage of the employee’s 

5 compensation, and 

6 ‘‘(II) which meets the require7 ments of subparagraph (B). 

8 ‘‘(ii) EXCEPTIONS.— 

9 ‘‘(I) EXCEPTION FOR EXISTING

10 EMPLOYEES.—Clause (i)(I) shall not 

11 apply to any employee who was eligi12 ble to participate in the arrangement 

13 (or a predecessor arrangement) imme14 diately before the first date on which 

15 the arrangement is an automatic con16 tribution trust. 

17 ‘‘(II) ELECTION OUT.—Each em18 ployee eligible to participate in the ar19 rangement may specifically elect not 

20 to have contributions made under 

21 clause (i), and such clause shall cease 

22 to apply to compensation paid on or 

23 after the effective date of the election. 

24 ‘‘(iii) APPLICABLE PERCENTAGE.— 

25 For purposes of this subparagraph— 
4 

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1 ‘‘(I) IN GENERAL.—The term 

2 ‘applicable percentage’ means, with 

3 respect to any employee, the percent4 age (not less than 3 percent) deter5 mined under the arrangement. 

6 ‘‘(II) INCREASE IN PERCENT7 AGE.—In the case of the second plan 

8 year beginning after the first date on 

9 which the election under clause (i)(I) 

10 is in effect with respect to the em11 ployee and any succeeding plan year, 

12 the applicable percentage shall be a 

13 percentage equal to the sum of the 

14 applicable percentage for the employee 

15 as of the close of the preceding plan 

16 year plus the number of percentage 

17 points (not less than 1 percentage 

18 point) specified by the plan. Such in19 crease shall continue until the applica20 ble percentage is at least 10 percent 

21 or such higher percentage specified by 

22 the plan. 

23 ‘‘(B) NOTICE REQUIREMENTS.— 
5 

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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 (A)(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 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 within a reasonable period before any year, 
6 

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1 given notice of the employee’s rights and 

2 obligations under the arrangement. 

3 The requirements of clauses (i) and (ii) of para4 graph (12)(D) shall be met with respect to the 

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

6 subparagraph.’’ 

7 (c) MATCHING CONTRIBUTIONS.—Section 

8 401(m)(11)(A) of the Internal Revenue Code of 1986 (re9 lating to additional alternative method of satisfying non10 discrimination test for matching contributions and em11 ployee contributions) is amended by striking ‘‘and’’ at the 

12 end of clause (ii), by striking the period at the end of 

13 clause (iii) and inserting ‘‘, and’’ and by adding at the 

14 end the following new clause: 

15 ‘‘(iii) meets the requirements of sub16 section (k)(12)(A)(iii).’’. 

17 (d) INVESTMENTS AND PREEMPTION.— 

18 (1) CONTROL DEEMED TO HAVE BEEN EXER19 CISED WITH RESPECT TO DEFAULT INVESTMENT AR20 RANGEMENTS.—Section 404(c) of the Employee Re21 tirement Income Security Act of 1974 (29 U.S.C. 

22 1104(c)) is amended by adding at the end the fol23 lowing new paragraph: 

24 ‘‘(4) TREATMENT OF DEFAULT INVESTMENT

25 ARRANGEMENT.— 
7 

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1 ‘‘(A) IN GENERAL.—A participant in an 

2 individual account plan shall, for purposes of 

3 paragraph (1), be treated as exercising control 

4 over the assets in the account with respect to 

5 the amount of contributions made under a de6 fault investment arrangement. 

7 ‘‘(B) DEFAULT INVESTMENT ARRANGE8 MENT DEFINED.—For purposes of this para9 graph, the term ‘default investment arrange10 ment’ means an arrangement— 

11 ‘‘(i) which meets the requirements of 

12 subparagraph (C), 

13 ‘‘(ii) under which the participant is 

14 treated as having elected to have the em15 ployer exercise control over the assets in 

16 his account until the participant specifi17 cally elects to exercise such control, and 

18 ‘‘(iii) under which assets described in 

19 clause (ii) are invested in accordance with 

20 regulations prescribed by the Secretary. 

21 Such regulations shall provide guidance on the 

22 appropriateness of designating default invest23 ments that include a mix of asset classes con24 sistent with long-term capital appreciation. The 

25 regulations shall also provide guidance on the 
8 

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1 designation of default investments in individual 

2 account plans that are not designed to meet the 

3 requirements of this section. 

4 ‘‘(C) NOTICE REQUIREMENTS.— 

5 ‘‘(i) TIME FOR NOTICE.—The admin6 istrator of a default investment arrange7 ment shall, within a reasonable period be8 fore each plan year, give to each employee 

9 to whom a default investment arrangement 

10 applies for such plan year notice of the em11 ployee’s rights and obligations under the 

12 arrangement which— 

13 ‘‘(I) is sufficiently accurate and 

14 comprehensive to apprise the employee 

15 of such rights and obligations, and 

16 ‘‘(II) is written in a manner cal17 culated to be understood by the aver18 age employee to whom the arrange19 ment applies. 

20 ‘‘(ii) FORM OF NOTICE; RESPONSE.— 

21 A notice shall not be treated as meeting 

22 the requirements of clause (i) with respect 

23 to an employee unless— 

24 ‘‘(I) the notice includes a notice 

25 explaining the employee’s right under 
9 

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1 the arrangement to elect to exercise 

2 control over the assets in his account, 

3 ‘‘(II) the employee has a reason4 able period of time after receipt of the 

5 notice described in subclause (I) and 

6 before the assets are first invested to 

7 make such election, and 

8 ‘‘(III) the notice explains how 

9 contributions made under the ar10 rangement will be invested in the ab11 sence of any investment election by 

12 the employee.’’. 

13 (2) PREEMPTION OF CONFLICTING STATE REG14 ULATION.—Section 514 of such Act (29 U.S.C. 

15 1144) is amended by adding at the end the following 

16 new subsection: 

17 ‘‘(e) AUTOMATIC CONTRIBUTION ARRANGEMENTS.— 

18 ‘‘(1) IN GENERAL.—Notwithstanding any other 

19 provision of this section, any law of a State which 

20 would directly or indirectly prohibit or restrict the 

21 inclusion in any plan of an automatic contribution 

22 arrangement shall be superseded. The Secretary may 

23 prescribe regulations which would establish min24 imum standards that such arrangements would be 
10 

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1 required to satisfy in order for this subsection to 

2 apply. 

3 ‘‘(2) AUTOMATIC CONTRIBUTION ARRANGE4 MENT DEFINED.—For purposes of this subsection, 

5 the term ‘automatic contribution arrangement’ 

6 means an arrangement— 

7 ‘‘(A) which meets the requirements of 

8 paragraph (3), 

9 ‘‘(B) under which a participant may elect 

10 to have the employer make payments as con11 tributions under the plan on behalf of the par12 ticipant, or to the participant directly in cash, 

13 ‘‘(C) under which the participant is treated 

14 as having elected to have the employer make 

15 such contributions in an amount equal to a uni16 form percentage of compensation provided 

17 under the plan until the participant specifically 

18 elects not to have such contributions made (or 

19 specifically elects to have such contributions 

20 made at a different percentage), and 

21 ‘‘(D) under which contributions described 

22 in subparagraph (C) are invested in accordance 

23 with regulations prescribed by the Secretary. 

24 Such regulations shall provide guidance on the ap25 propriateness of designating default investments 
11 

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1 that include a mix of asset classes consistent with 

2 long-term capital appreciation. 

3 ‘‘(3) NOTICE REQUIREMENT.— 

4 ‘‘(A) IN GENERAL.—The administrator of 

5 an individual account plan shall, within a rea6 sonable period before each plan year, give to 

7 each employee to whom an automatic contribu8 tion arrangement applies for such plan year no9 tice of the employee’s rights and obligations 

10 under the arrangement which— 

11 ‘‘(i) is sufficiently accurate and com12 prehensive to apprise the employee of such 

13 rights and obligations, and 

14 ‘‘(ii) is written in a manner calculated 

15 to be understood by the average employee 

16 to whom the arrangement applies. 

17 ‘‘(B) OTHER REQUIREMENTS.—A notice 

18 shall not be treated as meeting the require19 ments of subparagraph (A) with respect to an 

20 employee unless— 

21 ‘‘(i) the notice includes a notice ex22 plaining the employee’s right under the ar23 rangement to elect not to have elective con24 tributions made on the employee’s behalf 
12 

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1 (or to elect to have such contributions 

2 made at a different percentage), 

3 ‘‘(ii) the employee has a reasonable 

4 period of time after receipt of the notice 

5 described in clause (i) and before the first 

6 elective contribution is made to make such 

7 election, and 

8 ‘‘(iii) the notice explains how contribu9 tions made under the arrangement will be 

10 invested in the absence of any investment 

11 election by the employee.’’. 

12 (e) CORRECTIVE DISTRIBUTIONS.— 

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

14 Revenue Code of 1986 (relating to definitions and 

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

16 following new subsection: 

17 ‘‘(w) AUTOMATIC CONTRIBUTION ARRANGEMENTS.— 

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

19 the amount of any corrective distribution from a 

20 plan shall be treated as if such amount had never 

21 been held in such plan and shall be treated as a pay22 ment of compensation from the employer maintain23 ing the plan to the employee receiving such distribu24 tion. 
13 

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1 ‘‘(2) CORRECTIVE DISTRIBUTION.—For pur2 poses of this subsection, the term ‘corrective dis3 tribution’ means a distribution from an applicable 

4 employer plan of all amounts attributable to an erro5 neous automatic contribution. 

6 ‘‘(3) ERRONEOUS AUTOMATIC CONTRIBU7 TION.—For purposes of this subsection, the term 

8 ‘erroneous automatic contribution’ means an elective 

9 contribution made on behalf of an employee under 

10 any applicable employer plan pursuant to a plan pro11 vision treating the employee as having elected to 

12 have the employer make such elective contribution 

13 until the employee affirmatively elects not to have 

14 such contribution made or affirmatively elects to 

15 make contributions at a specified level, if the fol16 lowing requirements are satisfied: 

17 ‘‘(A) Within the applicable period, the em18 ployee notifies the plan administrator that the 

19 employee elects to have the elective contribution 

20 treated as an erroneous automatic contribution. 

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

22 that are treated as erroneous automatic con23 tributions with respect to an employee does not 

24 exceed the greater of— 

25 ‘‘(i) $400, or 
14 

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1 ‘‘(ii) the amount of the elective con2 tributions described in paragraph (3) with 

3 respect to the employee which where made 

4 during the first 4 payroll periods to which 

5 the arrangement applies. 

6 ‘‘(4) APPLICABLE EMPLOYER PLAN.—For pur7 poses of this subsection, the term ‘applicable em8 ployer plan’ has the meaning given such term by 

9 subsection (v)(6)(A). 

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

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

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

13 that begins on the first date that an amount is with14 held from compensation payable to the employee in 

15 order to make a plan contribution pursuant to a 

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

17 (2) VESTING CONFORMING AMENDMENTS.— 

18 (A) INTERNAL REVENUE CODE OF 1986.— 

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

20 is amended by inserting ‘‘an erroneous 

21 automatic contribution under section 

22 414(w),’’ after ‘‘402(g)(2)(A),’’. 

23 (ii) The heading of section 

24 411(a)(3)(G) of such Code is amended by 
15 

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1 inserting ‘‘OR ERRONEOUS AUTOMATIC

2 CONTRIBUTION’’ before the period. 

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

4 Code is amended by inserting ‘‘an erro5 neous automatic contribution under section 

6 414(w),’’ after ‘‘402(g)(2)(A),’’. 

7 (iv) The heading of section 

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

9 inserting ‘‘OR ERRONEOUS AUTOMATIC

10 CONTRIBUTION’’ before the period. 

11 (B) EMPLOYEE RETIREMENT INCOME SE12 CURITY ACT OF 1974.—Section 203(a)(3)(F) of 

13 the Employee Retirement Income Security Act 

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

15 by inserting ‘‘an erroneous automatic contribu16 tion under section 414(w) of such Code,’’ after 

17 ‘‘402(g)(2)(A) of such Code,’’. 

18 (f) APPLICATION OF AUTOMATIC CONTRIBUTION RE19 QUIREMENT TO FEDERAL THRIFT SAVINGS PLAN.—Sec20 tion 8432(a) of title 5, United States Code, is amended 

21 by adding at the end the following: 

22 ‘‘(4)(A) An employee who begins employment 

23 after January 1, 2006, or any Member who is elect24 ed or appointed to office after that date (regardless 

25 of whether that employee (or Member) has prior pe-
16 

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1 riods of service covered under this chapter or chap2 ter 83) shall be treated as having made an election 

3 to make contributions under subsection (b) in an 

4 amount equal to the applicable percentage of the 

5 employees compensation unless the employee specifi6 cally elects not to have such contributions made 

7 ‘‘(B)(i) For purposes of this paragraph, the 

8 term ‘applicable percentage’ means, with respect to 

9 any employee, 3 percent. 

10 ‘‘(ii) In the case of the second plan year begin11 ning after the first date on which the election under 

12 subparagraph (A) is in effect with respect to the em13 ployee and any succeeding plan year, the applicable 

14 percentage shall be a percentage equal to the sum of 

15 the applicable percentage for the employee as of the 

16 close of the preceding plan year plus the number of 

17 percentage points (not less than 1 percentage point) 

18 specified by the plan. Such increase shall continue 

19 until the applicable percentage is 10 percent. 

20 ‘‘(C) Each employee to whom subparagraph (A) 

21 applies shall— 

22 ‘‘(i) receive a notice explaining the employ23 ee’s right under the Thrift Savings Plan to 

24 elect not to have elective contributions made on 

25 the employee’s behalf, and how contributions 
17 

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1 made under the Thrift Savings Plan will be in2 vested in the absence of any investment election 

3 by the employee, and 

4 ‘‘(ii) have a reasonable period of time after 

5 receipt of such notice and before the first elec6 tive contribution is made to make such election. 

7 A similar notice shall be provided within a reason8 able period of time before each calendar year. 

9 ‘‘(D) In the case of an employee who does not 

10 make an investment election, the Thrift Savings 

11 Plan shall invest the contributions in accordance 

12 with the regulations prescribed by the Secretary of 

13 Labor under section 404(c)(4)(B) of the Employee 

14 Retirement Income Security Act of 1974.’’. 

15 (g) EFFECTIVE DATE.— 

16 (1) IN GENERAL.—Except as provided in para17 graph (2), the amendments made by this section 

18 shall apply to plan years beginning after December 

19 31, 2005. 

20 (2) REGULATIONS.—Final regulations under 

21 section 404(c)(4)(B)(iii) of the Employee Retirement 

22 Income Security Act of 1974 (added by this section) 

23 shall be issued no later than 6 months after the date 

24 of enactment of this Act. 
18 

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1 SEC. 3. DIRECT PAYMENT OF TAX REFUNDS TO INDIVIDUAL 

2 RETIREMENT PLANS. 

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

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

5 as follows: 

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

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

8 subparagraph (B), for purposes of this sub9 section, a taxpayer shall be deemed to have 

10 made a contribution to an individual retirement 

11 plan on the last day of the preceding taxable 

12 year if the contribution is made on account of 

13 such taxable year and is made not later than 

14 the time prescribed by law for filing the return 

15 for such taxable year (not including extensions 

16 thereof). 

17 ‘‘(B) DIRECT PAYMENT OF TAX REFUNDS

18 TO INDIVIDUAL RETIREMENT PLANS.— 

19 ‘‘(i) IN GENERAL.—To the extent pro20 vided in rules prescribed by the Secretary, 

21 a tax refund owed to a taxpayer and paid 

22 directly to an individual retirement plan 

23 shall be deemed a contribution made by 

24 the taxpayer— 
19 

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1 ‘‘(I) on the last day of the tax2 able year to which such refund re3 lates, and 

4 ‘‘(II) on account of such taxable 

5 year. 

6 ‘‘(ii) LIMITATION.—This subpara7 graph shall not apply to a tax refund un8 less such refund is shown on a return filed 

9 not later than the time prescribed by law 

10 for filing the return for the taxable year to 

11 which such refund relates (not including 

12 extensions thereof). 

13 ‘‘(iii) DIRECT PAYMENT.—For pur14 poses of this subparagraph, a tax refund is 

15 paid directly to an individual retirement 

16 plan if it is paid in the form of a direct 

17 transfer from the Secretary to the trustee 

18 or issuer of the individual retirement plan. 

19 ‘‘(iv) TAX REFUND.—For purposes of 

20 this subparagraph, the term ‘tax refund’ 

21 means any overpayment of an internal rev22 enue tax under section 6401 which the 

23 Secretary may credit or refund under sec24 tion 6402 (after application of subsections 

25 (c), (d), and (e) thereof).’’. 
20 

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1 (b) REGULATIONS.— 

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

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

4 the Treasury shall issue rules which permit a tax5 payer— 

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

7 a tax refund owed to the taxpayer paid directly 

8 to an individual retirement plan, 

9 (B) to specify the individual retirement 

10 plan to which such tax refund is to be paid 

11 (and the investment option in which such tax 

12 refund is to be invested), and 

13 (C) to the extent provided in rules pre14 scribed by the Secretary, to specify the taxable 

15 year on account of which such payment is 

16 made, except that the Secretary may require 

17 that the amount subject to such an election ex18 ceed a dollar threshold determined by the Sec19 retary as necessary or appropriate to ensure the 

20 administrability of such elections. 

21 (2) INFORMATION.—The Secretary may require 

22 that the taxpayer provide, and agree to the disclo23 sure of, any information necessary to pay the tax re24 fund to the individual retirement plan specified by 

25 the taxpayer. 
21 

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1 (3) SPECIAL RULE.—The Secretary may pro2 vide that if, for any reason, the trustee or issuer 

3 does not accept payment of a tax refund, the tax re4 fund shall instead be paid as if the taxpayer had not 

5 elected a direct payment to an individual retirement 

6 plan. 

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

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

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

10 date on which final rules implementing the amendments 

11 made by this section are prescribed. 

12 SEC. 4. CREDIT TO ENCOURAGE UNIVERSAL ACCESS TO 

13 OPT OUT DIRECT DEPOSIT RETIREMENT SAV14 INGS. 

15 (a) IN GENERAL.—Subpart D of part IV of sub16 chapter A of chapter 1 of the Internal Revenue Code of 

17 1986 (relating to business related credits) is amended by 

18 adding at the end the following new section: 

19 ‘‘SEC. 45J. EMPLOYER SALARY REDUCTION COSTS. 

20 ‘‘(a) GENERAL RULE.—For purposes of section 38, 

21 in the case of the first taxable year which includes the 

22 date that a qualified salary reduction arrangement of the 

23 eligible employer becomes effective, the employer salary re24 duction cost credit determined under this section for such 
22 

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1 taxable year is the amount determined under subsection 

2 (b). 

3 ‘‘(b) AMOUNT OF CREDIT.—The amount of the credit 

4 determined under this section for any taxable year with 

5 respect to an eligible employer shall be equal to 50 percent 

6 of the costs paid or incurred by the taxpayer in estab7 lishing the qualified salary reduction arrangement referred 

8 to in subsection (a). 

9 ‘‘(c) ELIGIBLE EMPLOYER.—For purposes of this 

10 section, the term ‘eligible employer’ means, with respect 

11 to any calendar year in which the taxable year begins, an 

12 employer which maintains a qualified salary reduction ar13 rangement meeting the requirements of subsection (d) and 

14 which did not maintain a qualified plan or arrangement 

15 (within the meaning of subsection (d)(8)) for the pre16 ceding 2 calendar years. 

17 ‘‘(d) EMPLOYEE ACCESS TO OPT OUT SALARY RE18 DUCTION CONTRIBUTIONS TO INDIVIDUAL RETIREMENT

19 PLANS.— 

20 ‘‘(1) IN GENERAL.—Every employer which does 

21 not maintain a qualified plan or arrangement for a 

22 calendar year may provide a qualified salary reduc23 tion arrangement for the calendar year. 

24 ‘‘(2) QUALIFIED SALARY REDUCTION ARRANGE25 MENT.—For purposes of this section, the term 
23 

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1 ‘qualified salary reduction arrangement’ means a 

2 salary reduction arrangement which meets the re3 quirements of paragraphs (4) and (5). 

4 ‘‘(3) SALARY REDUCTION ARRANGEMENT.—For 

5 purposes of this section, the term ‘salary reduction 

6 arrangement’ means a written arrangement of an 

7 employer under which— 

8 ‘‘(A) an employee eligible to participate in 

9 the arrangement may elect to— 

10 ‘‘(i) contribute to an individual retire11 ment plan established by or on behalf of 

12 the employee by having the employer make 

13 direct deposit payments to the plan by pay14 roll deduction, or 

15 ‘‘(ii) receive the amounts directly as 

16 cash compensation, 

17 ‘‘(B) no other contributions may be made 

18 under the arrangement, 

19 ‘‘(C) each employee eligible to participate 

20 in the arrangement is treated as having elected 

21 to have the employer make elective contribu22 tions under subparagraph (A)(i) in an amount 

23 equal to the applicable percentage (within the 

24 meaning of section 401(k)(13)(A)(iii)) of the 

25 employee’s compensation unless the employee 
24 

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1 specifically elects not to have such contributions 

2 made, and 

3 ‘‘(D) there is established the methods by 

4 which contributions made under the arrange5 ment will be invested in the absence of any in6 vestment election by the employee. 

7 ‘‘(4) PARTICIPATION REQUIREMENTS.— 

8 ‘‘(A) IN GENERAL.—The requirements of 

9 this paragraph are met with respect to a salary 

10 reduction arrangement for a year only if, under 

11 the arrangement, all employees of the employer 

12 are eligible to make the election under para13 graph (3)(A). 

14 ‘‘(B) EXCLUDABLE EMPLOYEES.—An em15 ployer may exclude from the requirement under 

16 paragraph (3) employees described in section 

17 410(b)(3) and any employee who has not com18 pleted hours of service for the employer on a 

19 regular basis during a period of at least 30 con20 secutive days during the calendar year. 

21 ‘‘(5) ADMINISTRATIVE REQUIREMENTS.—The 

22 requirements of this paragraph are met with respect 

23 to any salary reduction arrangement if, under the 

24 arrangement— 
25 

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1 ‘‘(A) the employer must make the pay2 ments elected under paragraph (3)(A) or re3 quired under paragraph (3)(C) not later than 

4 the close of the 30-day period following the last 

5 day of the month with respect to which the con6 tributions are to be made, or, if later, the dead7 line under applicable rules and regulations for 

8 the employer to deposit tax under section 3102 

9 for wages paid in that month, 

10 ‘‘(B) an employee may elect to terminate 

11 participation in the arrangement at any time 

12 during the year, except that if an employee so 

13 terminates, the arrangement may provide that 

14 the employee may not elect to resume participa15 tion until the beginning of the next year, 

16 ‘‘(C) each employee eligible to participate 

17 may elect, during the 60-day period before the 

18 beginning of any year (and the 60-day period 

19 before the first day the employee is eligible to 

20 participate), to participate in the arrangement, 

21 or to modify the amounts subject to the ar22 rangement, for such year, and 

23 ‘‘(D) immediately before the period for 

24 which an election described in paragraph (3)(A) 

25 may be made, the employer provides a notice to 
26 

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1 each employee of the employee’s opportunity to 

2 make the election and the maximum amount 

3 which may be contributed to an individual re4 tirement plan on an annual basis. 

5 ‘‘(6) USE OF DESIGNATED FINANCIAL INSTITU6 TION.—An employer shall not be treated as failing 

7 to satisfy the requirements of this subsection or any 

8 other provision of this title merely because the em9 ployer makes all contributions (or all contributions 

10 on behalf of employees who do not specify an indi11 vidual retirement plan, trustee, or issuer to receive 

12 the contributions) to individual retirement plans of 

13 a designated trustee or issuer. The preceding sen14 tence shall not apply unless each participant is noti15 fied in writing that the participant’s balance may be 

16 transferred without cost or penalty to another indi17 vidual retirement plan in accordance with subsection 

18 (d)(3). 

19 ‘‘(7) MODEL NOTICE.—The Secretary shall pro20 vide a model notice, written in a manner calculated 

21 to be understandable to the average worker, that 

22 employers may use to satisfy the requirement of 

23 paragraphs (5)(D) and (6). Model notices shall be 

24 provided in English, in Spanish, and in any other 

25 language deemed appropriate by the Secretary. 
27 

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1 ‘‘(8) QUALIFIED PLAN OR ARRANGEMENT.—For 

2 purposes of this section, an employer is treated as 

3 maintaining a qualified plan or arrangement for a 

4 calendar year if the employer maintains for such 

5 year a plan, contract, pension, or trust described in 

6 subparagraph (A) or (B) of section 219(g)(5) or an 

7 eligible deferred compensation plan (within the 

8 meaning of section 457(b)) with respect to which 

9 contributions are made, or benefits are accrued, for 

10 service in such year. 

11 ‘‘(e) SALARY REDUCTION CONTRIBUTIONS TREATED

12 LIKE OTHER CONTRIBUTIONS TO INDIVIDUAL RETIRE13 MENT PLANS.— 

14 ‘‘(1) TAX TREATMENT UNAFFECTED.—The fact 

15 that a contribution to an individual retirement plan 

16 is made on behalf of an employee under a qualified 

17 salary reduction arrangement instead of being made 

18 directly by the employee shall not affect the deduct19 ibility or other income tax treatment of the contribu20 tion or of other amounts under this title. 

21 ‘‘(2) SALARY REDUCTION CONTRIBUTIONS

22 TAKEN INTO ACCOUNT.—Any contribution made on 

23 behalf of an employee under a qualified salary reduc24 tion arrangement shall be taken into account in ap25 plying the limitations on contributions to individual 
28 

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1 retirement plans and the other provisions of this 

2 title applicable to individual retirement plans as if 

3 the contribution had been made to the plan directly 

4 by the employee.’’. 

5 (b) CREDIT ALLOWED AS PART OF GENERAL BUSI6 NESS CREDIT.—Section 38(b) of the Internal revenue 

7 Code of 1986 (defining current year business credit) is 

8 amended by striking ‘‘plus’’ at the end of paragraph (18), 

9 by striking the period at the end of paragraph (19) and 

10 inserting ‘‘, plus’’, and by adding at the end the following 

11 new paragraph: 

12 ‘‘(20) in the case of an eligible employer (as de13 fined in section 45J(c)), the employer salary reduc14 tion cost credit determined under section 45J(a).’’. 

15 (c) TREATMENT AS DEFAULT INVESTMENT AR16 RANGEMENT.—Section 404(c)(4)(B) of the Employee Re17 tirement Income security Act of 1974, as added by section 

18 2 of this Act, is amended by adding at the end the fol19 lowing new sentence: ‘‘For purposes of this subsection, an 

20 arrangement described in section 45J(d) shall be treated 

21 as a default investment arrangement.’’ 

22 (d) CLERICAL AMENDMENT.—The table of sections 

23 for subpart D of part IV of subchapter A of chapter 1 

24 of the Internal Revenue Code of 1986 is amended by add25 ing at the end the following new item: 

‘‘Sec. 45J. Employer salary reduction costs.’’. 
29 

•S 1590 IS

1 (e) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to taxable years beginning after 

3 December 31, 2005. 

Æ