II 

109TH CONGRESS 

1ST SESSION S. 1819 

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 

OCTOBER 4, 2005 

Mr. SANTORUM (for himself and Mr. BENNETT) 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 ‘‘401(k) Enhancement 

5 Act: Encouraging Retirement Savings’’. 
2 

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1 SEC. 2. INCREASING PARTICIPATION AND SAVINGS IN 

2 CASH OR DEFERRED PLANS THROUGH AUTO3 MATIC CONTRIBUTION ARRANGEMENTS. 

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

5 Revenue Code of 1986 (relating to cash or deferred ar6 rangement) is amended by adding at the end the following 

7 new paragraph: 

8 ‘‘(13) NONDISCRIMINATION REQUIREMENTS

9 FOR AUTOMATIC CONTRIBUTION TRUSTS.— 

10 ‘‘(A) IN GENERAL.—A cash or deferred ar11 rangement shall be treated as meeting the re12 quirements of paragraph (3)(A)(ii) if such ar13 rangement constitutes an automatic contribu14 tion trust. 

15 ‘‘(B) AUTOMATIC CONTRIBUTION TRUST.— 

16 ‘‘(i) IN GENERAL.—For purposes of 

17 this paragraph, the term ‘automatic con18 tribution trust’ means an arrangement— 

19 ‘‘(I) except as provided in clause 

20 (ii), under which each employee eligi21 ble to participate in the arrangement 

22 is treated as having elected to have 

23 the employer make elective contribu24 tions in an amount equal to the appli25 cable percentage of the employee’s 

26 compensation, and 
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1 ‘‘(II) which meets the require2 ments of subparagraphs (C) and (D). 

3 ‘‘(ii) EXCEPTIONS.— 

4 ‘‘(I) EMPLOYER ELECTION WITH

5 RESPECT TO EXISTING EMPLOYEES.— 

6 An employer may elect not to have 

7 clause (i)(I) apply to all employees 

8 who were eligible to participate in the 

9 arrangement (or a predecessor ar10 rangement) immediately before the 

11 first date on which the arrangement is 

12 an automatic contribution trust. The 

13 employer shall make the election 

14 under this subclause before such first 

15 date. 

16 ‘‘(II) ELECTION OUT.—Each em17 ployee eligible to participate in the ar18 rangement may specifically elect not 

19 to have contributions made under 

20 clause (i), and such clause shall cease 

21 to apply to compensation paid on or 

22 after the effective date of the election. 

23 ‘‘(iii) APPLICABLE PERCENTAGE.— 

24 For purposes of this subparagraph— 
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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 ‘‘(C) MATCHING OR NONELECTIVE CON24 TRIBUTIONS.— 
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1 ‘‘(i) IN GENERAL.—The requirements 

2 of this subparagraph are met if, under the 

3 arrangement, the employer— 

4 ‘‘(I) makes matching contribu5 tions on behalf of each employee who 

6 is not a highly compensated employee 

7 in an amount equal to 50 percent of 

8 the elective contributions of the em9 ployee to the extent such elective con10 tributions do not exceed 6 percent of 

11 compensation; or 

12 ‘‘(II) is required, without regard 

13 to whether the employee makes an 

14 elective contribution or employee con15 tribution, to make a contribution to a 

16 defined contribution plan on behalf of 

17 each employee who is not a highly 

18 compensated employee and who is eli19 gible to participate in the arrange20 ment in an amount equal to at least 

21 3 percent of the employee’s compensa22 tion, 

23 The rules of clauses (ii) and (iii) of para24 graph (12)(B) shall apply for purposes of 

25 subclause (I). The rules of paragraph 
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1 (12)(E)(ii) shall apply for purposes of sub2 clauses (I) and (II). 

3 ‘‘(ii) OTHER PLANS.—An arrange4 ment shall be treated as meeting the re5 quirements under clause (i) if any other 

6 plan maintained by the employer meets 

7 such requirements with respect to employ8 ees eligible under the arrangement. 

9 ‘‘(D) NOTICE REQUIREMENTS.— 

10 ‘‘(i) IN GENERAL.—The requirements 

11 of this subparagraph are met if the re12 quirements of clauses (ii) and (iii) are met. 

13 ‘‘(ii) REASONABLE PERIOD TO MAKE

14 ELECTION.—The requirements of this 

15 clause are met if each employee to whom 

16 subparagraph (B)(i) applies— 

17 ‘‘(I) receives a notice explaining 

18 the employee’s right under the ar19 rangement to elect not to have elective 

20 contributions made on the employee’s 

21 behalf, and how contributions made 

22 under the arrangement will be in23 vested in the absence of any invest24 ment election by the employee, and 
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1 ‘‘(II) has a reasonable period of 

2 time after receipt of such notice and 

3 before the first elective contribution is 

4 made to make such election. 

5 ‘‘(iii) ANNUAL NOTICE OF RIGHTS

6 AND OBLIGATIONS.—The requirements of 

7 this clause are met if each employee eligi8 ble to participate in the arrangement is, 

9 within a reasonable period before any year, 

10 given notice of the employee’s rights and 

11 obligations under the arrangement. 

12 The requirements of clauses (i) and (ii) of para13 graph (12)(D) shall be met with respect to the 

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

15 subparagraph.’’ 

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

17 the Internal Revenue Code of 1986 (relating to non18 discrimination test for matching contributions and em19 ployee contributions) is amended by redesignating para20 graph (12) as paragraph (13) and by inserting after para21 graph (11) the following new paragraph: 

22 ‘‘(12) ALTERNATE METHOD FOR AUTOMATIC

23 CONTRIBUTION TRUSTS.—A defined contribution 

24 plan shall be treated as meeting the requirements of 
8 

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1 paragraph (2) with respect to matching contribu2 tions if the plan— 

3 ‘‘(A) meets the contribution requirements 

4 of subparagraphs (B)(i) and (C) of subsection 

5 (k)(13); 

6 ‘‘(B) meets the notice requirements of sub7 paragraph (D) of subsection (k)(13); and 

8 ‘‘(C) meets the requirements of paragraph 

9 (11)(B) (ii) and (iii).’’. 

10 (c) EXCLUSION FROM DEFINITION OF TOP-HEAVY

11 PLANS.— 

12 (1) ELECTIVE CONTRIBUTION RULE.—Clause 

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

14 Code of 1986 is amended by inserting ‘‘or 

15 401(k)(13)’’ after ‘‘section 401(k)(12)’’. 

16 (2) MATCHING CONTRIBUTION RULE.—Clause 

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

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

19 401(m)(11)’’. 

20 (d) DEFINITION OF COMPENSATION.— 

21 (1) BASE PAY OR RATE OF PAY.—The Sec22 retary of the Treasury shall, not later than Decem23 ber 31, 2006, modify Treasury Regulation section 

24 1.414(s)–1(d)(3) to facilitate the use of the safe har25 bors in sections 401(k)(12), 401(k)(13), 
9 

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1 401(m)(11), and 401(m)(12) of the Internal Rev2 enue Code of 1986, and in Treasury Regulation sec3 tion 1.401(a)(4)–3(b), by plans that use base pay or 

4 rate of pay in determining contributions or benefits. 

5 Such modifications shall include increased flexibility 

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

7 where the amount of overtime compensation payable 

8 in a year can vary significantly. 

9 (2) APPLICATION OF REQUIREMENTS TO SEPA10 RATE PAYROLL PERIODS.—Not later than December 

11 31, 2005, the Secretary of the Treasury shall issue 

12 rules under subparagraphs (B)(i) and (C)(i) of sec13 tion 401(k)(13) of such Code and under clause (i) 

14 of section 401(m)(12)(A) of such Code that, effec15 tive for plan years beginning after December 31, 

16 2005, permit such requirements to be applied sepa17 rately to separate payroll periods based on rules 

18 similar to the rules described in Treasury Regulation 

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

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

21 section 401(m) of the Internal Revenue Code of 1986 is 

22 amended by adding at the end the following: 

23 ‘‘(C) SECTION 403(b) CONTRACTS.—An 

24 annuity contract under section 403(b) shall be 

25 treated as meeting the requirements of para-
10 

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1 graph (2) with respect to matching contribu2 tions if such contract meets requirements simi3 lar to the requirements under subparagraph 

4 (A).’’. 

5 (f) INVESTMENTS AND PREEMPTION.— 

6 (1) CONTROL DEEMED TO HAVE BEEN EXER7 CISED WITH RESPECT TO DEFAULT INVESTMENT AR8 RANGEMENTS.—Section 404(c) of the Employee Re9 tirement Income Security Act of 1974 (29 U.S.C. 

10 1104(c)) is amended by adding at the end the fol11 lowing new paragraph: 

12 ‘‘(4) TREATMENT OF DEFAULT INVESTMENT

13 ARRANGEMENT.— 

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

15 individual account plan shall, for purposes of 

16 paragraph (1), be treated as exercising control 

17 over the assets in the account with respect to 

18 the amount of contributions made under a de19 fault investment arrangement. 

20 ‘‘(B) DEFAULT INVESTMENT ARRANGE21 MENT DEFINED.—For purposes of this para22 graph, the term ‘default investment arrange23 ment’ means an arrangement— 

24 ‘‘(i) which meets the requirements of 

25 subparagraph (C), 
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1 ‘‘(ii) under which the participant is 

2 treated as having elected to have the em3 ployer exercise control over the assets in 

4 his account until the participant specifi5 cally elects to exercise such control, and 

6 ‘‘(iii) under which assets described in 

7 clause (ii) are invested in accordance with 

8 regulations prescribed by the Secretary. 

9 Such regulations shall provide guidance on the 

10 appropriateness of designating default invest11 ments that include a mix of asset classes con12 sistent with long-term capital appreciation. The 

13 regulations shall also provide guidance on the 

14 designation of default investments in individual 

15 account plans that are not designed to meet the 

16 requirements of this section. 

17 ‘‘(C) NOTICE REQUIREMENTS.— 

18 ‘‘(i) TIME FOR NOTICE.—The admin19 istrator of a default investment arrange20 ment shall, within a reasonable period be21 fore each plan year, give to each employee 

22 to whom a default investment arrangement 

23 applies for such plan year notice of the em24 ployee’s rights and obligations under the 

25 arrangement which— 
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1 ‘‘(I) is sufficiently accurate and 

2 comprehensive to apprise the employee 

3 of such rights and obligations, and 

4 ‘‘(II) is written in a manner cal5 culated to be understood by the aver6 age employee to whom the arrange7 ment applies. 

8 ‘‘(ii) FORM OF NOTICE; RESPONSE.— 

9 A notice shall not be treated as meeting 

10 the requirements of clause (i) with respect 

11 to an employee unless— 

12 ‘‘(I) the notice includes a notice 

13 explaining the employee’s right under 

14 the arrangement to elect to exercise 

15 control over the assets in his account, 

16 ‘‘(II) the employee has a reason17 able period of time after receipt of the 

18 notice described in subclause (I) and 

19 before the assets are first invested to 

20 make such election, and 

21 ‘‘(III) the notice explains how 

22 contributions made under the ar23 rangement will be invested in the ab24 sence of any investment election by 

25 the employee.’’. 
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1 (2) PREEMPTION OF CONFLICTING STATE REG2 ULATION.—Section 514 of such Act (29 U.S.C. 

3 1144) is amended by adding at the end the following 

4 new subsection: 

5 ‘‘(e) AUTOMATIC CONTRIBUTION ARRANGEMENTS.— 

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

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

8 would directly or indirectly prohibit or restrict the 

9 inclusion in any plan of an automatic contribution 

10 arrangement shall be superseded. The Secretary may 

11 prescribe regulations which would establish min12 imum standards that such arrangements would be 

13 required to satisfy in order for this subsection to 

14 apply. 

15 ‘‘(2) AUTOMATIC CONTRIBUTION ARRANGE16 MENT DEFINED.—For purposes of this subsection, 

17 the term ‘automatic contribution arrangement’ 

18 means an arrangement— 

19 ‘‘(A) which meets the requirements of 

20 paragraph (3), 

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

22 to have the employer make payments as con23 tributions under the plan on behalf of the par24 ticipant, or to the participant directly in cash, 
14 

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

2 as having elected to have the employer make 

3 such contributions in an amount equal to a uni4 form percentage of compensation provided 

5 under the plan until the participant specifically 

6 elects not to have such contributions made (or 

7 specifically elects to have such contributions 

8 made at a different percentage), and 

9 ‘‘(D) under which contributions described 

10 in subparagraph (C) are invested in accordance 

11 with regulations prescribed by the Secretary. 

12 Such regulations shall provide guidance on the ap13 propriateness of designating default investments 

14 that include a mix of asset classes consistent with 

15 long-term capital appreciation. 

16 ‘‘(3) NOTICE REQUIREMENT.— 

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

18 an individual account plan shall, within a rea19 sonable period before each plan year, give to 

20 each employee to whom an automatic contribu21 tion arrangement applies for such plan year no22 tice of the employee’s rights and obligations 

23 under the arrangement which— 
15 

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1 ‘‘(i) is sufficiently accurate and com2 prehensive to apprise the employee of such 

3 rights and obligations, and 

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

5 to be understood by the average employee 

6 to whom the arrangement applies. 

7 ‘‘(B) OTHER REQUIREMENTS.—A notice 

8 shall not be treated as meeting the require9 ments of subparagraph (A) with respect to an 

10 employee unless— 

11 ‘‘(i) the notice includes a notice ex12 plaining the employee’s right under the ar13 rangement to elect not to have elective con14 tributions made on the employee’s behalf 

15 (or to elect to have such contributions 

16 made at a different percentage), 

17 ‘‘(ii) the employee has a reasonable 

18 period of time after receipt of the notice 

19 described in clause (i) and before the first 

20 elective contribution is made to make such 

21 election, and 

22 ‘‘(iii) the notice explains how contribu23 tions made under the arrangement will be 

24 invested in the absence of any investment 

25 election by the employee.’’. 
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1 (g) CORRECTIVE DISTRIBUTIONS.— 

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

3 Revenue Code of 1986 (relating to definitions and 

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

5 following new subsection: 

6 ‘‘(w) AUTOMATIC CONTRIBUTION ARRANGEMENTS.— 

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

8 the amount of any corrective distribution from a 

9 plan shall be treated as if such amount had never 

10 been held in such plan and shall be treated as a pay11 ment of compensation from the employer maintain12 ing the plan to the employee receiving such distribu13 tion. 

14 ‘‘(2) CORRECTIVE DISTRIBUTION.—For pur15 poses of this subsection, the term ‘corrective dis16 tribution’ means a distribution from an applicable 

17 employer plan of all amounts attributable to an erro18 neous automatic contribution. 

19 ‘‘(3) ERRONEOUS AUTOMATIC CONTRIBU20 TION.—For purposes of this subsection, the term 

21 ‘erroneous automatic contribution’ means an elective 

22 contribution made on behalf of an employee under 

23 any applicable employer plan pursuant to a plan pro24 vision treating the employee as having elected to 

25 have the employer make such elective contribution 
17 

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1 until the employee affirmatively elects not to have 

2 such contribution made or affirmatively elects to 

3 make contributions at a specified level, if the fol4 lowing requirements are satisfied: 

5 ‘‘(A) Within the applicable period, the em6 ployee notifies the plan administrator that the 

7 employee elects to have the elective contribution 

8 treated as an erroneous automatic contribution. 

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

10 that are treated as erroneous automatic con11 tributions with respect to an employee does not 

12 exceed $500. 

13 ‘‘(4) APPLICABLE EMPLOYER PLAN.—For pur14 poses of this subsection, the term ‘applicable em15 ployer plan’ has the meaning given such term by 

16 subsection (v)(6)(A). 

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

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

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

20 that begins on the first date that an amount is with21 held from compensation payable to the employee in 

22 order to make a plan contribution pursuant to a 

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

24 (2) VESTING CONFORMING AMENDMENTS.— 

25 (A) INTERNAL REVENUE CODE OF 1986.— 
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1 (i) Section 411(a)(3)(G) of such Code 

2 is amended by inserting ‘‘an erroneous 

3 automatic contribution under section 

4 414(w),’’ after ‘‘402(g)(2)(A),’’. 

5 (ii) The heading of section 

6 411(a)(3)(G) of such Code is amended by 

7 inserting ‘‘OR ERRONEOUS AUTOMATIC

8 CONTRIBUTION’’ before the period. 

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

10 Code is amended by inserting ‘‘an erro11 neous automatic contribution under section 

12 414(w),’’ after ‘‘402(g)(2)(A),’’. 

13 (iv) The heading of section 

14 401(k)(8)(E) of such Code is amended by 

15 inserting ‘‘OR ERRONEOUS AUTOMATIC

16 CONTRIBUTION’’ before the period. 

17 (B) EMPLOYEE RETIREMENT INCOME SE18 CURITY ACT OF 1974.—Section 203(a)(3)(F) of 

19 the Employee Retirement Income Security Act 

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

21 by inserting ‘‘an erroneous automatic contribu22 tion under section 414(w) of such Code,’’ after 

23 ‘‘402(g)(2)(A) of such Code,’’. 

24 (h) EFFECTIVE DATE.— 
19 

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1 (1) IN GENERAL.—Except as provided in para2 graph (2), the amendments made by this section 

3 shall apply to plan years beginning after December 

4 31, 2005. 

5 (2) SECTION 403(b) CONTRACTS.—The amend6 ments made by subsection (e) shall apply to years 

7 beginning after December 31, 1998. 

8 (3) REGULATIONS.—Final regulations under 

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

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

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

12 of enactment of this Act. 

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