II 

109TH CONGRESS 

2D SESSION S. 3951 

To amend the Internal Revenue Code of 1986 and the Employee Retirement 

Income Security Act of 1974 to increase the retirement security of 

women and small business owners, and for other purposes. 

IN THE SENATE OF THE UNITED STATES 

SEPTEMBER 27, 2006 

Mr. SMITH (for himself, Mr. CONRAD, Mr. KERRY, and Mr. BINGAMAN) 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 and the Employee Retirement Income Security Act of 1974 to increase the retirement security of women and small business owners, 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; AMENDMENT OF 1986 CODE; 

4 TABLE OF CONTENTS. 

5 (a) SHORT TITLE.—This Act may be cited as the 

6 ‘‘Women’s Retirement Security Act of 2006’’. 

7 (b) AMENDMENT OF 1986 CODE.—Except as other8 wise expressly provided, whenever in this Act an amendVerDate Aug 31 2005 00:34 Sep 29, 2006 Jkt 049200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\S3951.IS S3951

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1 ment or repeal is expressed in terms of an amendment 

2 to, or repeal of, a section or other provision, the reference 

3 shall be considered to be made to a section or other provi4 sion of the Internal Revenue Code of 1986. 

5 (c) TABLE OF CONTENTS.—The table of contents for 

6 this Act is as follows: 

Sec. 1. Short title; amendment of 1986 Code; table of contents. 

TITLE I—PROVISIONS TO INCREASE RETIREMENT SAVINGS 

Subtitle A—Employee Access to Retirement Savings at Work 

Sec. 101. Employees not covered by qualified retirement plans or arrangements 

entitled to participate in payroll deposit IRA arrangements. 

Sec. 102. Credit for small employers maintaining payroll deposit IRA arrangements. 

Sec. 103. Establishment of automatic IRAs. 

Sec. 104. Establishment of TSP II Board. 

Subtitle B—Other Provisions 

Sec. 111. Modifications to computation of saver’s credit. 

Sec. 112. Qualified cash or deferred arrangements must allow long-term employees working more than 500 but less than 1,000 hours per 

year to participate. 

Sec. 113. Transfers of unused benefits of health flexible spending arrangement 

to certain retirement plans. 

Sec. 114. Computation of limits on IRA and Roth IRA contributions. 

Sec. 115. Contributions of military death gratuities to certain tax-favored accounts. 

TITLE II—PROVISIONS PROVIDING FOR PRESERVATION OF 

INCOME 

Sec. 201. Exclusion of certain qualified annuity payments. 

Sec. 202. Exclusion for lifetime annuity payments. 

Sec. 203. Joint study of application of spousal consent rules to defined contribution plans. 

Sec. 204. Facilitating longevity insurance. 

TITLE III—PROVISIONS ENSURING EQUITY IN DIVORCE 

Sec. 301. Elimination of current connection requirement under Railroad Retirement Act for certain survivors. 

Sec. 302. Permitting divorced spouses and widows and widowers to remarry 

after turning 60 without a penalty under Railroad Retirement 

Act. 

Sec. 303. Repeal of jurisdictional requirement for court to treat military retirement pay as property of the military member and spouse. 


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TITLE IV—PROVISIONS TO IMPROVE FINANCIAL LITERACY 

Sec. 401. Grants to community-based taxpayer clinics to provide retirement 

savings advice. 

Sec. 402. Treatment of qualified retirement planning services. 

Sec. 403. Retirement handbook and retirement readiness checklist. 

TITLE V—INCENTIVES FOR SMALL BUSINESSES TO ESTABLISH 

AND MAINTAIN RETIREMENT PLANS FOR EMPLOYEES 

Sec. 501. Credit for qualified pension plan contributions of small employers. 

Sec. 502. Deduction for pension contributions allowed in computing net earnings from self-employment. 

Sec. 503. Exemption of deferral-only qualified cash or deferred arrangements 

from top-heavy plan rules. 

Sec. 504. Extension of time for small pension plans to adopt required plan 

qualification amendments. 

1 TITLE I—PROVISIONS TO IN2 CREASE RETIREMENT SAV3 INGS 

4 Subtitle A—Employee Access to 

5 Retirement Savings at Work 

6 SEC. 101. EMPLOYEES NOT COVERED BY QUALIFIED RE7 TIREMENT PLANS OR ARRANGEMENTS ENTI8 TLED TO PARTICIPATE IN PAYROLL DEPOSIT 

9 IRA ARRANGEMENTS. 

10 (a) IN GENERAL.—Subpart A of part I of subchapter 

11 A of chapter 1 (relating to pension, profit-sharing, stock 

12 bonus plans, etc.) is amended by inserting after section 

13 408A the following new section: 

14 ‘‘SEC. 408B. RIGHT TO PAYROLL DEPOSIT IRA ARRANGE15 MENTS AT WORK. 

16 ‘‘(a) REQUIREMENT TO PROVIDE PAYROLL DEPOSIT

17 IRA ARRANGEMENT.—Each employer (other than an em18 ployer described in subsection (e)) shall provide to each 


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1 applicable employee of the employer for any calendar year 

2 the opportunity to participate in a payroll deposit IRA ar3 rangement which meets the requirements of this section. 

4 ‘‘(b) PAYROLL DEPOSIT IRA ARRANGEMENT.—For 

5 purposes of this section— 

6 ‘‘(1) IN GENERAL.—The term ‘payroll deposit 

7 IRA arrangement’ means a written arrangement of 

8 an employer— 

9 ‘‘(A) under which an applicable employee 

10 eligible to participate in the arrangement may 

11 elect to contribute to an individual retirement 

12 plan established by or on behalf of the employee 

13 by having the employer make periodic direct de14 posit or other payroll deposit payments (includ15 ing electronic payments) to the plan by payroll 

16 deduction, and 

17 ‘‘(B) which meets the requirements of 

18 paragraph (2). 

19 ‘‘(2) ADMINISTRATIVE REQUIREMENTS.—The 

20 requirements of this paragraph are met with respect 

21 to any payroll deposit IRA arrangement if— 

22 ‘‘(A) the employer must make the pay23 ments elected under paragraph (1)(A) on or be24 fore the later of— 


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1 ‘‘(i) the due date for the deposit of 

2 tax required to be deducted and withheld 

3 under chapter 24 (relating to collection of 

4 income tax at source on wages) for the 

5 payroll period to which such payments re6 late, or 

7 ‘‘(ii) the 30th day following the last 

8 day of the month with respect to which the 

9 payments are to be made, 

10 ‘‘(B) subject to a requirement for reason11 able notice, an employee may elect to terminate 

12 participation in the arrangement at any time 

13 during a calendar year, except that if an em14 ployee so terminates, the arrangement may pro15 vide that the employee may not elect to resume 

16 participation until the beginning of the next cal17 endar year, 

18 ‘‘(C) each employee eligible to participate 

19 may elect, during the 60-day period or other pe20 riod specified by the Secretary before the begin21 ning of any calendar year (and during the 60- 

22 day period or other period specified by the Sec23 retary before the first day the employee is eligi24 ble to participate), to participate in the ar25 rangement, or to modify the employee’s election 


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1 under the arrangement (including the amounts 

2 subject to the arrangement and the manner in 

3 which such amounts are invested), for such 

4 year, 

5 ‘‘(D) the employer provides— 

6 ‘‘(i) immediately before the beginning 

7 of each period described in subparagraph 

8 (C), a notice to each employee of the em9 ployee’s opportunity to make the election 

10 and the maximum amount which may be 

11 contributed to an individual retirement 

12 plan on an annual basis, and 

13 ‘‘(ii) if the arrangement includes an 

14 automatic contribution arrangement, the 

15 notices required under subsection (g) with 

16 respect to the automatic contribution ar17 rangement, 

18 ‘‘(E) subject to subsection (f), the arrange19 ment provides that an employee may elect to 

20 have contributions made to any individual re21 tirement plan specified by the employee, and 

22 ‘‘(F) if the arrangement does not include 

23 an automatic contribution arrangement— 

24 ‘‘(i) the arrangement requires the em25 ployer to take all reasonable actions to soVerDate Aug 31 2005 00:34 Sep 29, 2006 Jkt 049200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\S3951.IS S3951

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1 licit from all employees eligible to partici2 pate in the arrangement an explicit elec3 tion to either participate or not to partici4 pate in the arrangement, and 

5 ‘‘(ii) the arrangement provides that if 

6 an employee fails to make an explicit elec7 tion under clause (i) within the time pre8 scribed under the arrangement, the em9 ployee will be treated as having made an 

10 election to participate in the arrangement 

11 (and amounts shall be invested on behalf 

12 of the participant) in the same manner as 

13 if the arrangement had included an auto14 matic contribution arrangement under sub15 section (g). 

16 ‘‘(c) APPLICABLE EMPLOYEE DEFINED; RELATED

17 DEFINITIONS AND RULES.—For purposes of this sec18 tion— 

19 ‘‘(1) APPLICABLE EMPLOYEE.— 

20 ‘‘(A) IN GENERAL.—The term ‘applicable 

21 employee’ means, with respect to any calendar 

22 year, any employee— 

23 ‘‘(i) who was not eligible under a 

24 qualified plan or arrangement maintained 


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1 by the employer for service for the pre2 ceding calendar year, and 

3 ‘‘(ii) with respect to whom it is rea4 sonable to expect that the employee will 

5 not be eligible during the calendar year 

6 under such a qualified plan or arrange7 ment. 

8 ‘‘(B) SPECIAL RULES.—For purposes of 

9 subparagraph (A)(i)— 

10 ‘‘(i) ELIGIBILITY.—An employee shall 

11 be treated as eligible under a plan for a 

12 preceding calendar year if, as of the last 

13 day of the last plan year ending in the pre14 ceding calendar year, the employee has sat15 isfied the plan’s eligibility requirements. 

16 ‘‘(ii) EXCLUDED PLANS.—A qualified 

17 plan or arrangement shall not be taken 

18 into account under this paragraph if— 

19 ‘‘(I) the plan or arrangement is 

20 frozen as of the first day of the pre21 ceding calendar year, or 

22 ‘‘(II) in the case of a plan or ar23 rangement under which the only con24 tributions are discretionary on the 

25 part of the sponsor, there has not 


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1 been an employer contribution made 

2 to the plan or arrangement for the 2- 

3 plan-year period ending with the last 

4 plan year ending in the second pre5 ceding calendar year and it is not rea6 sonable to assume that an employer 

7 contribution will be made for the plan 

8 year ending in the preceding calendar 

9 year. 

10 ‘‘(2) EXCLUDABLE EMPLOYEES.—An employer 

11 may elect to exclude from treatment as applicable 

12 employees under subparagraph (A)— 

13 ‘‘(A) employees described in section 

14 410(b)(3), 

15 ‘‘(B) employees who have not attained the 

16 age of 18 before the beginning of the calendar 

17 year, 

18 ‘‘(C) employees who have not completed at 

19 least 3 months of service with the employer, 

20 ‘‘(D) employees who will be eligible to par21 ticipate in a qualified plan or arrangement of 

22 the employer upon completion of eligibility re23 quirements described in section 410(a)(1)(A) 

24 (without regard to section 410(a)(1)(B)), 


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1 ‘‘(E) employees who are eligible to make 

2 salary reduction contributions under an ar3 rangement which meets the requirements of 

4 section 403(b), and 

5 ‘‘(F) all employees of the employer if the 

6 employer maintains an arrangement described 

7 in section 408(p). 

8 ‘‘(3) QUALIFIED PLAN OR ARRANGEMENT.— 

9 The term ‘qualified plan or arrangement’ means a 

10 plan, contract, pension, or trust described in section 

11 219(g)(5). 

12 ‘‘(4) EXCEPTION FOR EMPLOYEES OF GOVERN13 MENTS AND CHURCHES.—The term ‘applicable em14 ployee’ shall not include an employee of— 

15 ‘‘(A) a government or entity described in 

16 section 414(d), or 

17 ‘‘(B) a church or a convention or associa18 tion of churches which is exempt from tax 

19 under section 501, including any employee de20 scribed in section 414(e)(3)(B). 

21 ‘‘(5) DESIGNATION OF APPLICABLE EMPLOY22 EES.—The Secretary shall issue guidelines for deter23 mining the class or classes of employees to be cov24 ered by a payroll deposit IRA arrangement. Such 

25 guidelines shall provide that if an employer elects 


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1 under paragraph (2) to exclude employees from the 

2 arrangement, the employer shall specify the classi3 fication or categories of employees who are not so 

4 covered. 

5 ‘‘(d) PAYROLL DEPOSIT IRA CONTRIBUTIONS

6 TREATED LIKE OTHER CONTRIBUTIONS TO INDIVIDUAL

7 RETIREMENT PLANS.— 

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

9 that a contribution to an individual retirement plan 

10 is made on behalf of an employee under a payroll de11 posit IRA arrangement instead of being made di12 rectly by the employee shall not affect the deduct13 ibility or other tax treatment of the contribution or 

14 of other amounts under this title. 

15 ‘‘(2) PAYROLL SAVINGS CONTRIBUTIONS TAKEN

16 INTO ACCOUNT.—Any contribution made on behalf 

17 of an employee under a payroll deposit IRA arrange18 ment shall be taken into account in applying the lim19 itations on contributions to individual retirement 

20 plans and the other provisions of this title applicable 

21 to individual retirement plans as if the contribution 

22 had been made directly by the employee. 

23 ‘‘(e) EXCEPTION FOR CERTAIN SMALL AND NEW

24 EMPLOYERS.— 


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1 ‘‘(1) IN GENERAL.—The requirements of this 

2 section shall not apply for any calendar year to an 

3 employer if— 

4 ‘‘(A) the employer did not have more than 

5 10 employees who received at least $5,000 of 

6 compensation from the employer for the pre7 ceding calendar year, or 

8 ‘‘(B) was not in existence at all times dur9 ing the 2 preceding calendar years and did not 

10 have more than 100 employees who received at 

11 least $5,000 of compensation from the employer 

12 on any day during either of the 2 preceding cal13 endar years. 

14 ‘‘(2) OPERATING RULES.—In determining the 

15 number of employees for purposes of this sub16 section— 

17 ‘‘(A) any rule applicable in determining the 

18 number of employees for purposes of section 

19 408(p)(2)(C) shall be applicable under this sub20 section, 

21 ‘‘(B) all members of the same family 

22 (within the meaning of section 318(a)(1)) shall 

23 be treated as 1 individual, and 

24 ‘‘(C) any reference to an employer shall in25 clude a reference to any predecessor employer. 


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1 ‘‘(f) DEPOSITS TO INDIVIDUAL RETIREMENT PLANS

2 OTHER THAN THOSE SELECTED BY EMPLOYEE.— 

3 ‘‘(1) IN GENERAL.—An employer shall not be 

4 treated as failing to satisfy the requirements of this 

5 section or any other provision of this title merely be6 cause the employer makes all contributions (or all 

7 contributions on behalf of employees who do not 

8 specify an individual retirement plan, trustee, or 

9 issuer to receive the contributions) to— 

10 ‘‘(A) individual retirement plans specified 

11 in paragraph (2), or 

12 ‘‘(B) individual retirement plans under the 

13 payroll tax deposit system established under 

14 paragraph (3). 

15 ‘‘(2) PLANS OF A DESIGNATED TRUSTEE OR

16 ISSUER.—An employer may elect to have contribu17 tions for all applicable employees participating in a 

18 payroll deposit IRA arrangement made to individual 

19 retirement plans of a designated trustee or issuer 

20 under the arrangement. The preceding sentence 

21 shall not apply unless each participant is notified in 

22 writing that the participant’s balance may be trans23 ferred without cost or penalty to another individual 

24 retirement plan established by or on behalf of the 

25 participant. 


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1 ‘‘(3) PAYROLL TAX DEPOSIT SYSTEM.—The 

2 Secretary, in consultation with the TSP II Board, 

3 shall establish a system under which an employer— 

4 ‘‘(A) includes with each deposit of tax re5 quired to be deducted and withheld under chap6 ter 24 the aggregate amounts, for the period 

7 covered by the deposit, which applicable employ8 ees designated under subsection (b)(1)(A) (or 

9 are deemed to have designated under subsection 

10 (b)(2)(F)(ii) or under an automatic contribu11 tion arrangement described in subsection (g)) 

12 for contribution to individual retirement plans, 

13 established on behalf of the employees under 

14 paragraph (4), and 

15 ‘‘(B) specifies, in such manner as the Sec16 retary may prescribe, for each applicable em17 ployee for whom a contribution is to be made 

18 the following information: 

19 ‘‘(i) The employee’s name and TIN. 

20 ‘‘(ii) The amount of the contribution. 

21 ‘‘(iii) The investment options selected 

22 by the employee (or deemed to have been 

23 selected by the employee under such auto24 matic contribution arrangement) and the 


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1 amount of the contribution allocated to 

2 each option. 

3 ‘‘(4) ESTABLISHMENT AND MAINTENANCE OF

4 ACCOUNTS UNDER PAYROLL TAX DEPOSIT SYS5 TEM.— 

6 ‘‘(A) IN GENERAL.—Subject to the provi7 sions of this section and section 408C, the TSP 

8 II Board shall provide for the establishment 

9 and maintenance of individual retirement plans 

10 (including automatic IRAs) into which contribu11 tions may be deposited through the payroll tax 

12 deposit system. To the maximum extent prac13 ticable, the TSP II Board shall— 

14 ‘‘(i) enter into contracts with persons 

15 eligible to be trustees of individual retire16 ment plans under section 408 to establish 

17 such plans, to provide the investment 

18 funds and investment management, and to 

19 provide notice, record keeping, and other 

20 administrative services, and 

21 ‘‘(ii) ensure that the costs of invest22 ment management and administration are 

23 kept to a minimum, including through con24 sideration of the use of investments which 

25 involve passive management and which 


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1 seek to replicate the performance of a por2 tion of the market. 

3 ‘‘(B) PAYROLL DEPOSIT FEATURES.—The 

4 TSP II Board shall establish procedures so that 

5 contributions may be made to individual retire6 ment plans (including automatic IRAs) through 

7 the payroll tax deposit system described in 

8 paragraph (3) without undue administrative or 

9 paperwork requirements on employers partici10 pating in the payroll tax deposit system. Such 

11 procedures shall ensure that only 1 such plan 

12 may be established for each TIN. 

13 ‘‘(C) LIMITATION ON ROLLOVERS TO

14 PLANS OUTSIDE THE SYSTEM.—If— 

15 ‘‘(i) any amount is paid or distributed 

16 out of an individual retirement plan estab17 lished under this paragraph, and 

18 ‘‘(ii) such amount is paid into an indi19 vidual retirement plan established outside 

20 of the payroll tax deposit system, 

21 the payment described in clause (ii) shall be 

22 treated as a rollover contribution for purposes 

23 of section 408(d)(3) if and only if the balance 

24 to the credit of the individual in such individual 

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1 fore the payment described in clause (i) was at 

2 least $15,000. 

3 ‘‘(g) COORDINATION WITH AUTOMATIC ENROLL4 MENT AND OTHER DEFAULT ELECTION PROVISIONS.— 

5 ‘‘(1) IN GENERAL.—A payroll deposit IRA ar6 rangement may provide that contributions under the 

7 arrangement will be made pursuant to an automatic 

8 contribution arrangement but only if the arrange9 ment meets requirements similar to the require10 ments applicable to an eligible automatic contribu11 tion arrangement under section 414(w). The Sec12 retary shall modify such requirements to the extent 

13 necessary to carry out the purposes of this section. 

14 ‘‘(2) DEFAULT INVESTMENTS.—If an employee 

15 is deemed under an automatic contribution arrange16 ment to have made an election to participate in a 

17 payroll deposit IRA arrangement— 

18 ‘‘(A) the employee shall be deemed to have 

19 made an election to make contributions in the 

20 amount specified in paragraph (3), 

21 ‘‘(B) such contributions shall be trans22 ferred to— 

23 ‘‘(i) an automatic IRA, or, 

24 ‘‘(ii) if the employer has made an elec25 tion under subsection (f)(2), to an indiVerDate Aug 31 2005 00:34 Sep 29, 2006 Jkt 049200 PO 00000 Frm 00017 Fmt 6652 Sfmt 6201 E:\BILLS\S3951.IS S3951

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1 vidual retirement plan of the designated 

2 trustee or issuer but only if the require3 ments of subparagraph (C) are met with 

4 respect to such individual retirement plan, 

5 and 

6 ‘‘(C) such contributions shall be invested 

7 as provided in paragraph (4). 

8 ‘‘(3) AMOUNT OF CONTRIBUTIONS.— 

9 ‘‘(A) IN GENERAL.—The amount specified 

10 in this paragraph is 3 percent of compensation. 

11 ‘‘(B) AUTHORITY OF BOARD TO PROVIDE

12 FOR ANNUAL INCREASES.—The TSP II Board 

13 may by regulation provide for annual increases 

14 in the percentage of compensation an employee 

15 is deemed to have elected under paragraph (2) 

16 but in no event shall the percentage of com17 pensation an employee is deemed to have elect18 ed exceed 8 percent. 

19 ‘‘(C) CONTRIBUTION LIMIT.—The con20 tributions under paragraph (2) on behalf of an 

21 employee for any calendar year shall not exceed 

22 the dollar limits applicable to the employee for 

23 the calendar year under section 219 or 408A. 

24 ‘‘(4) INVESTMENT IN LIFE CYCLE FUND OR

25 OTHER INVESTMENTS SPECIFIED BY THE BOARD.— 


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1 Amounts contributed under paragraph (2) shall be 

2 invested in— 

3 ‘‘(A) a life cycle fund similar to the life 

4 cycle funds offered under the Thrift Savings 

5 Fund established under subchapter III of chap6 ter 84 of title 5, United States Code, or 

7 ‘‘(B) such other investment or investments 

8 as the TSP II Board specifies in regulations 

9 and which entails asset allocation and extensive 

10 diversification. 

11 A fund or investment shall meet the requirements of 

12 this paragraph only if it is consistent with regula13 tions prescribed by the Secretary of Labor under 

14 section 404(c)(5) of the Employee Retirement In15 come Security Act of 1974. 

16 ‘‘(5) COORDINATION WITH WITHHOLDING.— 

17 The Secretary shall modify the withholding exemp18 tion certificate under section 3402(f) so that any no19 tice and election requirements with respect to an 

20 automatic contribution arrangement which is part of 

21 a payroll deposit IRA arrangement may be met 

22 through the use of such certificate. 

23 ‘‘(h) MODEL NOTICE.—The Secretary, in consulta24 tion with the TSP II Board, shall— 


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1 ‘‘(1) provide a model notice, written in a man2 ner calculated to be understandable to the average 

3 worker, that is simple for employers to use— 

4 ‘‘(A) to notify employees of the require5 ment under this section for the employer to pro6 vide certain employees with the opportunity to 

7 participate in a payroll deposit IRA arrange8 ment, and 

9 ‘‘(B) to satisfy the requirements of sub10 section (b)(2)(D). 

11 ‘‘(2) provide uniform forms for enrollment, in12 cluding automatic enrollment, in a payroll deposit 

13 IRA arrangement, and 

14 ‘‘(3) establish a web site or other electronic 

15 means for small employers to access and use to ob16 tain information on payroll deposit IRA arrange17 ments and to obtain required notices and forms.’’. 

18 (b) PREEMPTION OF CONFLICTING STATE LAWS.— 

19 Section 514(e)(1) of the Employee Retirement Income Se20 curity Act of 1974 (29 U.S.C. 1144(e)(1)), as added by 

21 section 902 of the Pension Protection Act of 2006, is 

22 amended to read as follows: 

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

24 provision of this section, this title shall supersede 


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1 any law of a State which would directly or indirectly 

2 prohibit or restrict— 

3 ‘‘(A) the inclusion in any plan of an auto4 matic contribution arrangement, or 

5 ‘‘(B) the establishment or operation of a 

6 deposit IRA arrangement meeting the require7 ments of section 408B of the Internal Revenue 

8 Code of 1986 (and the inclusion in such ar9 rangement of an automatic contribution ar10 rangement). 

11 The Secretary may prescribe regulations which 

12 would establish minimum standards that an auto13 matic contribution arrangement would be required to 

14 satisfy in order for this subsection to apply in the 

15 case of such arrangement. This subsection shall 

16 apply to a plan or arrangement without regard to 

17 whether this title applies to such plan or arrange18 ment.’’. 

19 (c) NOTICE OF AVAILABILITY OF INVESTMENT

20 GUIDELINES.—Section 408(i) (relating to reports) is 

21 amended by adding at the end the following new sentence: 

22 ‘‘Any report furnished under paragraph (2) to an indi23 vidual shall include notice of the availability of, and meth24 ods of acquiring, the basic investment guidelines prepared 

25 by the Secretary of Labor.’’. 


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1 (d) DEVELOPMENT OF BASIC INVESTMENT GUIDE2 LINES.— 

3 (1) IN GENERAL.—The Secretary of Labor 

4 shall, in consultation with the Secretary of Treasury, 

5 develop and publish basic guidelines for investing for 

6 retirement. Except as otherwise provided by the Sec7 retary of Labor, such guidelines shall include— 

8 (A) information on the benefits of diver9 sification, 

10 (B) information on the essential dif11 ferences, in terms of risk and return, between 

12 various pension plan investments, including 

13 stocks, bonds, mutual funds, and money market 

14 investments, 

15 (C) information on how an individual’s 

16 pension plan investment allocations may differ 

17 depending on the individual’s age and years to 

18 retirement and on other factors determined by 

19 the Secretary of Labor, 

20 (D) sources of information where individ21 uals may learn more about pension rights, indi22 vidual investing, and investment advice, and 

23 (E) such other information related to indi24 vidual investing as the Secretary of Labor de25 termines appropriate. 


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1 (2) CALCULATION INFORMATION.—The guide2 lines under paragraph (1) shall include addresses for 

3 Internet sites and worksheets which a participant or 

4 beneficiary in a pension plan may use to calculate— 

5 (A) the retirement age value of the partici6 pant’s or beneficiary’s nonforfeitable pension 

7 benefits under the plan (expressed as an annu8 ity amount and determined by reference to var9 ied historical annual rates of return and annu10 ity interest rates), and 

11 (B) other important amounts relating to 

12 retirement savings, including the amount which 

13 a participant or beneficiary would be required 

14 to save annually to provide a retirement income 

15 equal to various percentages of their current 

16 salary (adjusted for expected growth prior to 

17 retirement). 

18 (3) PUBLIC COMMENT.—The Secretary of 

19 Labor shall provide at least 90 days for public com20 ment on proposed guidelines before publishing the 

21 final guidelines. 

22 (4) RULES RELATING TO GUIDELINES.—The 

23 guidelines under paragraph (1)— 


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1 (A) shall be written in a manner calculated 

2 to be understood by the average plan partici3 pant, and 

4 (B) may be delivered in written, electronic, 

5 or other appropriate manner to the extent such 

6 manner would ensure that the guidelines are 

7 reasonably accessible to participants and bene8 ficiaries. 

9 (e) PENALTY FOR FAILURE TO PROVIDE ACCESS TO

10 PAYROLL SAVINGS ARRANGEMENTS.—Chapter 43 (relat11 ing to qualified pension, etc., plans) is amended by adding 

12 at the end the following new section: 

13 ‘‘SEC. 4980H. REQUIREMENTS FOR EMPLOYERS TO PRO14 VIDE EMPLOYEES ACCESS TO PAYROLL DE15 POSIT IRA ARRANGEMENTS. 

16 ‘‘(a) GENERAL RULE.—There is hereby imposed a 

17 tax on any failure by an employer to meet the require18 ments of subsection (d) for a calendar year. 

19 ‘‘(b) AMOUNT.— 

20 ‘‘(1) IN GENERAL.—The amount of the tax im21 posed by subsection (a) on any failure for any cal22 endar year shall be $100 with respect to each em23 ployee to whom such failure relates. 

24 ‘‘(2) TAX NOT TO APPLY WHERE FAILURE NOT

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1 CISED.—No tax shall be imposed by subsection (a) 

2 on any failure during any period for which it is es3 tablished to the satisfaction of the Secretary that the 

4 employer subject to liability for the tax did not know 

5 that the failure existed and exercised reasonable dili6 gence to meet the requirements of subsection (d). In 

7 no event shall the tax be imposed with respect to 

8 any failure that ends before the expiration of 90 

9 days after the employer has responded or has had a 

10 reasonable opportunity to respond to a request for 

11 confirmation of compliance under subsection (c). 

12 ‘‘(3) TAX NOT TO APPLY TO FAILURES COR13 RECTED WITHIN 30 DAYS.—No tax shall be imposed 

14 by subsection (a) on any failure if— 

15 ‘‘(A) the employer subject to liability for 

16 the tax under subsection (a) exercised reason17 able diligence to meet the requirements of sub18 section (d), and 

19 ‘‘(B) the employer provides the payroll de20 posit IRA arrangement described in section 

21 408B to each employee eligible to participate in 

22 the arrangement by the end of the 30-day pe23 riod beginning on the first date the employer 

24 knew, or exercising reasonable diligence would 

25 have known, that such failure existed. 


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•S 3951 IS

1 ‘‘(4) WAIVER BY SECRETARY.—In the case of a 

2 failure which is due to reasonable cause and not to 

3 willful neglect, the Secretary may waive part or all 

4 of the tax imposed by subsection (a) to the extent 

5 that the payment of such tax would be excessive or 

6 otherwise inequitable relative to the failure involved. 

7 ‘‘(c) PROCEDURES FOR NOTICE.—Not later than 6 

8 months after the date of the enactment of this section, 

9 the Secretary shall prescribe and implement procedures 

10 for obtaining from employers confirmation that such em11 ployers are in compliance with the requirements of sub12 section (d). The Secretary, in the Secretary’s discretion, 

13 may prescribe that the confirmation shall be obtained on 

14 an annual or less frequent basis, and may use for this 

15 purpose the annual report or quarterly report for employ16 ment taxes, or such other means as the Secretary may 

17 deem advisable. 

18 ‘‘(d) REQUIREMENT TO PROVIDE EMPLOYEE ACCESS

19 TO PAYROLL DEPOSIT IRA ARRANGEMENTS.—The re20 quirements of this subsection are met if the employer 

21 meets the requirements of section 408B.’’. 

22 (f) COORDINATION WITH ERISA FIDUCIARY DU23 TIES.—Section 404(c)(2) of such Act (29 U.S.C. 

24 1104(c)(2)) is amended— 


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•S 3951 IS

1 (1) by inserting ‘‘or an individual retirement 

2 plan designated by the employer under section 408B 

3 of such Code’’ after ‘‘1986’’, 

4 (2) by inserting ‘‘(7 days after notice has been 

5 given to an employee that an individual retirement 

6 plan has been established on behalf of the employee 

7 under section 408B of such Code)’’ after ‘‘estab8 lished’’ in subparagraph (C), and 

9 (3) by inserting ‘‘or with respect to an indi10 vidual retirement plan designated by an employer 

11 under section 408B of such Code’’ after ‘‘arrange12 ment’’ in the last sentence. 

13 (g) CONFORMING AMENDMENTS.— 

14 (1) The table of sections for subpart A of part 

15 I of subchapter A of chapter 1 is amended by insert16 ing after the item relating to section 408A the fol17 lowing new item: 

‘‘Sec. 408B. Right to payroll deposit IRA arrangements at work.’’. 

18 (2) The table of sections for chapter 43 is 

19 amended by adding at the end the following new 

20 item: 

‘‘Sec. 4980H. Requirements for employers to provide employees access to payroll deposit IRA arrangements.’’. 

21 (h) EFFECTIVE DATE.—The amendments made by 

22 this section shall apply to calendar years beginning after 

23 December 31, 2007. 


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•S 3951 IS

1 SEC. 102. CREDIT FOR SMALL EMPLOYERS MAINTAINING 

2 PAYROLL DEPOSIT IRA ARRANGEMENTS. 

3 (a) IN GENERAL.—Subpart D of part IV of sub4 chapter A of chapter 1 (relating to business related cred5 its) is amended by adding at the end the following new 

6 section: 

7 ‘‘SEC. 45N. SMALL EMPLOYER PAYROLL DEPOSIT IRA AR8 RANGEMENT COSTS. 

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

10 in the case of an eligible employer maintaining a payroll 

11 deposit IRA arrangement meeting the requirements of sec12 tion 408B (without regard to whether or not the employer 

13 is required to maintain the arrangement), the small em14 ployer payroll deposit IRA arrangement cost credit deter15 mined under this section for any taxable year is the 

16 amount determined under subsection (b). 

17 ‘‘(b) AMOUNT OF CREDIT.— 

18 ‘‘(1) IN GENERAL.—The amount of the credit 

19 determined under this section for any taxable year 

20 with respect to an eligible employer shall be equal to 

21 the lesser of— 

22 ‘‘(A) $25 multiplied by the number of ap23 plicable employees (within the meaning of sec24 tion 408B(c)) for whom contributions are made 

25 under the payroll deposit IRA arrangement reVerDate Aug 31 2005 00:34 Sep 29, 2006 Jkt 049200 PO 00000 Frm 00028 Fmt 6652 Sfmt 6201 E:\BILLS\S3951.IS S3951

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•S 3951 IS

1 ferred to in subsection (a) for the calendar year 

2 in which the taxable year begins, or 

3 ‘‘(B) $250. 

4 ‘‘(2) DURATION OF CREDIT.—No credit shall be 

5 determined under this section for any taxable year 

6 other than a taxable year which begins in the first 

7 2 calendar years in which the eligible employer 

8 maintains a payroll deposit IRA arrangement meet9 ing the requirements of section 408B. 

10 ‘‘(3) COORDINATION WITH SMALL EMPLOYER

11 STARTUP CREDIT.—No credit shall be allowed under 

12 this section for any taxable year if a credit is deter13 mined under section 45E for the taxable year. 

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

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

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

17 employer which maintains a payroll deposit IRA arrange18 ment meeting the requirements of section 408B and 

19 which, on each day during the preceding calendar year, 

20 had no more than 100 employees.’’. 

21 (b) CREDIT ALLOWED AS PART OF GENERAL BUSI22 NESS CREDIT.—Section 38(b) (defining current year busi23 ness credit) is amended by striking ‘‘and’’ at the end of 

24 paragraph (29), by striking the period at the end of paraVerDate Aug 31 2005 00:34 Sep 29, 2006 Jkt 049200 PO 00000 Frm 00029 Fmt 6652 Sfmt 6201 E:\BILLS\S3951.IS S3951

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•S 3951 IS

1 graph (30) and inserting ‘‘, and’’, and by adding at the 

2 end the following new paragraph: 

3 ‘‘(31) in the case of an eligible employer (as de4 fined in section 45N(c)) maintaining a payroll de5 posit IRA arrangement meeting the requirements of 

6 section 408B, the small employer payroll deposit 

7 IRA arrangement cost credit determined under sec8 tion 45N(a).’’. 

9 (c) CLERICAL AMENDMENT.—The table of sections 

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

11 is amended by adding at the end the following new item: 

‘‘Sec. 45N. Small employer payroll deposit IRA arrangement costs.’’. 

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

13 this section shall apply to taxable years beginning after 

14 December 31, 2007. 

15 SEC. 103. ESTABLISHMENT OF AUTOMATIC IRAS. 

16 (a) IN GENERAL.—Subpart A of part I of subchapter 

17 A of chapter 1 (relating to pension, profit-sharing, stock 

18 bonus plans, etc.), as amended by section 101, is amended 

19 by inserting after section 408B the following new section: 

20 ‘‘SEC. 408C. AUTOMATIC IRAS. 

21 ‘‘(a) GENERAL RULE.—An automatic IRA shall be 

22 treated for purposes of this title in the same manner as 

23 an individual retirement plan. An automatic IRA may also 

24 be treated as a Roth IRA for purposes of this title if it 

25 meets the requirements of section 408A. 


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•S 3951 IS

1 ‘‘(b) AUTOMATIC IRA.—For purposes of this section, 

2 the term ‘automatic IRA’ means an individual retirement 

3 plan (as defined in section 7701(a)(37)) which meets the 

4 investment and fee requirements under the regulations 

5 under subsection (c). 

6 ‘‘(c) INVESTMENT AND FEE REQUIREMENTS.— 

7 ‘‘(1) IN GENERAL.—The TSP II Board, in con8 sultation with the Secretary and the Secretary of 

9 Labor, shall, not later than 1 year after the date of 

10 the enactment of this section, prescribe regulations 

11 which set forth the requirements of this subsection 

12 which an individual retirement plan must meet in 

13 order to be treated as an automatic IRA. 

14 ‘‘(2) INVESTMENT OPTIONS.—The regulations 

15 under paragraph (1) shall provide that an automatic 

16 IRA shall allow the individual on whose behalf the 

17 individual retirement plan is established to invest 

18 contributions to, and earnings of, the plan in all of 

19 the following investment options: 

20 ‘‘(A) Options which are similar to all in21 vestment options which are available (at the 

22 time the plan is established) to a participant in 

23 the Thrift Savings Fund established under sub24 chapter III of chapter 84 of title 5, United 

25 States Code. 


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•S 3951 IS

1 ‘‘(B) Any other investment option specified 

2 in the regulations. 

3 Such regulations shall specify which of the invest4 ment options shall be treated as default investment 

5 options for purposes of section 408B(g)(4). 

6 ‘‘(3) INVESTMENT FEES.— 

7 ‘‘(A) IN GENERAL.—The regulations under 

8 paragraph (1) shall provide that an automatic 

9 IRA shall not charge any investment fees 

10 which, in the aggregate, are not reasonable (as 

11 determined under such regulations). 

12 ‘‘(B) INVESTMENT FEES.—For purposes of 

13 this paragraph, the term ‘investment fees’ in14 cludes any fee, commission, asset management 

15 fee, compensation for services, or any other 

16 charge or fee specified in the regulations under 

17 paragraph (1) which is imposed with respect to 

18 the automatic IRA.’’. 

19 (b) MANDATORY TRANSFERS.—Section 

20 401(a)(31)(B) is amended— 

21 (1) by inserting ‘‘(including an automatic 

22 IRA)’’ after ‘‘individual retirement plan’’ each place 

23 it appears, and 

24 (2) by adding at the end the following new sen25 tence: ‘‘Any amount so transferred (and any earnVerDate Aug 31 2005 00:34 Sep 29, 2006 Jkt 049200 PO 00000 Frm 00032 Fmt 6652 Sfmt 6201 E:\BILLS\S3951.IS S3951

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•S 3951 IS

1 ings thereon) shall be invested in a default invest2 ment described in section 408B(g)(4).’’. 

3 (c) CLERICAL AMENDMENT.—The table of sections 

4 for subpart A of part I of subchapter A of chapter 1 is 

5 amended by inserting after the item relating to section 

6 408B the following new item: 

‘‘Sec. 408C. Automatic IRAs.’’. 

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

8 this section shall apply to calendar years beginning on or 

9 after the date on which proposed and temporary or final 

10 regulations described in section 408C(c) of the Internal 

11 Revenue Code of 1986 (as added by this Act) are issued. 

12 SEC. 104. ESTABLISHMENT OF TSP II BOARD. 

13 (a) ESTABLISHMENT.—There is established in the ex14 ecutive branch of the Government a TSP II Board. The 

15 board shall be established and maintained in the same 

16 manner as the Federal Retirement Thrift Investment 

17 Board under subchapter VII of chapter 84 of title 5, 

18 United States Code. 

19 (b) EXECUTIVE DIRECTOR.—The TSP II Board shall 

20 appoint an Executive Director in a similar manner and 

21 with similar functions as the Executive Director of the 

22 Federal Retirement Thrift Investment Board under sec23 tion 8474 of title 5, United States Code. 

24 (c) DUTIES OF BOARD.—The TSP II Board shall es25 tablish policies and procedures for— 


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•S 3951 IS

1 (1) establishment and maintenance of individual 

2 retirement plans under the payroll tax deposit sys3 tem established under section 408B(f)(3) of the In4 ternal Revenue Code of 1986, 

5 (2) the investment and management of con6 tributions to such individual retirement plans, 

7 (3) the amount of contributions, and the invest8 ment of such contributions, under automatic con9 tribution arrangements under section 408B(g) of 

10 such Code, including the designation of investment 

11 funds in which such contributions may be invested, 

12 and 

13 (4) the establishment of automatic IRAs under 

14 section 408C of such Code, including the issuance of 

15 regulations under subsection (c) of such section. 

16 (d) BEST PRACTICES.—The TSP II Board shall, on 

17 a continual basis, prescribe and encourage best practices 

18 (including cost efficiencies and innovations) in enrollment, 

19 investment, distribution, and other procedures or arrange20 ments relating to retirement savings and investment. In 

21 carrying out its responsibilities under this section, the 

22 TSP II Board may implement (by contract or otherwise) 

23 pilot projects to help assess the efficacy and workability 

24 of specific practices and arrangements. 


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•S 3951 IS

1 (e) EXPANSION OF USE OF IRAS BY SELF-EM2 PLOYED AND OTHER INDIVIDUALS.—The TSP II Board 

3 shall establish procedures to disseminate information 

4 (through use of the Internet and other appropriate means) 

5 to— 

6 (1) facilitate and encourage the use by self-em7 ployed and other individuals of automatic debit and 

8 similar arrangements for investment in individual re9 tirement plans, including automatic IRAs, 

10 (2) facilitate and encourage efforts by voluntary 

11 associations to promote savings in individual retire12 ment plans, including automatic IRAs, by their 

13 members and others, and 

14 (3) facilitate and encourage the direct deposit 

15 of Federal and State income tax refunds in indi16 vidual retirement plans, including automatic IRAs. 

17 (f) EXCLUSIVE INTEREST.—The members of the 

18 TSP II Board shall discharge their responsibilities solely 

19 in the interest of participants and beneficiaries under the 

20 payroll tax deposit system established under section 408B 

21 of the Internal Revenue Code of 1986. 

22 (g) OTHER PROVISIONS MADE APPLICABLE.—The 

23 provisions of subsections (f)(3), (g), (i), and (j) of section 

24 8472 of title 5, United States Code, shall apply to the 

25 TSP II Board. 


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•S 3951 IS

1 Subtitle B—Other Provisions 

2 SEC. 111. MODIFICATIONS TO COMPUTATION OF SAVER’S 

3 CREDIT. 

4 (a) IN GENERAL.—Section 25B(b) (defining applica5 ble percentage), as amended by section 833 of the Pension 

6 Protection Act of 2006, is amended to read as follows: 

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

8 this section— 

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

10 is— 

11 ‘‘(A) if the taxpayer’s adjusted gross in12 come does not exceed the first threshold 

13 amount plus $5,000, 50 percent, reduced by 1 

14 percentage point for each $250 (or fraction 

15 thereof) by which such adjusted gross income 

16 exceeds the first threshold amount, 

17 ‘‘(B) if the taxpayer’s adjusted gross in18 come exceeds the first threshold amount plus 

19 $5,000, but does not exceed the second thresh20 old amount plus $5,000, 30 percent, reduced by 

21 1 percentage point for each $167 (or fraction 

22 thereof) by which such adjusted gross income 

23 exceeds the second threshold amount, and 


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•S 3951 IS

1 ‘‘(C) if the taxpayer’s adjusted gross in2 come exceeds the second threshold amount plus 

3 $5,000, zero percent. 

4 ‘‘(2) THRESHOLD AMOUNTS.— 

5 ‘‘(A) JOINT RETURNS.—In the case of a 

6 joint return— 

7 ‘‘(i) the first threshold amount is 

8 $30,000, and 

9 ‘‘(ii) the second threshold amount is 

10 $55,000. 

11 ‘‘(B) OTHER RETURNS.—In the case of— 

12 ‘‘(i) a head of household, the first and 

13 second threshold amounts shall be 75 per14 cent of such amounts for joint returns, and 

15 ‘‘(ii) any taxpayer not described in 

16 subparagraph (A) or clause (i), the first 

17 and second threshold amounts shall be 50 

18 percent of such amounts for joint returns. 

19 ‘‘(C) INFLATION ADJUSTMENT.—In the 

20 case of any taxable year beginning in a calendar 

21 year after 2006, each of the dollar amounts in 

22 subparagraph (A) shall be increased by an 

23 amount equal to— 

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


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•S 3951 IS

1 ‘‘(ii) the cost-of-living adjustment de2 termined under section 1(f)(3) for the cal3 endar year in which the taxable year be4 gins, determined by substituting ‘calendar 

5 year 2005’ for ‘calendar year 1992’ in sub6 paragraph (B) thereof. 

7 Any increase determined under the preceding 

8 sentence shall be rounded to the nearest mul9 tiple of $500.’’. 

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

11 this section shall apply to taxable years beginning after 

12 December 31, 2006. 

13 SEC. 112. QUALIFIED CASH OR DEFERRED ARRANGEMENTS 

14 MUST ALLOW LONG-TERM EMPLOYEES 

15 WORKING MORE THAN 500 BUT LESS THAN 

16 1,000 HOURS PER YEAR TO PARTICIPATE. 

17 (a) PARTICIPATION REQUIREMENT.— 

18 (1) IN GENERAL.—Subparagraph (D) of section 

19 401(k)(2) (defining qualified cash or deferred ar20 rangement) is amended to read as follows: 

21 ‘‘(D) which does not require, as a condi22 tion of participation in the arrangement, that 

23 an employee complete a period of service with 

24 the employer (or employers) maintaining the 


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•S 3951 IS

1 plan extending beyond the close of the earlier 

2 of— 

3 ‘‘(i) the period permitted under sec4 tion 410(a)(1) (determined without regard 

5 to subparagraph (B)(i) thereof), or 

6 ‘‘(ii) subject to the provisions of para7 graph (14), the first period of 3 consecu8 tive 12-month periods during each of which 

9 the employee has at least 500 hours of 

10 service.’’. 

11 (2) SPECIAL RULES.—Section 401(k) (relating 

12 to cash or deferred arrangements), as amended by 

13 section 902 of the Pension Protection Act of 2006, 

14 is amended by adding at the end the following new 

15 paragraph: 

16 ‘‘(14) SPECIAL RULES FOR PARTICIPATION RE17 QUIREMENT FOR LONG-TERM, PART-TIME WORK18 ERS.—For purposes of paragraph (2)(D)(ii)— 

19 ‘‘(A) AGE REQUIREMENT MUST BE MET.— 

20 Paragraph (2)(D)(ii) shall not apply to an em21 ployee unless the employee has met the require22 ment of section 410(a)(1)(A)(i) by the close of 

23 the last of the 12-month periods described in 

24 such paragraph. 


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•S 3951 IS

1 ‘‘(B) NONDISCRIMINATION AND TOP2 HEAVY RULES NOT TO APPLY.— 

3 ‘‘(i) NONDISCRIMINATION RULES.—In 

4 the case of employees who are eligible to 

5 participate in the arrangement solely by 

6 reason of paragraph (2)(D)(ii))— 

7 ‘‘(I) notwithstanding subsection 

8 (a)(4), an employer shall not be re9 quired to make nonelective or match10 ing contributions on behalf of such 

11 employees even if such contributions 

12 are made on behalf of other employees 

13 eligible to participate in the arrange14 ment, and 

15 ‘‘(II) an employer may elect to 

16 exclude such employees from the ap17 plication of paragraph (3) and sub18 section (m)(2). 

19 ‘‘(ii) TOP-HEAVY RULES.—An em20 ployer may elect to exclude all employees 

21 who are eligible to participate in a plan 

22 maintained by the employer solely by rea23 son of paragraph (2)(D)(ii) from— 


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•S 3951 IS

1 ‘‘(I) the determination of whether 

2 the plan is a top-heavy plan under 

3 section 416, and 

4 ‘‘(II) if the plan is a top-heavy 

5 plan under such section, the applica6 tion of the vesting and benefit re7 quirements under subsections (b) and 

8 (c) of such section. 

9 ‘‘(iii) VESTING.—For purposes of de10 termining whether an employee described 

11 in clause (i) has a nonforfeitable right to 

12 employer contributions (other than con13 tributions described in paragraph 

14 (3)(D)(i)) under the arrangement, each 

15 12-month period for which the employee 

16 has at least 500 hours of service shall be 

17 treated as a year of service. 

18 ‘‘(iv) EMPLOYEES WHO BECOME

19 FULL-TIME EMPLOYEES.—This subpara20 graph shall cease to apply to any employee 

21 after the date on which the employee meets 

22 the requirements of section 

23 410(a)(1)(A)(ii) without regard to para24 graph (2)(D)(ii). 


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•S 3951 IS

1 ‘‘(C) EXCEPTION FOR EMPLOYEES UNDER

2 COLLECTIVELY BARGAINED PLANS, ETC.—Para3 graph (2)(D)(ii) shall not apply to employees 

4 described in section 410(b)(3). 

5 ‘‘(D) SPECIAL RULES.— 

6 ‘‘(i) TIME OF PARTICIPATION.—The 

7 rules of section 410(a)(4) shall apply to an 

8 employee eligible to participate in an ar9 rangement solely by reason of paragraph 

10 (2)(D)(ii). 

11 ‘‘(ii) 12-MONTH PERIODS.—12-month 

12 periods shall be determined in the same 

13 manner as under the last sentence of sec14 tion 410(a)(3)(A).’’. 

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

16 this section shall apply to plan years beginning after De17 cember 31, 2007, except that, for purposes of section 

18 401(k)(2)(D)(ii) of the Internal Revenue Code of 1986 (as 

19 added by such amendments), 12-month periods beginning 

20 before such date shall not be taken into account. 

21 SEC. 113. TRANSFERS OF UNUSED BENEFITS OF HEALTH 

22 FLEXIBLE SPENDING ARRANGEMENT TO 

23 CERTAIN RETIREMENT PLANS. 

24 (a) IN GENERAL.—Section 125 (relating to cafeteria 

25 plans) is amended by redesignating subsections (h) and 


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•S 3951 IS

1 (i) as subsections (i) and (j), respectively, and by inserting 

2 after subsection (g) the following: 

3 ‘‘(h) CONTRIBUTIONS OF CERTAIN UNUSED HEALTH

4 BENEFITS.— 

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

6 a plan or other arrangement shall not fail to be 

7 treated as a cafeteria plan solely because qualified 

8 benefits of a participant under such plan include a 

9 health flexible spending arrangement under which 

10 not more than $500 of unused health benefits may 

11 be contributed on behalf of the participant to— 

12 ‘‘(A) a qualified retirement plan (as de13 fined in section 4974(c)), or 

14 ‘‘(B) an eligible deferred compensation 

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

16 by an eligible employer described in section 

17 457(e)(1)(A). 

18 ‘‘(2) TREATMENT OF CONTRIBUTION OF UN19 USED HEALTH BENEFITS.— 

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

21 title, contributions described in paragraph (1) 

22 shall be treated as elective contributions made 

23 pursuant to an election by the participant be24 tween such contributions and compensation 


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•S 3951 IS

1 which would otherwise be includible in the gross 

2 income of the employee. 

3 ‘‘(B) EXCLUSION OR DEDUCTION.—Con4 tributions described in paragraph (1) shall be 

5 excluded from gross income, or included in 

6 gross income and allowed as a deduction, to the 

7 same extent that elective contributions would be 

8 so treated under this title. 

9 ‘‘(3) HEALTH FLEXIBLE SPENDING ARRANGE10 MENT.—For purposes of this subsection, the term 

11 ‘health flexible spending arrangement’ means a flexi12 ble spending arrangement (as defined in section 

13 106(c)) which is a qualified benefit and only permits 

14 reimbursement for expenses for medical care (as de15 fined in section 213(d)(1) without regard to sub16 paragraphs (C) and (D) thereof). 

17 ‘‘(4) UNUSED HEALTH BENEFITS.—For pur18 poses of this subsection, the term ‘unused health 

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

20 excess of— 

21 ‘‘(A) the maximum amount of reimburse22 ment allowable to the participant with respect 

23 to a plan year under a health flexible spending 

24 arrangement, taking into account any election 

25 by the participant, over 


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•S 3951 IS

1 ‘‘(B) the actual amount of reimbursement 

2 with respect to such year under such arrange3 ment.’’. 

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

5 shall prescribe such rules as are appropriate to carry out 

6 the purposes of the amendments made by this section. 

7 Such rules may permit elections by plan sponsors with re8 spect to the year to which the contributions relate and may 

9 provide for special treatment for purposes of applying the 

10 requirements applicable to such contributions. 

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

12 subsection (a) shall apply to years beginning after Decem13 ber 31, 2006. 

14 SEC. 114. COMPUTATION OF LIMITS ON IRA AND ROTH IRA 

15 CONTRIBUTIONS. 

16 (a) CERTAIN WAGE REPLACEMENT INCOME TREAT17 ED AS COMPENSATION.— 

18 (1) WAGE REPLACEMENT INCOME.—Section 

19 219(f) (relating to other definitions and special 

20 rules) is amended by redesignating paragraph (8) as 

21 paragraph (9) and by inserting after paragraph (7) 

22 the following new paragraph: 

23 ‘‘(8) TREATMENT OF CERTAIN WAGE REPLACE24 MENT INCOME AS COMPENSATION.— 


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•S 3951 IS

1 ‘‘(A) IN GENERAL.—Notwithstanding para2 graph (1), applicable wage replacement income 

3 not otherwise treated as compensation shall be 

4 treated as compensation for purposes of this 

5 section. 

6 ‘‘(B) APPLICABLE WAGE REPLACEMENT

7 INCOME.—For purposes of this paragraph, the 

8 term ‘applicable wage replacement income’ 

9 means any amount received by an individual— 

10 ‘‘(i) as the result of the individual 

11 having become disabled, 

12 ‘‘(ii) as unemployment compensation 

13 (as defined in section 85(b)), 

14 ‘‘(iii) under workmen’s compensation 

15 acts, or 

16 ‘‘(iv) which constitutes wage replace17 ment income under regulations prescribed 

18 by the Secretary.’’. 

19 (2) CERTAIN EXCLUDABLE AMOUNTS MAY BE

20 TAKEN INTO ACCOUNT FOR PURPOSES OF ROTH

21 IRAS.—Section 408A(c)(2) (relating to contribution 

22 limit) is amended by adding at the end the following 

23 new flush sentence: 

24 ‘‘In determining the maximum amount under sub25 paragraph (A), subsections (b)(1)(B) and (c) of secVerDate Aug 31 2005 00:34 Sep 29, 2006 Jkt 049200 PO 00000 Frm 00046 Fmt 6652 Sfmt 6201 E:\BILLS\S3951.IS S3951

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•S 3951 IS

1 tion 219 shall be applied by taking into account 

2 compensation described in section 219(f)(8) without 

3 regard to whether it is includible in gross income.’’. 

4 (3) EFFECTIVE DATE.—The amendments made 

5 by this subsection shall apply to taxable years begin6 ning after December 31, 2006. 

7 (b) COMPUTATION OF MAXIMUM IRA DEDUCTION

8 FOR ROTH IRAS USING COMPENSATION FROM 2 PRE9 CEDING TAXABLE YEARS.— 

10 (1) IN GENERAL.—Section 408A(c) (relating to 

11 treatment of contributions) is amended by adding at 

12 the end the following new paragraph: 

13 ‘‘(8) COMPENSATION FROM PRECEDING 2

14 YEARS MAY BE TAKEN INTO ACCOUNT.— 

15 ‘‘(A) IN GENERAL.—A taxpayer may elect 

16 for purposes of paragraph (2) to take into ac17 count any unused compensation from the 2 tax18 able years immediately preceding the taxable 

19 year. 

20 ‘‘(B) UNUSED COMPENSATION.—For pur21 poses of this paragraph, the term ‘unused com22 pensation’ means with respect to an individual 

23 for any taxable year the compensation includ24 ible in the individual’s gross income for the tax25 able year reduced by the sum of— 


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•S 3951 IS

1 ‘‘(i) the amount allowed as a deduc2 tion under 219(a) to such individual for 

3 such taxable year, 

4 ‘‘(ii) the amount of any designated 

5 nondeductible contribution (as defined in 

6 section 408(o)) on behalf of such individual 

7 for such taxable year, 

8 ‘‘(iii) the amount of any contribution 

9 on behalf of such individual to a Roth IRA 

10 under this section for such taxable year, 

11 and 

12 ‘‘(iv) the amount of compensation in13 cludible in such individual’s gross income 

14 for such taxable year taken into account 

15 under section 219(c) in determining the 

16 limitation under section 219 or paragraph 

17 (2) for the individual’s spouse. 

18 ‘‘(C) APPLICATION TO SPECIAL RULE FOR

19 MARRIED INDIVIDUALS.—Under rules pre20 scribed by the Secretary, in applying section 

21 219(c) for any taxable year for purposes of ap22 plying paragraph (2)(A), unused compensation 

23 of an individual or an individual’s spouse for 

24 the 2 taxable years immediately preceding the 

25 taxable year may be taken into account.’’. 


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•S 3951 IS

1 (2) EFFECTIVE DATE.—The amendment made 

2 by this subsection shall apply to taxable years begin3 ning after December 31, 2006, but unused com4 pensation for taxable years beginning before Janu5 ary 1, 2007, may be taken into account for taxable 

6 years beginning after December 31, 2006. 

7 SEC. 115. CONTRIBUTIONS OF MILITARY DEATH GRATU8 ITIES TO CERTAIN TAX-FAVORED ACCOUNTS. 

9 (a) ROTH IRAS.— 

10 (1) PROVISION IN EFFECT BEFORE PENSION

11 PROTECTION ACT.—Subsection (e) of section 408A 

12 (relating to qualified rollover contribution), as in ef13 fect before the amendments made by section 824 of 

14 the Pension Protection Act of 2006, is amended to 

15 read as follows: 

16 ‘‘(e) QUALIFIED ROLLOVER CONTRIBUTION.—For 

17 purposes of this section— 

18 ‘‘(1) IN GENERAL.—The term ‘qualified rollover 

19 contribution’ means a rollover contribution to a Roth 

20 IRA from another such account, or from an indi21 vidual retirement plan, but only if such rollover con22 tribution meets the requirements of section 

23 408(d)(3). Such term includes a rollover contribu24 tion described in section 402A(c)(3)(A). For pur25 poses of section 408(d)(3)(B), there shall be disVerDate Aug 31 2005 00:34 Sep 29, 2006 Jkt 049200 PO 00000 Frm 00049 Fmt 6652 Sfmt 6201 E:\BILLS\S3951.IS S3951

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•S 3951 IS

1 regarded any qualified rollover contribution from an 

2 individual retirement plan (other than a Roth IRA) 

3 to a Roth IRA. 

4 ‘‘(2) MILITARY DEATH GRATUITY.— 

5 ‘‘(A) IN GENERAL.—The term ‘qualified 

6 rollover contribution’ includes a contribution to 

7 a Roth IRA maintained for the benefit of an in8 dividual to the extent that such contribution 

9 does not exceed the amount received by such in10 dividual under section 1477 of title 10, United 

11 States Code, or under section 1967 of title 38 

12 of such Code, if such contribution is made not 

13 later than 1 year after the day on which such 

14 individual receives such amount. 

15 ‘‘(B) ANNUAL LIMIT ON NUMBER OF

16 ROLLOVERS NOT TO APPLY.—Section 

17 408(d)(3)(B) shall not apply with respect to 

18 amounts treated as a rollover by the subpara19 graph (A). 

20 ‘‘(C) APPLICATION OF SECTION 72.—For 

21 purposes of applying section 72 in the case of 

22 a distribution which is not a qualified distribu23 tion, the amount treated as a rollover by reason 

24 of subparagraph (A) shall be treated as invest25 ment in the contract.’’. 


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•S 3951 IS

1 (2) PROVISION IN EFFECT AFTER PENSION

2 PROTECTION ACT.—Subsection (e) of section 408A, 

3 as in effect after the amendments made by section 

4 824 of the Pension Protection Act of 2006, is 

5 amended to read as follows: 

6 ‘‘(e) QUALIFIED ROLLOVER CONTRIBUTION.—For 

7 purposes of this section— 

8 ‘‘(1) IN GENERAL.—The term ‘qualified rollover 

9 contribution’ means a rollover contribution— 

10 ‘‘(A) to a Roth IRA from another such ac11 count, 

12 ‘‘(B) from an eligible retirement plan, but 

13 only if— 

14 ‘‘(i) in the case of an individual retire15 ment plan, such rollover contribution meets 

16 the requirements of section 408(d)(3), and 

17 ‘‘(ii) in the case of any eligible retire18 ment plan (as defined in section 

19 402(c)(8)(B) other than clauses (i) and (ii) 

20 thereof), such rollover contribution meets 

21 the requirements of section 402(c), 

22 403(b)(8), or 457(e)(16), as applicable. 

23 For purposes of section 408(d)(3)(B), there shall be 

24 disregarded any qualified rollover contribution from 


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•S 3951 IS

1 an individual retirement plan (other than a Roth 

2 IRA) to a Roth IRA. 

3 ‘‘(2) MILITARY DEATH GRATUITY.— 

4 ‘‘(A) IN GENERAL.—The term ‘qualified 

5 rollover contribution’ includes a contribution to 

6 a Roth IRA maintained for the benefit of an in7 dividual to the extent that such contribution 

8 does not exceed the amount received by such in9 dividual under section 1477 of title 10, United 

10 States Code, or under section 1967 of title 38 

11 of such Code, if such contribution is made not 

12 later than 1 year after the day on which such 

13 individual receives such amount. 

14 ‘‘(B) ANNUAL LIMIT ON NUMBER OF

15 ROLLOVERS NOT TO APPLY.—Section 

16 408(d)(3)(B) shall not apply with respect to 

17 amounts treated as a rollover by the subpara18 graph (A). 

19 ‘‘(C) APPLICATION OF SECTION 72.—For 

20 purposes of applying section 72 in the case of 

21 a distribution which is not a qualified distribu22 tion, the amount treated as a rollover by reason 

23 of subparagraph (A) shall be treated as invest24 ment in the contract.’’. 


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•S 3951 IS

1 (b) HEALTH SAVINGS ACCOUNTS AND ARCHER

2 MSAS.—Sections 220(f)(5) and 223(f)(5) are each 

3 amended by adding at the end the following flush sen4 tence: 

5 ‘‘For purposes of subparagraphs (A) and (B), rules 

6 similar to the rules of section 408A(e)(2) (relating 

7 to rollover treatment for contributions of military 

8 death gratuity) shall apply.’’. 

9 (c) EDUCATION SAVINGS ACCOUNTS.—Section 

10 530(d)(5) is amended by adding at the end the following 

11 new sentence: ‘‘For purposes of this paragraph, rules simi12 lar to the rules of section 408A(e)(2) (relating to rollover 

13 treatment for contributions of military death gratuity) 

14 shall apply.’’. 

15 (d) EFFECTIVE DATES.— 

16 (1) IN GENERAL.—Except as provided by para17 graphs (2) and (3), the amendments made by this 

18 section shall apply with respect to deaths from inju19 ries occurring on or after the date of the enactment 

20 of this Act. 

21 (2) APPLICATION OF AMENDMENTS TO DEATHS

22 FROM INJURIES OCCURRING ON OR AFTER OCTOBER

23 7, 2001, AND BEFORE ENACTMENT.—The amend24 ments made by this section shall apply to any con25 tribution made pursuant to section 408A(e)(2), 


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•S 3951 IS

1 220(f)(5), 223(f)(5), or 530(d)(5) of the Internal 

2 Revenue Code of 1986, as amended by this Act, with 

3 respect to amounts received under section 1477 of 

4 title 10, United States Code, or under section 1967 

5 of title 38 of such Code, for deaths from injuries oc6 curring on or after October 7, 2001, and before the 

7 date of the enactment of this Act if such contribu8 tion is made not later than 1 year after the date of 

9 the enactment of this Act. 

10 (3) PENSION PROTECTION ACT CHANGES.—Sec11 tion 408A(e)(1) of the Internal Revenue Code of 

12 1986 (as in effect after the amendments made by 

13 subsection (a)(2)) shall apply to taxable years begin14 ning after December 31, 2007. 

15 TITLE II—PROVISIONS PRO16 VIDING FOR PRESERVATION 

17 OF INCOME 

18 SEC. 201. EXCLUSION OF CERTAIN QUALIFIED ANNUITY 

19 PAYMENTS. 

20 (a) EXCLUSION.— 

21 (1) QUALIFIED PLANS.—Section 402(e) (relat22 ing to exempt trusts) is amended by adding at the 

23 end the following new paragraph: 

24 ‘‘(7) EXCLUSION OF PERCENTAGE OF LIFETIME

25 ANNUITY PAYMENTS.— 


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•S 3951 IS

1 ‘‘(A) IN GENERAL.—In the case of a life2 time annuity payment to a qualified distributee 

3 from a qualified trust (within the meaning of 

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

5 with a defined contribution plan, gross income 

6 shall not include 10 percent of the amount oth7 erwise includible in gross income (determined 

8 without regard to this paragraph). For pur9 poses of this paragraph, payments from an an10 nuity contract distributed by the qualified trust 

11 shall be treated as payments from the qualified 

12 trust. 

13 ‘‘(B) LIMITATION.— 

14 ‘‘(i) IN GENERAL.—If— 

15 ‘‘(I) the aggregate amount of 

16 lifetime annuity payments to the dis17 tributee during the taxable year which 

18 are includible in gross income (deter19 mined without regard to this para20 graph) and which are subject to this 

21 paragraph or to rules similar to the 

22 rules of this paragraph (other than 

23 section 72(b)(5) or 101(d)(4)), ex24 ceeds 


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•S 3951 IS

1 ‘‘(II) 50 percent of the applicable 

2 amount for the taxable year under 

3 section 415(a), 

4 then the aggregate amount otherwise ex5 cludable under subparagraph (A) for the 

6 taxable year shall be reduced by 10 percent 

7 of the portion of such excess which is allo8 cable under clause (ii) to payments which 

9 are subject to this paragraph. 

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

11 described in clause (i) for any taxable year 

12 shall be allocated ratably among all life13 time annuity payments to the qualified dis14 tributee described in clause (i)(I). 

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

16 paragraph— 

17 ‘‘(i) LIFETIME ANNUITY PAYMENT.— 

18 ‘‘(I) IN GENERAL.—Except as 

19 provided in this clause, the term ‘life20 time annuity payment’ means a dis21 tribution from an annuity contract 

22 which is a part of a series of substan23 tially equal periodic payments (not 

24 less frequently than annually) made 

25 over the life of the qualified disVerDate Aug 31 2005 00:34 Sep 29, 2006 Jkt 049200 PO 00000 Frm 00056 Fmt 6652 Sfmt 6201 E:\BILLS\S3951.IS S3951

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•S 3951 IS

1 tributee or the joint lives of the quali2 fied distributee and the qualified 

3 distributee’s designated beneficiary. 

4 For purposes of this paragraph, the 

5 term ‘annuity contract’ means a com6 mercial annuity (as defined in section 

7 3405(e)(6)), other than an endowment 

8 or life insurance contract. 

9 ‘‘(II) CERTAIN FLUCTUATING

10 PAYMENTS.—Annuity payments shall 

11 not fail to be treated as part of a se12 ries of substantially equal periodic 

13 payments merely because the amount 

14 of the periodic payments may vary in 

15 accordance with investment experi16 ence, reallocations among investment 

17 options, actuarial gains or losses, cost 

18 of living indices, a constant percent19 age (not less than zero) applied not 

20 less frequently than annually, or simi21 lar fluctuating criteria. 

22 ‘‘(III) CERTAIN CHANGES IN THE

23 MODE OF PAYMENT.—Annuity pay24 ments shall not fail to be treated as 

25 part of a series of substantially equal 


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•S 3951 IS

1 periodic payments merely because the 

2 period between each such payment is 

3 lengthened or shortened, but only if at 

4 all times such period is not longer 

5 than 1 year. 

6 ‘‘(IV) PERMITTED REDUC7 TIONS.—Annuity payments shall not 

8 fail to be treated as part of a series 

9 of substantially equal periodic pay10 ments merely because, in the case of 

11 an annuity payable over the lives of 

12 the qualified distributee and the quali13 fied distributee’s designated bene14 ficiary, the amounts paid after the 

15 death of the qualified distributee or 

16 the qualified distributee’s designated 

17 beneficiary are less than the amounts 

18 payable during their joint lives. 

19 ‘‘(V) CERTAIN CONTRACT BENE20 FITS.—The availability of a commuta21 tion benefit or other feature permit22 ting acceleration of annuity payments 

23 (or a modification of the period dur24 ing which such a benefit is available), 

25 a minimum period of payments or a 


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•S 3951 IS

1 minimum amount to be paid in any 

2 event shall not affect the treatment of 

3 a distribution as a lifetime annuity 

4 payment. 

5 ‘‘(VI) TRUST PAYMENTS.—In the 

6 case of lifetime annuity payments 

7 being made to a qualified trust, pay8 ments by the qualified trust to a 

9 qualified distributee of the entire 

10 amount received by the qualified trust 

11 with respect to the qualified dis12 tributee shall constitute lifetime annu13 ity payments if such payments are 

14 made within a reasonable period after 

15 receipt by the qualified trust. 

16 ‘‘(VII) QUALIFIED DOMESTIC RE17 LATIONS ORDERS.—Annuity payments 

18 shall not fail to be treated as a series 

19 of substantially equal periodic pay20 ments merely because the payments 

21 are reduced on account of a qualified 

22 domestic relations order (within the 

23 meaning of section 414(p)) that be24 comes effective after the commence25 ment of the annuity payments. 


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•S 3951 IS

1 ‘‘(ii) QUALIFIED DISTRIBUTEE.—The 

2 term ‘qualified distributee’ means the em3 ployee, the surviving spouse of the em4 ployee, and an alternate payee who is the 

5 spouse or former spouse of the employee. 

6 ‘‘(D) RECAPTURE TAX.— 

7 ‘‘(i) IN GENERAL.—If— 

8 ‘‘(I) an amount is not includible 

9 in gross income by reason of subpara10 graph (A), and 

11 ‘‘(II) the series of payments of 

12 which such payment is a part is sub13 sequently modified (other than by rea14 son of death or disability) so that 

15 some or all future payments are not 

16 lifetime annuity payments, 

17 the qualified distributee’s gross income for 

18 the first taxable year in which such modi19 fication occurs shall be increased by an 

20 amount, determined under rules prescribed 

21 by the Secretary, equal to the amount 

22 which (but for subparagraph (A)) would 

23 have been includible in the qualified 

24 distributee’s gross income if the modifica25 tion had been in effect at all times, plus inVerDate Aug 31 2005 00:34 Sep 29, 2006 Jkt 049200 PO 00000 Frm 00060 Fmt 6652 Sfmt 6201 E:\BILLS\S3951.IS S3951

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•S 3951 IS

1 terest for the deferral period at the under2 payment rate established under section 

3 6621. 

4 ‘‘(ii) DEFERRAL PERIOD.—For pur5 poses of this subparagraph, the term ‘de6 ferral period’ means, with respect to any 

7 amount, the period beginning with the tax8 able year in which (without regard to sub9 paragraph (A)) the amount would have 

10 been includible in gross income and ending 

11 with the taxable year in which the modi12 fication described in clause (i)(II) occurs. 

13 ‘‘(E) INVESTMENT IN THE CONTRACT.— 

14 For purposes of section 72, the investment in 

15 the contract shall be determined without regard 

16 to this paragraph.’’. 

17 (2) QUALIFIED ANNUITY PLANS.—Section 

18 403(a) (relating to qualified annuity plans) is 

19 amended by adding at the end the following new 

20 paragraph: 

21 ‘‘(6) EXCLUSION OF PERCENTAGE OF LIFETIME

22 ANNUITY PAYMENTS.—Rules similar to the rules of 

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

24 any annuity contract to which this subsection ap25 plies.’’. 


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•S 3951 IS

1 (3) PURCHASED ANNUITIES.—Section 403(b) 

2 (relating to purchased annuities) is amended by add3 ing at the end the following new paragraph: 

4 ‘‘(14) EXCLUSION OF PERCENTAGE OF LIFE5 TIME ANNUITY PAYMENTS.—Rules similar to the 

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

7 under any annuity contract or custodial account to 

8 which this subsection applies.’’. 

9 (4) IRAS.—Section 408(d) (relating to tax 

10 treatment of distributions), as amended by section 

11 1201 of the Pension Protection Act of 2006, is 

12 amended by adding at the end the following new 

13 paragraph: 

14 ‘‘(9) EXCLUSION OF PERCENTAGE OF LIFETIME

15 ANNUITY PAYMENTS.—Rules similar to the rules of 

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

17 an individual retirement plan.’’. 

18 (5) SECTION 457 PLANS.—Section 457(e) (relat19 ing to special rules for deferred compensation plans) 

20 is amended by adding at the end the following new 

21 paragraph: 

22 ‘‘(19) EXCLUSION OF PERCENTAGE OF LIFE23 TIME ANNUITY PAYMENTS.—Rules similar to the 

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


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•S 3951 IS

1 from an eligible deferred compensation plan of an el2 igible employer described in subsection (e)(1)(A).’’. 

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

4 this section shall apply to distributions made after Decem5 ber 31, 2006. 

6 SEC. 202. EXCLUSION FOR LIFETIME ANNUITY PAYMENTS. 

7 (a) LIFETIME ANNUITY PAYMENTS UNDER ANNUITY

8 CONTRACTS.—Section 72(b) (relating to exclusion ratio) 

9 is amended by adding at the end the following new para10 graph: 

11 ‘‘(5) EXCLUSION FOR LIFETIME ANNUITY PAY12 MENTS.— 

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

14 annuity payments received as an annuity under 

15 1 or more annuity contracts in any taxable 

16 year, gross income shall not include the lesser 

17 of— 

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

19 lifetime annuity payments which (without 

20 regard to this paragraph) is includible in 

21 gross income under this section for the 

22 taxable year, or 

23 ‘‘(ii) $20,000. 

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

25 the case of taxable years beginning after DeVerDate Aug 31 2005 00:34 Sep 29, 2006 Jkt 049200 PO 00000 Frm 00063 Fmt 6652 Sfmt 6201 E:\BILLS\S3951.IS S3951

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•S 3951 IS

1 cember 31, 2007, the $20,000 amount in sub2 paragraph (A)(ii) shall be increased by an 

3 amount equal to— 

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

5 ‘‘(ii) the cost-of-living adjustment de6 termined under section 1(f)(3) for the cal7 endar year in which the taxable year be8 gins, determined by substituting ‘calendar 

9 year 2006’ for ‘calendar year 1992’ in sub10 paragraph (B) thereof. 

11 If any amount as increased under the preceding 

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

13 shall be rounded to the next lower multiple of 

14 $500. 

15 ‘‘(C) APPLICATION OF PARAGRAPH.—Sub16 paragraph (A) shall not apply to— 

17 ‘‘(i) any amount received under an eli18 gible deferred compensation plan (as de19 fined in section 457(b)) or under a quali20 fied retirement plan (as defined in section 

21 4974(c)), 

22 ‘‘(ii) any amount paid under an annu23 ity contract which is received by the bene24 ficiary under the contract— 


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•S 3951 IS

1 ‘‘(I) after the death of the annu2 itant in the case of payments de3 scribed in subsection (c)(5)(A)(ii)(III), 

4 unless the beneficiary is the surviving 

5 spouse of the annuitant, or 

6 ‘‘(II) after the death of the annu7 itant and joint annuitant in the case 

8 of payments described in subsection 

9 (c)(5)(A)(ii)(IV), unless the bene10 ficiary is the surviving spouse of the 

11 last to die of the annuitant and the 

12 joint annuitant, or 

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

14 qualified funding asset (as defined in sec15 tion 130(d)), but without regard to wheth16 er there is a qualified assignment. 

17 ‘‘(D) INVESTMENT IN THE CONTRACT.— 

18 For purposes of this section, the investment in 

19 the contract shall be determined without regard 

20 to this paragraph.’’. 

21 (b) DEFINITIONS.—Section 72(c) is amended by add22 ing at the end the following new paragraph: 

23 ‘‘(5) LIFETIME ANNUITY PAYMENT.— 

24 ‘‘(A) IN GENERAL.—For purposes of sub25 section (b)(5), the term ‘lifetime annuity payVerDate Aug 31 2005 00:34 Sep 29, 2006 Jkt 049200 PO 00000 Frm 00065 Fmt 6652 Sfmt 6201 E:\BILLS\S3951.IS S3951

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•S 3951 IS

1 ment’ means any amount received as an annu2 ity under any portion of an annuity contract, 

3 but only if— 

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

5 case of payments described in subclause 

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

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

8 other legally enforceable means) to receive 

9 such amount during the life of the annu10 itant or joint annuitant is such annuitant 

11 or joint annuitant, and 

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

13 of substantially equal periodic payments 

14 made not less frequently than annually 

15 over— 

16 ‘‘(I) the life of the annuitant, 

17 ‘‘(II) the lives of the annuitant 

18 and a joint annuitant, but only if the 

19 annuitant is the spouse of the joint 

20 annuitant as of the annuity starting 

21 date or the difference in age between 

22 the annuitant and joint annuitant is 

23 15 years or less, 

24 ‘‘(III) the life of the annuitant 

25 with a minimum period of payments 


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•S 3951 IS

1 or with a minimum amount that must 

2 be paid in any event, or 

3 ‘‘(IV) the lives of the annuitant 

4 and a joint annuitant with a minimum 

5 period of payments or with a min6 imum amount that must be paid in 

7 any event, but only if the annuitant is 

8 the spouse of the joint annuitant as of 

9 the annuity starting date or the dif10 ference in age between the annuitant 

11 and joint annuitant is 15 years or 

12 less. 

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

14 clause (ii), annuity payments shall not fail 

15 to be treated as part of a series of substan16 tially equal periodic payments— 

17 ‘‘(I) because the amount of the 

18 periodic payments may vary in accord19 ance with investment experience, re20 allocations among investment options, 

21 actuarial gains or losses, cost-of-living 

22 indices, a constant percentage (not 

23 less than zero) applied not less fre24 quently than annually, or similar fluc25 tuating criteria, 


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•S 3951 IS

1 ‘‘(II) due to the existence of, or 

2 modification of the duration of, a pro3 vision in the contract permitting a 

4 lump-sum withdrawal after the annu5 ity starting date, or 

6 ‘‘(III) because the period between 

7 each such payment is lengthened or 

8 shortened, but only if at all times 

9 such period is no longer than 1 cal10 endar year. 

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

12 of subparagraph (A) and subsections (b)(5) and 

13 (x), the term ‘annuity contract’ means a com14 mercial annuity (as defined by section 

15 3405(e)(6)), other than an endowment or life 

16 insurance contract. 

17 ‘‘(C) MINIMUM PERIOD OF PAYMENTS.— 

18 For purposes of subparagraph (A), the min19 imum period of payments is a guaranteed term 

20 of payments which does not exceed the greater 

21 of— 

22 ‘‘(i) 10 years, or 

23 ‘‘(ii) the life expectancy of— 

24 ‘‘(I) the annuitant as of the an25 nuity starting date, in the case of lifeVerDate Aug 31 2005 00:34 Sep 29, 2006 Jkt 049200 PO 00000 Frm 00068 Fmt 6652 Sfmt 6201 E:\BILLS\S3951.IS S3951

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•S 3951 IS

1 time annuity payments described in 

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

3 ‘‘(II) the annuitant and joint an4 nuitant as of the annuity starting 

5 date, in the case of lifetime annuity 

6 payments described in subparagraph 

7 (A)(ii)(IV). 

8 For purposes of this subparagraph, life expect9 ancy shall be computed with reference to the ta10 bles prescribed by the Secretary under para11 graph (3). For purposes of subsection 

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

13 payments shall be determined as of the annuity 

14 starting date and reduced by one for each sub15 sequent year. 

16 ‘‘(D) MINIMUM AMOUNT THAT MUST BE

17 PAID IN ANY EVENT.—For purposes of subpara18 graph (A), the minimum amount that must be 

19 paid in any event is an amount payable to the 

20 designated beneficiary under an annuity con21 tract which is in the nature of a refund and 

22 does not exceed the greater of the amount ap23 plied to produce the lifetime annuity payments 

24 under the contract or the amount, if any, availVerDate Aug 31 2005 00:34 Sep 29, 2006 Jkt 049200 PO 00000 Frm 00069 Fmt 6652 Sfmt 6201 E:\BILLS\S3951.IS S3951

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•S 3951 IS

1 able for withdrawal under the contract on the 

2 date of death.’’. 

3 (c) RECAPTURE TAX FOR LIFETIME ANNUITY PAY4 MENTS.—Section 72 is amended by redesignating sub5 section (x) as subsection (y) and by inserting after sub6 section (x) the following new subsection: 

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

8 REDUCTIONS IN LIFETIME ANNUITY PAYMENTS.— 

9 ‘‘(1) IN GENERAL.—If— 

10 ‘‘(A) any amount received under an annu11 ity contract is excluded from income by reason 

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

13 payments) for any taxable year, and 

14 ‘‘(B) a recapture event described in para15 graph (2) occurs in any subsequent taxable 

16 year, 

17 then gross income for the first taxable year in which 

18 the recapture event occurs shall be increased by the 

19 recapture amount. 

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

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

22 ‘‘(A) the series of payments under an an23 nuity contract is subsequently modified so any 

24 future payments are not lifetime annuity pay25 ments, 


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•S 3951 IS

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

2 lifetime annuity payment under the contract an 

3 annuitant receives a lump sum and thereafter is 

4 to receive annuity payments in a reduced 

5 amount under the contract, or 

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

7 lifetime annuity payment under the contract the 

8 dollar amount of any subsequent annuity pay9 ment is reduced and a lump sum is not paid in 

10 connection with the reduction, unless such re11 duction is— 

12 ‘‘(i) due to an event described in sub13 section (c)(5)(A)(iii), or 

14 ‘‘(ii) due to the addition of, or in15 crease in, a minimum period of payments 

16 (within the meaning of subsection 

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

18 must be paid in any event (within the 

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

20 ‘‘(3) RECAPTURE AMOUNT.— 

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

22 subsection, the recapture amount shall be the 

23 amount, determined under rules prescribed by 

24 the Secretary, equal to the amount which (but 

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•S 3951 IS

1 ible in the taxpayer’s gross income if the modi2 fication or reduction described in subparagraph 

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

4 effect at all times, plus interest for the deferral 

5 period at the underpayment rate established by 

6 section 6621. 

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

8 of this subsection, the term ‘deferral period’ 

9 means, with respect to any amount, the period 

10 beginning with the taxable year in which (with11 out regard to subsection (b)(5)) the amount 

12 would have been includible in gross income and 

13 ending with the taxable year in which the modi14 fication or reduction described in subparagraph 

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

16 ‘‘(4) EXCEPTIONS TO RECAPTURE TAX.—Para17 graph (1) shall not apply in the case of any recap18 ture event which occurs because an annuitant— 

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

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

21 ‘‘(B) becomes a chronically ill individual 

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

23 ‘‘(C) encounters hardship.’’. 

24 (d) LIFETIME DISTRIBUTIONS OF LIFE INSURANCE

25 DEATH BENEFITS.— 


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1 (1) IN GENERAL.—Section 101(d) (relating to 

2 payment of life insurance proceeds at a date later 

3 than death) is amended by adding at the end the fol4 lowing new paragraph: 

5 ‘‘(4) EXCLUSION FOR LIFETIME ANNUITY PAY6 MENTS.— 

7 ‘‘(A) IN GENERAL.—In the case of 

8 amounts to which this subsection applies, gross 

9 income for any taxable year shall not include 

10 the lesser of— 

11 ‘‘(i) 50 percent of the portion of life12 time annuity payments which (without re13 gard to this paragraph) is includible in 

14 gross income under this section, or 

15 ‘‘(ii) the amount in effect under sec16 tion 72(b)(5)(A)(ii) for the taxable year. 

17 ‘‘(B) RULES OF SECTION 72(b)(5) TO

18 APPLY.—For purposes of this paragraph, rules 

19 similar to the rules of section 72(b)(5) and sec20 tion 72(x) shall apply, except that the term 

21 ‘beneficiary of the life insurance contract’ shall 

22 be substituted for the term ‘annuitant’ each 

23 place it appears, and the term ‘life insurance 

24 contract’ shall be substituted for the term ‘an25 nuity contract’ each place it appears.’’. 


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1 (2) CONFORMING AMENDMENT.—Section 

2 101(d)(1) is amended by inserting ‘‘or paragraph 

3 (4)’’ after ‘‘to the extent not excluded by the pre4 ceding sentence’’. 

5 (e) EFFECTIVE DATE.— 

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

7 this section shall apply to amounts received in cal8 endar years beginning after the date of the enact9 ment of this Act. 

10 (2) SPECIAL RULE FOR EXISTING CON11 TRACTS.—In the case of a contract in force on the 

12 date of the enactment of this Act that does not sat13 isfy the requirements of section 72(c)(5)(A) of the 

14 Internal Revenue Code of 1986 (as added by this 

15 section), or requirements similar to such section 

16 72(c)(5)(A) in the case of a life insurance contract, 

17 any modification to such contract (including a 

18 change in ownership) or to the payments under such 

19 contract that is made to satisfy the requirements of 

20 such section (or similar requirements) shall not re21 sult in the recognition of any gain or loss, any 

22 amount being included in gross income, or any addi23 tion to tax that otherwise might result from such 

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1 pleted before the date which is 2 years after the date 

2 of the enactment of this Act. 

3 SEC. 203. JOINT STUDY OF APPLICATION OF SPOUSAL CON4 SENT RULES TO DEFINED CONTRIBUTION 

5 PLANS. 

6 (a) STUDY.—The Secretary of Labor and the Sec7 retary of the Treasury shall jointly conduct a study of the 

8 feasibility and desirability of extending the application of 

9 the requirements of section 205 of the Employee Retire10 ment Income Security Act of 1974 and sections 

11 401(a)(11) and 417 of the Internal Revenue Code of 1986 

12 (relating to spousal consent requirements) to defined con13 tribution plans to which such requirements do not apply. 

14 Such study shall include consideration of— 

15 (1) any modifications of such requirements that 

16 are necessary to apply such requirements to such 

17 plans, and 

18 (2) the feasibility of providing notice and spous19 al consent in 1 or more electronic forms that are ca20 pable of authentication. 

21 (b) REPORT.—Not later than 2 years after the date 

22 of the enactment of this Act, the Secretaries shall report 

23 the results of the study, together with any recommenda24 tions for legislative changes, to the Committees on Fi25 nance and Health, Education, Labor, and Pensions of the 


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•S 3951 IS

1 Senate and the Committees on Ways and Means and Edu2 cation, and the Workforce of the House of Representa3 tives. 

4 SEC. 204. FACILITATING LONGEVITY INSURANCE. 

5 (a) IN GENERAL.—Paragraph (9) of section 401(a) 

6 is amended by inserting after subparagraph (G) the fol7 lowing new subparagraph: 

8 ‘‘(H) LONGEVITY INSURANCE.— 

9 ‘‘(i) IN GENERAL.—For purposes of 

10 this paragraph, any value attributable to 

11 longevity insurance shall be disregarded in 

12 determining the value of an employee’s in13 terest under a plan prior to the first date 

14 that payments are made under the lon15 gevity insurance. 

16 ‘‘(ii) LONGEVITY INSURANCE DE17 FINED.—For purposes of this subpara18 graph, the term ‘longevity insurance’ 

19 means an annuity payable on behalf of the 

20 employee under which— 

21 ‘‘(I) payments commence not 

22 later than 12 months following the 

23 calendar month in which the employee 

24 attains age 85 (or would have at25 tained age 85), 


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1 ‘‘(II) payments are made in sub2 stantially equal periodic payments 

3 (not less frequently than annually) 

4 over the life of the employee or the 

5 joint lives of the employee and the 

6 employee’s designated beneficiary, 

7 taking into account the rules of clause 

8 (i) of section 402(e)(7)(D), except as 

9 otherwise provided in subclause (III) 

10 of such section, 

11 ‘‘(III) prior to the death of the 

12 employee, the annuity does not make 

13 available any commutation benefit, 

14 cash surrender value, or other similar 

15 feature, and 

16 ‘‘(IV) except as provided in rules 

17 prescribed by the Secretary, in the 

18 case of an employee’s death prior to 

19 the date that payments commence, the 

20 value of any death benefits paid may 

21 not exceed the premiums paid for 

22 such annuity, plus interest com23 pounded annually at 3 percent. 

24 ‘‘(iii) ADJUSTING AGE.—For purposes 

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1 ally increase age 85 to reflect increases in 

2 life expectancy (as determined by the Sec3 retary) that occur on or after January 1, 

4 2006, except that any such increased age 

5 which is not a whole number shall be 

6 rounded to the next lower whole number.’’. 

7 (b) RULES.—Not later than one year after the date 

8 of enactment of this Act, the Secretary of the Treasury 

9 shall prescribe rules under which all or a portion of a par10 ticipant’s benefits under any plan described in section 

11 402(c)(8)(B) of the Internal Revenue Code of 1986 may 

12 be treated as longevity insurance under the rules of section 

13 401(a)(9)(H) of such Code. 

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

15 this section shall apply to years beginning after December 

16 31, 2007. 

17 TITLE III—PROVISIONS 

18 ENSURING EQUITY IN DIVORCE 

19 SEC. 301. ELIMINATION OF CURRENT CONNECTION RE20 QUIREMENT UNDER RAILROAD RETIREMENT 

21 ACT FOR CERTAIN SURVIVORS. 

22 (a) IN GENERAL.—Section 2(d)(1) of the Railroad 

23 Retirement Act of 1974 (45 U.S.C. 231a(d)(1)), in the 

24 matter preceding paragraph (i), is amended by inserting 


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1 ‘‘, except with respect to survivors described in paragraph 

2 (i), (ii), or (v),’’ after ‘‘December 31, 1995) and’’. 

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

4 subsection (a) shall take effect on the date of enactment 

5 of this Act and shall apply to annuity amounts accruing 

6 for months on or after such date. 

7 SEC. 302. PERMITTING DIVORCED SPOUSES AND WIDOWS 

8 AND WIDOWERS TO REMARRY AFTER TURN9 ING 60 WITHOUT A PENALTY UNDER RAIL10 ROAD RETIREMENT ACT. 

11 (a) IN GENERAL.— 

12 (1) DIVORCED SPOUSE.—Section 2(c)(4) of the 

13 Railroad Retirement Act of 1974 (45 U.S.C. 

14 231a(c)(4) is amended by adding at the end the fol15 lowing new sentence: ‘‘For purposes of paragraph 

16 (ii)(B), if a divorced wife marries after attaining age 

17 60, such marriage shall be deemed not to have oc18 curred.’’ 

19 (2) WIDOWS AND WIDOWERS.—Section 

20 2(d)(1)(v) of the Railroad Retirement Act of 1974 

21 (45 U.S.C. 231a(d)(1)(v)) is amended by adding at 

22 the end the following new sentence: ‘‘For purposes 

23 of this paragraph, if a widow marries after attaining 

24 age 60, such marriage shall be deemed not to have 

25 occurred.’’ 


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

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

3 this Act and shall apply to annuity amounts accruing for 

4 months on or after such date. 

5 SEC. 303. REPEAL OF JURISDICTIONAL REQUIREMENT FOR 

6 COURT TO TREAT MILITARY RETIREMENT 

7 PAY AS PROPERTY OF THE MILITARY MEM8 BER AND SPOUSE. 

9 (a) IN GENERAL.—Section 1408(c) of title 10, 

10 United States Code, is amended by striking paragraph (4). 

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

12 this section shall apply to final decrees issued on or after 

13 the date of the enactment of this Act. 

14 TITLE IV—PROVISIONS TO 

15 IMPROVE FINANCIAL LITERACY 

16 SEC. 401. GRANTS TO COMMUNITY-BASED TAXPAYER CLIN17 ICS TO PROVIDE RETIREMENT SAVINGS AD18 VICE. 

19 (a) IN GENERAL.—Section 7526 (relating to low-in20 come taxpayer clinics) is amended by adding at the end 

21 the following: 

22 ‘‘(d) ADDITIONAL GRANTS FOR RETIREMENT SAV23 INGS ADVICE.— 

24 ‘‘(1) MAKING OF GRANTS.—The Secretary may, 

25 subject to the availability of appropriated funds, 


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1 make grants to qualified low-income taxpayer clinics 

2 to provide retirement savings counseling to low-in3 come taxpayers. 

4 ‘‘(2) USE OF GRANT FUNDS.—Grants under 

5 paragraph (1) shall be used to— 

6 ‘‘(A) develop the infrastructure necessary 

7 to carry out retirement savings counseling for 

8 low-income taxpayers, including the develop9 ment of software to assist low-income taxpayers 

10 in beginning a retirement savings program, 

11 monitoring their savings behavior, and taking 

12 advantage of tax benefits provided under this 

13 title to assist in retirement savings, 

14 ‘‘(B) develop partnerships with certified fi15 nancial planners and other financial experts to 

16 assist in carrying out the retirement savings 

17 program, and 

18 ‘‘(C) train advisors to assist low-income 

19 taxpayers with retirement savings. 

20 ‘‘(3) CRITERIA FOR AWARDS.—The provisions 

21 of subsection (c)(4) shall apply in determining 

22 whether to make a grant under paragraph (1). 

23 ‘‘(4) LIMITATIONS AND SPECIAL RULES.— 

24 ‘‘(A) AGGREGATE LIMITATION.—Unless 

25 otherwise provided by specific appropriations, 


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•S 3951 IS

1 the Secretary shall not allocate more than 

2 $25,000,000 per year (exclusive of costs of ad3 ministering the program) to grants under para4 graph (1). 

5 ‘‘(B) LIMITATION ON ANNUAL GRANTS TO

6 A CLINIC.—The aggregate amount of grants 

7 which may be made under paragraph (1) to a 

8 clinic for a year shall not exceed $100,000. 

9 ‘‘(C) MULTI-YEAR GRANTS.—The provi10 sions of subsection (c)(3) shall apply to grants 

11 under paragraph (1). 

12 ‘‘(D) ADDITIONAL AMOUNTS.—Grants 

13 under paragraph (1) shall be in addition to any 

14 grants under subsection (a).’’ 

15 (b) CONFORMING AMENDMENTS.— 

16 (1) Section 7526(c) (relating to special rules 

17 and limitations) is amended by striking ‘‘this sec18 tion’’ each place it appears and inserting ‘‘subsection 

19 (a)’’. 

20 (2) Section 7526(c)(3) is amended by inserting 

21 ‘‘under subsection (a)’’ after ‘‘award’’. 

22 (c) AUTHORIZATION OF APPROPRIATIONS.—There is 

23 authorized to be appropriated for each fiscal year begin24 ning after September 30, 2006, $25,000,000 to carry out 

25 the provisions of this section. 


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1 SEC. 402. TREATMENT OF QUALIFIED RETIREMENT PLAN2 NING SERVICES. 

3 (a) IN GENERAL.—Subsection (m) of section 132 

4 (defining qualified retirement services) is amended by add5 ing at the end the following new paragraph: 

6 ‘‘(4) NO CONSTRUCTIVE RECEIPT.— 

7 ‘‘(A) IN GENERAL.—No amount shall be 

8 included in the gross income of any employee 

9 solely because the employee may choose between 

10 any qualified retirement planning services pro11 vided by an eligible investment advisor and 

12 compensation which would otherwise be includ13 ible in the gross income of such employee. The 

14 preceding sentence shall apply to highly com15 pensated employees only if the choice described 

16 in such sentence is available on substantially 

17 the same terms to each member of the group of 

18 employees normally provided education and in19 formation regarding the employer’s qualified 

20 employer plan. 

21 ‘‘(B) LIMITATION.—The maximum amount 

22 which may be excluded under subparagraph (A) 

23 with respect to any employee for any taxable 

24 year shall not exceed $1,000. 

25 ‘‘(C) ELIGIBLE INVESTMENT ADVISER.— 

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1 ble investment adviser’ means, with respect to 

2 a plan, a person— 

3 ‘‘(i) who— 

4 ‘‘(I) is registered as an invest5 ment adviser under the Investment 

6 Advisers Act of 1940 (15 U.S.C. 80b– 

7 1 et seq.), 

8 ‘‘(II) is registered as an invest9 ment adviser under the laws of the 

10 State in which such adviser maintains 

11 the principal office and place of busi12 ness of such adviser, but only if such 

13 State laws are consistent with section 

14 203A of the Investment Advisers Act 

15 of 1940 (15 U.S.C. 80b–3a), 

16 ‘‘(III) is a bank or similar finan17 cial institution referred to in section 

18 408(b)(4), 

19 ‘‘(IV) is an insurance company 

20 qualified to do business under the 

21 laws of a State, or 

22 ‘‘(V) is any other comparably 

23 qualified entity which satisfies such 

24 criteria as the Secretary determines 


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1 appropriate, consistent with the pur2 poses of this subsection, and 

3 ‘‘(ii) who meets the requirements of 

4 subparagraph (D). 

5 ‘‘(D) ADVISER REQUIREMENTS.—The re6 quirements of this subparagraph are met if 

7 every individual employed (or otherwise com8 pensated) by a person described in subpara9 graph (C)(i) who provides investment advice on 

10 behalf of such person to any plan participant or 

11 beneficiary is— 

12 ‘‘(i) an individual described in sub13 clause (I) of subparagraph (C)(i), 

14 ‘‘(ii) an individual described in sub15 clause (II) of subparagraph (C)(i), but 

16 only if such State has an examination re17 quirement to qualify for registration, 

18 ‘‘(iii) registered as a broker or dealer 

19 under the Securities Exchange Act of 1934 

20 (15 U.S.C. 78a et seq.), 

21 ‘‘(iv) a registered representative as de22 scribed in section 3(a)(18) of the Securi23 ties Exchange Act of 1934 (15 U.S.C. 

24 78c(a)(18)) or section 202(a)(17) of the 


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•S 3951 IS

1 Investment Advisers Act of 1940 (15 

2 U.S.C. 80b–2(a)(17)), or 

3 ‘‘(v) any other comparably qualified 

4 individual who satisfies such criteria as the 

5 Secretary determines appropriate, con6 sistent with the purposes of this para7 graph. 

8 ‘‘(E) TERMINATION.—This paragraph 

9 shall not apply to taxable years beginning after 

10 December 31, 2011.’’. 

11 (b) CONFORMING AMENDMENTS.— 

12 (1) Section 403(b)(3)(B) is amended by insert13 ing ‘‘132(m)(4),’’ after ‘‘132(f)(4),’’. 

14 (2) Section 414(s)(2) is amended by inserting 

15 ‘‘132(m)(4),’’ after ‘‘132(f)(4),’’. 

16 (3) Section 415(c)(3)(D)(ii) is amended by in17 serting ‘‘132(m)(4),’’ after ‘‘132(f)(4),’’. 

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

19 this section shall apply to taxable years beginning after 

20 December 31, 2006. 

21 SEC. 403. RETIREMENT HANDBOOK AND RETIREMENT 

22 READINESS CHECKLIST. 

23 (a) IN GENERAL.—Section 704 of the Social Security 

24 Act is amended by adding at the end the following new 

25 subsection: 


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1 ‘‘(f) RETIREMENT INFORMATION.— 

2 ‘‘(1) IN GENERAL.—The Commissioner, in con3 sultation with the Social Security Advisory Board, 

4 shall prepare— 

5 ‘‘(A) the financial reference handbook de6 scribed in paragraph (2), and 

7 ‘‘(B) the retirement readiness checklist de8 scribed in paragraph (3). 

9 ‘‘(2) FINANCIAL REFERENCE HANDBOOK.—The 

10 handbook described in this paragraph is a pamphlet 

11 which— 

12 ‘‘(A) includes definitions of basic financial 

13 terms, 

14 ‘‘(B) contains a listing of financial issues 

15 and problems facing individuals who are retir16 ing and explanations of methods of dealing with 

17 the issues and problems, and 

18 ‘‘(C) is in a form readily understandable 

19 by the average retiree. 

20 ‘‘(3) READINESS CHECKLIST.—The checklist 

21 described in this paragraph is a list of questions that 

22 individuals need to consider in preparation for re23 tirement, including the following: 

24 ‘‘(A) What annual income will the indi25 vidual need in retirement? 


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•S 3951 IS

1 ‘‘(B) How many years will the individual 

2 live in retirement? 

3 ‘‘(C) What will be the cost of Medicare 

4 premiums? 

5 ‘‘(D) What will be the cost of insurance 

6 necessary to supplement Medicare? 

7 ‘‘(E) How will savings be invested in re8 tirement? 

9 ‘‘(F) How will taxes affect your retirement 

10 income? 

11 The checklist will include answers to the questions 

12 or directions as to where information is available to 

13 answer the questions. All information shall be in a 

14 form readily understandable to the average recipient 

15 of the checklist. 

16 ‘‘(4) REVISIONS.—The Commissioner shall peri17 odically revise and update the handbook and check18 list prepared under this subsection. 

19 ‘‘(5) DISTRIBUTION OF MATERIALS.— 

20 ‘‘(A) HANDBOOK.—The financial reference 

21 handbook described in paragraph (2) shall be 

22 included with materials provided to an indi23 vidual when the individual first applies for ben24 efits under title II and such other times as the 

25 Commissioner determines appropriate. 


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•S 3951 IS

1 ‘‘(B) CHECKLIST.—The retirement readi2 ness checklist described in paragraph (3) shall 

3 be included with an individual’s annual social 

4 security account statement provided under sec5 tion 1143.’’. 

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

7 this section shall take effect on the date of the enactment 

8 of this Act, but the handbooks and checklists required to 

9 be provided by such amendment shall be provided on or 

10 after January 1, 2008 (or such earlier date as the Com11 missioner of Social Security may provide). 

12 TITLE V—INCENTIVES FOR 

13 SMALL BUSINESSES TO ES14 TABLISH AND MAINTAIN RE15 TIREMENT PLANS FOR EM16 PLOYEES 

17 SEC. 501. CREDIT FOR QUALIFIED PENSION PLAN CON18 TRIBUTIONS OF SMALL EMPLOYERS. 

19 (a) IN GENERAL.—Subpart D of part IV of sub20 chapter A of chapter 1 (relating to business related cred21 its), as amended by section 102, is amended by adding 

22 at the end the following new section: 


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1 ‘‘SEC. 45O. SMALL EMPLOYER PENSION PLAN CONTRIBU2 TIONS. 

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

4 in the case of an eligible employer, the small employer pen5 sion plan contribution credit determined under this section 

6 for any taxable year is an amount equal to 50 percent 

7 of the amount which would (but for subsection (f)(1)) be 

8 allowed as a deduction under section 404 for such taxable 

9 year for qualified employer contributions made to any 

10 qualified retirement plan on behalf of any employee who 

11 is not a highly compensated employee. 

12 ‘‘(b) CREDIT LIMITED TO 3 YEARS.—The credit al13 lowable by this section shall be allowed only with respect 

14 to the period of 3 taxable years beginning with the first 

15 taxable year for which a credit is allowable with respect 

16 to a plan under this section. 

17 ‘‘(c) QUALIFIED EMPLOYER CONTRIBUTION.—For 

18 purposes of this section— 

19 ‘‘(1) DEFINED CONTRIBUTION PLANS.—In the 

20 case of a defined contribution plan, the term ‘quali21 fied employer contribution’ means the amount of 

22 nonelective and matching contributions to the plan 

23 made by the employer on behalf of any employee 

24 who is not a highly compensated employee to the ex25 tent such amount does not exceed 3 percent of such 


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•S 3951 IS

1 employee’s compensation from the employer for the 

2 year. 

3 ‘‘(2) DEFINED BENEFIT PLANS.—In the case of 

4 a defined benefit plan, the term ‘qualified employer 

5 contribution’ means the amount of employer con6 tributions to the plan made on behalf of any em7 ployee who is not a highly compensated employee to 

8 the extent that the accrued benefit of such employee 

9 derived from employer contributions for the year 

10 does not exceed the equivalent (as determined under 

11 regulations prescribed by the Secretary and without 

12 regard to contributions and benefits under the Social 

13 Security Act) of 3 percent of such employee’s com14 pensation from the employer for the year. 

15 ‘‘(d) QUALIFIED RETIREMENT PLAN.— 

16 ‘‘(1) IN GENERAL.—The term ‘qualified retire17 ment plan’ means any plan described in section 

18 401(a) which includes a trust exempt from tax 

19 under section 501(a) if the plan meets— 

20 ‘‘(A) the contribution requirements of 

21 paragraph (2), 

22 ‘‘(B) the vesting requirements of para23 graph (3), and 

24 ‘‘(C) the distribution requirements of para25 graph (4). 


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1 ‘‘(2) CONTRIBUTION REQUIREMENTS.— 

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

3 this paragraph are met if, under the plan— 

4 ‘‘(i) the employer is required to make 

5 nonelective contributions of at least 1 per6 cent of compensation (or the equivalent 

7 thereof in the case of a defined benefit 

8 plan) for each employee who is not a high9 ly compensated employee who is eligible to 

10 participate in the plan, and 

11 ‘‘(ii) allocations of nonelective em12 ployer contributions, in the case of a de13 fined contribution plan, are either in equal 

14 dollar amounts for all employees covered 

15 by the plan or bear a uniform relationship 

16 to the total compensation, or the basic or 

17 regular rate of compensation, of the em18 ployees covered by the plan (and an equiv19 alent requirement is met with respect to a 

20 defined benefit plan). 

21 ‘‘(B) COMPENSATION LIMITATION.—The 

22 compensation taken into account under sub23 paragraph (A) for any year shall not exceed the 

24 limitation in effect for such year under section 

25 401(a)(17). 


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1 ‘‘(3) VESTING REQUIREMENTS.—The require2 ments of this paragraph are met if the plan satisfies 

3 the requirements of either of the following subpara4 graphs: 

5 ‘‘(A) 3-YEAR VESTING.—A plan satisfies 

6 the requirements of this subparagraph if an em7 ployee who has completed at least 3 years of 

8 service has a nonforfeitable right to 100 percent 

9 of the employee’s accrued benefit derived from 

10 employer contributions. 

11 ‘‘(B) 5-YEAR GRADED VESTING.—A plan 

12 satisfies the requirements of this subparagraph 

13 if an employee has a nonforfeitable right to a 

14 percentage of the employee’s accrued benefit de15 rived from employer contributions determined 

16 under the following table: 

The nonforfeitable 

‘‘Years of service: percentage is: 

1 ......................................................................................................... 20

2 ......................................................................................................... 40

3 ......................................................................................................... 60

4 ......................................................................................................... 80

5 ......................................................................................................... 100. 

17 ‘‘(4) DISTRIBUTION REQUIREMENTS.—In the 

18 case of a profit-sharing or stock bonus plan, the re19 quirements of this paragraph are met if, under the 

20 plan, qualified employer contributions are distribut21 able only as provided in section 401(k)(2)(B). 


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1 ‘‘(e) OTHER DEFINITIONS.—For purposes of this 

2 section— 

3 ‘‘(1) ELIGIBLE EMPLOYER.— 

4 ‘‘(A) IN GENERAL.—The term ‘eligible em5 ployer’ means, with respect to any year, an em6 ployer which has no more than 25 employees 

7 who received at least $5,000 of compensation 

8 from the employer for the preceding year. 

9 ‘‘(B) REQUIREMENT FOR NEW QUALIFIED

10 EMPLOYER PLANS.—Such term shall not in11 clude an employer if, during the 3-taxable year 

12 period immediately preceding the first taxable 

13 year for which the credit under this section is 

14 otherwise allowable for a qualified employer 

15 plan of the employer, the employer or any mem16 ber of any controlled group including the em17 ployer (or any predecessor of either) established 

18 or maintained a qualified employer plan with 

19 respect to which contributions were made, or 

20 benefits were accrued, for substantially the 

21 same employees as are in the qualified employer 

22 plan. 

23 ‘‘(2) HIGHLY COMPENSATED EMPLOYEE.—The 

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1 ing given such term by section 414(q) (determined 

2 without regard to section 414(q)(1)(B)(ii)). 

3 ‘‘(f) SPECIAL RULES.— 

4 ‘‘(1) DISALLOWANCE OF DEDUCTION.—No de5 duction shall be allowed for that portion of the quali6 fied employer contributions paid or incurred for the 

7 taxable year which is equal to the credit determined 

8 under subsection (a). 

9 ‘‘(2) ELECTION NOT TO CLAIM CREDIT.—This 

10 section shall not apply to a taxpayer for any taxable 

11 year if such taxpayer elects to have this section not 

12 apply for such taxable year. 

13 ‘‘(3) AGGREGATION RULES.—All persons treat14 ed as a single employer under subsection (a) or (b) 

15 of section 52, or subsection (n) or (o) of section 414, 

16 shall be treated as one person. All eligible employer 

17 plans shall be treated as 1 eligible employer plan. 

18 ‘‘(g) RECAPTURE OF CREDIT ON FORFEITED CON19 TRIBUTIONS.— 

20 ‘‘(1) IN GENERAL.—Except as provided in para21 graph (2), if any accrued benefit which is forfeitable 

22 by reason of subsection (d)(3) is forfeited, the em23 ployer’s tax imposed by this chapter for the taxable 

24 year in which the forfeiture occurs shall be increased 

25 by 35 percent of the employer contributions from 


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1 which such benefit is derived to the extent such con2 tributions were taken into account in determining 

3 the credit under this section. 

4 ‘‘(2) REALLOCATED CONTRIBUTIONS.—Para5 graph (1) shall not apply to any contribution which 

6 is reallocated by the employer under the plan to em7 ployees who are not highly compensated employees.’’. 

8 (b) CREDIT ALLOWED AS PART OF GENERAL BUSI9 NESS CREDIT.—Section 38(b) (defining current year busi10 ness credit) , as amended by section 102, is amended by 

11 striking ‘‘and’’ at the end of paragraph (30), by striking 

12 the period at the end of paragraph (31) and inserting ‘‘, 

13 and’’, and by adding at the end the following new para14 graph: 

15 ‘‘(32) in the case of an eligible employer (as de16 fined in section 45O(e)), the small employer pension 

17 plan contribution credit determined under section 

18 45O(a).’’. 

19 (c) CONFORMING AMENDMENTS.— 

20 (1) Subsection (c) of section 196 is amended by 

21 striking ‘‘and’’ at the end of paragraph (12), by 

22 striking the period at the end of paragraph (13) and 

23 inserting ‘‘, and’’, and by adding at the end the fol24 lowing new paragraph: 


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•S 3951 IS

1 ‘‘(14) the small employer pension plan contribu2 tion credit determined under section 45O(a).’’. 

3 (2) The table of sections for subpart D of part 

4 IV of subchapter A of chapter 1, as amended by sec5 tion 102, is amended by adding at the end the fol6 lowing new item: 

‘‘Sec. 45O. Small employer pension plan contributions.’’. 

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

8 this section shall apply to contributions paid or incurred 

9 in taxable years beginning after December 31, 2006. 

10 SEC. 502. DEDUCTION FOR PENSION CONTRIBUTIONS AL11 LOWED IN COMPUTING NET EARNINGS FROM 

12 SELF-EMPLOYMENT. 

13 (a) IN GENERAL.—Section 1402(a) (defining net 

14 earnings from self-employment) is amended by striking 

15 ‘‘and’’ at the end of paragraph (15), by striking the period 

16 at the end of paragraph (16) and inserting ‘‘, and’’, and 

17 by inserting after paragraph (16) the following new para18 graph: 

19 ‘‘(17) any deduction allowed under section 404 

20 by reason of section 404(a)(8)(C) shall be allowed, 

21 except that the amount of such deduction shall be 

22 determined without regard to this paragraph.’’. 

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

24 this section shall apply to taxable years beginning after 

25 December 31, 2006. 


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1 SEC. 503. EXEMPTION OF DEFERRAL-ONLY QUALIFIED 

2 CASH OR DEFERRED ARRANGEMENTS FROM 

3 TOP-HEAVY PLAN RULES. 

4 (a) IN GENERAL.—Section 416(g) (defining top5 heavy plan) is amended by adding at the end the following 

6 new paragraph: 

7 ‘‘(5) EXCEPTION FOR DEFERRAL-ONLY CASH

8 OR DEFERRED ARRANGEMENTS.—In the case of a 

9 plan which consists solely of a qualified cash or de10 ferred arrangement (as defined in section 401(k)(2)) 

11 under which no amounts may be contributed other 

12 than elective deferrals (as defined in section 

13 402(g)(3)), such plan shall not be treated as a top14 heavy plan.’’. 

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

16 this section shall apply to years beginning after December 

17 31, 2006. 

18 SEC. 504. EXTENSION OF TIME FOR SMALL PENSION PLANS 

19 TO ADOPT REQUIRED PLAN QUALIFICATION 

20 AMENDMENTS. 

21 (a) IN GENERAL.—In the case of an eligible small 

22 plan for which a remedial amendment period is established 

23 under Internal Revenue Procedure 2005-66 (or any regu24 lation, revenue ruling, revenue procedure, or guidance pro25 viding for a similar period), no amendment to the plan 

26 necessary for the plan to meet the qualification requireVerDate Aug 31 2005 00:34 Sep 29, 2006 Jkt 049200 PO 00000 Frm 00098 Fmt 6652 Sfmt 6201 E:\BILLS\S3951.IS S3951

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1 ments under the Internal Revenue Code of 1986 shall be 

2 required before the close of such period. 

3 (b) ADDITIONAL REQUIREMENTS.—Subsection (a) 

4 shall not apply to an eligible small plan unless— 

5 (1) any amendment described in subsection (a) 

6 applies retroactively to the period during which such 

7 amendment would otherwise have been required to 

8 be in effect, 

9 (2) the plan is operated during the period de10 scribed in paragraph (1) as if the amendment were 

11 in effect, and 

12 (3) the plan meets such requirements as the 

13 Secretary of the Treasury may prescribe to ensure 

14 that the Secretary, the Secretary of Labor, employ15 ers maintaining the plan, and participants and bene16 ficiaries of the plan are adequately notified of the 

17 terms of the plan actually in effect during a plan 

18 year. 

19 (c) ELIGIBLE SMALL PLAN.—For purposes of this 

20 section— 

21 (1) IN GENERAL.—The term ‘‘eligible small 

22 plan’’ means a plan which, as of the beginning of a 

23 remedial amendment or similar period described in 

24 subsection (a), had 100 or fewer participants. For 

25 purposes of this paragraph, all defined benefit plans 


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1 which are single-employer plans and are maintained 

2 by the same employer (or any member of such em3 ployer’s controlled group) shall be treated as 1 plan, 

4 but only participants with respect to such employer 

5 or member shall be taken into account. 

6 (2) APPLICATION OF CERTAIN RULES IN DE7 TERMINATION OF PLAN SIZE.—For purposes of this 

8 subsection— 

9 (A) PLANS NOT IN EXISTENCE IN PRE10 CEDING YEAR.—In the case of the first plan 

11 year of any plan, subparagraph (B) shall apply 

12 to such plan by taking into account the number 

13 of participants that the plan is reasonably ex14 pected to have on days during such first plan 

15 year. 

16 (B) PREDECESSORS.—Any reference in 

17 paragraph (1) to an employer shall include a 

18 reference to any predecessor of such employer. 

19 (d) EFFECTIVE DATE.—This section shall apply to 

20 amendments required to be adopted for plan years begin21 ning after December 31, 2006. 

Æ 


ccoleman on PROD1PC71 with BILLS