683 
porations which includes such employer 
corporation, has issued a class of stock 
which is a publicly traded employer secu-
rity. 
‘‘(ii) EXCEPTION FOR CERTAIN CON-
TROLLED GROUPS WITH PUBLICLY TRAD-
ED
SECURITIES.—Clause (i) shall not 
apply to a plan if— 
‘‘(I) no employer corporation, or 
parent corporation of an employer 
corporation, has issued any publicly 
traded employer security, and 
‘‘(II) no employer corporation, or 
parent corporation of an employer 
corporation, has issued any special 
class of stock which grants particular 
rights to, or bears particular risks for, 
the holder or issuer with respect to 
any corporation described in clause (i) 
which has issued any publicly traded 
employer security. 
‘‘(iii) DEFINITIONS.—For purposes of 
this subparagraph, the term— 
‘‘(I) ‘controlled group of corpora-
tions’ has the meaning given such 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00683
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
684 
term by section 1563(a), except that 
‘50 percent’ shall be substituted for 
‘80 percent’ each place it appears, 
‘‘(II) 
‘employer 
corporation’ 
means a corporation which is an em-
ployer maintaining the plan, and 
‘‘(III) ‘parent corporation’ has 
the meaning given such term by sec-
tion 424(e). 
‘‘(G) OTHER DEFINITIONS.—For purposes 
of this paragraph— 
‘‘(i) APPLICABLE
INDIVIDUAL.—The 
term ‘applicable individual’ means— 
‘‘(I) any participant in the plan, 
and 
‘‘(II) any beneficiary who has an 
account under the plan with respect to 
which the beneficiary is entitled to ex-
ercise the rights of a participant. 
‘‘(ii) 
ELECTIVE
DEFERRAL.—The 
term ‘elective deferral’ means an employer 
contribution 
described 
in 
section 
402(g)(3)(A). 
‘‘(iii) 
EMPLOYER
SECURITY.—The 
term ‘employer security’ has the meaning 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00684
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
685 
given such term by section 407(d)(1) of 
the Employee Retirement Income Security 
Act of 1974. 
‘‘(iv) EMPLOYEE
STOCK
OWNERSHIP 
PLAN.—The term ‘employee stock owner-
ship plan’ has the meaning given such 
term by section 4975(e)(7). 
‘‘(v) PUBLICLY
TRADED
EMPLOYER 
SECURITIES.—The term ‘publicly traded 
employer securities’ means employer secu-
rities which are readily tradable on an es-
tablished securities market. 
‘‘(vi) YEAR OF SERVICE.—The term 
‘year of service’ has the meaning given 
such term by section 411(a)(5). 
‘‘(H) TRANSITION RULE FOR SECURITIES 
ATTRIBUTABLE
TO
EMPLOYER
CONTRIBU-
TIONS.— 
‘‘(i) RULES
PHASED
IN
OVER
YEARS.— 
‘‘(I) IN GENERAL.—In the case 
of the portion of an account to which 
subparagraph (C) applies and which 
consists of employer securities ac-
quired in a plan year beginning before 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00685
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
686 
January 1, 2007, subparagraph (C) 
shall only apply to the applicable per-
centage of such securities. This sub-
paragraph shall be applied separately 
with respect to each class of securi-
ties. 
‘‘(II) EXCEPTION
FOR
CERTAIN 
PARTICIPANTS
AGED
OR
OVER.— 
Subclause (I) shall not apply to an 
applicable individual who is a partici-
pant who has attained age 55 and 
completed at least 3 years of service 
before the first plan year beginning 
after December 31, 2005. 
‘‘(ii) APPLICABLE PERCENTAGE.—For 
purposes of clause (i), the applicable per-
centage shall be determined as follows: 
‘‘Plan year to which 
The applicable 
subparagraph (C) applies: 
percentage is: 
1st ......................................................................................................
2d .......................................................................................................
3d and following .................................................................................
100.’’. 
(2) CONFORMING AMENDMENTS.— 
(A) Section 401(a)(28)(B) of such Code 
(relating to additional requirements relating to 
employee stock ownership plans) is amended by 
adding at the end the following new clause: 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00686
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
687 
‘‘(v) EXCEPTION.—This subparagraph 
shall not apply to an applicable defined 
contribution plan (as defined in paragraph 
(35)(E)).’’ 
(B) Section 409(h)(7) of such Code is 
amended by inserting ‘‘or subparagraph (B) or 
(C) of section 401(a)(35)’’ before the period at 
the end. 
(C) Section 4980(c)(3)(A) of such Code is 
amended by striking ‘‘if—’’ and all that follows 
and inserting ‘‘if the requirements of subpara-
graphs (B), (C), and (D) are met.’’ 
(b) AMENDMENTS OF ERISA.— 
(1) IN GENERAL.—Section 204 of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 
1054) is amended by redesignating subsection (j) as 
subsection (k) and by inserting after subsection (i) 
the following new subsection: 
‘‘(j) DIVERSIFICATION REQUIREMENTS FOR CERTAIN 
INDIVIDUAL ACCOUNT PLANS.— 
‘‘(1) IN GENERAL.—An applicable individual ac-
count plan shall meet the diversification require-
ments of paragraphs (2), (3), and (4). 
‘‘(2) EMPLOYEE
CONTRIBUTIONS
AND
ELEC-
TIVE DEFERRALS INVESTED IN EMPLOYER SECURI-
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00687
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
688 
TIES.—In the case of the portion of an applicable in-
dividual’s account attributable to employee contribu-
tions and elective deferrals which is invested in em-
ployer securities, a plan meets the requirements of 
this paragraph if the applicable individual may elect 
to direct the plan to divest any such securities and 
to reinvest an equivalent amount in other investment 
options meeting the requirements of paragraph (4). 
‘‘(3) EMPLOYER CONTRIBUTIONS INVESTED IN 
EMPLOYER SECURITIES.—In the case of the portion 
of the account attributable to employer contributions 
other than elective deferrals which is invested in em-
ployer securities, a plan meets the requirements of 
this paragraph if each applicable individual who— 
‘‘(A) is a participant who has completed at 
least 3 years of service, or 
‘‘(B) is a beneficiary of a participant de-
scribed in subparagraph (A) or of a deceased 
participant, 
may elect to direct the plan to divest any such secu-
rities and to reinvest an equivalent amount in other 
investment options meeting the requirements of 
paragraph (4). 
‘‘(4) INVESTMENT OPTIONS.— 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00688
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
689 
‘‘(A) IN GENERAL.—The requirements of 
this paragraph are met if the plan offers not 
less than 3 investment options, other than em-
ployer securities, to which an applicable indi-
vidual may direct the proceeds from the divest-
ment of employer securities pursuant to this 
subsection, each of which is diversified and has 
materially different risk and return characteris-
tics. 
‘‘(B) TREATMENT OF CERTAIN RESTRIC-
TIONS AND CONDITIONS.— 
‘‘(i) TIME FOR MAKING INVESTMENT 
CHOICES.—A plan shall not be treated as 
failing to meet the requirements of this 
paragraph merely because the plan limits 
the time for divestment and reinvestment 
to periodic, reasonable opportunities occur-
ring no less frequently than quarterly. 
‘‘(ii) CERTAIN
RESTRICTIONS
AND 
CONDITIONS
NOT
ALLOWED.—Except as 
provided in regulations, a plan shall not 
meet the requirements of this paragraph if 
the plan imposes restrictions or conditions 
with respect to the investment of employer 
securities which are not imposed on the in-
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00689
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
690 
vestment of other assets of the plan. This 
subparagraph shall not apply to any re-
strictions or conditions imposed by reason 
of the application of securities laws. 
‘‘(5) 
APPLICABLE
INDIVIDUAL
ACCOUNT 
PLAN.—For purposes of this subsection— 
‘‘(A) IN GENERAL.—The term ‘applicable 
individual account plan’ means any individual 
account plan (as defined in section 3(34)) which 
holds any publicly traded employer securities. 
‘‘(B) EXCEPTION FOR CERTAIN ESOPS.— 
Such term does not include an employee stock 
ownership plan if— 
‘‘(i) there are no contributions to such 
plan (or earnings thereunder) which are 
held within such plan and are subject to 
subsection (k) or (m) of section 401 of the 
Internal Revenue Code of 1986, and 
‘‘(ii) such plan is a separate plan (for 
purposes of section 414(l) of such Code) 
with respect to any other defined benefit 
plan or individual account plan maintained 
by the same employer or employers. 
‘‘(C) EXCEPTION
FOR
ONE
PARTICIPANT 
PLANS.—Such term shall not include a one-par-
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00690
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
691 
ticipant retirement plan (as defined in section 
101(i)(8)(B)). 
‘‘(D) CERTAIN PLANS TREATED AS HOLD-
ING
PUBLICLY
TRADED
EMPLOYER
SECURI-
TIES.— 
‘‘(i) IN
GENERAL.—Except as pro-
vided in regulations or in clause (ii), a plan 
holding employer securities which are not 
publicly traded employer securities shall be 
treated as holding publicly traded employer 
securities if any employer corporation, or 
any member of a controlled group of cor-
porations which includes such employer 
corporation, has issued a class of stock 
which is a publicly traded employer secu-
rity. 
‘‘(ii) EXCEPTION FOR CERTAIN CON-
TROLLED GROUPS WITH PUBLICLY TRAD-
ED
SECURITIES.—Clause (i) shall not 
apply to a plan if— 
‘‘(I) no employer corporation, or 
parent corporation of an employer 
corporation, has issued any publicly 
traded employer security, and 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00691
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
692 
‘‘(II) no employer corporation, or 
parent corporation of an employer 
corporation, has issued any special 
class of stock which grants particular 
rights to, or bears particular risks for, 
the holder or issuer with respect to 
any corporation described in clause (i) 
which has issued any publicly traded 
employer security. 
‘‘(iii) DEFINITIONS.—For purposes of 
this subparagraph, the term— 
‘‘(I) ‘controlled group of corpora-
tions’ has the meaning given such 
term by section 1563(a) of the Inter-
nal Revenue Code of 1986, except 
that ‘50 percent’ shall be substituted 
for ‘80 percent’ each place it appears, 
‘‘(II) 
‘employer 
corporation’ 
means a corporation which is an em-
ployer maintaining the plan, and 
‘‘(III) ‘parent corporation’ has 
the meaning given such term by sec-
tion 424(e) of such Code. 
‘‘(6) OTHER
DEFINITIONS.—For purposes of 
this paragraph— 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00692
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
693 
‘‘(A) APPLICABLE INDIVIDUAL.—The term 
‘applicable individual’ means— 
‘‘(i) any participant in the plan, and 
‘‘(ii) any beneficiary who has an ac-
count under the plan with respect to which 
the beneficiary is entitled to exercise the 
rights of a participant. 
‘‘(B) ELECTIVE
DEFERRAL.—The term 
‘elective deferral’ means an employer contribu-
tion described in section 402(g)(3)(A) of the In-
ternal Revenue Code of 1986. 
‘‘(C) EMPLOYER
SECURITY.—The term 
‘employer security’ has the meaning given such 
term by section 407(d)(1). 
‘‘(D) 
EMPLOYEE
STOCK
OWNERSHIP 
PLAN.—The term ‘employee stock ownership 
plan’ has the meaning given such term by sec-
tion 4975(e)(7) of such Code. 
‘‘(E) PUBLICLY TRADED EMPLOYER SECU-
RITIES.—The term ‘publicly traded employer 
securities’ means employer securities which are 
readily tradable on an established securities 
market. 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00693
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
694 
‘‘(F) YEAR OF SERVICE.—The term ‘year 
of service’ has the meaning given such term by 
section 203(b)(2). 
‘‘(7) TRANSITION RULE FOR SECURITIES AT-
TRIBUTABLE TO EMPLOYER CONTRIBUTIONS.— 
‘‘(A) RULES PHASED IN OVER 3 YEARS.— 
‘‘(i) IN GENERAL.—In the case of the 
portion of an account to which paragraph 
(3) applies and which consists of employer 
securities acquired in a plan year begin-
ning before January 1, 2007, paragraph 
(3) shall only apply to the applicable per-
centage of such securities. This subpara-
graph shall be applied separately with re-
spect to each class of securities. 
‘‘(ii) EXCEPTION FOR CERTAIN PAR-
TICIPANTS AGED 55 OR OVER.—Clause (i) 
shall not apply to an applicable individual 
who is a participant who has attained age 
55 and completed at least 3 years of serv-
ice before the first plan year beginning 
after December 31, 2005. 
‘‘(B) 
APPLICABLE
PERCENTAGE.—For 
purposes of subparagraph (A), the applicable 
percentage shall be determined as follows: 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00694
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
695 
‘‘Plan year to which 
The applicable 
paragraph (3) applies: 
percentage is: 
1st ......................................................................................................
2d .......................................................................................................
3d .......................................................................................................
100.’’. 
(2) 
CONFORMING
AMENDMENT.—Section 
407(b)(3) of such Act (29 U.S.C. 1107(b)(3)) is 
amended by adding at the end the following: 
‘‘(D) For diversification requirements for quali-
fying employer securities held in certain individual 
account plans, see section 204(j).’’. 
(c) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in para-
graphs (2) and (3), the amendments made by this 
section shall apply to plan years beginning after De-
cember 31, 2006. 
(2) SPECIAL
RULE
FOR
COLLECTIVELY
BAR-
GAINED AGREEMENTS.—In the case of a plan main-
tained pursuant to 1 or more collective bargaining 
agreements between employee representatives and 1 
or more employers ratified on or before the date of 
the enactment of this Act, paragraph (1) shall be 
applied to benefits pursuant to, and individuals cov-
ered by, any such agreement by substituting for 
‘‘December 31, 2006’’ the earlier of— 
(A) the later of— 
(i) December 31, 2007, or 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00695
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
696 
(ii) the date on which the last of such 
collective bargaining agreements termi-
nates (determined without regard to any 
extension thereof after such date of enact-
ment), or 
(B) December 31, 2008. 
(3) SPECIAL RULE FOR CERTAIN EMPLOYER SE-
CURITIES HELD IN AN ESOP.— 
(A) IN GENERAL.—In the case of employer 
securities to which this paragraph applies, the 
amendments made by this section shall apply to 
plan years beginning after the earlier of— 
(i) December 31, 2007, or 
(ii) the first date on which the fair 
market value of such securities exceeds the 
guaranteed minimum value described in 
subparagraph (B)(ii). 
(B) APPLICABLE SECURITIES.—This para-
graph shall apply to employer securities which 
are attributable to employer contributions other 
than elective deferrals, and which, on Sep-
tember 17, 2003— 
(i) consist of preferred stock, and 
(ii) are within an employee stock own-
ership 
plan 
(as 
defined 
in 
section 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00696
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
697 
4975(e)(7) of the Internal Revenue Code 
of 1986), the terms of which provide that 
the value of the securities cannot be less 
than the guaranteed minimum value speci-
fied by the plan on such date. 
(C) COORDINATION
WITH
TRANSITION 
RULE.—In applying section 401(a)(35)(H) of 
the Internal Revenue Code of 1986 and section 
204(j)(7) of the Employee Retirement Income 
Security Act of 1974 (as added by this section) 
to employer securities to which this paragraph 
applies, the applicable percentage shall be de-
termined without regard to this paragraph. 
SEC. 902. INCREASING PARTICIPATION THROUGH AUTO-
MATIC CONTRIBUTION ARRANGEMENTS. 
(a) IN GENERAL.—Section 401(k) of the Internal 
Revenue Code of 1986 (relating to cash or deferred ar-
rangement) is amended by adding at the end the following 
new paragraph: 
‘‘(13) ALTERNATIVE METHOD FOR AUTOMATIC 
CONTRIBUTION
ARRANGEMENTS
TO
MEET
NON-
DISCRIMINATION REQUIREMENTS.— 
‘‘(A) IN GENERAL.—A qualified automatic 
contribution arrangement shall be treated as 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00697
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
698 
meeting 
the 
requirements 
of 
paragraph 
(3)(A)(ii). 
‘‘(B) QUALIFIED
AUTOMATIC
CONTRIBU-
TION
ARRANGEMENT.—For purposes of this 
paragraph, the term ‘qualified automatic con-
tribution arrangement’ means any cash or de-
ferred arrangement which meets the require-
ments of subparagraphs (C) through (E). 
‘‘(C) AUTOMATIC DEFERRAL.— 
‘‘(i) IN GENERAL.—The requirements 
of this subparagraph are met if, under the 
arrangement, each employee eligible to 
participate in the arrangement is treated 
as having elected to have the employer 
make elective contributions in an amount 
equal to a qualified percentage of com-
pensation. 
‘‘(ii) ELECTION
OUT.—The election 
treated as having been made under clause 
(i) shall cease to apply with respect to any 
employee if such employee makes an af-
firmative election— 
‘‘(I) to not have such contribu-
tions made, or 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00698
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
699 
‘‘(II) to make elective contribu-
tions at a level specified in such af-
firmative election. 
‘‘(iii) QUALIFIED PERCENTAGE.—For 
purposes of this subparagraph, the term 
‘qualified percentage’ means, with respect 
to any employee, any percentage deter-
mined under the arrangement if such per-
centage is applied uniformly, does not ex-
ceed 10 percent, and is at least— 
‘‘(I) 3 percent during the period 
ending on the last day of the first 
plan year which begins after the date 
on which the first elective contribution 
described in clause (i) is made with 
respect to such employee, 
‘‘(II) 4 percent during the first 
plan year following the plan year de-
scribed in subclause (I), 
‘‘(III) 5 percent during the sec-
ond plan year following the plan year 
described in subclause (I), and 
‘‘(IV) 6 percent during any sub-
sequent plan year. 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00699
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
700 
‘‘(iv) AUTOMATIC
DEFERRAL
FOR 
CURRENT
EMPLOYEES
NOT
REQUIRED.— 
Clause (i) may be applied without taking 
into account any employee who— 
‘‘(I) was eligible to participate in 
the arrangement (or a predecessor ar-
rangement) immediately before the 
date on which such arrangement be-
comes a qualified automatic contribu-
tion arrangement (determined after 
application of this clause), and 
‘‘(II) had an election in effect on 
such date either to participate in the 
arrangement or to not participate in 
the arrangement. 
‘‘(D) MATCHING
OR
NONELECTIVE
CON-
TRIBUTIONS.— 
‘‘(i) IN GENERAL.—The requirements 
of this subparagraph are met if, under the 
arrangement, the employer— 
‘‘(I) makes matching contribu-
tions on behalf of each employee who 
is not a highly compensated employee 
in an amount equal to the sum of 100 
percent of the elective contributions of 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00700
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
701 
the employee to the extent that such 
contributions do not exceed 1 percent 
of compensation plus 50 percent of so 
much of such compensation as exceeds 
1 percent but does not exceed 6 per-
cent of compensation, or 
‘‘(II) is required, without regard 
to whether the employee makes an 
elective contribution or employee con-
tribution, to make a contribution to a 
defined contribution plan on behalf of 
each employee who is not a highly 
compensated employee and who is eli-
gible to participate in the arrange-
ment in an amount equal to at least 
3 percent of the employee’s compensa-
tion. 
‘‘(ii) APPLICATION
OF
RULES
FOR 
MATCHING CONTRIBUTIONS.—The rules of 
clauses (ii) and (iii) of paragraph (12)(B) 
shall apply for purposes of clause (i)(I). 
‘‘(iii) WITHDRAWAL AND VESTING RE-
STRICTIONS.—An arrangement shall not be 
treated as meeting the requirements of 
clause (i) unless, with respect to employer 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00701
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
702 
contributions (including matching con-
tributions) taken into account in deter-
mining whether the requirements of clause 
(i) are met— 
‘‘(I) any employee who has com-
pleted at least 2 years of service 
(within 
the 
meaning 
of 
section 
411(a)) has a nonforfeitable right to 
100 percent of the employee’s accrued 
benefit derived from such employer 
contributions, and 
‘‘(II) the requirements of sub-
paragraph (B) of paragraph (2) are 
met with respect to all such employer 
contributions. 
‘‘(iv) 
APPLICATION
OF
CERTAIN 
OTHER
RULES.—The rules of subpara-
graphs (E)(ii) and (F) of paragraph (12) 
shall apply for purposes of subclauses (I) 
and (II) of clause (i). 
‘‘(E) NOTICE REQUIREMENTS.— 
‘‘(i) IN GENERAL.—The requirements 
of this subparagraph are met if, within a 
reasonable period before each plan year, 
each employee eligible to participate in the 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00702
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
703 
arrangement for such year receives written 
notice of the employee’s rights and obliga-
tions under the arrangement which— 
‘‘(I) is sufficiently accurate and 
comprehensive to apprise the employee 
of such rights and obligations, and 
‘‘(II) is written in a manner cal-
culated to be understood by the aver-
age employee to whom the arrange-
ment applies. 
‘‘(ii) TIMING AND CONTENT REQUIRE-
MENTS.—A notice shall not be treated as 
meeting the requirements of clause (i) with 
respect to an employee unless— 
‘‘(I) the notice explains the em-
ployee’s right under the arrangement 
to elect not to have elective contribu-
tions made on the employee’s behalf 
(or to elect to have such contributions 
made at a different percentage), 
‘‘(II) in the case of an arrange-
ment under which the employee may 
elect among 2 or more investment op-
tions, the notice explains how con-
tributions made under the arrange-
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00703
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
704 
ment will be invested in the absence of 
any investment election by the em-
ployee, and 
‘‘(III) the employee has a reason-
able period of time after receipt of the 
notice described in subclauses (I) and 
(II) and before the first elective con-
tribution is made to make either such 
election.’’. 
(b) MATCHING CONTRIBUTIONS.—Section 401(m) of 
such Code (relating to nondiscrimination test for matching 
contributions and employee contributions) is amended by 
redesignating paragraph (12) as paragraph (13) and by 
inserting after paragraph (11) the following new para-
graph: 
‘‘(12) ALTERNATIVE METHOD FOR AUTOMATIC 
CONTRIBUTION
ARRANGEMENTS.—A defined con-
tribution plan shall be treated as meeting the re-
quirements of paragraph (2) with respect to match-
ing contributions if the plan— 
‘‘(A) is a qualified automatic contribution 
arrangement (as defined in subsection (k)(13)), 
and 
‘‘(B) meets the requirements of paragraph 
(11)(B).’’. 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00704
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
705 
(c) EXCLUSION FROM DEFINITION OF TOP-HEAVY 
PLANS.— 
(1) ELECTIVE
CONTRIBUTION
RULE.—Clause 
(i) of section 416(g)(4)(H) of such Code is amended 
by 
inserting 
‘‘or 
401(k)(13)’’ 
after 
‘‘section 
401(k)(12)’’. 
(2) MATCHING
CONTRIBUTION
RULE.—Clause 
(ii) of section 416(g)(4)(H) of such Code is amended 
by 
inserting 
‘‘or 
401(m)(12)’’ 
after 
‘‘section 
401(m)(11)’’. 
(d) TREATMENT OF WITHDRAWALS OF CONTRIBU-
TIONS DURING FIRST 90 DAYS.— 
(1) IN GENERAL.—Section 414 of the Internal 
Revenue Code of 1986 is amended by adding at the 
end the following new subsection: 
‘‘(w) SPECIAL RULES FOR CERTAIN WITHDRAWALS 
FROM ELIGIBLE AUTOMATIC CONTRIBUTION ARRANGE-
MENTS.— 
‘‘(1) IN
GENERAL.—If an eligible automatic 
contribution arrangement allows an employee to 
elect to make permissible withdrawals— 
‘‘(A) the amount of any such withdrawal 
shall be includible in the gross income of the 
employee for the taxable year of the employee 
in which the distribution is made, 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00705
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
706 
‘‘(B) no tax shall be imposed under section 
72(t) with respect to the distribution, and 
‘‘(C) the arrangement shall not be treated 
as violating any restriction on distributions 
under this title solely by reason of allowing the 
withdrawal. 
In the case of any distribution to an employee by 
reason of an election under this paragraph, employer 
matching contributions shall be forfeited or subject 
to such other treatment as the Secretary may pre-
scribe. 
‘‘(2) PERMISSIBLE
WITHDRAWAL.—For pur-
poses of this subsection— 
‘‘(A) IN GENERAL.—The term ‘permissible 
withdrawal’ means any withdrawal from an eli-
gible automatic contribution arrangement meet-
ing the requirements of this paragraph which— 
‘‘(i) is made pursuant to an election 
by an employee, and 
‘‘(ii) consists of elective contributions 
described in paragraph (3)(B) (and earn-
ings attributable thereto). 
‘‘(B) TIME FOR MAKING ELECTION.—Sub-
paragraph (A) shall not apply to an election by 
an employee unless the election is made no later 
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00706
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS
707 
than the date which is 90 days after the date 
of the first elective contribution with respect to 
the employee under the arrangement. 
‘‘(C) AMOUNT
OF
DISTRIBUTION.—Sub-
paragraph (A) shall not apply to any election by 
an employee unless the amount of any distribu-
tion by reason of the election is equal to the 
amount of elective contributions made with re-
spect to the first payroll period to which the eli-
gible automatic contribution arrangement ap-
plies to the employee and any succeeding pay-
roll period beginning before the effective date of 
the election (and earnings attributable thereto). 
‘‘(3) ELIGIBLE AUTOMATIC CONTRIBUTION AR-
RANGEMENT.—For purposes of this subsection, the 
term ‘eligible automatic contribution arrangement’ 
means an arrangement under an applicable employer 
plan— 
‘‘(A) under which a participant may elect 
to have the employer make payments as con-
tributions under the plan on behalf of the par-
ticipant, or to the participant directly in cash, 
‘‘(B) under which the participant is treated 
as having elected to have the employer make 
such contributions in an amount equal to a uni-
VerDate Aug 31 2005 
00:22 Aug 01, 2006
Jkt 049200
PO 00000
Frm 00707
Fmt 6652
Sfmt 6201
E:\BILLS\H4.PCS
H4
ccoleman on PROD1PC71 with BILLS