fied in writing that the participant’s balance may be
transferred without cost or penalty to another indi-
vidual retirement plan in accordance with subsection
(d)(3).
‘‘(8) MODEL NOTICE.—The Secretary shall pro-
vide a model notice, written in a manner calculated
to be understandable to the average worker, that
employers may use to satisfy the requirement of
paragraphs (5)(D) and (7). Model notices shall be
provided in English, in Spanish, and in any other
language deemed appropriate by the Secretary.
‘‘(e) SALARY REDUCTION CONTRIBUTIONS TREATED
LIKE OTHER CONTRIBUTIONS TO INDIVIDUAL RETIRE-
MENT PLANS.—
‘‘(1) TAX TREATMENT UNAFFECTED.—The fact
that a contribution to an individual retirement plan
is made on behalf of an employee under a salary re-
duction arrangement instead of being made directly
by the employee shall not affect the deductibility or
other income tax treatment of the contribution or of
other amounts under this title.
‘‘(2) 
SALARY
REDUCTION
CONTRIBUTIONS
TAKEN INTO ACCOUNT.—Any contribution made on
behalf of an employee under a salary reduction ar-
rangement shall be taken into account in applying
the limitations on contributions to individual retire-
ment plans and the other provisions of this title ap-
plicable to individual retirement plans as if the con-
tribution had been made to the plan directly by the
employee.’’.
(b) CREDIT FOR SMALL EMPLOYERS MAINTAINING
SALARY REDUCTION ARRANGEMENTS FACILITATING EM-
PLOYEE CONTRIBUTIONS TO INDIVIDUAL RETIREMENT
PLANS.—
(1) IN GENERAL.—Subpart D of part IV of
subchapter A of chapter 1 (relating to business re-
lated credits) is amended by adding at the end the
following new section:
‘‘SEC. 45G. SMALL EMPLOYER SALARY REDUCTION COSTS.
‘‘(a) GENERAL RULE.—For purposes of section 38,
in the case of an eligible employer, the small employer sal-
ary reduction cost credit determined under this section for
any taxable year is the amount determined under sub-
section (b).
‘‘(b) AMOUNT OF CREDIT.—The amount of the credit
determined under this section for any taxable year with
respect to an eligible employer shall be—
‘‘(1) $200 for the taxable year which includes
the date that the arrangement referred to subsection
(a) becomes effective, and
‘‘(2) $50 for each subsequent taxable year dur-
ing which the arrangement is in effect.
‘‘(c) ELIGIBLE EMPLOYER.—For purposes of this
section, the term ‘eligible employer’ means, with respect
to any calendar year in which the taxable year begins, an
employer which maintains a salary reduction arrangement
meeting the requirements of section 4980G(d) and which
did not maintain a qualified plan or arrangement (within
the meaning of section 4980G(d)(2)) for the preceding 2
calendar years.’’.
(2) CREDIT ALLOWED AS PART OF GENERAL
BUSINESS CREDIT.—Section 38(b) (defining current
year business credit) is amended by striking ‘‘plus’’
at the end of paragraph (14), by striking the period
at the end of paragraph (15) and inserting ‘‘, plus’’,
and by adding at the end the following new para-
graph:
‘‘(16) in the case of an eligible employer (as de-
fined in section 45G(c)), the small employer salary
reduction cost credit determined under section
45G(a).’’.
(c) CLERICAL AMENDMENTS.—
(1) The table of sections for chapter 43 is
amended by adding at the end the following new
item:
‘‘Sec. 4980G. Requirements for employers to provide employees
access to salary reduction contributions to indi-
vidual retirement plans.’’.
(2) The table of sections for subpart D of part
IV of subchapter A of chapter 1 is amended by add-
ing at the end the following new item:
‘‘Sec. 45G. Small employer salary reduction costs.’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2002.
SEC. 4. CREDIT FOR QUALIFIED PENSION PLAN CONTRIBU-
TIONS OF SMALL EMPLOYERS.
(a) IN GENERAL.—Subpart D of part IV of sub-
chapter A of chapter 1 (relating to business related cred-
its), as amended by section 3(b)(1), is amended by adding
at the end the following new section:
‘‘SEC. 45H. SMALL EMPLOYER PENSION PLAN CONTRIBU-
TIONS.
‘‘(a) GENERAL RULE.—For purposes of section 38,
in the case of an eligible employer, the small employer pen-
sion plan contribution credit determined under this section
for any taxable year is an amount equal to 50 percent
of the amount which would (but for subsection (f)(1)) be
allowed as a deduction under section 404 for such taxable
year for qualified employer contributions made to any
qualified retirement plan on behalf of any employee who
is not a highly compensated employee.
‘‘(b) CREDIT LIMITED TO 3 YEARS.—The credit al-
lowable by this section shall be allowed only with respect
to the period of 3 taxable years beginning with the first
taxable year for which a credit is allowable with respect
to a plan under this section.
‘‘(c) QUALIFIED EMPLOYER CONTRIBUTION.—For
purposes of this section—
‘‘(1) DEFINED CONTRIBUTION PLANS.—In the
case of a defined contribution plan, the term ‘quali-
fied employer contribution’ means the amount of
nonelective and matching contributions to the plan
made by the employer on behalf of any employee
who is not a highly compensated employee to the ex-
tent such amount does not exceed 3 percent of such
employee’s compensation from the employer for the
year.
‘‘(2) DEFINED BENEFIT PLANS.—In the case of
a defined benefit plan, the term ‘qualified employer
contribution’ means the amount of employer con-
tributions to the plan made on behalf of any em-
ployee who is not a highly compensated employee to
the extent that the accrued benefit of such employee
derived from employer contributions for the year
does not exceed the equivalent (as determined under
regulations prescribed by the Secretary and without
regard to contributions and benefits under the Social
Security Act) of 3 percent of such employee’s com-
pensation from the employer for the year.
‘‘(d) QUALIFIED RETIREMENT PLAN.—
‘‘(1) IN GENERAL.—The term ‘qualified retire-
ment plan’ means any plan described in section
401(a) which includes a trust exempt from tax
under section 501(a) if the plan meets—
‘‘(A) the contribution requirements of
paragraph (2),
‘‘(B) the vesting requirements of para-
graph (3), and
‘‘(C) the distribution requirements of para-
graph (4).
‘‘(2) CONTRIBUTION REQUIREMENTS.—
‘‘(A) IN GENERAL.—The requirements of
this paragraph are met if, under the plan—
‘‘(i) the employer is required to make
nonelective contributions of at least 1 per-
cent of compensation (or the equivalent
thereof in the case of a defined benefit
plan) for each employee who is not a high-
ly compensated employee who is eligible to
participate in the plan, and
‘‘(ii) allocations of nonelective em-
ployer contributions, in the case of a de-
fined contribution plan, are either in equal
dollar amounts for all employees covered
by the plan or bear a uniform relationship
to the total compensation, or the basic or
regular rate of compensation, of the em-
ployees covered by the plan (and an equiv-
alent requirement is met with respect to a
defined benefit plan).
‘‘(B) COMPENSATION
LIMITATION.—The
compensation taken into account under sub-
paragraph (A) for any year shall not exceed the
limitation in effect for such year under section
401(a)(17).
‘‘(3) VESTING
REQUIREMENTS.—The require-
ments of this paragraph are met if the plan satisfies
the requirements of either of the following subpara-
graphs:
‘‘(A) 3-YEAR
VESTING.—A plan satisfies
the requirements of this subparagraph if an em-
ployee who has completed at least 3 years of
service has a nonforfeitable right to 100 percent
of the employee’s accrued benefit derived from
employer contributions.
‘‘(B) 5-YEAR
GRADED
VESTING.—A plan
satisfies the requirements of this subparagraph
if an employee has a nonforfeitable right to a
percentage of the employee’s accrued benefit de-
rived from employer contributions determined
under the following table:
The nonforfeitable
‘‘Years of service:
percentage is:
1 ...............................................................................................
2 ...............................................................................................
3 ...............................................................................................
4 ...............................................................................................
5 ...............................................................................................
100.
‘‘(4) DISTRIBUTION
REQUIREMENTS.—In the
case of a profit-sharing or stock bonus plan, the re-
quirements of this paragraph are met if, under the
plan, qualified employer contributions are distribut-
able only as provided in section 401(k)(2)(B).
‘‘(e) OTHER DEFINITIONS.—For purposes of this
section—
‘‘(1) ELIGIBLE EMPLOYER.—
‘‘(A) IN GENERAL.—The term ‘eligible em-
ployer’ means, with respect to any year, an em-
ployer which has no more than 20 employees
who received at least $5,000 of compensation
from the employer for the preceding year.
‘‘(B) REQUIREMENT FOR NEW QUALIFIED
EMPLOYER
PLANS.—Such term shall not in-
clude an employer if, during the 3-taxable year
period immediately preceding the 1st taxable
year for which the credit under this section is
otherwise allowable for a qualified employer
plan of the employer, the employer or any mem-
ber of any controlled group including the em-
ployer (or any predecessor of either) established
or maintained a qualified employer plan with
respect to which contributions were made, or
benefits were accrued, for substantially the
same employees as are in the qualified employer
plan.
‘‘(2) HIGHLY COMPENSATED EMPLOYEE.—The
term ‘highly compensated employee’ has the mean-
ing given such term by section 414(q) (determined
without regard to section 414(q)(1)(B)(ii)).
‘‘(f) SPECIAL RULES.—
‘‘(1) DISALLOWANCE OF DEDUCTION.—No de-
duction shall be allowed for that portion of the quali-
fied employer contributions paid or incurred for the
taxable year which is equal to the credit determined
under subsection (a).
‘‘(2) ELECTION NOT TO CLAIM CREDIT.—This
section shall not apply to a taxpayer for any taxable
year if such taxpayer elects to have this section not
apply for such taxable year.
‘‘(3) AGGREGATION RULES.—All persons treat-
ed as a single employer under subsection (a) or (b)
of section 52, or subsection (n) or (o) of section 414,
shall be treated as one person. All eligible employer
plans shall be treated as 1 eligible employer plan.
‘‘(g) RECAPTURE OF CREDIT ON FORFEITED CON-
TRIBUTIONS.—If any accrued benefit which is forfeitable
by reason of subsection (d)(3) is forfeited, the employer’s
tax imposed by this chapter for the taxable year in which
the forfeiture occurs shall be increased by 35 percent of
the employer contributions from which such benefit is de-
rived to the extent such contributions were taken into ac-
count in determining the credit under this section.’’.
(b) CREDIT ALLOWED AS PART OF GENERAL BUSI-
NESS CREDIT.—Section 38(b) (defining current year busi-
ness credit), as amended by section 3(b)(2), is amended
by striking ‘‘plus’’ at the end of paragraph (15), by strik-
ing the period at the end of paragraph (16) and inserting
‘‘, plus’’, and by adding at the end the following new para-
graph:
‘‘(17) in the case of an eligible employer (as de-
fined in section 45H(e)), the small employer pension
plan contribution credit determined under section
45H(a).’’.
(c) CONFORMING AMENDMENTS.—
(1) Section 39(d) is amended by adding at the
end the following new paragraph:
‘‘(11) NO
CARRYBACK
OF
SMALL
EMPLOYER
PENSION PLAN CONTRIBUTION CREDIT BEFORE JAN-
UARY 1, 2003.—No portion of the unused business
credit for any taxable year which is attributable to
the small employer pension plan contribution credit
determined under section 45H may be carried back
to a taxable year beginning before January 1,
2003.’’.
(2) Subsection (c) of section 196 is amended by
striking ‘‘and’’ at the end of paragraph (9), by strik-
ing the period at the end of paragraph (10) and in-
serting ‘‘, and’’, and by adding at the end the fol-
lowing new paragraph:
‘‘(11) the small employer pension plan contribu-
tion credit determined under section 45H(a).’’.
(3) The table of sections for subpart D of part
IV of subchapter A of chapter 1, as amended by sec-
tion 3(c)(2), is amended by adding at the end the
following new item:
‘‘Sec. 45H. Small employer pension plan contributions.’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to contributions paid or incurred
in taxable years beginning after December 31, 2002.
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