I
105TH CONGRESS
2D SESSION
H. R. 3870
To amend the Internal Revenue Code of 1986 to provide additional retirement
savings opportunities for small employers, including self-employed individuals.
IN THE HOUSE OF REPRESENTATIVES
MAY 14, 1998
Mr. BLUNT (for himself, Mr. BENTSEN, Mr. HULSHOF, Mr. MORAN of Vir-
ginia, Mr. MCCRERY, Mr. YOUNG of Alaska, Mr. BRADY, Mr. CRAPO, Mr.
DEAL of Georgia, Mrs. EMERSON, Mr. HILL, Mr. HUTCHINSON, Mr.
LATOURETTE, Mr. LOBIONDO, Ms. MCCARTHY
of Missouri, Mr.
MALONEY of Connecticut, Mr. MORAN of Kansas, Mrs. MYRICK, Mr.
TALENT, Mr. PASCRELL, Mr. PICKERING, Mr. SCHUMER, and Mr. TAY-
LOR of North Carolina) introduced the following bill; which was referred
to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to provide
additional retirement savings opportunities for small em-
ployers, including self-employed individuals.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. REFERENCE.
Except as otherwise expressly provided, whenever in
this Act an amendment or repeal is expressed in terms
of an amendment to, or repeal of, a section or other provi-
sion, the reference shall be considered to be made to a
section or other provision of the Internal Revenue Code
of 1986.
SEC. 2. QUALIFIED SMALL EMPLOYER PLAN.
(a) IN GENERAL.—Section 401 is amended by redes-
ignating subsection (o) as subsection (p) and by inserting
after subsection (n) the following new subsection:
‘‘(o) QUALIFIED SMALL EMPLOYER PLAN.—
‘‘(1) IN GENERAL.—A trust created or orga-
nized in the United States and forming part of a
small employer plan of a small employer for the ex-
clusive benefit of its employees or their beneficiaries
constitutes a qualified trust under subsection (a) if
such plan meets the requirements of paragraph (2).
‘‘(2) REQUIREMENTS.—A plan meets the re-
quirements of this paragraph if—
‘‘(A) such plan is the only qualified retire-
ment plan of a small employer,
‘‘(B) the plan year for such plan is the cal-
endar year,
‘‘(C) as of the 1st day of the plan year,
such plan covers all eligible employees of the
employer,
‘‘(D) such plan meets the contribution re-
quirements of paragraph (4),
‘‘(E) such plan meets the vesting require-
ments of paragraph (5),
‘‘(F) such plan meets the funding require-
ments of section 412, if applicable, and
‘‘(G) such plan meets the other require-
ments specified in paragraph (6).
‘‘(3) ELIGIBLE
EMPLOYEE.—For purposes of
paragraph (2)(C), the term ‘eligible employee’ means
an individual who—
‘‘(A) has attained age 21, and
‘‘(B) has completed not less than 1,000
hours of service for the employer during the cal-
endar year preceding the plan year.
‘‘(4) CONTRIBUTIONS.—A plan meets the re-
quirements of this paragraph if—
‘‘(A) employer contributions to the plan—
‘‘(i) are not less than 3 percent, and
do not exceed 10 percent, of compensation
of all participants in the plan, and
‘‘(ii) are allocated to all participants
in the plan on a uniform basis without re-
gard to subsection (l), and
‘‘(B) in the case of discretionary employer
contributions—
‘‘(i) such contributions made to the
plan do not exceed 15 percent of com-
pensation and are allocated to all partici-
pants—
‘‘(I) as a level percentage of com-
pensation, or
‘‘(II) under a formula that meets
the requirements of subsection (l)(2)
(relating to permitted disparity), or
‘‘(ii) are made to the same plan under
an arrangement that meets the require-
ments of subsection (k), in which case the
minimum 3 percent contribution referred
to in subparagraph (A)(i) shall be applied
against the nonelective contributions of
subsection (k)(12)(C).
Nothing in subparagraph (B)(ii) shall be construed
to exempt such plan from any other requirement of
subsection (k)(12).
‘‘(5) VESTING.—
‘‘(A) IN GENERAL.—A plan satisfies the
requirements of this paragraph if it satisfies the
requirements of either of the following clauses:
‘‘(i) 3-YEAR VESTING.—A plan satis-
fies the requirements of this clause if an
employee who has completed at least 3
years of service with the employer or em-
ployers maintaining the plan has a non-
forfeitable right to 100 percent of his ac-
crued benefit derived from employer con-
tributions.
‘‘(ii) 6-YEAR
GRADED
VESTING.—A
plan satisfies the requirements of this
clause if an employee has a nonforfeitable
right to a percentage of his accrued benefit
derived from employer contributions deter-
mined under the following table:
The nonforfeitable
Years of service
percentage is:
2 ............................................................................
3 ............................................................................
4 ............................................................................
5 ............................................................................
6 or more ..............................................................
100.
‘‘(B) CERTAIN
RULES
MADE
APPLICA-
BLE.—Except to the extent inconsistent with
the provisions of this paragraph, the rules of
section 411 shall apply for purposes of this sub-
section.
‘‘(C) YEAR OF SERVICE.—For purposes of
subparagraph (A), years of service shall be de-
termined under the last sentence of section
410(a)(3)(A).
‘‘(6) OTHER REQUIREMENTS.—
‘‘(A) ARRANGEMENT MAY BE ONLY PLAN
OF EMPLOYER.—
‘‘(i) IN
GENERAL.—An arrangement
shall not be treated as a qualified small
employer plan for any year if the employer
(or any predecessor employer) maintained
a qualified plan with respect to which con-
tributions were made, or benefits were ac-
crued, for service in any year in the period
beginning with the year such arrangement
became effective and ending with the year
for which the determination is being made.
If only individuals other than employees
described in subparagraph (A) or (B) of
section 410(b)(3) are eligible to participate
in such arrangement, then the preceding
sentence shall be applied without regard to
any qualified plan in which only employees
so described are eligible to participate.
‘‘(ii) QUALIFIED PLAN.—For purposes
of this subparagraph, the term ‘qualified
plan’ means a plan, contract, pension, or
trust described in subparagraph (A) or (B)
of section 219(g)(5).
‘‘(iii) GRACE PERIOD.—In the case of
an employer who establishes and maintains
a plan under this subsection for 1 or more
years and who fails to meet any require-
ment of this subsection for any subsequent
year due to any acquisition, disposition, or
similar transaction involving another such
employer, rules similar to the rules of sec-
tion 410(b)(6)(C) shall apply for purposes
of this subsection.
‘‘(iv) RULE
OF
CONSTRUCTION.—
Clauses (i), (ii), and (iii) shall not be con-
strued to prevent a rollover contribution
that meets the requirements of section
402(c) or to prevent the adoption of the
qualified small employer plan as a succes-
sor plan.
‘‘(B) PLAN MAY NOT BE ESOP.—A small
employer plan does not meet the requirements
of paragraph (1) if such plan is—
‘‘(i) a tax credit employee stock own-
ership plan (as defined in section 409(a)),
or
‘‘(ii) an employee stock ownership
plan (as defined in section 4975(e)(7)).
‘‘(C) OTHER APPLICABLE PROVISIONS.—A
plan shall not be treated as a qualified small
employer plan unless the plan meets the re-
quirements of—
‘‘(i) paragraphs (1), (2), (9), (11),
(12), (13), (14), (15), (16), (17), (19),
(20), (22), (23), (27), (30), and (31) of
subsection (a), and
‘‘(ii) subsections (b), (c), and (d).
‘‘(7) TOP-HEAVY RULES INAPPLICABLE.—Sec-
tion 416 shall not apply to a trust that meets the
requirements of this subsection.
‘‘(8) COMPENSATION DEFINED.—For purposes
of this subsection, the term ‘compensation’ has the
meaning 
given 
such 
term 
by 
section
404(a)(3)(A)(v).’’.
(b) DEFINITION OF SMALL EMPLOYER.—
(1) IN
GENERAL.—Section 414 (relating to
definitions and special rules) is amended by adding
at the end the following new subsection:
‘‘(v) SMALL EMPLOYER.—For purposes of this part,
the term ‘small employer’ means an employer (including
a professional service organization) that, on the 1st day
of the plan year, has 100 or fewer employees.’’.
(2) CONFORMING AMENDMENTS.—
(A) Subsections (b) and (c) of section 414
are each amended by inserting ‘‘subsection (v)
and’’ after ‘‘For purposes of’’.
(B) Paragraph (3) of section 414(n) is
amended by striking ‘‘and’’ at the end of sub-
paragraph (B), by striking the period at the
end of subparagraph (C) and inserting ‘‘, and’’,
and by adding at the end the following new sub-
paragraph:
‘‘(D) subsection (v).’’.
(c) DEDUCTION
FOR
CONTRIBUTIONS
OF
EM-
PLOYER.—Clause (i) of section 404(a)(3)(A) is amended
by striking ‘‘or’’ at the end of subclause (I), by striking
the period at the end of subclause (II) and inserting ‘‘,
or’’, and by adding at the end the following new subclause:
‘‘(III) the amount such employer is al-
lowed to contribute to such trust under
section 401(o) for such year, but not more
than 25 percent of aggregate compensa-
tion.’’.
(d) SINGLE ANNUAL ENTRY DATE.—
(1) DEFINITION OF YEAR OF SERVICE.—Sub-
paragraph (A) of section 410(a)(3) of such Code (re-
lating to general rule for definition of year of serv-
ice) is amended by adding at the end the following:
‘‘In the case of service for an employer who has in
effect a qualified small employer plan under section
401(o), computation of any 12-month period shall be
made with reference to the first day of the calendar
year in which employment of the employee com-
menced.’’.
(2) TIME OF PARTICIPATION.—Paragraph (4)
of section 410(a) (relating to time of participation)
is amended by adding at the end the following: ‘‘In
the case of a qualified small employer plan under
section 401(o), the preceding sentence shall be ap-
plied without regard to subparagraph (B).’’.
(e) COMPENSATION.—Subparagraph (A) of section
404(a)(3) (relating to stock bonus and profit-sharing
trusts) is amended by redesignating clause (v) as clause
(vi) and by inserting after clause (iv) the following new
clause:
‘‘(v) COMPENSATION
DEFINED.—For
purposes of this paragraph, the term ‘com-
pensation’ means a participant’s com-
pensation 
(as 
defined 
by 
section
415(c)(3))’’.
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to years beginning after December
31, 1998.
SEC. 3. CREDIT FOR EMPLOYER EXPENSES IN ESTABLISH-
ING QUALIFIED SMALL EMPLOYER RETIRE-
MENT PLANS.
(a) GENERAL RULE.—Subpart D of part IV of sub-
chapter A of chapter 1 is amended by adding at the end
the following new section:
‘‘SEC. 45D. EXPENSES IN ESTABLISHING QUALIFIED SMALL
EMPLOYER RETIREMENT PLANS.
‘‘(a) GENERAL RULE.—For purposes of section 38,
the qualified small employer retirement plan credit deter-
mined under this section for the taxable year is an amount
equal to 50 percent of the qualified retirement plan ex-
penses paid or incurred in the taxable year by an eligible
small employer.
‘‘(b) LIMITATION.—The credit allowed under sub-
section (a) shall not exceed—
‘‘(1) $2,000 for the taxable year in which the
qualified small employer retirement plan is adopted,
and
‘‘(2) $1,000 for each of the 4 years following
the year in which such plan was adopted and zero
thereafter.
‘‘(c) DEFINITIONS.—For purposes of subsection
(a)—
‘‘(1) 
QUALIFIED
RETIREMENT
PLAN
EX-
PENSE.—The term ‘qualified retirement plan ex-
pense’ means an expense—
‘‘(A) for establishing, maintaining, and ad-
ministering a qualified small employer retire-
ment plan, and
‘‘(B) for educating employees with respect
to such plan.
‘‘(2) ELIGIBLE SMALL EMPLOYER.—The term
‘eligible small employer’ means a small employer (as
defined in section 414(v)) who establishes a qualified
plan on or after January 1, 1998, and on or before
December 31, 2000.’’.
(b) CREDIT MADE PART OF GENERAL BUSINESS
CREDIT.—Subsection (b) of section 38 is amended by
striking ‘‘plus’’ at the end of paragraph (11), by striking
the period at the end of paragraph (12) and inserting ‘‘,
plus’’, and by adding at the end thereof the following new
paragraph:
‘‘(13) the qualified small employer retirement
plan credit determined under section 45D(a).’’.
(c) CREDIT ALLOWED AGAINST REGULAR AND MINI-
MUM TAX.—
(1) IN GENERAL.—Subsection (c) of section 38
(relating to limitation based on amount of tax) is
amended by redesignating paragraph (3) as para-
graph (4) and by inserting after paragraph (2) the
following new paragraph:
‘‘(3) SPECIAL
RULES
FOR
QUALIFIED
SMALL
EMPLOYER RETIREMENT PLAN CREDIT.—
‘‘(A) IN
GENERAL.—In the case of the
qualified small employer retirement plan cred-
it—
‘‘(i) this section and section 39 shall
be applied separately with respect to the
credit, and
‘‘(ii) in applying paragraph (1) to the
credit—
‘‘(I) subparagraph (A) thereof
shall not apply, and
‘‘(II) the limitation under para-
graph (1) (as modified by subclause
(I)) shall be reduced by the credit al-
lowed under subsection (a) for the
taxable year (other than the qualified
small employer retirement plan cred-
it).
‘‘(B) QUALIFIED
SMALL
EMPLOYER
RE-
TIREMENT PLAN CREDIT.—For purposes of this
subsection, the term ‘qualified small employer
retirement plan credit’ means the credit allow-
able under subsection (a) by reason of section
45D(a).’’.
(2) CONFORMING AMENDMENT.—Subclause (II)
of section 38(c)(2)(A)(ii) is amended by inserting
‘‘or the qualified small employer retirement plan
credit’’ after ‘‘employment credit’’.
(d) LIMITATION ON CARRYBACK.—Subsection (d) of
section 39 is amended by adding at the end thereof the
following new paragraph:
‘‘(7) NO CARRYBACK OF QUALIFIED SMALL EM-
PLOYER RETIREMENT PLAN CREDIT BEFORE EFFEC-
TIVE
DATE.—No portion of the unused business
credit for any taxable year which is attributable to
the credit determined under section 45D may be
carried back to any taxable year ending before the
date of the enactment of section 45D.’’.
(e) DEDUCTION FOR CERTAIN UNUSED BUSINESS
CREDITS.—Subsection (c) of section 196 is amended by
striking ‘‘and’’ at the end of paragraph (6), by striking
the period at the end of paragraph (7) and inserting ‘‘,
and’’, and by adding after paragraph (7) the following new
paragraph:
‘‘(8) the qualified small employer retirement
plan credit determined under section 45D.’’.
(f) DENIAL OF DOUBLE BENEFIT.—Section 280C is
amended by adding at the end thereof the following new
subsection:
‘‘(d) CREDIT FOR QUALIFIED SMALL EMPLOYER RE-
TIREMENT PLAN EXPENSES.—No deduction shall be al-
lowed for that portion of the expenses referred to in sec-
tion 45D(c)(1) otherwise allowable as a deduction for the
taxable year which is equal to the amount of the credit
determined for such taxable year under section 45D(a).’’.
(g) CLERICAL AMENDMENT.—The table of sections
for subpart D of part IV of subchapter A of chapter 1
is amended by adding at the end the following new item:
‘‘Sec. 45D. Expenses in establishing qualified small employer re-
tirement plans.’’.
(h) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
the date of the enactment of this Act.
SEC. 4. IMPLEMENTATION.
(a) MODEL PLAN.—Not later than 6 months after
the date of the enactment of this Act, the Secretary of
the Treasury shall issue a model small employer retire-
ment plan that meets the requirements of section 401(o)
of the Internal Revenue Code of 1986.
(b) SIMPLIFIED ANNUAL FILING REQUIREMENT FOR
OWNERS AND THEIR SPOUSES.—
(1) IN GENERAL.—The Secretary of the Treas-
ury shall modify the requirements for filing annual
returns with respect to one-participant retirement
plans to ensure that such plans with assets of
$500,000 or less as of the close of the plan year
need not file a return for that year.
(2) ONE-PARTICIPANT RETIREMENT PLAN DE-
FINED.—For purposes of this subsection, the term
‘‘one-participant retirement plan’’ means a retire-
ment plan that—
(A) on the first day of the plan year—
(i) covered only the employer (and the
employer’s spouse) and the employer
owned the entire business (whether or not
incorporated), or
(ii) covered only one or more partners
(and their spouses) in a business partner-
ship (including partners in an S or C cor-
poration),
(B) meets the minimum coverage require-
ments of section 410(b) of the Internal Revenue
Code of 1986 without being combined with any
other plan of the business that covers the em-
ployees of the business,
(C) does not provide benefits to anyone ex-
cept the employer (and the employer’s spouse)
or the partners (and their spouses),
(D) does not cover a business that is a
member of an affiliated service group, a con-
trolled group of corporations, or a group of
businesses under common control, and
(E) does not cover a business that leases
employees.
(3) OTHER DEFINITIONS.—Terms used in para-
graph (2) which are also used in section 414 of the
Internal Revenue Code of 1986 shall have the re-
spective meanings given such terms by such section.
(c) SIMPLIFIED ANNUAL FILING REQUIREMENT FOR
PLANS WITH FEWER THAN 25 EMPLOYEES.—In the case
of a retirement plan which covers less than 25 employees
on the 1st day of the plan year and meets the require-
ments described in subparagraphs (B), (D), and (E) of
subsection (b)(2), the Secretary of the Treasury shall pro-
vide for the filing of a simplified annual return that is
substantially similar to the annual return required to be
filed by a one-participant retirement plan.
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