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-
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).’’.
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,
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
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-
708
form percentage of compensation provided 
under the plan until the participant specifically 
elects not to have such contributions made (or 
specifically elects to have such contributions 
made at a different percentage), 
‘‘(C) under which, in the absence of an in-
vestment election by the participant, contribu-
tions described in subparagraph (B) are in-
vested in accordance with regulations prescribed 
by the Secretary of Labor under section 
404(c)(5) of the Employee Retirement Income 
Security Act of 1974, and 
‘‘(D) which meets the requirements of 
paragraph (4). 
‘‘(4) NOTICE REQUIREMENTS.—
‘‘(A) IN GENERAL.—The administrator of 
a plan containing an arrangement described in 
paragraph (3) shall, within a reasonable period 
before each plan year, give to each employee to 
whom an arrangement described in paragraph 
(3) applies for such plan year notice of the em-
ployee’s rights and obligations under the ar-
rangement which—
709
‘‘(i) is sufficiently accurate and com-
prehensive to apprise the employee of such 
rights and obligations, and 
‘‘(ii) is written in a manner calculated 
to be understood by the average employee 
to whom the arrangement applies. 
‘‘(B) TIME AND FORM OF NOTICE.—A no-
tice shall not be treated as meeting the require-
ments of subparagraph (A) with respect to an 
employee unless—
‘‘(i) the notice includes an explanation 
of the employee’s right under the arrange-
ment 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) the employee has a reasonable 
period of time after receipt of the notice 
described in clause (i) and before the first 
elective contribution is made to make such 
election, and 
‘‘(iii) the notice explains how contribu-
tions made under the arrangement will be 
invested in the absence of any investment 
election by the employee.
710
‘‘(5) APPLICABLE EMPLOYER PLAN.—For pur-
poses of this subsection, the term ‘applicable em-
ployer plan’ means—
‘‘(A) an employees’ trust described in sec-
tion 401(a) which is exempt from tax under 
section 501(a), 
‘‘(B) a plan under which amounts are con-
tributed by an individual’s employer for an an-
nuity contract described in section 403(b), and 
‘‘(C) an eligible deferred compensation 
plan described in section 457(b) which is main-
tained by an eligible employer described in sec-
tion 457(e)(1)(A). 
‘‘(6) SPECIAL RULE.—A withdrawal described 
in paragraph (1) (subject to the limitation of para-
graph (2)(C)) shall not be taken into account for 
purposes of section 401(k)(3).’’. 
(2) VESTING CONFORMING AMENDMENTS.—
(A) Section 411(a)(3)(G) of such Code is 
amended by inserting ‘‘an erroneous automatic 
contribution under section 414(w),’’ after 
‘‘402(g)(2)(A),’’. 
(B) The heading of section 411(a)(3)(G) of 
such Code is amended by inserting ‘‘OR ERRO-
711
NEOUS AUTOMATIC CONTRIBUTION’’ before 
the period. 
(C) Section 401(k)(8)(E) of such Code is 
amended by inserting ‘‘an erroneous automatic 
contribution under section 414(w),’’ after 
‘‘402(g)(2)(A),’’. 
(D) The heading of section 401(k)(8)(E) 
of such Code is amended by inserting ‘‘OR ER-
RONEOUS AUTOMATIC CONTRIBUTION’’ be-
fore the period. 
(E) Section 203(a)(3)(F) of the Employee 
Retirement Income Security Act of 1974 (29 
U.S.C. 1053(a)(3)(F)) is amended by inserting 
‘‘an erroneous automatic contribution under 
section 
414(w) 
of 
such 
Code,’’ 
after 
‘‘402(g)(2)(A) of such Code,’’. 
(e) EXCESS CONTRIBUTIONS.—
(1) EXPANSION OF CORRECTIVE DISTRIBUTION 
PERIOD FOR AUTOMATIC CONTRIBUTION ARRANGE-
MENTS.—Subsection (f) of section 4979 of the Inter-
nal Revenue Code of 1986 is amended—
(A) by inserting ‘‘(6 months in the case of 
an excess contribution or excess aggregate con-
tribution to an eligible automatic contribution 
arrangement 
(as 
defined 
in 
section
712
414(w)(3)))’’ after ‘‘21⁄2 months’’ in paragraph 
(1), and 
(B) by striking ‘‘21⁄2 MONTHS OF’’ in the 
heading and inserting ‘‘SPECIFIED
PERIOD 
AFTER’’. 
(2) YEAR
OF
INCLUSION.—Paragraph (2) of 
section 4979(f) of such Code is amended to read as 
follows: 
‘‘(2) YEAR OF INCLUSION.—Any amount dis-
tributed as provided in paragraph (1) shall be treat-
ed as earned and received by the recipient in the re-
cipient’s taxable year in which such distributions 
were made.’’. 
(3) SIMPLIFICATION
OF
ALLOCABLE
EARN-
INGS.—
(A) SECTION 4979.—Paragraph (1) of sec-
tion 4979(f) of such Code is amended by adding 
‘‘through the end of the plan year for which the 
contribution was made’’ after ‘‘thereto’’. 
(B) SECTION 401(k) AND 401(M).—
(i) Clause (i) of section 401(k)(8)(A) 
of such Code is amended by adding 
‘‘through the end of such year’’ after 
‘‘such contributions’’.