179
SEC. 1202. REPORTING SIMPLIFICATION. 
(a) SIMPLIFIED ANNUAL FILING REQUIREMENT FOR 
OWNERS AND THEIR SPOUSES.—
(1) IN GENERAL.—The Secretary of the Treas-
ury and the Secretary of Labor shall modify the re-
quirements for filing annual returns with respect to 
one-participant retirement plans to ensure that such 
plans with assets of $250,000 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
180
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. 
(4) EFFECTIVE DATE.—The provisions of this 
subsection shall apply to plan years beginning on or 
after January 1, 2003. 
(b) SIMPLIFIED ANNUAL FILING REQUIREMENT FOR 
PLANS WITH FEWER THAN 25 EMPLOYEES.—In the case 
of plan years beginning after December 31, 2004, the Sec-
retary of the Treasury and the Secretary of Labor shall 
provide for the filing of a simplified annual return for any 
retirement plan which covers less than 25 employees on 
the first day of a plan year and which meets the require-
181
ments described in subparagraphs (B), (D), and (E) of 
subsection (a)(2). 
SEC. 1203. IMPROVEMENT OF EMPLOYEE PLANS COMPLI-
ANCE RESOLUTION SYSTEM. 
The Secretary of the Treasury shall continue to up-
date and improve the Employee Plans Compliance Resolu-
tion System (or any successor program) giving special at-
tention to—
(1) increasing the awareness and knowledge of 
small employers concerning the availability and use 
of the program; 
(2) taking into account special concerns and 
circumstances that small employers face with respect 
to compliance and correction of compliance failures; 
(3) extending the duration of the self-correction 
period under the Self-Correction Program for signifi-
cant compliance failures; 
(4) expanding the availability to correct insig-
nificant compliance failures under the Self-Correc-
tion Program during audit; and 
(5) assuring that any tax, penalty, or sanction 
that is imposed by reason of a compliance failure is 
not excessive and bears a reasonable relationship to 
the nature, extent, and severity of the failure.
182
The Secretary of the Treasury shall have full authority 
to effectuate the foregoing with respect to the Employee 
Plans Compliance Resolution System (or any successor 
program) and any other employee plans correction poli-
cies, including the authority to waive income, excise, or 
other taxes to ensure that any tax, penalty, or sanction 
is not excessive and bears a reasonable relationship to the 
nature, extent, and severity of the failure. 
SEC. 1204. EXTENSION TO ALL GOVERNMENTAL PLANS OF 
MORATORIUM ON APPLICATION OF CERTAIN 
NONDISCRIMINATION RULES APPLICABLE TO 
STATE AND LOCAL PLANS. 
(a) IN GENERAL.—
(1) Subparagraph (G) of section 401(a)(5) and 
subparagraph (H) of section 401(a)(26) are each 
amended by striking ‘‘section 414(d))’’ and all that 
follows and inserting ‘‘section 414(d)).’’. 
(2) Subparagraph (G) of section 401(k)(3) and 
paragraph (2) of section 1505(d) of the Taxpayer 
Relief Act of 1997 are each amended by striking 
‘‘maintained by a State or local government or polit-
ical subdivision thereof (or agency or instrumentality 
thereof)’’. 
(b) CONFORMING AMENDMENTS.—
183
(1) The heading for subparagraph (G) of sec-
tion 401(a)(5) is amended to read as follows: ‘‘GOV-
ERNMENTAL PLANS.—’’. 
(2) The heading for subparagraph (H) of sec-
tion 401(a)(26) is amended to read as follows: ‘‘EX-
CEPTION FOR GOVERNMENTAL PLANS.—’’. 
(3) Subparagraph (G) of section 401(k)(3) is 
amended by inserting ‘‘GOVERNMENTAL PLANS.—’’ 
after ‘‘(G)’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to years beginning after December 
31, 2003. 
SEC. 1205. NOTICE AND CONSENT PERIOD REGARDING DIS-
TRIBUTIONS. 
(a) EXPANSION OF PERIOD.—
(1) AMENDMENT
OF
INTERNAL
REVENUE 
CODE.—
(A) IN
GENERAL.—Subparagraph (A) of 
section 417(a)(6) is amended by striking ‘‘90-
day’’ and inserting ‘‘180-day’’. 
(B) MODIFICATION
OF
REGULATIONS.—
The Secretary of the Treasury shall modify the 
regulations under sections 402(f), 411(a)(11), 
and 417 of the Internal Revenue Code of 1986 
to substitute ‘‘180 days’’ for ‘‘90 days’’ each
184
place it appears in Treasury Regulations sec-
tions 1.402(f)–1, 1.411(a)–11(c), and 1.417(e)–
1(b). 
(2) EFFECTIVE DATE.—The amendment made 
by paragraph (1)(A) and the modifications required 
by paragraph (1)(B) shall apply to years beginning 
after December 31, 2003. 
(b) CONSENT REGULATION INAPPLICABLE TO CER-
TAIN DISTRIBUTIONS.—
(1) IN GENERAL.—The Secretary of the Treas-
ury shall modify the regulations under section 
411(a)(11) of the Internal Revenue Code of 1986 to 
provide that the description of a participant’s right, 
if any, to defer receipt of a distribution shall also de-
scribe the consequences of failing to defer such re-
ceipt. 
(2) EFFECTIVE DATE.—
(A) IN GENERAL.—The modifications re-
quired by paragraph (1) shall apply to years be-
ginning after December 31, 2003. 
(B) REASONABLE NOTICE.—In the case of 
any description of such consequences made be-
fore the date that is 90 days after the date on 
which the Secretary of the Treasury issues a 
safe harbor description under paragraph (1), a
185
plan shall not be treated as failing to satisfy the 
requirements of section 411(a)(11) of such 
Code by reason of the failure to provide the in-
formation required by the modifications made 
under paragraph (1) if the Administrator of 
such plan makes a reasonable attempt to com-
ply with such requirements. 
SEC. 1206. REDUCED PBGC PREMIUM FOR NEW PLANS OF 
SMALL EMPLOYERS. 
(a) IN GENERAL.—Subparagraph (A) of section 
4006(a)(3) of the Employee Retirement Income Security 
Act of 1974 (29 U.S.C. 1306(a)(3)(A)) is amended—
(1) in clause (i), by inserting ‘‘other than a new 
single-employer plan (as defined in subparagraph 
(F)) maintained by a small employer (as so de-
fined),’’ after ‘‘single-employer plan,’’, 
(2) in clause (iii), by striking the period at the 
end and inserting ‘‘, and’’, and 
(3) by adding at the end the following new 
clause: 
‘‘(iv) in the case of a new single-employer plan 
(as defined in subparagraph (F)) maintained by a 
small employer (as so defined) for the plan year, $5 
for each individual who is a participant in such plan 
during the plan year.’’.
186
(b) 
DEFINITION
OF
NEW
SINGLE-EMPLOYER 
PLAN.—Section 4006(a)(3) of the Employee Retirement 
Income Security Act of 1974 (29 U.S.C. 1306(a)(3)) is 
amended by adding at the end the following new subpara-
graph: 
‘‘(F)(i) For purposes of this paragraph, a single-em-
ployer plan maintained by a contributing sponsor shall be 
treated as a new single-employer plan for each of its first 
5 plan years if, during the 36-month period ending on the 
date of the adoption of such plan, the sponsor or any 
member of such sponsor’s controlled group (or any prede-
cessor of either) did not establish or maintain a plan to 
which this title applies with respect to which benefits were 
accrued for substantially the same employees as are in the 
new single-employer plan. 
‘‘(ii)(I) For purposes of this paragraph, the term 
‘small employer’ means an employer which on the first day 
of any plan year has, in aggregation with all members of 
the controlled group of such employer, 100 or fewer em-
ployees. 
‘‘(II) In the case of a plan maintained by two or more 
contributing sponsors that are not part of the same con-
trolled group, the employees of all contributing sponsors 
and controlled groups of such sponsors shall be aggregated
187
for purposes of determining whether any contributing 
sponsor is a small employer.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to plans established after Decem-
ber 31, 2002. 
SEC. 1207. REDUCTION OF ADDITIONAL PBGC PREMIUM 
FOR NEW AND SMALL PLANS. 
(a) NEW PLANS.—Subparagraph (E) of section 
4006(a)(3) of the Employee Retirement Income Security 
Act of 1974 (29 U.S.C. 1306(a)(3)(E)) is amended by 
adding at the end the following new clause: 
‘‘(v) In the case of a new defined benefit plan, the 
amount determined under clause (ii) for any plan year 
shall be an amount equal to the product of the amount 
determined under clause (ii) and the applicable percent-
age. For purposes of this clause, the term ‘applicable per-
centage’ means—
‘‘(I) 0 percent, for the first plan year. 
‘‘(II) 20 percent, for the second plan year. 
‘‘(III) 40 percent, for the third plan year. 
‘‘(IV) 60 percent, for the fourth plan year. 
‘‘(V) 80 percent, for the fifth plan year. 
For purposes of this clause, a defined benefit plan (as de-
fined in section 3(35)) maintained by a contributing spon-
sor shall be treated as a new defined benefit plan for each
188
of its first 5 plan years if, during the 36-month period 
ending on the date of the adoption of the plan, the sponsor 
and each member of any controlled group including the 
sponsor (or any predecessor of either) did not establish 
or maintain a plan to which this title applies with respect 
to which benefits were accrued for substantially the same 
employees as are in the new plan.’’. 
(b) SMALL
PLANS.—Paragraph (3) of section 
4006(a) of the Employee Retirement Income Security Act 
of 1974 (29 U.S.C. 1306(a)), as amended by section 
207(b), is amended—
(1) by striking ‘‘The’’ in subparagraph (E)(i) 
and inserting ‘‘Except as provided in subparagraph 
(G), the’’, and 
(2) by inserting after subparagraph (F) the fol-
lowing new subparagraph: 
‘‘(G)(i) In the case of an employer who has 25 or 
fewer employees on the first day of the plan year, the addi-
tional premium determined under subparagraph (E) for 
each participant shall not exceed $5 multiplied by the 
number of participants in the plan as of the close of the 
preceding plan year. 
‘‘(ii) For purposes of clause (i), whether an employer 
has 25 or fewer employees on the first day of the plan 
year is determined taking into consideration all of the em-
189
ployees of all members of the contributing sponsor’s con-
trolled group. In the case of a plan maintained by two 
or more contributing sponsors, the employees of all con-
tributing sponsors and their controlled groups shall be ag-
gregated for purposes of determining whether the 25-or-
fewer-employees limitation has been satisfied.’’. 
(c) EFFECTIVE DATES.—
(1) SUBSECTION (a).—The amendments made 
by subsection (a) shall apply to plans established 
after December 31, 2002. 
(2) SUBSECTION (b).—The amendments made 
by subsection (b) shall apply to plan years beginning 
after December 31, 2003. 
SEC. 1208. AUTHORIZATION FOR PBGC TO PAY INTEREST 
ON PREMIUM OVERPAYMENT REFUNDS. 
(a) IN GENERAL.—Section 4007(b) of the Employ-
ment Retirement Income Security Act of 1974 (29 U.S.C. 
1307(b)) is amended—
(1) by striking ‘‘(b)’’ and inserting ‘‘(b)(1)’’, 
and 
(2) by inserting at the end the following new 
paragraph: 
‘‘(2) The corporation is authorized to pay, subject to 
regulations prescribed by the corporation, interest on the 
amount of any overpayment of premium refunded to a des-
190
ignated payor. Interest under this paragraph shall be cal-
culated at the same rate and in the same manner as inter-
est is calculated for underpayments under paragraph 
(1).’’. 
(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to interest accruing for periods 
beginning not earlier than the date of the enactment of 
this Act. 
SEC. 1209. SUBSTANTIAL OWNER BENEFITS IN TERMI-
NATED PLANS. 
(a) MODIFICATION OF PHASE-IN OF GUARANTEE.—
Section 4022(b)(5) of the Employee Retirement Income 
Security Act of 1974 (29 U.S.C. 1322(b)(5)) is amended 
to read as follows: 
‘‘(5)(A) For purposes of this paragraph, the term 
‘majority owner’ means an individual who, at any time 
during the 60-month period ending on the date the deter-
mination is being made—
‘‘(i) owns the entire interest in an unincor-
porated trade or business, 
‘‘(ii) in the case of a partnership, is a partner 
who owns, directly or indirectly, 50 percent or more 
of either the capital interest or the profits interest 
in such partnership, or
191
‘‘(iii) in the case of a corporation, owns, directly 
or indirectly, 50 percent or more in value of either 
the voting stock of that corporation or all the stock 
of that corporation. 
For purposes of clause (iii), the constructive ownership 
rules of section 1563(e) of the Internal Revenue Code of 
1986 shall apply (determined without regard to section 
1563(e)(3)(C)). 
‘‘(B) In the case of a participant who is a majority 
owner, the amount of benefits guaranteed under this sec-
tion shall equal the product of—
‘‘(i) a fraction (not to exceed 1) the numerator 
of which is the number of years from the later of the 
effective date or the adoption date of the plan to the 
termination date, and the denominator of which is 
10, and
‘‘(ii) the amount of benefits that would be guar-
anteed under this section if the participant were not 
a majority owner.’’. 
(b) MODIFICATION OF ALLOCATION OF ASSETS.—
(1) Section 4044(a)(4)(B) of the Employee Re-
tirement Income Security Act of 1974 (29 U.S.C. 
1344(a)(4)(B)) is amended by striking ‘‘section 
4022(b)(5)’’ and inserting ‘‘section 4022(b)(5)(B)’’.
192
(2) Section 4044(b) of such Act (29 U.S.C. 
1344(b)) is amended—
(A) by striking ‘‘(5)’’ in paragraph (2) and 
inserting ‘‘(4), (5),’’, and 
(B) 
by 
redesignating 
paragraphs 
(3) 
through (6) as paragraphs (4) through (7), re-
spectively, and by inserting after paragraph (2) 
the following new paragraph: 
‘‘(3) If assets available for allocation under 
paragraph (4) of subsection (a) are insufficient to 
satisfy in full the benefits of all individuals who are 
described in that paragraph, the assets shall be allo-
cated first to benefits described in subparagraph (A) 
of that paragraph. Any remaining assets shall then 
be allocated to benefits described in subparagraph 
(B) of that paragraph. If assets allocated to such 
subparagraph (B) are insufficient to satisfy in full 
the benefits described in that subparagraph, the as-
sets shall be allocated pro rata among individuals on 
the basis of the present value (as of the termination 
date) of their respective benefits described in that 
subparagraph.’’. 
(c) CONFORMING AMENDMENTS.—
193
(1) Section 4021 of the Employee Retirement 
Income Security Act of 1974 (29 U.S.C. 1321) is 
amended—
(A) in subsection (b)(9), by striking ‘‘as 
defined in section 4022(b)(6)’’, and 
(B) by adding at the end the following new 
subsection: 
‘‘(d) For purposes of subsection (b)(9), the term ‘sub-
stantial owner’ means an individual who, at any time dur-
ing the 60-month period ending on the date the determina-
tion is being made—
‘‘(1) owns the entire interest in an unincor-
porated trade or business, 
‘‘(2) in the case of a partnership, is a partner 
who owns, directly or indirectly, more than 10 per-
cent of either the capital interest or the profits inter-
est in such partnership, or 
‘‘(3) in the case of a corporation, owns, directly 
or indirectly, more than 10 percent in value of either 
the voting stock of that corporation or all the stock 
of that corporation. 
For purposes of paragraph (3), the constructive ownership 
rules of section 1563(e) of the Internal Revenue Code of 
1986 shall apply (determined without regard to section 
1563(e)(3)(C)).’’.
194
(2) Section 4043(c)(7) of such Act (29 U.S.C. 
1343(c)(7)) 
is 
amended 
by 
striking 
‘‘section 
4022(b)(6)’’ and inserting ‘‘section 4021(d)’’. 
(d) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall apply to plan terminations—
(A) under section 4041(c) of the Employee 
Retirement Income Security Act of 1974 (29 
U.S.C. 1341(c)) with respect to which notices 
of intent to terminate are provided under sec-
tion 4041(a)(2) of such Act (29 U.S.C. 
1341(a)(2)) after December 31, 2002, and 
(B) under section 4042 of such Act (29 
U.S.C. 1342) with respect to which proceedings 
are instituted by the corporation after such 
date. 
(2) CONFORMING AMENDMENTS.—The amend-
ments made by subsection (c) shall take effect on 
January 1, 2004. 
SEC. 1210. QUALIFIED GROUP LEGAL SERVICES PLANS. 
(a) IN GENERAL.—Subsection (e) of section 120 of 
the Internal Revenue Code of 1986 is amended to read 
as follows:
195
‘‘(e) APPLICATION OF SECTION.—This section and 
section 501(c)(20) shall apply to taxable years begin-
ning—
‘‘(1) after December 31, 1976, and before July 
1, 1992, and 
‘‘(2) after December 31, 2003, and before Jan-
uary 1, 2009.’’. 
(b) INCREASE IN MAXIMUM EXCLUSION.—The last 
sentence of section 120(a) of such Code is amended by 
striking ‘‘$70’’ and inserting ‘‘$150’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2003. 
SEC. 1211. STUDIES. 
(a) MODEL
SMALL
EMPLOYER
GROUP
PLANS 
STUDY.—As soon as practicable after the date of the en-
actment of this Act, the Secretary of Labor, in consulta-
tion with the Secretary of the Treasury, shall conduct a 
study to determine—
(1) the most appropriate form or forms of—
(A) employee pension benefit plans which 
would—
(i) be simple in form and easily main-
tained by multiple small employers, and
196
(ii) provide for ready portability of 
benefits for all participants and bene-
ficiaries, 
(B) alternative arrangements providing 
comparable benefits which may be established 
by employee or employer associations, and 
(C) alternative arrangements providing 
comparable benefits to which employees may 
contribute in a manner independent of employer 
sponsorship, and 
(2) appropriate methods and strategies for 
making pension plan coverage described in para-
graph (1) more widely available to American work-
ers. 
(b) MATTERS TO BE CONSIDERED.—In conducting 
the study under subsection (a), the Secretary of Labor 
shall consider the adequacy and availability of existing em-
ployee pension benefit plans and the extent to which exist-
ing models may be modified to be more accessible to both 
employees and employers. 
(c) REPORT.—Not later than 18 months after the 
date of the enactment of this Act, the Secretary of Labor 
shall report the results of the study under subsection (a), 
together with the Secretary’s recommendations, to the 
Committee on Education and the Workforce and the Com-
197
mittee on Ways and Means of the House of Representa-
tives and the Committee on Health, Education, Labor, 
and Pensions and the Committee on Finance of the Sen-
ate. Such recommendations shall include one or more 
model plans described in subsection (a)(1)(A) and model 
alternative 
arrangements 
described 
in 
subsections 
(a)(1)(B) and (a)(1)(C) which may serve as the basis for 
appropriate administrative or legislative action. 
(d) STUDY ON EFFECT OF LEGISLATION.—Not later 
than 5 years after the date of the enactment of this Act, 
the Secretary of Labor shall submit to the Committee on 
Education and the Workforce of the House of Representa-
tives and the Committee on Health, Education, Labor, 
and Pensions of the Senate a report on the effect of the 
provisions of this Act and title VI of the Economic Growth 
and Tax Relief Reconciliation Act of 2001 on pension plan 
coverage, including any change in—
(1) the extent of pension plan coverage for low 
and middle-income workers, 
(2) the levels of pension plan benefits generally, 
(3) the quality of pension plan coverage gen-
erally, 
(4) workers’ access to and participation in pen-
sion plans, and 
(5) retirement security.
198
TITLE XIII—STOCK OPTIONS 
SEC. 1301. EXCLUSION OF INCENTIVE STOCK OPTIONS AND 
EMPLOYEE STOCK PURCHASE PLAN STOCK 
OPTIONS FROM WAGES. 
(a) EXCLUSION FROM EMPLOYMENT TAXES.—
(1) SOCIAL SECURITY TAXES.—
(A) Section 3121(a) (relating to definition 
of wages) is amended by striking ‘‘or’’ at the 
end of paragraph (20), by striking the period at 
the end of paragraph (21) and inserting ‘‘; or’’, 
and by inserting after paragraph (21) the fol-
lowing new paragraph: 
‘‘(22) remuneration on account of—
‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b)) 
or under an employee stock purchase plan (as 
defined in section 423(b)), or 
‘‘(B) any disposition by the individual of 
such stock.’’. 
(B) Section 209(a) of the Social Security 
Act is amended by striking ‘‘or’’ at the end of 
paragraph (17), by striking the period at the 
end of paragraph (18) and inserting ‘‘; or’’, and
199
by inserting after paragraph (18) the following 
new paragraph: 
‘‘(19) Remuneration on account of—
‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b) 
of the Internal Revenue Code of 1986) or under 
an employee stock purchase plan (as defined in 
section 423(b) of such Code), or 
‘‘(B) any disposition by the individual of 
such stock.’’. 
(2) 
RAILROAD
RETIREMENT
TAXES.—Sub-
section (e) of section 3231 is amended by adding at 
the end the following new paragraph: 
‘‘(11) QUALIFIED STOCK OPTIONS.—The term 
‘compensation’ shall not include any remuneration 
on account of—
‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b)) 
or under an employee stock purchase plan (as 
defined in section 423(b)), or 
‘‘(B) any disposition by the individual of 
such stock.’’.
200
(3) UNEMPLOYMENT TAXES.—Section 3306(b) 
(relating to definition of wages) is amended by strik-
ing ‘‘or’’ at the end of paragraph (16), by striking 
the period at the end of paragraph (17) and insert-
ing ‘‘; or’’, and by inserting after paragraph (17) the 
following new paragraph: 
‘‘(18) remuneration on account of—
‘‘(A) a transfer of a share of stock to any 
individual pursuant to an exercise of an incen-
tive stock option (as defined in section 422(b)) 
or under an employee stock purchase plan (as 
defined in section 423(b)), or 
‘‘(B) any disposition by the individual of 
such stock.’’. 
(b) WAGE WITHHOLDING NOT REQUIRED ON DIS-
QUALIFYING DISPOSITIONS.—Section 421(b) (relating to 
effect of disqualifying dispositions) is amended by adding 
at the end the following new sentence: ‘‘No amount shall 
be required to be deducted and withheld under chapter 
24 with respect to any increase in income attributable to 
a disposition described in the preceding sentence.’’. 
(c) WAGE WITHHOLDING NOT REQUIRED ON COM-
PENSATION WHERE OPTION PRICE IS BETWEEN 85 PER-
CENT AND 100 PERCENT OF VALUE OF STOCK.—Section 
423(c) (relating to special rule where option price is be-
201
tween 85 percent and 100 percent of value of stock) is 
amended by adding at the end the following new sentence: 
‘‘No amount shall be required to be deducted and withheld 
under chapter 24 with respect to any amount treated as 
compensation under this subsection.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to stock acquired pursuant to op-
tions exercised after the date of the enactment of this Act. 
TITLE XIV—OTHER ELEMENTS 
OF RETIREMENT SECURITY 
SEC. 1401. EMPLOYEE PRE-TAX PAYMENTS FOR RETIREE 
HEALTH. 
(a) IN GENERAL.—Section 106 (relating to contribu-
tions by employer to accident and health plans) is amend-
ed by adding at the end the following new subsection: 
‘‘(d) EMPLOYER-PROVIDED COVERAGE OF FORMER 
EMPLOYEES.—
‘‘(1) IN GENERAL.—Coverage under an accident 
or health plan maintained by an employer which is 
provided to a former employee of the employer shall 
be treated as employer-provided coverage under an 
accident or health plan for purposes of subsection 
(a) to the extent such coverage is paid for by the 
former employee pursuant to a qualified election. No 
amount shall be included in the gross income of any
202
former employee solely because the former employee 
may make the choice described in paragraph (3). 
‘‘(2) APPLICABLE LIMITATION.—
‘‘(A) IN GENERAL.—In the case of taxable 
years beginning before January 1, 2010, the 
amount of benefits under an eligible retirement 
plan (as defined in clauses (iii), (iv), (v), and 
(vi) of section 402(c)(8)(B)) of an employer 
which may be excluded from the gross income 
of an individual by reason of paragraph (1) 
shall not exceed the applicable limitation. 
‘‘(B) APPLICABLE LIMITATION.—For pur-
poses of subparagraph (A), the applicable limi-
tation shall be determined in accordance with 
the following table:
The applicable 
‘‘For taxable years beginning in: 
limitation is: 
2004 and 2005 .........................................................................
$500
2006 and 2007 .........................................................................
$1,000
2008 and 2009 .........................................................................
$2,000.
‘‘(3) QUALIFIED ELECTION.—For purposes of 
paragraph (1), a qualified election is an election 
made by the former employee to have benefits other-
wise payable to the former employee under an eligi-
ble retirement plan (as defined in clauses (iii), (iv), 
(v), and (vi) of section 402(c)(8)(B)) (or under an 
annuity contract distributed by such a plan) used to 
pay for coverage described in paragraph (1).