ments of paragraph (2) with respect to match-
ing contributions if the plan—
‘‘(i) meets the contribution require-
ments of subparagraphs (B)(i) and (D) of 
subsection (k)(13), 
‘‘(ii) meets the participation require-
ments of subsection (k)(13)(C), 
‘‘(iii) meets the vesting and notice re-
quirements of subparagraphs (E) and (F) 
of subsection (k)(13), and 
‘‘(iv) meets the requirements of para-
graph (11)(B). 
‘‘(B) MATCHING CONTRIBUTIONS.—An an-
nuity contract under section 403(b) shall be 
treated as meeting the requirements of para-
graph (2) with respect to matching contribu-
tions if such contract meets requirements simi-
lar to the requirements under subparagraph 
(A).’’. 
(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) DEFINITION OF COMPENSATION.—
(1) BASE
PAY
OR
RATE
OF
PAY.—The Sec-
retary of the Treasury shall, by no later than De-
cember 31, 2006, modify Treasury Regulation sec-
tion 1.414(s)–1(d)(3) to facilitate the use of the safe 
harbors 
in 
sections 
401(k)(12), 
401(k)(13), 
401(m)(11), and 401(m)(12) of the Internal Rev-
enue Code of 1986, and in Treasury Regulation sec-
tion 1.401(a)(4)–3(b) by plans that use base pay or 
rate of pay in determining contributions or benefits. 
Such facilitation shall include increased flexibility in 
satisfying section 414(s) of such Code in situations 
where the amount of overtime compensation payable 
in a year can vary significantly. 
(2) APPLICATION OF REQUIREMENTS TO SEPA-
RATE PAYROLL PERIODS.—Not later than December 
31, 2005, the Secretary of the Treasury shall issue 
rules under subparagraphs (B)(i) and (D)(i) of sec-
tion 401(k)(13) of such Code and under clause (i) 
of section 401(m)(12)(A) of such Code that, effec-
tive for plan years beginning after December 31,
2005, permit such requirements to be applied sepa-
rately to separate payroll periods based on rules 
similar to the rules described in Treasury Regulation 
sections 1.401(k)–3(c)(5)(ii) and 1.401(m)–3(d)(4). 
(e) SECTION 403(b) CONTRACTS.—Paragraph (11) of 
section 401(m) of such Code is amended by adding at the 
end the following: 
‘‘(C) SECTION
403(b) CONTRACTS.—An 
annuity contract under section 403(b) shall be 
treated as meeting the requirements of para-
graph (2) with respect to matching contribu-
tions if such contract meets requirements simi-
lar to the requirements under subparagraph 
(A).’’. 
(f) INVESTMENTS AND PREEMPTION.—
(1) CONTROL DEEMED TO HAVE BEEN EXER-
CISED WITH RESPECT TO AMOUNT OF AUTOMATIC 
CONTRIBUTIONS.—Section 404(c) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 
1104(c)) (as amended by this Act) is amended by 
adding at the end the following new paragraphs: 
‘‘(5)(A) A participant in an individual account plan 
shall, for purposes of paragraph (1), be treated as exer-
cising control over the assets in the account with respect
to the amount of contributions made under an automatic 
contribution arrangement. 
‘‘(B) For purposes this paragraph, the term ‘auto-
matic contribution arrangement’ means an arrangement—
‘‘(i) which meets the requirements of subpara-
graph (C), 
‘‘(ii) under which a participant may elect to 
have the employer make payments as contributions 
under the plan on behalf of the participant, or to the 
participant directly in cash, 
‘‘(iii) under which the participant is treated as 
having elected to have the employer make such con-
tributions in an amount equal to a specified percent-
age of compensation provided under the plan until 
the participant affirmatively elects not to have such 
contributions made (or affirmatively elects to have 
such contributions made at a different percentage), 
and 
‘‘(iv) under which contributions described in 
clause (iii) are invested in accordance with regula-
tions prescribed by the Secretary, which regulations 
shall provide for the investment of the contributions 
in one or more diversified funds that include invest-
ments that provide long-term capital appreciation 
and investments that provide preservation of capital.
‘‘(C)(i) The administrator of an individual account 
plan shall, within a reasonable period before each plan 
year, give to each employee to whom an automatic con-
tribution arrangement applies for such plan year notice 
of the employee’s rights and obligations under the ar-
rangement which—
‘‘(I) is sufficiently accurate and comprehensive 
to apprise the employee of such rights and obliga-
tions, and 
‘‘(II) is written in a manner calculated to be 
understood by the average employee to whom the ar-
rangement applies. 
‘‘(ii) A notice shall not be treated as meeting the re-
quirements of clause (i) with respect to an employee un-
less—
‘‘(I) the notice includes a notice explaining the 
employee’s right under the arrangement to elect not 
to have elective contributions made on the employ-
ee’s behalf (or to elect to have such contributions 
made at a different percentage), 
‘‘(II) the notice explains how contributions 
made under the arrangement will be invested in the 
absence of any investment election by the employee, 
and
‘‘(III) the employee has a reasonable period of 
time after receipt of the notice described in sub-
clauses (I) and (II) and before the first elective con-
tribution is made to make either such election. 
‘‘(6)(A) A participant in an individual account plan 
shall, for purposes of paragraph (1), be treated as exer-
cising control over the assets in the account with respect 
to contributions described in subparagraph (B). 
‘‘(B) Contributions are described in this subpara-
graph (B) if—
‘‘(i) such contributions are not described in 
paragraph (5), 
‘‘(ii) the administrator of the plan satisfies 
rules similar to the rules of paragraph (5)(C) (ex-
cept that the notice shall relate to the employee’s 
right to make a different investment election), and 
‘‘(iii) such contributions are invested pursuant 
to the regulations under paragraph (5)(B)(iv).’’. 
(2) PREEMPTION OF CONFLICTING STATE REG-
ULATION.—Section 514(b) of such Act (29 U.S.C. 
1144(b)) is amended—
(A) by redesignating paragraph (9) as 
paragraph (10); and 
(B) by inserting after paragraph (8) the 
following new paragraph:
‘‘(9) Notwithstanding any other provision of this sec-
tion, any law of a State which would directly or indirectly 
prohibit or restrict the inclusion in any plan of an auto-
matic contribution arrangement (as defined in section 
404(c)(5)(B)) shall be superseded. The Secretary may 
prescribe regulations which would establish minimum 
standards that such arrangements would be required to 
satisfy in order for this paragraph to apply.’’. 
(g) CORRECTIVE DISTRIBUTIONS.—
(1) IN GENERAL.—Section 414 of the Internal 
Revenue Code of 1986 (relating to definitions and 
special rules) is amended by adding at the end the 
following new subsection: 
‘‘(bb) 
AUTOMATIC
CONTRIBUTION
ARRANGE-
MENTS.—
‘‘(1) IN GENERAL.—For purposes of this title, 
the amount of any corrective distribution from a 
plan shall be treated as if such amount had never 
been held in such plan and shall be treated as a pay-
ment of compensation from the employer maintain-
ing the plan to the employee receiving such distribu-
tion. 
‘‘(2) CORRECTIVE
DISTRIBUTION.—For pur-
poses of this subsection, the term ‘corrective dis-
tribution’ means a distribution from an applicable
employer plan of all amounts attributable to an erro-
neous automatic contribution. 
‘‘(3) 
ERRONEOUS
AUTOMATIC
CONTRIBU-
TION.—For purposes of this subsection, the term 
‘erroneous automatic contribution’ means an elective 
contribution made on behalf of an employee under 
any applicable employer plan pursuant to a plan pro-
vision treating the employee as having elected to 
have the employer make such elective contribution 
until the employee affirmatively elects not to have 
such contribution made or affirmatively elects to 
make contributions at a specified level, if the fol-
lowing requirements are satisfied—
‘‘(A) within the applicable period, the em-
ployee notifies the plan administrator that the 
employee elects to have the elective contribution 
treated as an erroneous automatic contribution, 
and 
‘‘(B) the sum of the elective contributions 
that are treated as erroneous automatic con-
tributions with respect to an employee does not 
exceed $500. 
‘‘(4) APPLICABLE EMPLOYER PLAN.—For pur-
poses of this subsection, the term ‘applicable em-
ployer plan’ has the meaning described in subsection
(v)(6)(A) except that the term shall not include an 
eligible deferred compensation plan maintained by 
an 
eligible 
employer 
described 
in 
section 
457(e)(1)(B). 
‘‘(5) APPLICABLE
PERIOD.—For purposes of 
this subsection, with respect to an employee, the 
term ‘applicable period’ means the three month pe-
riod that begins on the first date that an amount is 
withheld from compensation payable to the employee 
in order to make a plan contribution pursuant to a 
plan provision described in paragraph (3).’’. 
(2) VESTING CONFORMING AMENDMENTS.—
(A) INTERNAL REVENUE CODE OF 1986.—
(i) Section 411(a)(3)(G) of such Code 
is amended by inserting ‘‘an erroneous 
automatic 
contribution 
under 
section 
414(bb),’’ after ‘‘402(g)(2)(A),’’. 
(ii) 
The 
heading 
of 
section 
411(a)(3)(G) of such Code is amended by 
inserting ‘‘OR
ERRONEOUS
AUTOMATIC 
CONTRIBUTION’’ before the period. 
(iii) Section 401(k)(8)(E) of such 
Code is amended by inserting ‘‘an erro-
neous automatic contribution under section 
414(bb),’’ after ‘‘402(g)(2)(A),’’.
(iv) 
The 
heading 
of 
section 
401(k)(8)(E) of such Code is amended by 
inserting ‘‘OR
ERRONEOUS
AUTOMATIC 
CONTRIBUTION’’ before the period. 
(B) EMPLOYEE RETIREMENT INCOME SE-
CURITY ACT OF 1974.—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 contribu-
tion under section 414(bb) of such Code,’’ after 
‘‘402(g)(2)(A) of such Code,’’. 
(h) EFFECTIVE DATE.—
(1) IN GENERAL.—Except as provided by para-
graph (2), the amendments made by this section 
shall apply to plan years beginning after December 
31, 2005. 
(2) SECTION 403(b) CONTRACTS.—The amend-
ments made by subsection (e) shall apply to years 
beginning after December 31, 1998. 
(3) REGULATIONS.—Final regulations under 
section 404(c)(5)(B)(iv) of the Employee Retirement 
Income Security Act of 1974 (added by this section) 
shall be issued no later than 6 months after the date 
of enactment of this Act.