I
105TH CONGRESS
2D SESSION
H. R. 3101
To amend the Internal Revenue Code of 1986 to require faster vesting
of employer contributions to defined benefit plans, to require employer
plans to permit rollovers to individual retirement accounts on an employ-
ee’s separation from service, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
JANUARY 27, 1998
Mr. NEAL of Massachusetts introduced the following bill; which was referred
to the Committee on Ways and Means, and in addition to the Committee
on Education and the Workforce, for a period to be subsequently deter-
mined by the Speaker, in each case for consideration of such provisions
as fall within the jurisdiction of the committee concerned
A BILL
To amend the Internal Revenue Code of 1986 to require
faster vesting of employer contributions to defined bene-
fit plans, to require employer plans to permit rollovers
to individual retirement accounts on an employee’s sepa-
ration from service, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Pension Improvement
Act of 1998’’.
SEC. 2. FASTER VESTING FOR EMPLOYER CONTRIBUTIONS
TO DEFINED CONTRIBUTION PLANS.
(a) AMENDMENTS TO INTERNAL REVENUE CODE.—
(1) IN
GENERAL.—Paragraph (2) of section
411(a) of the Internal Revenue Code of 1986 (relat-
ing to minimum vesting standards), as amended by
paragraph (2), is amended by adding at the end the
following new subparagraph:
‘‘(B) DEFINED CONTRIBUTION PLANS.—A
defined contribution plan satisfies the require-
ments of this subparagraph if the plan satisfies
the requirements of clause (i) or (ii).
‘‘(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 has a nonforfeitable right
to 100 percent of the employee’s accrued
benefit derived from employer contribu-
tions.
‘‘(ii) 5-YEAR VESTING.—A plan satis-
fies the requirements of this clause if an
employee has a nonforfeitable right to a
percentage of the employee’s accrued bene-
fit derived from employer contributions de-
termined under the following table:
The nonforfeitable
‘‘Years of service:
percentage is:
1 ...............................................................................................
2 ...............................................................................................
3 ...............................................................................................
4 ...............................................................................................
5 ...............................................................................................
100.’’.
(2) CONFORMING
AMENDMENTS.—Paragraph
(2) of section 411(a) of such Code (as in effect be-
fore the amendment made by paragraph (1)) is
amended—
(A) by redesignating subparagraphs (A)
and (B) as clauses (i) and (ii),
(B) by striking the material preceding
clause (i) (as so redesignated) and inserting the
following:
‘‘(2) EMPLOYER CONTRIBUTIONS.—
‘‘(A) DEFINED
BENEFIT
PLANS.—A de-
fined benefit plan satisfies the requirements of
this subparagraph if the plan satisfies the re-
quirements of clause (i) or (ii).’’, and
(C) in clauses (i) and (ii) (as so redesig-
nated), by striking ‘‘subparagraph’’ and insert-
ing ‘‘clause’’.
(b) AMENDMENTS TO ERISA.—
(1) IN
GENERAL.—Paragraph (2) of section
203(a) of the Employee Retirement Income Security
Act of 1974 (29 U.S.C. 1053(a)), as amended by
paragraph (2), is amended by adding at the end the
following new subparagraph:
‘‘(B) A defined contribution plan satisfies the
requirements of this subparagraph if the plan satis-
fies the requirements of clause (i) or (ii).
‘‘(i) A plan satisfies the requirements of
this clause if an employee 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.
‘‘(ii) A plan satisfies the requirements of
this clause if an employee has a nonforfeitable
right to a percentage of the employee’s accrued
benefit derived from employer contributions de-
termined under the following table:
The nonforfeitable
‘‘Years of service:
percentage is:
1 ...............................................................................................
2 ...............................................................................................
3 ...............................................................................................
4 ...............................................................................................
5 ...............................................................................................
100.’’.
(2) CONFORMING
AMENDMENTS.—Paragraph
(2) of section 203(a) of such Act (as in effect before
the amendment made by paragraph (1)) is amend-
ed—
(A) by redesignating subparagraphs (A)
and (B) as clauses (i) and (ii),
(B) by striking the material preceding
clause (i) (as so redesignated) and inserting the
following:
‘‘(2)(A) A defined benefit plan satisfies the re-
quirements of this subparagraph if the plan satisfies
the requirements of clause (i) or (ii).’’, and
(C) in clauses (i) and (ii) (as so redesig-
nated), by striking ‘‘subparagraph’’ and insert-
ing ‘‘clause’’.
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section
shall apply to contributions for plan years beginning
after December 31, 1998.
(2) COLLECTIVE BARGAINING AGREEMENTS.—
In the case of a plan maintained pursuant to 1 or
more collective bargaining agreements between em-
ployee representatives and 1 or more employers rati-
fied by the date of the enactment of this Act, the
amendments made by this section shall not apply to
contributions on behalf of employees covered by any
such agreement for plan years beginning before the
earlier of—
(A) the later of—
(i) the date on which the last of such
collective bargaining agreements termi-
nates (determined without regard to any
extension thereof on or after such date of
enactment), or
(ii) January 1, 1999, or
(B) January 1, 2003.
SEC. 3. EMPLOYERS REQUIRED TO PERMIT ROLLOVERS TO
INDIVIDUAL RETIREMENT PLANS WITHIN 3
MONTHS AFTER SEPARATION FROM SERVICE.
(a) IN GENERAL.—Subsection (a) of section 401 of
the Internal Revenue Code of 1986 (relating to qualified
pension, profit-sharing, and stock bonus plans) is amend-
ed by inserting after paragraph (34) the following new
paragraph:
‘‘(35) ROLLOVERS
REQUIRED
TO
BE
PER-
MITTED AFTER SEPARATION FROM SERVICE.—
‘‘(A) IN GENERAL.—A trust shall not con-
stitute a qualified trust under this section un-
less the plan of which such trust is a part pro-
vides that—
‘‘(i) each employee is entitled to elect
that an eligible rollover distribution be
made to a individual retirement plan dur-
ing the 90-day period beginning on the
plans) is amended by adding at the end the following new
paragraph:
‘‘(9) 25-PERCENT
ADDITIONAL
TAX
ON
DIS-
TRIBUTIONS
WITHIN
YEARS
AFTER
ROLLOVER
AFTER SEPARATION FROM SERVICE.—In the case of
an individual retirement plan to which a rollover de-
scribed in section 401(a)(35)(A) is made—
‘‘(A) IN GENERAL.—During the 2-year pe-
riod beginning on the date that the rollover (re-
ferred to in such section) is paid into the plan,
paragraph (1) shall be applied by substituting
‘25 percent’ for ‘10 percent’.
‘‘(B) COMMINGLING NOT PERMITTED.—
‘‘(i) Section 408(d)(3) shall not apply
to any amount received by an individual
from such plan (and no amount trans-
ferred from such plan to another individual
retirement plan shall be excluded from
gross income by reason of such transfer).
‘‘(ii) Such plan shall not be treated as
an individual retirement plan for purposes
of determining whether any other amount
is a rollover contribution.’’.
(c) EXCEPTION FROM INCOME TAX WITHHOLD-
ING.—Paragraph (2) of section 3405(c) of such Code is
amended by striking ‘‘section 401(a)(31)(A)’’ and insert-
ing ‘‘paragraph (31)(A) or (35)(A) of section 401(a)’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to employees who separate from
service after December 31, 1998.
SEC. 4. PENALTY-FREE DISTRIBUTIONS FROM INDIVIDUAL
RETIREMENT PLANS TO UNEMPLOYED INDI-
VIDUALS.
(a) IN GENERAL.—Paragraph (2) of section 72(t) of
the Internal Revenue Code of 1986 is amended by adding
at the end the following new subparagraph:
‘‘(G) DISTRIBUTIONS TO UNEMPLOYED IN-
DIVIDUALS.—A distribution from an individual
retirement plan to an individual after separa-
tion from employment, if—
‘‘(i) such individual has received un-
employment compensation for 12 consecu-
tive weeks under any Federal or State un-
employment compensation law by reason of
such separation, and
‘‘(ii) such distributions are made dur-
ing any taxable year during which such un-
employment compensation is paid or the
succeeding taxable year.
To the extent provided in regulations, a self-em-
ployed individual shall be treated as meeting
the requirements of clause (i) if, under Federal
or State law, the individual would have received
unemployment compensation but for the fact
the individual was self-employed.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to distributions after December
31, 1998.
SEC. 5. INVOLUNTARY CASH-OUTS PERMITTED ONLY IF
DISTRIBUTION ROLLED TO AN IRA.
(a) AMENDMENTS TO INTERNAL REVENUE CODE.—
(1) VESTING.—Paragraph (11) of section
411(a) of the Internal Revenue Code of 1986 (relat-
ing to restrictions on certain mandatory distribu-
tions) is amended by redesignating subparagraphs
(B) and (C) as subparagraphs (C) and (D), respec-
tively, and by inserting after subparagraph (A) the
following new subparagraph:
‘‘(B) ROLLOVER
REQUIRED
IF
PRESENT
VALUE
OF
BENEFIT
BELOW
THRESHOLD.—If
the present value of any nonforfeitable accrued
benefit does not exceed $5,000, a plan meets
the requirements of this paragraph only if such
plan provides that such benefit (to the extent
the distribution of such benefit is otherwise in-
cludible in gross income) may be immediately
distributed only in a trustee-to-trustee transfer
to an individual retirement plan of such individ-
ual which is specified by such individual.’’.
(2) JOINT
AND
SURVIVOR
ANNUITIES.—The
first sentence of section 417(e)(1) of such Code is
amended to read as follows: ‘‘If the present value of
a qualified joint and survivor annuity or a qualified
preretirement survivor annuity under a plan does
not 
exceed 
the 
dollar 
limit 
under 
section
411(a)(11)(A), the plan may provide that such value
(to the extent the distribution of such value is other-
wise includible in gross income) will be immediately
distributed but only if the participant and the
spouse of the participant (or where the participant
has died, the surviving spouse) designate 1 or more
individual retirement plans of any such individual to
receive such distribution and such distribution is
made in a trustee-to-trustee transfer in accordance
with such designation.’’.
(3) SECTION 457 PLANS.—Subparagraph (A) of
section 457(e)(9) of such Code is amended by add-
ing at the end the following new sentence: ‘‘This
paragraph shall apply only if the amount (to the ex-
tent the distribution of such amount is otherwise in-
cludible in gross income) is distributed in a trustee-
to-trustee transfer to an individual retirement plan
of such individual which is specified by such individ-
ual.’’.
(4) 25-PERCENT
ADDITIONAL
TAX
ON
DIS-
TRIBUTIONS
WITHIN
YEARS
AFTER
CASHOUT
ROLLOVER.—Subsection (t) of section 72 of such
Code (relating to 10-percent additional tax on early
distributions from qualified retirement plans) is
amended by adding at the end the following new
paragraph:
‘‘(10) 25-PERCENT ADDITIONAL TAX ON DIS-
TRIBUTIONS
WITHIN
YEARS
AFTER
CASHOUT
ROLLOVER.—
‘‘(A) IN
GENERAL.—In the case of any
trustee-to-trustee transfer described in section
411(a)(11), 417(e)(1), or 457(e)(9) to an indi-
vidual retirement plan, during the 2-year period
beginning on the date that such transfer is
made to such plan, paragraph (1) shall be ap-
plied by substituting ‘25 percent’ for ‘10 per-
cent’.
‘‘(B) COMMINGLING NOT PERMITTED.—In
the case of a individual retirement plan to
which there is a rollover described in subpara-
graph (A)—
‘‘(i) section 408(d)(3) shall not apply
to any amount received by an individual
from such plan (and no amount trans-
ferred from such plan to another individual
retirement plan shall be excluded from
gross income by reason of such transfer),
and
‘‘(ii) such plan shall not be treated as
an individual retirement plan for purposes
of determining whether any other amount
is a rollover contribution.’’.
(5) EXCEPTION FROM INCOME TAX WITHHOLD-
ING.—Paragraph (2) of section 3405(c) of such
Code is amended by inserting before the period ‘‘or
if the distribution is a trustee-to-trustee transfer de-
scribed 
in 
section 
411(a)(11), 
417(e)(1), 
or
457(e)(9)’’.
(b) AMENDMENTS TO ERISA.—
(1) VESTING.—
(A) Subsection (e) of section 203 of Em-
ployee Retirement Income Security Act of 1974
is amended by redesignating paragraphs (2)
and (3) as paragraphs (3) and (4), respectively,
and by inserting after paragraph (1) the follow-
ing new paragraph:
‘‘(2) If the present value of any nonforfeitable benefit
with respect to a participant in a plan does not exceed
$5,000, the plan shall provide that such benefit (to the
extent the distribution of such benefit is otherwise includ-
ible in gross income) may be immediately distributed only
in a trustee-to-trustee transfer to an individual retirement
plan of such individual which is specified by such individ-
ual.’’.
(B) Paragraph (3) of section 203(e) of
such Act, as redesignated by subparagraph (A),
is amended by striking ‘‘paragraph (1)’’ and in-
serting ‘‘paragraphs (1) and (2)’’.
(2) JOINT
AND
SURVIVOR
ANNUITIES.—The
first sentence of section 205(g)(1) of such Act is
amended to read as follows: ‘‘If the present value of
a qualified joint and survivor annuity or a qualified
preretirement survivor annuity under a plan does
not exceed the dollar limit under section 203(e)(1),
the plan may provide that such value (to the extent
the distribution of such value is otherwise includible
in gross income) will be immediately distributed but
only if the participant and the spouse of the partici-
pant (or where the participant has died, the surviv-
ing spouse) designate 1 or more individual retire-
ment plans of any such individual to receive such
distribution and such distribution is made in a trust-
ee-to-trustee transfer in accordance with such des-
ignation.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to plan years beginning after De-
cember 31, 1998.
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