230
as a disqualified person or a year is treated as a non-
allocation year, this paragraph shall not be construed
to result in the person or year not being so treated.
‘‘(6) 
DEFINITIONS.—For 
purposes 
of 
this
subsection—
‘‘(A) 
EMPLOYEE
STOCK
OWNERSHIP
PLAN.—The term ‘employee stock ownership
plan’ has the meaning given such term by sec-
tion 4975(e)(7).
‘‘(B) EMPLOYER
SECURITIES.—The term
‘employer security’ has the meaning given such
term by section 409(l).
‘‘(C) SYNTHETIC EQUITY.—The term ‘syn-
thetic equity’ means any stock option, warrant,
restricted stock, deferred issuance stock right, or
similar interest or right that gives the holder the
right to acquire or receive stock of the S corpora-
tion in the future. Except to the extent provided
in regulations, synthetic equity also includes a
stock appreciation right, phantom stock unit, or
similar right to a future cash payment based on
the value of such stock or appreciation in such
value.
231
‘‘(7) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary to carry
out the purposes of this subsection.’’.
(b) COORDINATION WITH SECTION 4975(e)(7).—The
last sentence of section 4975(e)(7) (defining employee stock
ownership plan) is amended by inserting ‘‘, section 409(p),’’
after ‘‘409(n)’’.
(c) EXCISE TAX.—
(1) APPLICATION OF TAX.—Subsection (a) of sec-
tion 4979A (relating to tax on certain prohibited allo-
cations of employer securities) is amended—
(A) by striking ‘‘or’’ at the end of para-
graph (1), and
(B) by striking all that follows paragraph
(2) and inserting the following:
‘‘(3) there is any allocation of employer securi-
ties which violates the provisions of section 409(p), or
a nonallocation year described in subsection (e)(2)(C)
with respect to an employee stock ownership plan, or
‘‘(4) any synthetic equity is owned by a dis-
qualified person in any nonallocation year,
there is hereby imposed a tax on such allocation or owner-
ship equal to 50 percent of the amount involved.’’.
(2) LIABILITY.—Section 4979A(c) (defining li-
ability for tax) is amended to read as follows:
232
‘‘(c) LIABILITY FOR TAX.—The tax imposed by this
section shall be paid—
‘‘(1) in the case of an allocation referred to in
paragraph (1) or (2) of subsection (a), by—
‘‘(A) the employer sponsoring such plan, or
‘‘(B) the eligible worker-owned cooperative,
which made the written statement described in section
664(g)(1)(E) or in section 1042(b)(3)(B) (as the case
may be), and
‘‘(2) in the case of an allocation or ownership re-
ferred to in paragraph (3) or (4) of subsection (a), by
the S corporation the stock in which was so allocated
or owned.’’.
(3) DEFINITIONS.—Section 4979A(e) (relating to
definitions) is amended to read as follows:
‘‘(e) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) DEFINITIONS.—Except as provided in para-
graph (2), terms used in this section have the same
respective meanings as when used in sections 409 and
4978.
‘‘(2) SPECIAL RULES RELATING TO TAX IMPOSED
BY REASON OF PARAGRAPH (3) OR (4) OF SUBSECTION
(a).—
233
‘‘(A) 
PROHIBITED
ALLOCATIONS.—The
amount involved with respect to any tax imposed
by reason of subsection (a)(3) is the amount allo-
cated to the account of any person in violation
of section 409(p)(1).
‘‘(B) SYNTHETIC EQUITY.—The amount in-
volved with respect to any tax imposed by reason
of subsection (a)(4) is the value of the shares on
which the synthetic equity is based.
‘‘(C) SPECIAL
RULE
DURING
FIRST
NON-
ALLOCATION
YEAR.—For purposes of subpara-
graph (A), the amount involved for the first non-
allocation year of any employee stock ownership
plan shall be determined by taking into account
the total value of all the deemed-owned shares of
all disqualified persons with respect to such
plan.
‘‘(D) STATUTE OF LIMITATIONS.—The stat-
utory period for the assessment of any tax im-
posed by this section by reason of paragraph (3)
or (4) of subsection (a) shall not expire before the
date which is 3 years from the later of—
‘‘(i) the allocation or ownership re-
ferred to in such paragraph giving rise to
such tax, or
234
‘‘(ii) the date on which the Secretary is
notified of such allocation or ownership.’’.
(d) EFFECTIVE DATES.—
(1) IN
GENERAL.—The amendments made by
this section shall apply to plan years beginning after
December 31, 2001.
(2) EXCEPTION
FOR
CERTAIN
PLANS.—In the
case of any—
(A) employee stock ownership plan estab-
lished after July 11, 2000, or
(B) employee stock ownership plan estab-
lished on or before such date if employer securi-
ties held by the plan consist of stock in a cor-
poration with respect to which an election under
section 1362(a) of the Internal Revenue Code of
1986 is not in effect on such date,
the amendments made by this section shall apply to
plan years ending after July 11, 2000.
235
Subtitle 
B—Treatment 
of 
Plan
Amendments Reducing Future
Benefit Accruals
SEC. 521. NOTICE REQUIRED FOR PENSION PLAN AMEND-
MENTS HAVING THE EFFECT OF SIGNIFI-
CANTLY REDUCING FUTURE BENEFIT ACCRU-
ALS.
(a) EXCISE TAX.—
(1) IN GENERAL.—Chapter 43 of subtitle D (re-
lating to qualified pension, etc., plans) is amended by
adding at the end the following new section:
‘‘SEC. 4980F. FAILURE TO PROVIDE NOTICE OF PENSION
PLAN AMENDMENTS REDUCING BENEFIT AC-
CRUALS.
‘‘(a) IMPOSITION OF TAX.—There is hereby imposed a
tax on the failure of an applicable pension plan to meet
the requirements of subsection (e) with respect to any appli-
cable individual.
‘‘(b) AMOUNT OF TAX.—
‘‘(1) IN GENERAL.—The amount of the tax im-
posed by subsection (a) on any failure with respect to
any applicable individual shall be $100 for each day
in the noncompliance period with respect to such fail-
ure.
236
‘‘(2) NONCOMPLIANCE PERIOD.—For purposes of
this section, the term ‘noncompliance period’ means,
with respect to any failure, the period beginning on
the date the failure first occurs and ending on the
date the notice to which the failure relates is provided
or the failure is otherwise corrected.
‘‘(c) LIMITATIONS ON AMOUNT OF TAX.—
‘‘(1) TAX NOT TO APPLY WHERE FAILURE NOT
DISCOVERED
AND
REASONABLE
DILIGENCE
EXER-
CISED.—No tax shall be imposed by subsection (a) on
any failure during any period for which it is estab-
lished to the satisfaction of the Secretary that any
person subject to liability for the tax under subsection
(d) did not know that the failure existed and exercised
reasonable diligence to meet the requirements of sub-
section (e).
‘‘(2) TAX
NOT
TO
APPLY
TO
FAILURES
COR-
RECTED WITHIN 30 DAYS.—No tax shall be imposed
by subsection (a) on any failure if—
‘‘(A) any person subject to liability for the
tax under subsection (d) exercised reasonable
diligence to meet the requirements of subsection
(e), and
‘‘(B) such person provides the notice de-
scribed in subsection (e) during the 30-day pe-
237
riod beginning on the first date such person
knew, or exercising reasonable diligence would
have known, that such failure existed.
‘‘(3) OVERALL LIMITATION FOR UNINTENTIONAL
FAILURES.—
‘‘(A) IN GENERAL.—If the person subject to
liability for tax under subsection (d) exercised
reasonable diligence to meet the requirements of
subsection (e), the tax imposed by subsection (a)
for failures during the taxable year of the em-
ployer (or, in the case of a multiemployer plan,
the taxable year of the trust forming part of the
plan) shall not exceed $500,000. For purposes of
the preceding sentence, all multiemployer plans
of which the same trust forms a part shall be
treated as 1 plan.
‘‘(B) TAXABLE YEARS IN THE CASE OF CER-
TAIN
CONTROLLED
GROUPS.—For purposes of
this paragraph, if all persons who are treated as
a single employer for purposes of this section do
not have the same taxable year, the taxable years
taken into account shall be determined under
principles similar to the principles of section
1561.
238
‘‘(4) WAIVER BY SECRETARY.—In the case of a
failure which is due to reasonable cause and not to
willful neglect, the Secretary may waive part or all
of the tax imposed by subsection (a) to the extent that
the payment of such tax would be excessive or other-
wise inequitable relative to the failure involved.
‘‘(d) LIABILITY FOR TAX.—The following shall be lia-
ble for the tax imposed by subsection (a):
‘‘(1) In the case of a plan other than a multiem-
ployer plan, the employer.
‘‘(2) In the case of a multiemployer plan, the
plan.
‘‘(e) NOTICE REQUIREMENTS FOR PLAN AMENDMENTS
SIGNIFICANTLY REDUCING BENEFIT ACCRUALS.—
‘‘(1) IN GENERAL.—If the sponsor of an applica-
ble pension plan adopts an amendment which has the
effect of significantly reducing the rate of future ben-
efit accrual of 1 or more participants, the plan ad-
ministrator shall, not later than the 45th day before
the effective date of the amendment, provide written
notice to each applicable individual (and to each em-
ployee organization representing applicable individ-
uals) which—
239
‘‘(A) sets forth a summary of the plan
amendment and the effective date of the amend-
ment,
‘‘(B) includes a statement that the plan
amendment is expected to significantly reduce
the rate of future benefit accrual,
‘‘(C) includes a description of the classes of
employees reasonably expected to be affected by
the reduction in the rate of future benefit ac-
crual,
‘‘(D) sets forth examples illustrating how
the plan will change benefits for such classes of
employees,
‘‘(E) if paragraph (2) applies to the plan
amendment, includes a notice that the plan ad-
ministrator will provide a benefit estimation tool
kit described in paragraph (2)(B) to each appli-
cable individual no later than the date required
under paragraph (2)(A), and
‘‘(F) includes a notice of each applicable in-
dividual’s right under Federal law to receive,
and of the procedures for requesting, an annual
benefit statement.
‘‘(2) REQUIREMENT TO PROVIDE BENEFIT ESTI-
MATION TOOL KIT.—
240
‘‘(A) IN GENERAL.—If a plan amendment
results in the conversion of an applicable pension
plan to a cash balance plan (within the meaning
of section 411(d)(6)(D)(iv)), the plan adminis-
trator shall, not later than the 15th day before
the effective date of the amendment, provide a
benefit estimation tool kit described in subpara-
graph (B) to each applicable individual. If such
plan amendment occurs within 12 months of an
event described in section 410(b)(6)(C), the plan
administrator shall in no event be required to
provide the benefit estimation tool kit to applica-
ble individuals affected by the event before the
date which is 24 months after such event.
‘‘(B) BENEFIT ESTIMATION TOOL KIT.—The
benefit estimation tool kit described in this sub-
paragraph shall include the following informa-
tion:
‘‘(i) Sufficient information to enable
an applicable individual to estimate the in-
dividual’s projected benefits under the terms
of the plan in effect both before and after the
adoption of the amendment.
‘‘(ii) The formulas and actuarial as-
sumptions necessary to estimate under both
241
such plan terms a single life annuity at ap-
propriate ages, and, when available, a lump
sum distribution.
‘‘(iii) The interest rate used to compute
a lump sum distribution and information
as to whether the value of any early retire-
ment benefit or retirement-type subsidy
(within 
the 
meaning 
of 
section
411(d)(6)(B)(i)) is included in the lump
sum distribution.
‘‘(3) NOTICE TO DESIGNEE.—Any notice under
paragraph (1) or (2) may be provided to a person
designated, in writing, by the person to which it
would otherwise be provided.
‘‘(f) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) APPLICABLE INDIVIDUAL.—
‘‘(A) IN
GENERAL.—The term ‘applicable
individual’ means, with respect to any plan
amendment—
‘‘(i) each participant in the plan, and
‘‘(ii) any beneficiary who is an alter-
nate payee (within the meaning of section
414(p)(8)) under an applicable qualified
242
domestic relations order (within the mean-
ing of section 414(p)(1)(A)),
whose rate of future benefit accrual under the
plan may reasonably be expected to be signifi-
cantly reduced by such plan amendment.
‘‘(B) EXCEPTION FOR PARTICIPANTS WITH
LESS THAN 1 YEAR OF PARTICIPATION.—Such
term shall not include a participant who has less
than 1 year of participation (within the mean-
ing of section 411(b)(4)) under the plan as of the
effective date of the plan amendment.
‘‘(2) APPLICABLE PENSION PLAN.—The term ‘ap-
plicable pension plan’ means—
‘‘(A) a defined benefit plan, or
‘‘(B) an individual account plan which is
subject to the funding standards of section 412.
Such term shall not include a governmental plan
(within the meaning of section 414(d)), a church plan
(within the meaning of section 414(e)) with respect to
which an election under section 410(d) has not been
made, or any other plan to which section 204(h) of
the Employee Retirement Income Security Act of
1974 does not apply.
‘‘(3) EARLY RETIREMENT.—A plan amendment
which eliminates or significantly reduces any early
243
retirement benefit or retirement-type subsidy (within
the meaning of section 411(d)(6)(B)(i)) shall be treat-
ed as having the effect of significantly reducing the
rate of future benefit accrual.
‘‘(g) NEW TECHNOLOGIES.—The Secretary may by
regulations allow any notice under paragraph (1) or (2)
of subsection (e) to be provided by using new technologies.’’
(2) CONFORMING AMENDMENT.—The table of sec-
tions for chapter 43 of subtitle D is amended by add-
ing at the end the following new item:
‘‘Sec. 4980F. Failure to provide notice of pension plan amend-
ments reducing benefit accruals.’’
(b) AMENDMENT TO ERISA.—Section 204(h) of the
Employee Retirement Income Security Act of 1974 (29
U.S.C. 1054(h)) is amended to read as follows:
‘‘(h)(1) If an applicable pension plan is amended so
as to provide a significant reduction in the rate of future
benefit accrual of 1 or more participants, the plan adminis-
trator shall, not later than the 45th day before the effective
date of the amendment, provide written notice to each ap-
plicable individual (and to each employee organization rep-
resenting applicable individuals) which—
‘‘(A) sets forth a summary of the plan amend-
ment and the effective date of the amendment,
244
‘‘(B) includes a statement that the plan amend-
ment is expected to significantly reduce the rate of fu-
ture benefit accrual,
‘‘(C) includes a description of the classes of em-
ployees reasonably expected to be affected by the re-
duction in the rate of future benefit accrual,
‘‘(D) sets forth examples illustrating how the
plan will change benefits for such classes of employees,
‘‘(E) if paragraph (2) applies to the plan
amendment, includes a notice that the plan adminis-
trator will provide a benefit estimation tool kit de-
scribed in paragraph (2)(B) to each applicable indi-
vidual no later than the date required under para-
graph (2)(A), and
‘‘(F) includes a notice of each applicable individ-
ual’s right under Federal law to receive, and of the
procedures for requesting, an annual benefit state-
ment.
‘‘(2)(A) If a plan amendment results in the conversion
of an applicable pension plan to a cash balance plan (with-
in the meaning of section 204(g)(4)(D)), the plan adminis-
trator shall, not later than the 15th day before the effective
date of the amendment, provide a benefit estimation tool
kit described in subparagraph (B) to each applicable indi-
vidual. If such plan amendment occurs within 12 months
245
of an event described in section 410(b)(6)(C) of the Internal
Revenue Code of 1986, the plan administrator shall in no
event be required to provide the benefit estimation tool kit
to applicable individuals affected by the event before the
date which is 24 months after such event.
‘‘(B) The benefit estimation tool kit described in this
subparagraph shall include the following information:
‘‘(i) Sufficient information to enable an applica-
ble individual to estimate the individual’s projected
benefits under the terms of the plan in effect both be-
fore and after the adoption of the amendment.
‘‘(ii) The formulas and actuarial assumptions
necessary to estimate under both such plan terms a
single life annuity at appropriate ages, and, when
available, a lump sum distribution.
‘‘(iii) The interest rate used to compute a lump
sum distribution and information as to whether the
value of any early retirement benefit or retirement-
type subsidy (within the meaning of subsection
(g)(2)(A)) is included in the lump sum distribution.
‘‘(3) Any notice under paragraph (1) or (2) may be
provided to a person designated, in writing, by the person
to which it would otherwise be provided.
‘‘(4)(A) In the case of any egregious failure to meet
any requirement of this subsection with respect to any plan
246
amendment, the provisions of the applicable pension plan
shall be applied as if such plan amendment entitled all ap-
plicable individuals to the greater of—
‘‘(i) the benefits to which they would have been
entitled without regard to such amendment, or
‘‘(ii) the benefits under the plan with regard to
such amendment.
‘‘(B) For purposes of subparagraph (A), there is an
egregious failure to meet the requirements of this subsection
if such failure is within the control of the plan sponsor and
is—
‘‘(i) an intentional failure (including any failure
to promptly provide the required notice or informa-
tion after the plan administrator discovers an unin-
tentional failure to meet the requirements of this sub-
section),
‘‘(ii) a failure to provide most of the individuals
with most of the information they are entitled to re-
ceive under this subsection, or
‘‘(iii) a failure which is determined to be egre-
gious under regulations prescribed by the Secretary of
the Treasury.
‘‘(C) For excise tax on failure to meet requirements,
see section 4980F of the Internal Revenue Code of 1986.
247
‘‘(5)(A) For purposes of this subsection, the term ‘ap-
plicable individual’ means, with respect to any plan
amendment—
‘‘(i) each participant in the plan, and
‘‘(ii) any beneficiary who is an alternate payee
(within the meaning of section 206(d)(3)(K)) under
an applicable qualified domestic relations order
(within the meaning of section 206(d)(3)(B)),
whose rate of future benefit accrual under the plan may
reasonably be expected to be significantly reduced by such
plan amendment.
‘‘(B) Such term shall not include a participant who
has less than 1 year of participation (within the meaning
of subsection (b)(4)) under the plan as of the effective date
of the plan amendment.
‘‘(6) For purposes of this subsection, the term ‘applica-
ble pension plan’ means—
‘‘(A) a defined benefit plan, or
‘‘(B) an individual account plan which is subject
to the funding standards of section 302.
‘‘(7) For purposes of this subsection, a plan amend-
ment which eliminates or significantly reduces any early
retirement benefit or retirement-type subsidy (within the
meaning of section 204(g)(2)(A)) shall be treated as having
248
the effect of significantly reducing the rate of future benefit
accrual.
‘‘(8) The Secretary of the Treasury may by regulations
allow any notice under this subsection to be provided by
using new technologies.’’
SEC. 522. PROTECTION OF PARTICIPANTS DURING CONVER-
SIONS TO CASH BALANCE OR OTHER HYBRID
DEFINED BENEFIT PLANS.
(a) AMENDMENTS TO INTERNAL REVENUE CODE.—
(1) IN GENERAL.—Section 411(d)(6) (relating to
accrued benefit may not be decreased by amendment)
is amended by adding at the end the following new
subparagraph:
‘‘(D) TREATMENT
OF
CONVERSIONS
TO
CASH BALANCE OR OTHER HYBRID PLANS.—
‘‘(i) IN
GENERAL.—For purposes of
subparagraph (A), an applicable plan
amendment shall be treated as reducing the
accrued benefit of a participant if, under
the terms of the plan as in effect after the
amendment, the accrued benefit of the par-
ticipant may at any time be less than the
sum of—
‘‘(I) the participant’s accrued ben-
efit for years of service before the effec-
249
tive date of the amendment, determined
under the terms of the plan as in effect
before the amendment and by not tak-
ing into account any early retirement
benefit 
or 
retirement-type 
subsidy
(within the meaning of subparagraph
(B)(i)), plus
‘‘(II) the participant’s accrued
benefit for years of service after the ef-
fective date of the amendment, deter-
mined under the terms of the plan as
in effect after the amendment.
‘‘(ii) INITIAL
ACCOUNT
BALANCE.—If
an applicable plan amendment provides
that the accrued benefit initially credited to
a participant’s accumulation account (or
its equivalent) on the effective date of the
amendment is not less than the amount de-
termined under section 417(e)(3)(C) as of
such date, the plan shall not be treated as
failing to meet the requirements of clause
(i)(I) at any time after such date merely be-
cause of fluctuations in interest rates.