692
‘‘(II) no employer corporation, or 
parent corporation of an employer 
corporation, has issued any special 
class of stock which grants particular 
rights to, or bears particular risks for, 
the holder or issuer with respect to 
any corporation described in clause (i) 
which has issued any publicly traded 
employer security. 
‘‘(iii) DEFINITIONS.—For purposes of 
this subparagraph, the term—
‘‘(I) ‘controlled group of corpora-
tions’ has the meaning given such 
term by section 1563(a) of the Inter-
nal Revenue Code of 1986, except 
that ‘50 percent’ shall be substituted 
for ‘80 percent’ each place it appears, 
‘‘(II) 
‘employer 
corporation’ 
means a corporation which is an em-
ployer maintaining the plan, and 
‘‘(III) ‘parent corporation’ has 
the meaning given such term by sec-
tion 424(e) of such Code. 
‘‘(6) OTHER
DEFINITIONS.—For purposes of 
this paragraph—
693
‘‘(A) APPLICABLE INDIVIDUAL.—The term 
‘applicable individual’ means—
‘‘(i) any participant in the plan, and 
‘‘(ii) any beneficiary who has an ac-
count under the plan with respect to which 
the beneficiary is entitled to exercise the 
rights of a participant. 
‘‘(B) ELECTIVE
DEFERRAL.—The term 
‘elective deferral’ means an employer contribu-
tion described in section 402(g)(3)(A) of the In-
ternal Revenue Code of 1986. 
‘‘(C) EMPLOYER
SECURITY.—The term 
‘employer security’ has the meaning given such 
term by section 407(d)(1). 
‘‘(D) 
EMPLOYEE
STOCK
OWNERSHIP 
PLAN.—The term ‘employee stock ownership 
plan’ has the meaning given such term by sec-
tion 4975(e)(7) of such Code. 
‘‘(E) PUBLICLY TRADED EMPLOYER SECU-
RITIES.—The term ‘publicly traded employer 
securities’ means employer securities which are 
readily tradable on an established securities 
market.
694
‘‘(F) YEAR OF SERVICE.—The term ‘year 
of service’ has the meaning given such term by 
section 203(b)(2). 
‘‘(7) TRANSITION RULE FOR SECURITIES AT-
TRIBUTABLE TO EMPLOYER CONTRIBUTIONS.—
‘‘(A) RULES PHASED IN OVER 3 YEARS.—
‘‘(i) IN GENERAL.—In the case of the 
portion of an account to which paragraph 
(3) applies and which consists of employer 
securities acquired in a plan year begin-
ning before January 1, 2007, paragraph 
(3) shall only apply to the applicable per-
centage of such securities. This subpara-
graph shall be applied separately with re-
spect to each class of securities. 
‘‘(ii) EXCEPTION FOR CERTAIN PAR-
TICIPANTS AGED 55 OR OVER.—Clause (i) 
shall not apply to an applicable individual 
who is a participant who has attained age 
55 and completed at least 3 years of serv-
ice before the first plan year beginning 
after December 31, 2005. 
‘‘(B) 
APPLICABLE
PERCENTAGE.—For 
purposes of subparagraph (A), the applicable 
percentage shall be determined as follows:
695
‘‘Plan year to which 
The applicable 
paragraph (3) applies: 
percentage is: 
1st ......................................................................................................
2d .......................................................................................................
3d .......................................................................................................
100.’’.
(2) 
CONFORMING
AMENDMENT.—Section 
407(b)(3) of such Act (29 U.S.C. 1107(b)(3)) is 
amended by adding at the end the following: 
‘‘(D) For diversification requirements for quali-
fying employer securities held in certain individual 
account plans, see section 204(j).’’. 
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graphs (2) and (3), the amendments made by this 
section shall apply to plan years beginning after De-
cember 31, 2006. 
(2) SPECIAL
RULE
FOR
COLLECTIVELY
BAR-
GAINED AGREEMENTS.—In the case of a plan main-
tained pursuant to 1 or more collective bargaining 
agreements between employee representatives and 1 
or more employers ratified on or before the date of 
the enactment of this Act, paragraph (1) shall be 
applied to benefits pursuant to, and individuals cov-
ered by, any such agreement by substituting for 
‘‘December 31, 2006’’ the earlier of—
(A) the later of—
(i) December 31, 2007, or
696
(ii) the date on which the last of such 
collective bargaining agreements termi-
nates (determined without regard to any 
extension thereof after such date of enact-
ment), or 
(B) December 31, 2008. 
(3) SPECIAL RULE FOR CERTAIN EMPLOYER SE-
CURITIES HELD IN AN ESOP.—
(A) IN GENERAL.—In the case of employer 
securities to which this paragraph applies, the 
amendments made by this section shall apply to 
plan years beginning after the earlier of—
(i) December 31, 2007, or 
(ii) the first date on which the fair 
market value of such securities exceeds the 
guaranteed minimum value described in 
subparagraph (B)(ii). 
(B) APPLICABLE SECURITIES.—This para-
graph shall apply to employer securities which 
are attributable to employer contributions other 
than elective deferrals, and which, on Sep-
tember 17, 2003—
(i) consist of preferred stock, and 
(ii) are within an employee stock own-
ership 
plan 
(as 
defined 
in 
section
697
4975(e)(7) of the Internal Revenue Code 
of 1986), the terms of which provide that 
the value of the securities cannot be less 
than the guaranteed minimum value speci-
fied by the plan on such date. 
(C) COORDINATION
WITH
TRANSITION 
RULE.—In applying section 401(a)(35)(H) of 
the Internal Revenue Code of 1986 and section 
204(j)(7) of the Employee Retirement Income 
Security Act of 1974 (as added by this section) 
to employer securities to which this paragraph 
applies, the applicable percentage shall be de-
termined without regard to this paragraph. 
SEC. 902. INCREASING PARTICIPATION THROUGH AUTO-
MATIC CONTRIBUTION ARRANGEMENTS. 
(a) IN GENERAL.—Section 401(k) of the Internal 
Revenue Code of 1986 (relating to cash or deferred ar-
rangement) is amended by adding at the end the following 
new paragraph: 
‘‘(13) ALTERNATIVE METHOD FOR AUTOMATIC 
CONTRIBUTION
ARRANGEMENTS
TO
MEET
NON-
DISCRIMINATION REQUIREMENTS.—
‘‘(A) IN GENERAL.—A qualified automatic 
contribution arrangement shall be treated as
698
meeting 
the 
requirements 
of 
paragraph 
(3)(A)(ii). 
‘‘(B) QUALIFIED
AUTOMATIC
CONTRIBU-
TION
ARRANGEMENT.—For purposes of this 
paragraph, the term ‘qualified automatic con-
tribution arrangement’ means any cash or de-
ferred arrangement which meets the require-
ments of subparagraphs (C) through (E). 
‘‘(C) AUTOMATIC DEFERRAL.—
‘‘(i) IN GENERAL.—The requirements 
of this subparagraph are met if, under the 
arrangement, each employee eligible to 
participate in the arrangement is treated 
as having elected to have the employer 
make elective contributions in an amount 
equal to a qualified percentage of com-
pensation. 
‘‘(ii) ELECTION
OUT.—The election 
treated as having been made under clause 
(i) shall cease to apply with respect to any 
employee if such employee makes an af-
firmative election—
‘‘(I) to not have such contribu-
tions made, or
699
‘‘(II) to make elective contribu-
tions at a level specified in such af-
firmative election. 
‘‘(iii) QUALIFIED PERCENTAGE.—For 
purposes of this subparagraph, the term 
‘qualified percentage’ means, with respect 
to any employee, any percentage deter-
mined under the arrangement if such per-
centage is applied uniformly, does not ex-
ceed 10 percent, and is at least—
‘‘(I) 3 percent during the period 
ending on the last day of the first 
plan year which begins after the date 
on which the first elective contribution 
described in clause (i) is made with 
respect to such employee, 
‘‘(II) 4 percent during the first 
plan year following the plan year de-
scribed in subclause (I), 
‘‘(III) 5 percent during the sec-
ond plan year following the plan year 
described in subclause (I), and 
‘‘(IV) 6 percent during any sub-
sequent plan year.
700
‘‘(iv) AUTOMATIC
DEFERRAL
FOR 
CURRENT
EMPLOYEES
NOT
REQUIRED.—
Clause (i) may be applied without taking 
into account any employee who—
‘‘(I) was eligible to participate in 
the arrangement (or a predecessor ar-
rangement) immediately before the 
date on which such arrangement be-
comes a qualified automatic contribu-
tion arrangement (determined after 
application of this clause), and 
‘‘(II) had an election in effect on 
such date either to participate in the 
arrangement or to not participate in 
the arrangement. 
‘‘(D) MATCHING
OR
NONELECTIVE
CON-
TRIBUTIONS.—
‘‘(i) IN GENERAL.—The requirements 
of this subparagraph are met if, under the 
arrangement, the employer—
‘‘(I) makes matching contribu-
tions on behalf of each employee who 
is not a highly compensated employee 
in an amount equal to the sum of 100 
percent of the elective contributions of
701
the employee to the extent that such 
contributions do not exceed 1 percent 
of compensation plus 50 percent of so 
much of such compensation as exceeds 
1 percent but does not exceed 6 per-
cent of compensation, or 
‘‘(II) is required, without regard 
to whether the employee makes an 
elective contribution or employee con-
tribution, to make a contribution to a 
defined contribution plan on behalf of 
each employee who is not a highly 
compensated employee and who is eli-
gible to participate in the arrange-
ment in an amount equal to at least 
3 percent of the employee’s compensa-
tion. 
‘‘(ii) APPLICATION
OF
RULES
FOR 
MATCHING CONTRIBUTIONS.—The rules of 
clauses (ii) and (iii) of paragraph (12)(B) 
shall apply for purposes of clause (i)(I). 
‘‘(iii) WITHDRAWAL AND VESTING RE-
STRICTIONS.—An arrangement shall not be 
treated as meeting the requirements of 
clause (i) unless, with respect to employer
702
contributions (including matching con-
tributions) taken into account in deter-
mining whether the requirements of clause 
(i) are met—
‘‘(I) any employee who has com-
pleted at least 2 years of service 
(within 
the 
meaning 
of 
section 
411(a)) has a nonforfeitable right to 
100 percent of the employee’s accrued 
benefit derived from such employer 
contributions, and 
‘‘(II) the requirements of sub-
paragraph (B) of paragraph (2) are 
met with respect to all such employer 
contributions. 
‘‘(iv) 
APPLICATION
OF
CERTAIN 
OTHER
RULES.—The rules of subpara-
graphs (E)(ii) and (F) of paragraph (12) 
shall apply for purposes of subclauses (I) 
and (II) of clause (i). 
‘‘(E) NOTICE REQUIREMENTS.—
‘‘(i) IN GENERAL.—The requirements 
of this subparagraph are met if, within a 
reasonable period before each plan year, 
each employee eligible to participate in the