existing regulations issued under section 414(r) of the Inter-
nal Revenue Code of 1986 in order to expand (to the extent
that the Secretary determines appropriate) the ability of
a pension plan to demonstrate compliance with the line of
business requirements based upon the facts and cir-
cumstances surrounding the design and operation of the
plan, even though the plan is unable to satisfy the mechan-
ical tests currently used to determine compliance.
SEC. 205. 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) of the
Internal Revenue Code of 1986 and subparagraph
(H) of section 401(a)(26) of such Code 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) of the
Internal Revenue Code of 1986 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 political subdivision thereof
(or agency or instrumentality thereof)’’.
(b) CONFORMING AMENDMENTS.—
(1) The heading for subparagraph (G) of section
401(a)(5) of such Code is amended to read as follows:
‘‘GOVERNMENTAL PLANS.—’’.
(2) The heading for subparagraph (H) of section
401(a)(26) of such Code is amended to read as fol-
lows: ‘‘EXCEPTION FOR GOVERNMENTAL PLANS.—’’.
(3) Subparagraph (G) of section 401(k)(3) of
such Code 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,
2002.
SEC. 206. 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) of the Internal Revenue Code of
1986 is amended by striking ‘‘90-day’’ and in-
serting ‘‘180-day’’.
(B) MODIFICATION OF REGULATIONS.—The
Secretary of the Treasury shall modify the regu-
lations under sections 402(f), 411(a)(11), and
417 of the Internal Revenue Code of 1986 to sub-
stitute ‘‘180 days’’ for ‘‘90 days’’ each place it
appears 
in 
Treasury 
Regulations 
sections
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, 2002.
(b) CONSENT REGULATION INAPPLICABLE TO CERTAIN
DISTRIBUTIONS.—
(1) IN GENERAL.—The Secretary of the Treasury
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 describe the
consequences of failing to defer such receipt.
(2) EFFECTIVE DATE.—
(A) IN
GENERAL.—The modifications re-
quired by paragraph (1) shall apply to years be-
ginning after December 31, 2002.
(B) REASONABLE NOTICE.—In the case of
any description of such consequences made before
the date that is 90 days after the date on which
the Secretary of the Treasury issues a safe har-
bor description under paragraph (1), a plan
shall not be treated as failing to satisfy the re-
quirements of section 411(a)(11) of such Code by
reason of the failure to provide the information
required by the modifications made under para-
graph (1) if the Administrator of such plan
makes a reasonable attempt to comply with such
requirements.
SEC. 207. 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.’’.
(b) DEFINITION OF NEW SINGLE-EMPLOYER PLAN.—
Section 4006(a)(3) of the Employee Retirement Income Se-
curity Act of 1974 (29 U.S.C. 1306(a)(3)) is amended by
adding at the end the following new subparagraph:
‘‘(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 mem-
ber of such sponsor’s controlled group (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 sin-
gle-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 employ-
ees.
‘‘(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 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 December 31,
2001.
SEC. 208. 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 add-
ing 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 de-
termined under clause (ii) and the applicable percentage.
For purposes of this clause, the term ‘applicable percentage’
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
of its first 5 plan years if, during the 36-month period end-
ing 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 additional
premium determined under subparagraph (E) for each par-
ticipant 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 employees
of all members of the contributing sponsor’s controlled
group. In the case of a plan maintained by two or more
contributing sponsors, the employees of all contributing
sponsors and their controlled groups shall be aggregated 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, 2001.
(2) SUBSECTION (b).—The amendments made by
subsection (b) shall apply to plan years beginning
after December 31, 2002.
SEC. 209. AUTHORIZATION FOR PBGC TO PAY INTEREST ON
PREMIUM OVERPAYMENT REFUNDS.
(a) IN GENERAL.—Section 4007(b) of the Employment
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-
ignated payor. Interest under this paragraph shall be cal-
culated at the same rate and in the same manner as interest
is calculated for underpayments under paragraph (1).’’.
(b) EFFECTIVE DATE.—The amendment made by sub-
section (a) shall apply to interest accruing for periods be-
ginning not earlier than the date of the enactment of this
Act.
SEC. 210. SUBSTANTIAL OWNER BENEFITS IN TERMINATED
PLANS.
(a) MODIFICATION OF PHASE-IN OF GUARANTEE.—
Section 4022(b)(5) of the Employee Retirement Income Se-
curity 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 ‘ma-
jority owner’ means an individual who, at any time during
the 60-month period ending on the date the determination
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
‘‘(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 section
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)’’.
(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 sat-
isfy in full the benefits of all individuals who are de-
scribed in that paragraph, the assets shall be allocated
first to benefits described in subparagraph (A) of that
paragraph. Any remaining assets shall then be allo-
cated to benefits described in subparagraph (B) of
that paragraph. If assets allocated to such subpara-
graph (B) are insufficient to satisfy in full the bene-
fits described in that subparagraph, the assets 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.—
(1) Section 4021 of the Employee Retirement In-
come Security Act of 1974 (29 U.S.C. 1321) is
amended—
(A) in subsection (b)(9), by striking ‘‘as de-
fined 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)).’’.
(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 section
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 Jan-
uary 1, 2003.
SEC. 211. STUDIES.
(a) 
MODEL
SMALL
EMPLOYER
GROUP
PLANS
STUDY.—As soon as practicable after the date of the enact-
ment of this Act, the Secretary of Labor, in consultation
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
(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 con-
tribute in a manner independent of employer
sponsorship, and
(2) appropriate methods and strategies for mak-
ing pension plan coverage described in paragraph (1)
more widely available to American workers.
(b) MATTERS TO BE CONSIDERED.—In conducting the
study under subsection (a), the Secretary of Labor shall con-
sider the adequacy and availability of existing employee
pension benefit plans and the extent to which existing mod-
els 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 Committee on Ways
and Means of the House of Representatives and the Com-
mittee on Health, Education, Labor, and Pensions and the
Committee on Finance of the Senate. Such recommenda-
tions 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 legisla-
tive 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 provi-
sions of this Act and title VI of the Economic Growth and
Tax Relief Reconciliation Act of 2001 on pension plan cov-
erage, 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.
SEC. 212. INTEREST RATE RANGE FOR ADDITIONAL FUND-
ING REQUIREMENTS.
(a) 
IN
GENERAL.—Subclause 
(III) 
of 
section
412(l)(7)(C)(i) of the Internal Revenue Code of 1986 is
amended—
(1) by striking ‘‘2002 or 2003’’ in the text and
inserting ‘‘2001, 2002, or 2003’’, and
(2) by striking ‘‘2002 AND 2003’’ in the heading
and inserting ‘‘2001, 2002, AND 2003’’.
(b) EFFECTIVE DATE.—The amendments made by this
section shall take effect as if included in the amendments
made by section 405 of the Job Creation and Worker Assist-
ance Act of 2002.
SEC. 213. PROVISIONS RELATING TO PLAN AMENDMENTS.
(a) IN GENERAL.—If this section applies to any plan
or contract amendment—
(1) such plan or contract shall be treated as
being operated in accordance with the terms of the
plan for purposes of the Internal Revenue Code of
1986 during the period described in subsection
(b)(2)(A), and
(2) except as provided by the Secretary of the
Treasury, such plan shall not fail to meet the require-
ments of section 411(d)(6) of the Internal Revenue
Code of 1986 by reason of such amendment.
(b) AMENDMENTS TO WHICH SECTION APPLIES.—
(1) IN GENERAL.—This section shall apply to
any amendment to any plan or annuity contract
which is made—
(A) pursuant to any amendment made by
this title or title VI of the Economic Growth and
Tax Relief Reconciliation Act of 2001, or pursu-
ant to any regulation issued by the Secretary of
the Treasury under this title or such title VI,
and
(B) on or before the last day of the first
plan year beginning on or after January 1,
2005.
In the case of a governmental plan (as defined in sec-
tion 414(d) of the Internal Revenue Code of 1986),
this paragraph shall be applied by substituting
‘‘2007’’ for ‘‘2005’’.
(2) CONDITIONS.—This section shall not apply to
any amendment unless—
(A) during the period—
(i) beginning on the date the legislative
or regulatory amendment described in para-
graph (1)(A) takes effect (or in the case of
a plan or contract amendment not required
by such legislative or regulatory amend-
ment, the effective date specified by the
plan), and
(ii) ending on the date described in
paragraph (1)(B) (or, if earlier, the date the
plan or contract amendment is adopted),
the plan or contract is operated as if such plan
or contract amendment were in effect; and
(B) such plan or contract amendment ap-
plies retroactively for such period.
TITLE III—STOCK OPTIONS
SEC. 301. 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) of the Internal Revenue
Code of 1986 (relating to definition of wages) is
amended by striking ‘‘or’’ at the end of para-
graph (20), by striking the period at the end of
paragraph (21) and inserting ‘‘; or’’, and by in-
serting after paragraph (21) the following 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 de-
fined 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 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 sec-
tion 423(b) of such Code), or
‘‘(B) any disposition by the individual of
such stock.’’.
(2) RAILROAD RETIREMENT TAXES.—Subsection
(e) of section 3231 of such Code 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 de-
fined in section 423(b)), or
‘‘(B) any disposition by the individual of
such stock.’’.
(3) UNEMPLOYMENT TAXES.—Section 3306(b) of
such Code (relating to definition of wages) is amend-
ed by striking ‘‘or’’ at the end of paragraph (16), by
striking the period at the end of paragraph (17) and
inserting ‘‘; 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 de-
fined 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) of such Code
(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 attrib-
utable 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) of such Code (relating to special rule where option
price is between 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 options
exercised after the date of the enactment of this Act.
TITLE 
IV—SOCIAL 
SECURITY
AND MEDICARE HELD HARM-
LESS
SEC. 401. PROTECTION OF SOCIAL SECURITY AND MEDI-
CARE.
The amounts transferred to any trust fund under the
Social Security Act shall be determined as if this Act had
not been enacted.
Union Calendar No. 232
107TH CONGRESS
2D SESSION
H. R. 3669
[Report No. 107–382, Part I]
A BILL
To amend the Internal Revenue Code of 1986 to
empower employees to control their retirement
savings accounts through new diversification
rights, new disclosure requirements, and new tax
incentives for retirement education.
APRIL 9, 2002
The Committee on Education and the Workforce dis-
charged; committed to the Committee of the Whole
House on the State of the Union and ordered to be
printed