[Senate Report 107-242]
[From the U.S. Government Publishing Office]
Calendar No. 552
107th Congress Report
SENATE
2d Session 107-242
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NATIONAL EMPLOYEE SAVINGS AND TRUST EQUITY GUARANTEE ACT
_______
August 2, 2002.--Ordered to be printed
Filed under authority of the order of the Senate of August 1, 2002
_______
Mr. Baucus, from the Committee on Finance, submitted the following
R E P O R T
[To accompany S. 1971]
The Committee on Finance, to which was referred the bill
(S. 1971) to amend the Internal Revenue Code of 1986 and the
Employee Retirement Income Security Act of 1974 to protect the
retirement security of American workers by ensuring that
pension assets are adequately diversified and by providing
workers with adequate access to, and information about, their
pension plans, and for other purposes, having considered the
same, reports favorably thereon with an amendment in the nature
of a substitute and recommends that the bill, as amended, do
pass.
CONTENTS
Page
I. Legislative Background............................................3
II. Explanation of the Bill...........................................3
Title I. Diversification of Pension Plan Assets...................3
A. Defined Contribution Plans Required to Provide
Employees with Freedom to Invest Their Plan Assets
(sec. 101 of the bill, new sec. 401(a)(35) of the
Code, and new sec. 204(j) of ERISA)................ 3
Title II. Protection of Employees During Pension Plan Transaction
Suspension Period.................................................9
A. Notice to Participants or Beneficiaries of
Transaction Suspension Periods (sec. 201 of the
bill, new sec. 4980G of the Code, and new sec.
101(i) of ERISA)................................... 9
B. Inapplicability of Relief from Fiduciary Liability
During Suspension of Ability of Participant or
Beneficiary to Direct Investments (sec. 202 of the
bill and sec. 404(c) of ERISA)..................... 13
C. Clarification of Participant Access to Remedies
under ERISA (sec. 203 of the bill and sec. 409 of
ERISA)............................................. 16
D. Increased Maximum Bond Amount for Plans Holding
Employer Securities (sec. 204 of the bill and sec.
412(a) of ERISA)................................... 17
Title III. Providing Information to Assist Participants..........18
A. Benefit Statements and Investment Guidelines (secs.
301-302 of the bill, new sec. 4980H of the Code,
and secs. 104 and 105 of ERISA).................... 18
B. Information on Optional Forms of Benefit (sec. 303
of the bill)....................................... 23
C. Fiduciary Duty to Provide Material Information
Relating to Investment in Employer Stock (sec. 304
of the bill and sec. 404(c) of ERISA).............. 24
D. Electronic Disclosure of Insider Trading (sec. 305
of the bill and sec. 101 of ERISA)................. 26
E. Fiduciary Rules for Plan Sponsors Designating
Independent Investment Advisors (sec. 306 of the
bill and new sec. 404(e) of ERISA)................. 27
Title IV. Other Provisions Relating to Pensions..................29
A. Employee Plans Compliance Resolution System (sec.
401 of the bill)................................... 29
B. Extension to all Governmental Plans of Moratorium on
Application of Certain Nondiscrimination Rules
Applicable to State and Local Government Plans
(sec. 402 of the bill, sec. 1505 of the Taxpayer
Relief Act of 1997, and secs. 401(a) and 401(k) of
the Code).......................................... 30
C. Notice and Consent Period Regarding Distributions
(sec. 403 of the bill, sec. 417 of the Code, and
sec. 205 of ERISA)................................. 31
D. Technical Corrections to Saver Act (sec. 404 of the
bill and sec. 517 of ERISA)........................ 33
E. Missing Participants (sec. 405 of the bill and secs.
206(f) and 4050 of ERISA).......................... 34
F. Reduced PBGC Premiums for Small and New Plans (secs.
406-407 of the bill and sec. 4006 of ERISA)........ 35
G. Authorization for PBGC to Pay Interest on Premium
Overpayment Refunds (sec. 408 of the bill and sec.
4007(b) of ERISA).................................. 36
H. Rules for Substantial Owner Benefits in Terminated
Plans (sec. 409 of the bill and secs. 4022 and 4044
of ERISA).......................................... 37
I. Benefit Suspension Notice (sec. 410 of the bill).... 38
J. Interest Rate Range for Additional Funding
Requirements (sec. 411 of the bill, sec. 412 of the
Code, and secs. 302 and 4006 of ERISA)............. 39
K. Voluntary Early Retirement Incentive Plans
Maintained by Local Educational Agencies and Other
Entities (sec. 412 of the bill, sec. 457 of the
Code, sec. 3(2)(B) of ERISA, and sec. 4(l)(1) of
the Age Discrimination in Employment Act).......... 41
L. Automatic Rollovers of Certain Involuntary
Distributions (sec. 413 of the bill and sec. 404(c)
of ERISA).......................................... 44
M. Extension of Transition Rule to Pension Funding
Requirements (sec. 414 of the bill and sec. 769(c)
of the Retirement Protection Act of 1994).......... 46
N. Studies (secs. 421-425 of the bill)................. 48
O. Plan Amendments (sec. 431 of the bill).............. 49
Title V. Provisions Relating to Executives and Stock Options.....51
A. Repeal of Limitation on Issuance of Treasury
Guidance Regarding Nonqualified Deferred
Compensation (sec. 501 of the bill)................ 51
B. Taxation of Deferred Compensation Provided through
Offshore Trusts (sec. 502 of the bill and sec. 83
of the Code)....................................... 54
C. Treatment of Loans to Executives (sec. 503 of the
bill and new sec. 7872A and sec. 7872 of the Code). 56
D. Required Wage Withholding at Top Marginal Rate for
Supplemental Wage Payments in Excess of $1 Million
(sec. 504 of the bill and sec. 13273 of the Revenue
Reconciliation Act of 1993)........................ 59
E. Chief Executive Officer Required To Sign Corporate
Income Tax Returns (sec. 511 of the bill and sec.
6062 of the Code).................................. 60
F. Exclusion of Incentive Stock Options and Employee
Stock Purchase Plan Stock Options from Wages (sec.
521 of the bill and secs. 421(b), 423(c), 3121(a),
3231, and 3306(b) of the Code)..................... 61
G. Capital Gain Treatment on Sale of Stock Acquired
from Exercise of Statutory Stock Options to Comply
with Conflict of Interest Requirements (sec. 522 of
the bill and sec. 421 of the Code)................. 62
III.Budget Effects of the Bill.......................................64
A. Committee Estimates................................. 64
B. Budget Authority and Tax Expenditures............... 68
C. Consultation with Congressional Budget Office....... 68
IV. Votes of the Committee...........................................68
V. Regulatory Impact and Other Matters..............................68
A. Regulatory Impact................................... 68
B. Unfunded Mandates Statement......................... 69
C. Tax Complexity Analysis............................. 69
VI. Changes in Existing Law Made By the Bill as Reported.............70
I. LEGISLATIVE BACKGROUND
The Senate Committee on Finance marked up S. 1971 (the
``National Employee Savings and Trust Equity Guarantee Act'')
on July 11, 2002, and ordered the bill, as amended, favorably
reported by voice vote.
The Committee held a hearing on February 27, 2002,
regarding retirement security. The Committee also held a
hearing on April 18, 2002, regarding corporate governance and
executive compensation.
II. EXPLANATION OF THE BILL
TITLE I. DIVERSIFICATION OF PENSION PLAN ASSETS
A. Defined Contribution Plans Required To Provide Employees With
Freedom To Invest Their Plan Assets
(Sec. 101 of the bill, new sec. 401(a)(35) of the Code, and new sec.
204(j) of ERISA)
PRESENT LAW
In general
Qualified retirement plans are subject to regulation under
the Internal Revenue Code (the ``Code'') and under the Employee
Retirement Income Security Act of 1974 (``ERISA''). Some of the
requirements under the Code and ERISA for qualified retirement
plans are identical or very similar. For example, both the Code
and ERISA impose minimum participation and vesting
requirements. Other requirements are contained only in the Code
or only in ERISA. In the case of a Code requirement, failure to
satisfy the requirement could result in the loss of qualified
status for the plan or in the imposition of an excise tax. In
the case of an ERISA requirement, failure to satisfy the
requirement could result in the imposition of a penalty or a
civil action by a participant or the Department of Labor.
The Code and ERISA contain different rules that limit the
investment of defined contribution plan assets in employer
securities. The extent to which the limits apply depends on the
type of plan and the type of contribution involved.
Diversification requirements applicable to employee stock ownership
plans (``ESOPs'')
An ESOP is a defined contribution plan that is designated
as an ESOP and is designed to invest primarily in stock of the
employer. An ESOP can be an entire plan or it can be a
component of a larger defined contribution plan. An ESOP may
provide for different types of contributions, including
employer nonelective contributions and others. For example, an
ESOP may include a 401(k) feature that permits employees to
make elective deferrals.\1\
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\1\ Such an ESOP design is sometimes referred to as a ``KSOP.''
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Under the Code,\2\ ESOPs are subject to a requirement that
a participant who has attained age 55 and who has at least 10
years of participation in the plan must be permitted to
diversify the investment of the participant's account in assets
other than employer securities. The diversification requirement
applies to a participant for six years, starting with the year
in which the individual firsts meets the eligibility
requirements (i.e., age 55 and 10 years of participation). The
participant must be allowed to elect to diversify up to 25
percent of the participant's account (50 percent in the sixth
year), reduced by the portion of the account diversified in
prior years.
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\2\ All references are to provisions of the Code unless otherwise
indicated.
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The participant must be given 90 days after the end of each
plan year in the election period to make the election to
diversify. In the case of participants who elect to diversify,
the plan satisfies the diversification requirement if (1) the
plan distributes the applicable amount to the participant
within 90 days after the election period, (2) the plan offers
at least three investment options (not inconsistent with
Treasury regulations) and, within 90 days of the election
period, invests the applicable amount in accordance with the
participant's election, or (3) the applicable amount is
transferred within 90 days of the election period to another
qualified defined contribution plan of the employer providing
investment options in accordance with (2).\3\
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\3\ Sec. 401(a)(28); IRS Notice 88-56, 1988-1 C.B. 540, Q&A 16.
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10-percent limit on the acquisition of employer securities
The Employee Retirement Income Security Act of 1974
(``ERISA'') prohibits money purchase pension plans (other than
certain plans in existence before the enactment of ERISA) from
acquiring employer securities if, after the acquisition, more
than 10 percent of the assets of the plan would be invested in
employer stock. This 10-percent limitation generally does not
apply to other types of defined contribution plans.\4\ Thus,
most defined contribution plans, such as profit-sharing plans,
stock bonus plans, and ESOPs, are not subject to any limit
under ERISA on the amount of employer contributions that can be
invested in employer securities. In addition, a fiduciary
generally is deemed not to violate the requirement that plan
assets be diversified with respect to the acquisition or
holding of employer securities in such plans.\5\
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\4\ The 10-percent limitation also applies to defined benefit plans
and to a defined contribution plan that is part of an arrangement under
which benefits payable to a participant under a defined benefit plan
are reduced by benefits under the defined contribution plan (i.e., a
``floor-offset'' arrangement).
\5\ Under ERISA, plans that are not subject to the 10-percent
limitation on the acquisition of employer securities are referred to as
``eligible individual account plans.''
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Under ERISA, the 10-percent limitation on the acquisition
of employer securities, described above, applies separately to
the portion of a plan consisting of elective deferrals (and
earnings thereon) if any portion of an individual's elective
deferrals (or earnings thereon) are required to be invested in
employer securities pursuant to plan terms or the direction of
a person other than the participant. This restriction does not
apply if (1) the amount of elective deferrals required to be
invested in employer securities does not exceed more than one
percent of any employee's compensation, (2) the fair market
value of all defined contribution plans maintained by the
employer is no more than 10-percent of the fair market value of
all retirement plans of the employer, or (3) the plan is an
ESOP.
REASONS FOR CHANGE
The Committee understands that employer securities are one
possible investment for defined contribution plans. In some
cases, the plan may offer employer securities as one of several
investment options made available to plan participants. In
other cases, the plan may provide that certain contributions
are invested in employer securities. For example, many plans
provide that employer matching contributions with respect to
employee elective deferrals under a qualified cash or deferred
arrangement are to be invested in employer securities.
Present law has facilitated and encouraged the acquisition
of employer securities by qualified plans, particularly in the
case of ESOPs. Thus, for example, present law provides that the
dividends paid on employer securities held by an ESOP are
deductible under certain circumstances and also allows an ESOP
to borrow to acquire the employer securities. Present law
recognizes that employer securities can be a profitable
investment for employees as well as a corporate financing tool
for employers. Employees who hold employer securities through a
defined contribution plan often feel that they have a stake in
the business, leading to increased profitability.
On the other hand, the Committee recognizes that
diversification of assets is a basic principle of sound
investment policy and that requiring that certain contributions
be invested in employer securities may create tension with the
objectives of diversification. Failure to adequately diversify
defined contribution plan investments may jeopardize retirement
security.
The Committee believes that allowing participants greater
opportunity to diversify plan investments in employer stock
will help participants achieve their retirement security goals,
while continuing to allow employers and employees the freedom
to choose their own investments. Thus, the Committee bill
requires defined contribution plans that hold employer
securities that are publicly traded to permit qualified plan
participants to direct the plan to reinvest employer securities
in other assets. The Committee bill generally requires
diversification in accordance with the present-law rules
regarding vesting.
The Committee believes that the current role of ESOPs
should be preserved; thus, the bill does not apply additional
diversification requirements to ``stand alone'' ESOPs, meaning
ESOPs that do not hold elective deferrals and related
contributions. Again, the Committee believes this strikes an
appropriate balance between the principle of diversification
and the goals served by ESOPs. For example, some ESOPs hold a
controlling interest in the employer, and the Committee
believes it is appropriate to encourage this form of ownership.
EXPLANATION OF PROVISION
In general
Under the provision, in order to satisfy the requirements
under the Code and under ERISA, certain defined contribution
plans are required to provide diversification rights with
respect to amounts invested in employer securities. Such a plan
is required to permit applicable individuals to direct that the
portion of the individual's account held in employer securities
be invested in alternative investments. An applicable
individual includes (1) any plan participant; and (2) any
beneficiary who has an account under the plan with respect to
which the beneficiary is entitled to exercise the rights of a
participant. The time when the diversification requirements
apply depends on the type of contributions invested in employer
securities.
Plans subject to requirements
The diversification requirements generally apply to any
defined contribution plan holding publicly-traded employer
securities (i.e., securities issued by the employer or a member
of the employer's controlled group of corporations \6\ that are
readily tradable on an established securities market). For this
purpose, a plan holding employer securities that are not
publicly traded is generally treated as holding publicly-traded
employer securities if the employer (or any member of the
employer's controlled group of corporations) has issued any
class of publicly-traded stock. This treatment does not apply
if the employer (and any parent corporation \7\ of the
employer) has not issued any publicly-traded security or any
special class of stock that grants particular rights to, or
bears particular risks for, the holder or the issuer with
respect to any member of the employer's controlled group that
has issued any class of publicly-traded stock. The Secretary of
the Treasury has the authority to provide other exceptions in
regulations. For example, an exception may be appropriate if no
stock of the employer maintaining the plan (including stock
held in the plan) is publicly traded, but a member of the
employer's controlled group has issued a small amount of
publicly-traded stock.
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\6\ For this purpose, ``controlled group of corporations'' has the
same meaning as under section 1563(a), except that, in applying that
section, 50 percent is substituted for 80 percent.
\7\ For this purpose, ``parent corporation'' has the same meaning
as under section 424(e), i.e., any corporation (other than the
employer) in an unbroken chain of corporations ending with the employer
if each corporation other than the employer owns stock possessing at
least 50 percent of the total combined voting power of all classes of
stock with voting rights or at least 50 percent of the total value of
shares of all classes of stock in one of the other corporations in the
chain.
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The diversification requirements do not apply to an ESOP
that (1) does not hold contributions (or earnings thereon) that
are subject to the special nondiscrimination tests that apply
to elective deferrals, employee after-tax contributions, and
matching contributions, and (2) is a separate plan from any
other qualified retirement plan of the employer. Accordingly,
an ESOP that holds elective deferrals, employee contributions,
employer matching contributions, or nonelective employer
contributions used to satisfy the special nondiscrimination
tests (including the safe harbor methods of satisfying the
tests) is subject to the diversification requirements under the
provision. An ESOP that is subject to the diversification
requirements under the provision is no longer subject to the
present-law ESOP diversification rules.\8\
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\8\ Providing the diversification rights required under the
provision, or greater diversification rights, will not cause an ESOP to
fail to be designed to invest primarily in qualifying employer
securities under section 4975(e)(7)(A).
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The diversification requirements under the provision do not
apply to a one-participant retirement plan. A one-participant
retirement plan is a plan that (1) on the first day of the plan
year, covers only an individual (or the individual and his or
her spouse) and the individual owns the entire business
maintaining the plan (whether or not incorporated) or covers
only one or more partners (or partners and their spouses) in a
business partnership, (2) meets the minimum coverage
requirements without being combined with any other plan that
covers employees of the business, (3) does not provide benefits
to anyone except the individuals (and spouses) described in
(1), (4) does not cover a business that is a member of an
affiliated service group, a controlled group of corporations,
or a group of corporations under common control, and (5) does
not cover a business that uses leased employees.\9\
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\9\ The term ``one-participant retirement plan'' is defined in the
provision relating to notice of a transaction suspension period.
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Elective deferrals and employee contributions
In the case of amounts attributable to elective deferrals
under a qualified cash or deferred arrangement and employee
after-tax contributions that are invested in employer
securities, any applicable individual must be permitted to
direct that such amounts be invested in alternative
investments.
Other contributions
In the case of amounts attributable to all other
contributions (i.e., nonelective employer contributions and
employer matching contributions), an applicable individual who
is a participant with three years of service,\10\ a beneficiary
of such a participant, or a beneficiary of a deceased
participant must be permitted to direct that such amounts be
invested in alternative investments.
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\10\ Years of service is defined as under the rules relating to
vesting (sec. 411(a)).
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The provision provides a transition rule for amounts
attributable to these other contributions that are invested in
employer securities acquired before the first plan year for
which diversification requirements apply. Under the transition
rule, for the first three years for which the new
diversification requirements apply to the plan, the applicable
percentage of such amounts is subject to diversification as
shown in Table 1, below. In determining the portion of the
account subject to diversification under the transition rule,
any previous diversification of employer securities pursuant to
an election under the present-law ESOP diversification
requirements is taken into account. The transition rule does
not apply to plan participants who have three years of service
and who have attained age 55 by the beginning of the first plan
year beginning after December 31, 2002.
TABLE 1.--APPLICABLE PERCENTAGE FOR EMPLOYER SECURITIES HELD ON
EFFECTIVE DATE
------------------------------------------------------------------------
Plan year for which diversification
applies Applicable percentage
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First year............................. 33 (or, if greater, the amount
that would be required under
present-law ESOP
diversification rule).
Second year............................ 66.
Third year............................. 100.
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The application of the transition rule is illustrated by
the following example. Suppose that the account of a
participant with at least three years of service held 120
shares of employer stock contributed as matching contributions
before the diversification requirements became effective. In
the first year for which diversification applies, 33 percent
(i.e., 40 shares) of that stock is subject to the
diversification requirements. In the second year for which
diversification applies, a total of 66 percent of 120 shares of
stock (i.e., 79 shares, or an additional 39 shares) is subject
to the diversification requirements. In the third year for
which diversification applies, 100 percent of the stock, or all
120 shares, is subject to the diversification requirements. In
addition, in each year, employer stock in the account
attributable to elective deferrals and employee after-tax
contributions is fully subject to the diversification
requirements, as is any new stock contributed to the account.
Requirements for investment alternatives
In order to satisfy the diversification requirements, the
plan is required to give applicable individuals a choice of at
least three investment options, other than employer securities,
each of which is diversified and has materially different risk
and return characteristics. Other investment options offered by
the plan generally also have to be available. A plan may not
impose restrictions or conditions with respect to the
investment of employer securities that are not imposed on the
investment of other plan assets (other than restrictions or
conditions imposed by reason of the application of securities
laws). Such a restriction or condition includes a provision
under which a participant who divests his or her account of
employer securities receives less favorable treatment (such as
a lower rate of employer contributions) than a participant
whose account remains invested in employer securities. A plan
does not fail to meet the diversification requirements merely
because the plan limits the times when investment changes can
be made to periodic, reasonable opportunities that occur at
least quarterly.
EFFECTIVE DATE
The provision is generally effective for plan years
beginning after December 31, 2002. In the case of a plan
maintained pursuant to one or more collective bargaining
agreements, the provision is effective for plan years beginning
after the earlier of (1) the later of December 31, 2003, or the
date on which the last of such collective bargaining agreements
terminates (determined without regard to any extension thereof
after the date of enactment), or (2) December 31, 2004.
TITLE II. PROTECTION OF EMPLOYEES DURING PENSION PLAN TRANSACTION
SUSPENSION PERIOD
A. Notice to Participants or Beneficiaries of Transaction Suspension
Periods
(Sec. 201 of the bill, new sec. 4980G of the Code, and new sec. 101(i)
of ERISA)
PRESENT LAW
The Code and ERISA require various notices to be provided
to participants and beneficiaries under an employer-sponsored
retirement plan regarding their rights under the plan. Present
law does not specifically require that participants be given
advance notice of temporary periods during which the ability to
direct investments or to obtain loans or distributions from the
plan is restricted.
Failure to provide a notice required under the Code may
result in the imposition of an excise tax (e.g., sec. 4980F,
relating to notice requirements for plans significantly
reducing benefit accruals) or a reporting penalty (e.g., sec.
6652(i), relating to a failure to give written explanation of
qualifying rollover distributions). Failure to provide a notice
required under ERISA may result in the imposition of a civil
penalty.\11\
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\11\ ERISA also permits the Secretary of Labor, a participant, a
beneficiary, or a plan fiduciary to bring civil action to enforce any
ERISA requirements.
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REASONS FOR CHANGE
In the course of normal plan operation, periods may occur
during which a plan participant's ability to direct the
investment of his or her account or obtain loans or
distributions from the plan is restricted (a so-called
``blackout'' period). These periods usually occur in connection
with administrative changes, such as a change in recordkeepers
or in the investment options offered under a plan. Such a
period may result also from changes in the plan in connection
with a corporate transaction, such as a sale or merger. The
Committee believes that plan participants should be given
advance notice of such a period, before the period begins, in
order to give participants the opportunity to prepare for any
restrictions that will occur. For example, if the ability to
direct investments will be restricted, a participant may wish
to make investment changes before the restriction period
begins.
EXPLANATION OF PROVISION
In general
Under the provision, the Code and ERISA require that
advance notice of a transaction suspension period must be
provided by the administrator of an applicable pension plan to
the applicable individuals to whom the transaction suspension
period applies (and to any employeeorganization representing
such individuals). An applicable individual (as defined under the
provision relating to diversification) is (1) any plan participant and
(2) any beneficiary who has an account under the plan with respect to
which the beneficiary is entitled to exercise the rights of a
participant. Generally, notice must be provided at least 30 days before
the beginning of the transaction suspension period.
An applicable pension plan is a qualified retirement plan
or annuity, a tax-sheltered annuity plan, or an eligible
deferred compensation plan of a governmental employer that
maintains accounts for participants and beneficiaries. An
applicable pension plan includes a plan that is a governmental
plan or a church plan, and such a plan is subject to the notice
requirement under the Code. However, governmental plans
(including an eligible deferred compensation plan of a
governmental employer) and church plans are generally exempt
from ERISA. As a result, the ERISA notice requirement does not
apply to such a plan.
An applicable pension plan does not include a one-
participant retirement plan, defined as a plan that (1) on the
first day of the plan year, covers only an individual (or the
individual and his or her spouse) and the individual owns the
entire business maintaining the plan (whether or not
incorporated) or covers only one or more partners (or partners
and their spouses) in a business partnership, (2) meets the
minimum coverage requirements without being combined with any
other plan that covers employees of the business, (3) does not
provide benefits to anyone except the individuals (and spouses)
described in (1), (4) does not cover a business that is a
member of an affiliated service group, a controlled group of
corporations, or a group of corporations under common control,
and (5) does not cover a business that uses leased employees.
Definition of transaction suspension period
A transaction suspension period means a period of more than
three consecutive business days during which certain rights are
significantly restricted. The rights that are relevant for
purposes of a transaction suspension period are rights
otherwise provided under the plan to one or more applicable
individuals to direct investments (including investments in
employer securities) or to obtain loans or distributions from
the plan. However, rights that are significantly restricted
because of the application of securities laws or other
circumstances specified in regulations and restrictions
required in connection with a qualified domestic relations
order are not taken into account in determining whether a
transaction suspension period occurs.
Whether an individual's right to direct investments or
obtain loans or distributions from the plan is significantly
restricted is generally determined by reference to the normal
rights and procedures provided under the plan. A variety of
factors may be relevant in making this determination. For
example, if, in connection with a change in plan recordkeepers,
no investment directions, loans, or distributions can be
executed over a three-day weekend (i.e., a Saturday, a Sunday,
and a Monday that is a Federal holiday), then no transaction
suspension period results if the participants would not, under
the terms of the plan, have been able to engage in such
transactions during that period in any event. As another
example, suppose a plan provides that a participant's loan
request will be processed within 30 days from the time the loan
request is submitted. The mere fact that, in connection with a
change in plan administrators, the processing of loan requests
is suspended for a ten-day period does not result in a
transaction suspension period if participants' ability to
submit loan requests continues during the ten-day period and
the ten-day suspension does not cause the processing of loan
requests to take longer than the 30-day period provided in the
plan. In addition, if a plan provides that a participant's
ability to make investment changes, or obtain a loan or a
distribution, is limited for a certain period in connection
with a qualified domestic relations order with respect to the
participant's account, that limitation generally does not
result in a transaction suspension period.
In the case of a right that may be exercised at only
certain times, for example, on only certain days during a
month, in determining whether there is a transaction period, it
may be relevant to consider the time until the right is again
available. For example, if, under the plan, rights may be
exercised only on the first three business days of the month, a
significant restriction placed on those rights for those three
days has the effect of restricting those rights until the
following month, even though the restriction is for only three
days.
Factors in addition to the time period involved may also be
relevant in determining whether a transaction suspension period
occurs, and the relevant factors may vary depending on the
rights affected. For example, suppose a plan offers a variety
of investment options, including three options that have
similar characteristics (e.g., similar risk and return
characteristics). If the ability to transfer funds into only
one of these options is restricted, this might not result in a
transaction suspension period for purposes of the provision,
because participants have the right to transfer funds into
similar investment options. In addition, a transaction
suspension period does not occur as a result of plan provisions
that restrict a participant's right to direct the investment of
the assets in his or her account to certain periods, such as
the first fifteen days of each month.
Timing of notice
Notice of a transaction suspension period is generally
required at least 30 days before the beginning of the period.
An exception applies in the case of a transaction suspension
period imposed because of an event outside the control of the
employer, plan, or plan administrator. In that case, notice
must be provided as soon as reasonably practicable under the
circumstances. The Secretary of the Treasury is given the
authority to provide additional exceptions (and to specify the
time when notice is required) in the case of a transaction
suspension period due to other circumstances specified by the
Secretary, including the application of securities laws.
In the case of a transaction suspension period beginning
within 30 days after a major corporate disposition by a
corporation maintaining the plan, the notice requirements are
treated as met if, not later than 30 days before the
disposition, the plan administrator (or the employer
maintaining the plan) provides notice of the transaction
suspension period. A ``major corporate disposition'' means the
disposition of substantially all of the stock of the
corporation, or a subsidiary thereof, or the disposition of
substantially all of the assets used in a trade or business of
the corporation or subsidiary. In accordance with Treasury
regulations, similar rules will apply in the case of an entity
that is not a corporation.
It is intended under the provision that participants will
be given the opportunity to execute investment changes with
respect to their accounts, or obtain loans or distributions
otherwise permitted under the plan, before the transaction
suspension period begins.
Form and content of notice
Notice of a transaction suspension period must be written
in a manner calculated to be understood by the average plan
participant and provide sufficient information (as determined
under Treasury guidance) to allow the recipients to understand
the timing and effect of the transaction suspension period.
Specifically, the notice is required to include (1) the reasons
for the suspension, (2) an identification of the investments
and other rights under the plan that are affected, (3) the
expected beginning date and length of the suspension
period,\12\ and (4) in the case of a transaction suspension
period affecting rights related to plan investments, a
statement that the applicable individual should evaluate the
appropriateness of current investment decisions in light of the
inability to direct or diversify assets during the expected
period of suspension. The notice must be provided in writing
and may be delivered in electronic or other form that is
reasonably expected to result in receipt of the notice by the
applicable individual. The Secretary of the Treasury is
required, in consultation with the Secretary of Labor, to issue
a model transaction suspension period notice.
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\12\ If the expected beginning date or length of the transaction
suspension period changes after notice has been provided, notice of the
change must be provided as soon as reasonably practicable.
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Sanctions for failure to provide notice
Excise tax
An excise tax generally applies in the case of a failure to
provide notice of a transaction suspension period as required
under the Code. A reporting penalty applies in the case of a
failure related to a governmental plan or a church plan.
Under the provision, an excise tax is generally imposed on
the employer if notice of a transaction suspension is not
provided.\13\ The excise tax is $100 per day for each
applicable individual with respect to whom the failure
occurred, until notice is provided or the failure is otherwise
corrected. If the employer exercises reasonable diligence to
meet the notice requirements, the total excise tax imposed
during a taxable year will not exceed $500,000.
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\13\ In the case of a multiemployer plan, the excise tax is imposed
on the plan. In the case of a tax-sheltered annuity program under
section 403(b) that is not treated as established or maintained by the
employer for purposes of ERISA, the excise tax is imposed on the plan
administrator.
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No tax will be imposed with respect to a failure if the
employer does not know that the failure existed and exercises
reasonable diligence to comply with the notice requirement. In
addition, no tax will be imposed if the employer exercises
reasonable diligence to comply and provides the required notice
as soon as reasonably practicable after learning of the
failure. In the case of a failure due to reasonable cause and
not to willful neglect, the Secretary of the Treasury is
authorized to waive the excise tax to the extent that the
payment of the tax would be excessive or otherwise inequitable
relative to the failure involved.
The excise tax does not apply in the case of a failure to
provide notice of a transaction suspension period with respect
to a governmental plan or a church plan. In that case, on
notice and demand by the Secretary, a penalty applies of $100
per day for each applicable individual with respect to whom the
failure occurs, until notice is provided or the failure is
otherwise corrected.\14\ The limitations and exceptions to the
excise tax apply also to the penalty.
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\14\ In the case of a governmental plan or church plan, a penalty
does not apply to a failure to provide notice to an employee
organization.
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ERISA civil penalty
In the case of a failure to provide notice of a transaction
suspension period as required under ERISA, the Secretary of
Labor is authorized to assess a civil penalty of up to $100 per
day for each violation.\15\ For this purpose, each violation
with respect to a single participant or beneficiary is treated
as a separate violation.
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\15\ The civil penalty under ERISA does not apply to a governmental
plan or a church plan that is exempt from ERISA.
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EFFECTIVE DATE
The provision is generally effective for plan years
beginning after December 31, 2002. In the case of a plan
maintained pursuant to one or more collective bargaining
agreements, the provision is effective for plan years beginning
after the earlier of (1) the later of December 31, 2003, or the
date on which the last of such collective bargaining agreements
terminates (determined without regard to any extension thereof
after the date of enactment), or (2) December 31, 2004. No
later than 120 days after enactment of the provision, the
Secretary of the Treasury is required to specify (1) the
circumstances under which 30 days notice of a transaction
suspension period is not required and (2) the time by which
notice is required to be provided in those circumstances.
B. Inapplicability of Relief From Fiduciary Liability During Suspension
of Ability of Participant or Beneficiary to Direct Investments
(Sec. 202 of the bill and sec. 404(c) of ERISA)
PRESENT LAW
Fiduciary rules under ERISA
ERISA contains general fiduciary duty standards that apply
to all fiduciary actions, including investment decisions. ERISA
requires that a plan fiduciary generally must discharge its
duties solely in the interests of participants and
beneficiaries and with care, prudence, and diligence. With
respect to plan assets, ERISA requires a fiduciary to diversify
the investments of the plan so as to minimize the risk of large
losses, unless under the circumstances it is clearly prudent
not to do so.\16\
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\16\ Certain defined contribution plans are not subject to the
diversification requirement for investments or the general prudence
requirement (to the extent that it requires diversification) with
respect to investments in employer stock.
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A plan fiduciary that breaches any of the fiduciary
responsibilities, obligations, or duties imposed by ERISA is
personally liable to make good to the plan any losses to the
plan resulting from such breach and to restore to the plan any
profits the fiduciary has made through the use of plan assets.
A plan fiduciary may be liable also for a breach of
responsibility by another fiduciary (a ``co-fiduciary'') in
certain circumstances.
Special rule for participant control of assets
ERISA provides a special rule for a defined contribution
plan that permits participants to exercise control over the
assets in their individual accounts. Under the special rule, if
a participant exercises control over the assets in his or her
account (as determined under regulations), the participant is
not deemed to be a fiduciary by reason of such exercise and no
person who is otherwise a fiduciary is liable for any loss, or
by reason of any breach, that results from the participant's
exercise of control.
Regulations issued by the Department of Labor describe the
requirements that must be met in order for a participant to be
treated as exercising control over the assets in his or her
account. With respect to investment options:
the plan must provide at least three different
investment options, each of which is diversified and has
materially different risk and return characteristics;
the plan must allow participants to give
investment instructions with respect to each investment option
under the plan with a frequency that is appropriate in light of
the reasonably expected market volatility of the investment
option (the general volatility rule);
at a minimum, participants must be allowed to give
investment instructions at least every three months with
respect to least three of the investment options, and those
investment options must constitute a broad range of options
(the three-month minimum rule);
participants must be provided with detailed
information about the investment options, information regarding
fees, investment instructions and limitations, and copies of
financial data and prospectuses; and
specific requirements must be satisfied with
respect to investments in employer stock to ensure that
employees' buying, selling, and voting decisions are
confidential and free from employer influence.
If these and the other requirements under the regulations
are met, a plan fiduciary may be liable for the investment
options made available under the plan, but not for the specific
investment decisions made by participants.
REASONS FOR CHANGE
The Committee believes that participants generally should
not be considered to exercise control over the assets in their
accounts when they are prevented from making investment changes
because of a transaction suspension period. On the other hand,
transaction suspension periods are sometimes necessary to
ensure the proper administration of a plan. Accordingly, the
Committee believes that a fiduciary that fulfills its fiduciary
responsibilities under ERISA in connection with authorizing the
transaction suspension period should not be responsible for
losses that occur during the transaction suspension period with
respect to investments chosen by the participant.
EXPLANATION OF PROVISION
Under the provision, relief from fiduciary liability for
any loss or breach resulting from a participant's exercise of
control over assets generally does not apply in the case of a
transaction suspension period during which the ability of the
participant to direct the investment of the assets in his or
her account is suspended by a plan sponsor or fiduciary. For
this purpose, transaction suspension period is defined as under
the provision requiring advance notice of a transaction
suspension period. Under a special rule, if a transaction
suspension period occurs in connection with a change in the
investment options offered under the plan, a participant is
deemed to have exercised control over the assets in his or her
account before the transaction suspension period if, after
notice of the change in investment options is given to the
participant, assets in the account of the participant are
transferred either (1) to investment options in accordance with
the participant's affirmative election (provided that the
election otherwise meets the conditions for the participant to
exercise control over the assets in the account), or (2) in the
absence of an affirmative election by the participant and where
fiduciary relief applied with respect to the prior investment
options, to investment options with reasonably comparable risk
and return characteristics in the manner set forth in the
notice.
In addition, if the fiduciary meets the requirements of
ERISA in connection with authorizing the transaction suspension
period, the fiduciary will not be liable for any loss occurring
during the period as a result of a participant's or
beneficiary's exercise of control over assets in his or her
account before the period. Matters to be considered in
determining whether the requirements of ERISA were satisfied
include (but are not limited to) whether the fiduciary(1)
determined that the expected transaction suspension period was
reasonable, (2) provided notice of the transaction suspension period
(as required under another provision of the bill), and (3) acted in
accordance with the general fiduciary duty standards of ERISA in
determining whether to enter into the transaction suspension period.
The Secretary of Labor is required, in consultation with the Secretary
of Treasury, to issue, before December 31, 2002, final regulations
providing guidance, including safe harbors, on how plan fiduciaries
will be able to satisfy their fiduciary responsibilities during a
transaction suspension period during which the ability of a participant
or beneficiary to direct the investment of the assets in his or her
account is suspended.
EFFECTIVE DATE
The provision is generally effective for plan years
beginning after December 31, 2002. In the case of a plan
maintained pursuant to one or more collective bargaining
agreements, the provision is effective for plan years beginning
after the earlier of (1) the later of December 31, 2003, or the
date on which the last of such collective bargaining agreements
terminates (determined without regard to any extension thereof
after the date of enactment), or (2) December 31, 2004.
C. Clarification of Participant Access to Remedies Under ERISA
(Sec. 203 of the bill and sec. 409 of ERISA)
PRESENT LAW
ERISA contains several provisions under which a participant
may bring a civil action against a plan fiduciary.\17\
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\17\ ERISA sec. 502(a). Some of these provisions also allow the
Secretary of Labor or another plan fiduciary to bring a civil action.
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A participant may bring a civil action for appropriate
relief under the general fiduciary liability provision of
ERISA.\18\ Under this provision, a plan fiduciary that breaches
any of the fiduciary responsibilities, obligations, or duties
imposed by ERISA is personally liable to make good to the plan
any losses to the plan resulting from such breach and to
restore to the plan any profits the fiduciary has made through
the use of plan assets. In addition, the fiduciary is subject
to other equitable or remedial relief as a court deems
appropriate, including the removal of the fiduciary. This
general fiduciary liability provision has been interpreted to
provide broad relief (including money damages) and to authorize
the award of damages to make the plan whole for investment
losses due to a breach of fiduciary duty. However, amounts
recovered under the general fiduciary liability provision are
not payable to a participant personally, even in the case of a
civil action brought by a participant, because such recovery
must be on behalf of the plan.\19\
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\18\ ERISA sec. 409, relating to liability for breach of fiduciary
duty. Participant civil actions for breach of such duties are
authorized in ERISA sec. 502(a)(2).
\19\ Massachusetts Mutual Life Insurance Co. v. Russell, 473 U.S.
134 (1985).
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In the case of a recovery with respect to an individual
account plan,\20\ amounts recovered generally are payable to
the plan and allocated to participants' accounts.\21\ Issues
have arisen under present law regarding the extent to which
damages recovered under the general fiduciary liability
provision with respect to a breach of fiduciary liability
affecting a participant's individual account under an
individual account plan are to be allocated to the
participant's account.
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\20\ Under ERISA, a defined contribution plan is generally referred
to as an individual account plan.
\21\ Funds held under a defined contribution plan must be allocated
to participants' accounts in accordance with a definite formula. The
plan must provide for the valuation of amounts held by the plan, and
allocations and adjustments of participants' accounts in accordance
with the valuation, at least once a year. See Rev. Rul. 80-155, 1980-1
C.B. 84.
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ERISA also gives a participant the right to bring a civil
action--
to recover benefits due to him or her under the
terms of the plan, to enforce his or her rights under the terms
of the plan, or to clarify his or her rights to future benefits
under the terms of the plan,\22\ or
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\22\ ERISA sec. 502(a)(1)(B).
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to enjoin any act or practice which violates any
provision of this title or the terms of the plan, or to obtain
other appropriate equitable relief to redress such violations
or to enforce any provisions of this title or the terms of the
plan.\23\
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\23\ ERISA sec. 502(a)(3).
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These provisions enable a participant to seek recovery on
his or her own behalf, not just on behalf of the plan,
including recovery for a breach of fiduciary duty.\24\ However,
``appropriate equitable relief'' that a participant may obtain
on his or her own behalf does not include money damages (i.e.,
compensatory damages).\25\ Participants in defined contribution
plans who have brought action against a plan fiduciary under
one of these ERISA provisions have been denied the recovery of
damages for the difference between the earnings on their
accounts and the amount of earnings they would have received if
the plan administrator had complied with the participants'
instructions as to the transfer or distribution of the accounts
because lost earnings are considered compensatory damages.\26\
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\24\ Varity Corporation v. Charles Howe, 516 U.S. 489 (1996).
\25\ Mertens v. Hewitt Associates, 508 U.S. 248 (1993).
\26\ Helfrich v. PNC Bank, Kentucky, Inc., 267 F.3d 477 (6th Cir.
2001), cert.den., reported at 2002 U.S. LEXIS 1558 (March 18, 2002);
Kerr v. Charles F. Vatterott & Co., 184 F.3d 938 (8th Cir. 1999). In
Ream v. Frey, 107 F.3d 147 (3rd Cir. 1997), a participant brought an
action under ERISA section 502(a)(3) for breach of fiduciary duty
against a former trustee of a plan that was no longer functioning. The
Circuit Court noted that, while the district court seemed to treat the
complaint as an action for money damages, the participant sought only
to recover his vested interest in the plan, which largely reflected his
own contributions, so that the relief granted to the participant could
be characterized as restitution (i.e., a form of equitable relief).
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REASONS FOR CHANGE
The Committee believes that, in the case of a breach of
fiduciary duty that causes financial harm to the accounts of
individual participants under an individual account plan, ERISA
was intended to make available the full range of ERISA relief
so as to put a participant's account in the financial position
it would have been in if the fiduciary breach had not occurred.
The Committee wishes to remove any doubt that may exist under
present law as to whether such relief is available.
Accordingly, the Committee bill provides that amounts recovered
for harm to particular accounts is to be allocated to those
accounts to the extent the court deems appropriate.
EXPLANATION OF PROVISION
The provision clarifies that, in the case of a fiduciary
breach with respect to an individual account plan, the relief
available under the general fiduciary liability provision of
ERISA will, to the extent the court deems appropriate, be
apportioned to each individual account affected by the breach.
No inference is intended as to the scope of recovery available
to participants under present law.
EFFECTIVE DATE
The provision is effective on the date of enactment.
D. Increased Maximum Bond Amount for Plans Holding Employer Securities
(Sec. 204 of the bill and sec. 412(a) of ERISA)
PRESENT LAW
ERISA generally requires every fiduciary and every person
who handles funds or other property of an employee benefit plan
(a ``plan official'') to be bonded under a qualifying bond. A
plan official without a qualifying bond is prohibited from
receiving, handling, or otherwise exercising control of any
funds or property of an employee benefit plan. The amount of
the bond is fixed annually at no less than 10 percent of the
funds handled but must be at least $1,000 and not more than
$500,000 (unless the Secretary of Labor prescribes a larger
amount after notice and an opportunity to be heard). Qualifying
bonds must have a corporate surety which is an acceptable
surety on Federal bonds and meet certain other requirements.
REASONS FOR CHANGE
The present-law bonding requirement is intended to protect
employee benefit plan participants against losses that result
from fraud or dishonesty on the part of plan officials who
handle plan assets. The maximum amount of the bond has been
$500,000 since the bonding requirement was enacted in 1962
under a predecessor to ERISA. The Committee is aware that many
employee benefit plans have significant investments in employer
securities. Such investments can be beneficial for plan
participants; however, recent highly publicized cases regarding
the financial distress of companies with plans that invest in
employer securities highlight the additional risks that such
investments can pose. Thus, the Committee believes it is
appropriate to provide additional protection for such plans by
raising the maximum bond amount.
EXPLANATION OF PROVISION
The bill raises the maximum bond amount to $1 million for
fiduciaries of plans that hold employer securities.
EFFECTIVE DATE
The provision is effective for plan years beginning after
December 31, 2002.
TITLE III. PROVIDING INFORMATION TO ASSIST PARTICIPANTS
A. Benefit Statements and Investment Guidelines
(Secs. 301-302 of the bill, new sec. 4980H of the Code, and secs. 104
and 105 of ERISA)
PRESENT LAW
Pension benefit statements
ERISA provides that a plan administrator must furnish a
benefit statement to any participant or beneficiary who makes a
written request for such a statement. This requirement applies
in the case of any plan that is subject to ERISA, including
defined contribution and defined benefit plans. The benefit
statement must indicate, on the basis of the latest available
information, (1) the participant's or beneficiary's total
accrued benefit, and (2) the participant's or beneficiary's
vested accrued benefit or the earliest date on which the
accrued benefit will become vested. A participant or
beneficiary is not entitled to receive more than one benefit
statement during any 12-month period. If the plan administrator
fails or refuses to furnish the benefit statement within 30
days of the participant's or beneficiary's written request, the
participant or beneficiary may bring a civil action to recover
from the plan administrator $100 a day, within the court's
discretion, or other relief that the court deems proper.\27\
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\27\ ERISA also permits the Secretary of Labor, a participant, a
beneficiary, or a fiduciary to bring civil action to enforce any ERISA
requirements.
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Individual statements to participants on separation from service
A plan administrator must furnish an individual statement
to each participant who (1) separates from service during the
year, (2) is entitled to a deferred vested benefit under the
plan as of the end of the plan year, and (3) whose benefits
were not paid during the year.\28\ The individual statement
must set forth the nature, amount and form of the deferred
vested benefit to which the participant is entitled. The plan
administrator generally must provide the individual statement
no later than 180 days after the end of the plan year in which
the separation from service occurs. If the plan administrator
fails to provide the individual statement, the Secretary of
Labor or the participant may bring a civil action for
appropriate relief.
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\28\ This information is based on an annual registration statement
that the plan administrator is required to file under the Code with the
Secretary of Treasury with respect to all participants who meet these
requirements for the plan year. The annual registration statement is
filed by means of Schedule SSA of the Form 5500. The Code and ERISA
require that the plan administrator furnish an individual statement to
the participant.
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Investment guidelines
Present law does not require that participants be given
investment guidelines relating to retirement savings.
REASONS FOR CHANGE
The Committee believes that regular information concerning
the value of retirement benefits, especially the value of
benefits accumulating in a defined contribution plan account,
is necessary to increase employee awareness and appreciation of
the importance of retirement savings. In addition, under some
employer-sponsored retirement plans, participants are
responsible for directing the investment of the assets in their
accounts under the plan. Awareness of investment principles,
including the need for diversification, is fundamental to
making investment decisions consistent with long-term
retirement income security. The Committee believes participants
should be provided with investment guidelines and information
for calculating retirement income to enable them to make sound
investment and retirement savings decisions.
EXPLANATION OF PROVISION
Pension benefit statements
In general
The provision provides new benefit statement requirements
under the Code and ERISA, depending in part on the type of plan
and the individual to whom the statement is provided.
Requirements for defined contribution plans
In the case of an applicable pension plan, the plan
administrator is required under the Code and ERISA to provide a
benefit statement (1) to an applicable individual who has the
right to direct the investment of the assets in his or her
account, at least quarterly, (2) to other applicable
individuals, at least annually, and (3) to a beneficiary who is
not an applicable individual, upon written request, but limited
to one request during any 12-month period. An applicable
pension plan is defined (as under the provision relating to
notice of a transaction suspension period) as a qualified
retirement plan or annuity, a tax-sheltered annuity plan, or an
eligible deferred compensation plan of a governmental employer
that maintains accounts for participants and beneficiaries
(other than a one-participant retirement plan).\29\ An
applicable individual is defined (as under the provision
relating to notice of a transaction suspension period) as (1)
any plan participant and (2) any beneficiary who has an account
under the plan with respect to which the beneficiary is
entitled to exercise the rights of a participant.
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\29\ An applicable pension plan includes a plan that is a
governmental plan or a church plan, and such a plan is subject to the
benefit statement requirement under the Code. However, governmental
plans (including an eligible deferred compensation plan of a
governmental employer) and church plans are generally exempt from
ERISA. As a result, the ERISA benefit statement requirement does not
apply to such a plan.
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The benefit statement is required to indicate, on the basis
of the latest available information, (1) the total benefits
accrued, and (2) the vested accrued benefit or the earliest
date on which the accrued benefit will become vested. In
addition, the statement must include the value of investments
allocated to the individual's account (determined as of the
plan's most recent valuation date), including the value of any
employer securities (without regard to whether the securities
were contributed by the employer or acquired at the direction
of the individual), and an explanation of any limitations or
restrictions on the right of the individual to direct
investments.
Requirements for defined benefit plans
Under the provision, the administrator of a defined benefit
plan is generally required under ERISA either (1) to furnish a
benefit statement at least once every three years \30\ to each
participant who has a vested accrued benefit and who is
employed by the employer at the time the benefit statements are
furnished to participants, or (2) to furnish at least annually
to each such participant notice of the availability of a
benefit statement and the manner in which the participant can
obtain it. The notice may be included with other communications
to the participant if done in a manner reasonably designed to
attract the attention of the participant.
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\30\ The Secretary of Labor is authorized to provide that years in
which no employee or former employee benefits under the plan need not
be taken into account in determining the three-year period.
---------------------------------------------------------------------------
The administrator of a defined benefit plan is also
required to furnish a benefit statement to a participant or
beneficiary upon written request, limited to one request during
any 12-month period.
A benefit statement is required to indicate, on the basis
of the latest available information, (1) the total benefits
accrued, and (2) the vested accrued benefit or the earliest
date on which the accrued benefit will become vested. In the
case of a statement provided to a participant (other than at
the participant's request), information may be based on
reasonable estimates determined under regulations prescribed by
the Secretary of Labor.
Form of benefit statement
The benefit statement is required to be written in a manner
calculated to be understood by the average plan participant. It
is required to be provided in writing and may be delivered in
electronic or other form that is reasonably expected to result
in receipt of the statement by the applicable individual. For
example, regulations could permit current benefit statements to
be provided on a continuous basis through a secure plan website
for a participant or beneficiary who has access to the website.
The Secretary of Labor is directed to develop one or more
model benefit statements, written in a manner calculated to be
understood by the average plan participant, that may be used by
plan administrators in complying with the requirements of ERISA
and the Code. The use of the model statement is optional. It is
intended that the model statement include items such as the
amount of nonforfeitable accrued benefits as of the statement
date that are payable at normal retirement age under the plan,
the amount of accrued benefits that are forfeitable but that
may become nonforfeitable under the terms of the plan,
information on how to contact the SocialSecurity Administration
to obtain a participant's personal earnings and benefit estimate
statement, and other information that may be important to understanding
benefits earned under the plan.
Investment guidelines
In general
Under the provision, the plan administrator of an
applicable pension plan is required under the Code and ERISA to
provide at least annually a model form relating to basic
investment guidelines to applicable individuals.\31\
``Applicable pension plan'' and ``applicable individual'' are
defined as under the provision relating to required benefit
statements.
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\31\ The ERISA requirement does not apply to a plan that is exempt
from ERISA, such as a governmental plan or a church plan.
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Model form
Under the provision, the Secretary of the Treasury is
directed, in consultation with the Secretary of Labor, to
develop and make available a model form containing basic
guidelines for investing for retirement. Such guidelines
generally include (1) information on the benefits of
diversification of investments, (2) information on the
essential differences, in terms of risk and return, of pension
plan investments, including stocks, bonds, mutual funds and
money market investments, (3) information on how an
individual's investment allocations under the plan may differ
depending on the individual's age and years to retirement, as
well as other factors determined by the Secretary, (4) sources
of information where individuals may learn more about pension
rights, individual investing, and investment advice, and (5)
such other information related to individual investing as the
Secretary determines appropriate. In addition, the Secretary
has the authority to vary the required information depending on
the type of plan. For example, some information may be omitted
in the case of a plan that does not provide for investment
direction by participants.
The model form must also include addresses for Internet
sites, and a worksheet, that an individual can use to calculate
(1) the retirement age annuity value of the individual's vested
benefits under the plan (determined by reference to varied
historical annual rates of return and annuity interest rates),
and (2) other important amounts relating to retirement savings,
including the amount that an individual must save in order to
provide a retirement income equal to various percentages of his
or her current salary (adjusted for expected growth prior to
retirement). The Secretary of Labor is also required to develop
an Internet site to be used by an individual in making these
calculations, the address of which will be included in the
model form.
The Secretary of the Treasury is directed to provide at
least 90 days for public comment before publishing final notice
of the model form and to update the model form at least
annually.
The model form must be written in a manner calculated to be
understood by the average plan participant and must be in
writing and may be delivered in electronic or other form that
is reasonably expected to result in receipt by the applicable
individual.
Sanctions for failure to provide information
Excise tax
Under the provision, an excise tax generally applies in the
case of a failure to provide a benefit statement or an
investment guideline model form as required under the Code.
However, a reporting penalty applies in the case of a failure
related to a governmental plan or a church plan.
The excise tax is generally imposed on the employer if a
required benefit statement or model form is not provided.\32\
The excise tax is $100 per day for each participant or
beneficiary with respect to whom the failure occurs, until the
benefit statement or model form is provided or the failure is
otherwise corrected. If the employer exercises reasonable
diligence to meet the benefit statement or model form
requirement, the total excise tax imposed during a taxable year
will not exceed $500,000. The $500,000 annual limit will apply
separately to failures to provide required benefit statements
and failures to provide the model form.
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\32\ In the case of a multiemployer plan, the excise tax is imposed
on the plan. In the case of a tax-sheltered annuity program under
section 403(b) that is not treated as established or maintained by the
employer for purposes of ERISA, the excise tax is imposed on the plan
administrator.
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No tax will be imposed with respect to a failure if the
employer does not know that the failure existed and exercises
reasonable diligence to comply with the benefit statement or
model form requirement. In addition, no tax will be imposed if
the employer exercises reasonable diligence to comply and
provides the required benefit statement or model form within 30
days of learning of the failure. In the case of a failure due
to reasonable cause and not to willful neglect, the Secretary
of the Treasury is authorized to waive the excise tax to the
extent that the payment of the tax would be excessive or
otherwise inequitable relative to the failure involved.
The excise tax does not apply in the case of a failure to
provide a benefit statement or model form with respect to a
governmental plan or a church plan. In that case, on notice and
demand by the Secretary, a penalty applies of $100 per day for
each applicable individual with respect to whom the failure
occurs, until the benefit statement or model form is provided
or the failure is otherwise corrected. The limitations and
exceptions to the excise tax apply also to the penalty.
ERISA civil penalty
The ERISA remedies that apply in the case of a failure or
refusal to provide a benefit statement under present law apply
if the plan administrator fails or refuses to furnish a benefit
statement or model form required under the provisions.\33\ That
is, the participant or beneficiary is entitled to bring a civil
action to recover from the plan administrator $100 a day,
within the court's discretion, or such other relief that the
court deems proper.
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\33\ The civil penalty under ERISA does not apply to a governmental
plan or a church plan that is exempt from ERISA.
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EFFECTIVE DATE
The provision is generally effective for plan years
beginning after December 31, 2003. In the case of a plan
maintained pursuant to one or more collective bargaining
agreements, the provision is effective for plan years beginning
after the earlier of (1) the later of December 31, 2004, or the
date on which the last of such collective bargaining agreements
terminates (determined without regard to any extension thereof
after the date of enactment), or (2) December 31, 2005.
B. Information on Optional Forms of Benefit
(Sec. 303 of the bill)
PRESENT LAW
Under a defined benefit plan, benefits generally must be
paid in the form of an annuity for the life of the participant
unless the participant consents to a distribution in another
form. In the case of a married participant, benefits must be
paid in the form of a qualified joint and survivor annuity
(``QJSA'') unless the participant and his or her spouse consent
to another form of benefit. A QJSA is an annuity for the life
of the participant, with a survivor annuity for the life of the
spouse which is not less than 50 percent (and not more than 100
percent) of the amount of the annuity payable during the joint
lives of the participant and his or her spouse. The participant
and his or her spouse may waive the right to a QJSA provided
certain requirements are satisfied, including a requirement
that a written explanation be provided of the effect of a
waiver of the annuity.
Defined benefit plans generally provide that a participant
may choose among other forms of benefit offered under the plan,
such as a lump sum distribution. These optional forms of
benefit generally must be actuarially equivalent to the life
annuity benefit payable to the participant.
A defined benefit plan must specify the actuarial
assumptions that will be used in determining optional forms of
benefit under the plan in a manner that precludes employer
discretion in the assumptions to be used. For example, a plan
may specify that a variable interest rate will be used in
determining actuarial equivalent forms of benefit, but may not
give the employer discretion to choose the interest rate.
In addition, statutory actuarial assumptions must be used
in determining the minimum value of certain optional forms of
benefit, such as a lump sum. That is, the lump sum payable
under the plan may not be less than the amount of the lump sum
that is actuarially equivalent to the life annuity payable to
the participant, determined using the statutory assumptions.
The statutory assumptions consist of an applicable mortality
table (as published by the Internal Revenue Service) and an
applicable interest rate.
REASONS FOR CHANGE
The Committee believes that a participant should have
sufficient information to evaluate the relative values of
various optional forms of benefit available to the participant
under a plan before making a decision as to which form of
benefit to elect.
EXPLANATION OF PROVISION
Under the provision, the Secretary of the Treasury is
directed to issue (within 30 days of enactment of the
provision) regulations requiring the plan administrator of a
defined benefit plan that provides optional forms of benefit to
provide a statement comparing the relative values of optional
forms of benefits payable under the plan. The statement must be
provided at a time specified by the Secretary of the Treasury
and must be written in a manner calculated to be understood by
the average plan participant. The statement must include such
information as the Secretary determines appropriate to enable a
plan participant, spouse, or surviving spouse to make an
informed decision as to what form of benefit to elect. For
example, in the case of a plan that provides a subsidized early
retirement annuity benefit, it is intended that the information
will include, at a minimum, a quantification of whether and how
the subsidy is included in determining other forms of benefit
(e.g., a lump sum) payable at early retirement age.
EFFECTIVE DATE
The provision is effective on the date of enactment.
C. Fiduciary Duty To Provide Material Information Relating to
Investment in Employer Stock
(Sec. 304 of the bill and sec. 404(c) of ERISA)
PRESENT LAW
ERISA contains general fiduciary duty standards that apply
to all fiduciary actions. Among them are requirements that plan
fiduciaries generally discharge their duties solely in the
interest of participants and beneficiaries and with care,
prudence, and diligence. A plan fiduciary that breaches any of
the fiduciary responsibilities, obligations, or duties imposed
by ERISA is personally liable to make good to the plan any
losses to the plan resulting from such breach and to restore to
the plan any profits the fiduciary has made through the use of
plan assets. A plan fiduciary may be liable also for a breach
of responsibility by another fiduciary in certain
circumstances.
ERISA provides a special rule for a defined contribution
plan that permits participants to exercise control over the
assets in their individual accounts.\34\ Under the special
rule, if a participant or beneficiary exercises control over
the assets in his or her account, the participant or
beneficiary is not deemed to be a fiduciary by reason of such
exercise and no person who is otherwise a fiduciary is liable
for any loss, or by reason of any breach, that results from the
participant's or beneficiary's exercise of control.
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\34\ ERISA sec. 404(c).
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REASONS FOR CHANGE
The Committee believes that, in the case of a defined
contribution plan that allows participants and beneficiaries to
exercise control over the assets in their individual accounts,
the same material investment information that the plan sponsor
is required to disclose to investors under securities laws
should be provided to participants and beneficiaries whose
accounts are invested in employer stock. The Committee believes
that plan sponsors and plan administrators should have a
fiduciary duty to provide this information.
EXPLANATION OF PROVISION
The bill amends ERISA to provide that sponsors and
administrators of defined contribution plans that permit
participants and beneficiaries to exercise control over the
assets in their individual accounts have a fiduciary duty to
ensure that, in connection with investments of such assets in
employer stock, the participant or beneficiary is provided with
the same material investment information that would generally
be required to be disclosed by the employer to investors under
applicable securities laws. The provision of misleading
information by the plan sponsor or administrator is a violation
of this requirement.
In the case of a failure to provide material investment
information, the Secretary of Labor is authorized to assess a
civil penalty of up to $1,000 per day. In addition, such a
failure would violate the fiduciary rules of ERISA. As a
result, the fiduciary could be liable under present-law rules
to make good to the plan any losses to the plan resulting from
such breach and to restore to the plan any profits the
fiduciary has made through the use of plan assets.
EFFECTIVE DATE
The provision is effective with respect to plan years
beginning after December 31, 2002.
D. Electronic Disclosure of Insider Trading
(Sec. 305 of the bill and sec. 101 of ERISA)
PRESENT LAW
Disclosure rules under ERISA
ERISA contains rules requiring the provision of certain
information to employee benefit plan participants and
beneficiaries by plans sponsors and administrators. For
example, ERISA generally requires distribution to plan
participants and beneficiaries of written summaries of employee
benefit plans as well as summaries of any modifications to
certain plan provisions. The required disclosures advise
participants and beneficiaries of their rights and benefits
under plans and applicable law, provide them access to plan
financial information, and provide them opportunities to
prevent or redress any violations of their rights.
Elective deferrals
A defined contribution plan can accept varied types of
contributions, depending on the design of the particular plan.
In general, defined contribution plans can accept elective
deferrals, which are contributions made under a qualified cash
or deferred arrangement (i.e., a ``section 401(k) plan'') that
are made by reason of the employee's election to have the
employer make the contributions to the plan rather than paying
them directly to the employee in cash.
REASONS FOR CHANGE
Many defined contribution plans that accept elective
deferrals permit those deferrals to be invested in employer
stock or real property. Participants and beneficiaries in such
plans have the same interest as other investors in receiving
information about any sale or purchase of employer stock by an
officer, director, or affiliate of the employer (``insider
trades''). Thus, the Committee believes that any insider trade
that is required to be disclosed to the SEC should also be
specifically disclosed to participants and beneficiaries in the
plans. The Committee believes that the posting of such
information on a plan website (or providing it upon request in
another form) will not unreasonably burden employers and will
facilitate participants' and beneficiaries' access to the
information.
EXPLANATION OF PROVISION
The provision amends ERISA to require that an employer that
sponsors a defined contribution plan that permits elective
deferrals to be invested in employer stock or real property
must disclose to participants and beneficiaries any insider
trade that is required to be disclosed to the SEC. Within a
reasonable period after disclosure to the SEC, the insider
trade information must be posted on the plan's website or
provided upon request, in the case of a participant or
beneficiary who does not have access to a plan website. It is
intended that the Department of Labor will provide guidance
with respect to requests for disclosure in the case of such a
participant or beneficiary. For example, participants could be
permitted to make standing requests to receive any insider
trade disclosures in some other form.
Under the provision, the SEC is permitted to accept
electronic disclosure in place of any form of disclosure
otherwise required with respect to participants and
beneficiaries.
EFFECTIVE DATE
The provision is effective with respect to plan years
beginning after December 31, 2002.
E. Fiduciary Rules for Plan Sponsors Designating Independent Investment
Advisors
(Sec. 306 of the bill and new sec. 404(e) of ERISA)
PRESENT LAW
ERISA requires an employee benefit plan to provide for one
or more named fiduciaries who jointly or severally have the
authority to control and manage the operation and
administration of the plan. In addition to fiduciaries named in
the plan, or identified pursuant to a procedure specified in
the plan, a person is a plan fiduciary under ERISA to the
extent the fiduciary exercises any discretionary authority or
control over management of the plan or exercises authority or
control over management or disposition of its assets, renders
investmentadvice for a fee or other compensation, or has any
discretionary authority or responsibility in the administration of the
plan. In certain circumstances, a fiduciary under ERISA may be liable
for a breach of responsibility by a co-fiduciary.
REASONS FOR CHANGE
The Committee believes that providing specific rules under
which a fiduciary may arrange for independent investment advice
to be provided to participants who are responsible for
directing the investment of their retirement assets will
facilitate the provision of such investment advice without
undercutting the fiduciary requirements of ERISA. The provision
of independent investment advice will better enable
participants to make sound investment decisions.
EXPLANATION OF PROVISION
In general
The provision amends ERISA by adding specific rules dealing
with the provision of investment advice to plan participants by
a qualified investment adviser. The provision applies to a
defined contribution plan that permits a participant or
beneficiary to exercise investment control over the assets in
his or her account. Under the provision, if certain
requirements are met, an employer or other plan fiduciary will
not be liable for investment advice provided by a qualified
investment adviser.
Qualified investment adviser
Under the provision, a ``qualified investment adviser'' is
defined as a person who is a plan fiduciary by reason of
providing investment advice and who is also (1) a registered
investment adviser under the Investment Advisers Act of 1940 or
registered as an investment adviser under the laws of the State
(consistent with section 203A of the Investment Advisers Act
\35\) in which the adviser maintains its principal office, (2)
a bank or similar financial institution, (3) an insurance
company qualified to do business under State law, or (4) a
comparably qualified entity under criteria to be established by
the Secretary of Labor. In addition, any individual who
provides investment advice to participants on behalf of the
investment adviser (such as an employee thereof) is required to
be (1) a registered investment adviser under Federal or State
law as described above,\36\ (2) a registered broker or dealer
under the Securities Exchange Act, (3) a registered
representative under the Securities Exchange Act or the
Investment Advisers Act, or (4) any comparably qualified
individual under criteria to be established by the Secretary of
Labor.
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\35\ See, 15 U.S.C. 80b-3a. Nothing in the proposal is intended to
restrict the authority under present law of any State to assert
jurisdiction over investment advisers and investment adviser
representatives based on their presence in the State or the fact that
they have clients in the State.
\36\ An individual who is registered as an investment adviser under
the laws of a State is a qualified investment adviser only if the State
has an examination requirement to qualify for such registration.
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A qualified investment adviser is required to provide the
following documents to the employer or plan fiduciary: (1) the
contract for investment advice services, (2) a disclosure of
the fees to be received by the investment adviser, and (3)
documentation that the investment advisor is a qualified
investment adviser. A qualified investment adviser that
acknowledges its fiduciary status will be a fiduciary under
ERISA with respect to investment advice provided to a
participant or beneficiary.
Requirements for employer or other fiduciary
Before designating the investment adviser and at least
annually thereafter, the employer or other fiduciary is
required to obtain written verification that the investment
adviser (1) is a qualified investment adviser, (2) acknowledges
its status as a plan fiduciary that is solely responsible for
the investment advice it provides, (3) has reviewed the plan
document (including investment options) and determined that its
relationship with the plan and the investment advice provided
to any participant or beneficiary, including the receipt of
fees or compensation, will not violate the prohibited
transaction rules, (4) will consider any employer securities or
employer real property allocated to the participant's or
beneficiary's account in providing investment advice, and (5)
has the necessary insurance coverage (as determined by the
Secretary of Labor) for any claim by a participant or
beneficiary.
In designating an investment adviser, the employer or other
fiduciary is required to review the documents provided by the
qualified investment adviser. The employer or other fiduciary
is also required to make a determination that there is no
material reason not to engage the investment adviser.
In the case of (1) information that the investment adviser
is no longer qualified or (2) concerns about the investment
adviser's services raised by a substantial number of
participants or beneficiaries, the employer or other fiduciary
is required within 30 days to investigate and to determine
whether to continue the investment adviser's services.
An employer or other fiduciary that complies with the
requirements for designating and monitoring an investment
adviser will be deemed to have satisfied its fiduciary duty in
the prudent selection and periodic review of an investment
adviser and does not bear liability as a fiduciary or co-
fiduciary for any loss or breach resulting from the investment
advice.
EFFECTIVE DATE
The provision applies to investment advisers designated
after the date of enactment.
TITLE IV. OTHER PROVISIONS RELATING TO PENSIONS
A. Employee Plans Compliance Resolution System
(Sec. 401 of the bill)
PRESENT LAW
A retirement plan that is intended to be a tax-qualified
plan provides retirement benefits on a tax-favored basis if the
plan satisfies all of the requirements of section 401(a).
Similarly, an annuity that is intended to be a tax-sheltered
annuity provides retirement benefits on a tax-favored basis if
the program satisfies all of the requirements of section
403(b). Failure to satisfy all of the applicable requirements
of section 401(a) or section 403(b) may disqualify a plan or
annuity for the intended tax-favored treatment.
The Internal Revenue Service (``IRS'') has established the
Employee Plans Compliance Resolution System (``EPCRS''), which
is a comprehensive system of correction programs for sponsors
of retirement plans and annuities that are intended, but have
failed, to satisfy the requirements of section 401(a), section
403(a), or section 403(b), as applicable.\37\ EPCRS permits
employers to correct compliance failures and continue to
provide their employees with retirement benefits on a tax-
favored basis.
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\37\ Rev. Proc. 2002-47, 2002-29 I.R.B. 1.
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The IRS has designed EPCRS to (1) encourage operational and
formal compliance, (2) promote voluntary and timely correction
of compliance failures, (3) provide sanctions for compliance
failures identified on audit that are reasonable in light of
the nature, extent, and severity of the violation, (4) provide
consistent and uniform administration of the correction
programs, and (5) permit employers to rely on the availability
of EPCRS in taking corrective actions to maintain the tax-
favored status of their retirement plans and annuities.
The basic elements of the programs that comprise EPCRS are
self-correction, voluntary correction with IRS approval, and
correction on audit. The Self-Correction Program (``SCP'')
generally permits a plan sponsor that has established
compliance practices to correct certain insignificant failures
at any time (including during an audit), and certain
significant failures within a 2-year period, without payment of
any fee or sanction. The Voluntary Correction Program (``VCP'')
program permits an employer, at any time before an audit, to
pay a limited fee and receive IRS approval of a correction. For
a failure that is discovered on audit and corrected, the Audit
Closing Agreement Program (``Audit CAP'') provides for a
sanction that bears a reasonable relationship to the nature,
extent, and severity of the failure and that takes into account
the extent to which correction occurred before audit.
The IRS has expressed its intent that EPCRS will be updated
and improved periodically in light of experience and comments
from those who use it.
REASONS FOR CHANGE
The Committee commends the IRS for the establishment of
EPCRS and agrees with the IRS that EPCRS should be updated and
improved periodically. The Committee believes that future
improvements should facilitate use of the compliance and
correction programs by small employers and expand the
flexibility of the programs.
EXPLANATION OF PROVISION
The provision clarifies that the Secretary of the Treasury
has the full authority to establish and implement EPCRS (or any
successor program) and any other employee plans correction
policies, including the authority to waive income, excise or
other taxes to ensure that any tax, penalty or sanction is not
excessive and bears a reasonable relationship to the nature,
extent and severity of the failure.
The Secretary of the Treasury is directed to continue to
update and improve EPCRS (or any successor program), giving
special attention to (1) increasing the awareness and knowledge
of small employers concerning the availability and use of
EPCRS, (2) taking into account special concerns and
circumstances that small employers face with respect to
compliance and correction of compliance failures, (3) extending
the duration of the self-correction period under SCP for
significant compliance failures, (4) expanding the availability
to correct insignificant compliance failures under SCP during
audit, and (5) assuring that any tax, penalty, or sanction that
is imposed by reason of a compliance failure is not excessive
and bears a reasonable relationship to the nature, extent, and
severity of the failure.
EFFECTIVE DATE
The provision is effective on the date of enactment.
B. Extension to all Governmental Plans of Moratorium on Application of
Certain Nondiscrimination Rules Applicable to State and Local
Government Plans
(Sec. 402 of the bill, sec. 1505 of the Taxpayer Relief Act of 1997,
and secs. 401(a) and 401(k) of the Code)
PRESENT LAW
A qualified retirement plan maintained by a State or local
government is exempt from the rules concerning
nondiscrimination (sec. 401(a)(4)) and minimum participation
(sec. 401(a)(26)). All other governmental plans are not exempt
from the nondiscrimination and minimum participation rules.
REASONS FOR CHANGE
The Committee believes that application of the
nondiscrimination and minimum participation rules to
governmental plans is unnecessary and inappropriate in light of
the unique circumstances under which such plans and
organizations operate. Further, the Committee believes that it
is appropriate to provide for consistent application of the
minimum coverage, nondiscrimination, and minimum participation
rules for governmental plans.
EXPLANATION OF PROVISION
The provision exempts all governmental plans (as defined in
sec. 414(d)) from the nondiscrimination and minimum
participation rules.
EFFECTIVE DATE
The provision is effective for plan years beginning after
December 31, 2002.
C. Notice and Consent Period Regarding Distributions
(Sec. 403 of the bill, sec. 417 of the Code, and sec. 205 of ERISA)
PRESENT LAW
Notice and consent requirements apply to certain
distributions from qualified retirement plans. These
requirements relate to the content and timing of information
that a plan must provide to a participant prior to a
distribution, and to whether the plan must obtain the
participant's consent to the distribution. The nature and
extent of the notice and consent requirements applicable to a
distribution depend upon the value of the participant's vested
accrued benefit and whether the joint and survivor annuity
requirements (sec. 417) apply to the participant.
If the present value of the participant's vested accrued
benefit exceeds $5,000,\38\ the plan may not distribute the
participant's benefit without the written consent of the
participant. The participant's consent to a distribution is not
valid unless the participant has received from the plan a
notice that contains a written explanation of (1) the material
features and the relative values of the optional forms of
benefit available under the plan, (2) the participant's right,
if any, to have the distribution directly transferred to
another retirement plan or IRA, and (3) the rules concerning
the taxation of a distribution. If the joint and survivor
annuity requirements apply to the participant, this notice also
must contain a written explanation of (1) the terms and
conditions of the qualified joint and survivor annuity
(``QJSA''), (2) the participant's right to make, and the effect
of, an election to waive the QJSA, (3) the rights of the
participant's spouse with respect to a participant's waiver of
the QJSA, and (4) the right to make, and the effect of, a
revocation of a waiver of the QJSA. The plan generally must
provide this notice to the participant no less than 30 and no
more than 90 days before the date distribution commences.
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\38\ The portion of a participant's benefit that is attributable to
amounts rolled over from another plan may be disregarded in determining
the present value of the participant's vested accrued benefit.
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If the participant's vested accrued benefit does not exceed
$5,000, the terms of the plan may provide for distribution
without the participant's consent. In that case, the plan must
provide that, if the amount of the distribution exceeds $1,000,
the plan administrator will transfer the distribution to a
designated IRA unless the participant elects to receive the
distribution directly or have it directly transferred to
another retirement plan or IRA. Before making a distribution,
the plan administrator generally is required to provide to the
participant a notice that contains a written explanation of (1)
the participant's right, if any, to have the distribution
directly transferred to another retirement plan or IRA, (2) the
fact that a distribution that exceeds $1,000 will be
transferred to a designated IRA unless the participant elects
otherwise, and (3) the rules concerning the taxation of a
distribution. The plan generally must provide this notice to
the participant no less than 30 and no more than 90 days before
the date distribution commences.
REASONS FOR CHANGE
The Committee understands that an employee is not always
able to evaluate distribution alternatives, select the most
appropriate alternative, and notify the plan of the selection
within a 90-day period. The Committee believes that requiring a
plan to furnish multiple distribution notices to an employee
who does not make a distribution election within 90 days is
administratively burdensome. In addition, the Committee
believes that participants who are entitled to defer
distributions should be informed of the impact of a decision
not to defer distribution on the taxation and accumulation of
their retirement benefits.
EXPLANATION OF PROVISION
Under the provision, a qualified retirement plan is
required to provide the applicable distribution notice no less
than 30 days and no more than 180 days before the date
distribution commences. The Secretary of the Treasury is
directed to modify the applicable regulations to reflect the
extension of the notice period to 180 days and 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.
EFFECTIVE DATE
The modifications made or required by the provision are
effective for years beginning after December 31, 2002. In the
case of a description of the consequences of a participant's
failure to defer receipt of a distribution that is made before
the date 90 days after the date on which the Secretary of the
Treasury makes modifications to the applicable regulations, the
plan administrator is required to make a reasonable attempt to
comply with the requirements of the provision.
D. Technical Corrections to Saver Act
(Sec. 404 of the bill and sec. 517 of ERISA)
PRESENT LAW
The Savings Are Vital to Everyone's Retirement (``SAVER'')
Act initiated a public-private partnership to educate American
workers about retirement savings and directed the Department of
Labor to maintain an ongoing program of public information and
outreach. The Act also convened a National Summit on Retirement
Savings held June 4-5, 1998. A second National Summit on
Retirement Savings was held February 27 through March 1, 2002,
co-hosted by the President and the bipartisan Congressional
leadership. The National Summit brings together experts in the
fields of employee benefits and retirement savings, key leaders
of government, and interested parties from the private sector
and general public. The delegates are selected by the
Congressional leadership and the President. The National Summit
is a public-private partnership, receiving substantial funding
from private sector contributions. The goals ofthe National
Summits are to: (1) advance the public's knowledge and understanding of
retirement savings and facilitate the development of a broad-based,
public education program; (2) identify the barriers which hinder
workers from setting aside adequate savings for retirement and impede
employers, especially small employers, from assisting their workers in
accumulating retirement savings; and (3) develop specific
recommendations for legislative, executive, and private sector actions
to promote retirement income savings among American workers.
REASONS FOR CHANGE
The Committee believes it is appropriate to make
modifications and clarifications regarding the administration
of future National Summits on Retirement Savings.
EXPLANATION OF PROVISION
Under the provision, future National Summits on Retirement
Savings are to be held in 2006 and 2010. To facilitate the
administration of future National Summits, the Department of
Labor is given authority to enter into cooperative agreements
(pursuant to the Federal Grant and Cooperative Agreement Act of
1977) with any appropriate, qualified entity.
Six new statutory delegates are added to future National
Summits: the Chairman and Ranking Member of each of the
following: the Senate Committee on Finance, the House Committee
on Ways and Means, and the Subcommittee on Employer-Employee
Relations of the House Committee on Education and the
Workforce. Further, the President, in consultation with the
Congressional leadership, is permitted to appoint additional
Summit participants, not to exceed the lesser of three percent
of all additional participants or 10 participants, from a list
of nominees provided by the private sector partner in Summit
administration. The provision also clarifies that new delegates
are to be appointed for each future National Summit (as was the
intent of the original legislation) and sets deadlines for
their appointment.
The provision also sets deadlines for the Department of
Labor to publish the Summit agenda, gives the Department of
Labor limited reception and representation authority, and
specifies that the Department of Labor consult with the
Congressional leadership in drafting the post-Summit report.
EFFECTIVE DATE
The provision is effective on the date of enactment.
E. Missing Participants
(Sec. 405 of the bill and secs. 206(f) and 4050 of ERISA)
PRESENT LAW
The plan administrator of a defined benefit pension plan
that is subject to Title IV of ERISA, is maintained by a single
employer, and terminates under a standard termination is
required to distribute the assets of the plan. With respect to
a participant whom the plan administrator of a single employer
plan cannot locate after a diligent search, the plan
administrator satisfies the distribution requirement only by
purchasing irrevocable commitments from an insurer to provide
all benefit liabilities under the plan or transferring the
participant's designated benefit to the Pension Benefit
Guaranty Corporation (``PBGC''), which holds the benefit of the
missing participant as trustee until the PBGC locates the
missing participant and distributes the benefit.
The PBGC missing participant program is not available to
multiemployer plans or defined contribution plans and other
plans not covered by Title IV of ERISA.
REASONS FOR CHANGE
The Committee recognizes that no statutory provision or
formal regulatory guidance exists concerning an appropriate
method of handling the benefits of missing participants in
terminated multiemployer plans or defined contribution plans
and other plans not subject to the PBGC termination insurance
program. Therefore, sponsors of these plans face uncertainty
with respect to the benefits of missing participants. The
Committee believes that it is appropriate to extend the
established PBGC missing participant program to these plans in
order to reduce uncertainty for plan sponsors and increase the
likelihood that missing participants will receive their
retirement benefits.
EXPLANATION OF PROVISION
The PBGC is directed to prescribe for terminating
multiemployer plans rules similar to the present-law missing
participant rules applicable to terminating single-employer
plans that are subject to Title IV of ERISA.
In addition, plan administrators of certain types of plans
not subject to the PBGC termination insurance program under
present law are permitted, but not required, to elect to
transfer missing participants' benefits to the PBGC upon plan
termination. Specifically, the provision extends the missing
participants program (in accordance with regulations) to
defined contribution plans, defined benefit plans that have no
more than 25 active participants and are maintained by
professional service employers, and the portion of defined
benefit plans that provide benefits based upon the separate
accounts of participants and therefore are treated as defined
contribution plans under ERISA.
EFFECTIVE DATE
The provision is effective for distributions made after
final regulations implementing the provision are prescribed.
F. Reduced PBGC Premiums For Small and New Plans
(Secs. 406-407 of the bill and sec. 4006 of ERISA)
PRESENT LAW
Under present law, the Pension Benefit Guaranty Corporation
(``PBGC'') provides insurance protection for participants and
beneficiaries under certain defined benefit pension plans by
guaranteeing certain basic benefits under the plan in the event
the plan is terminated with insufficient assets to pay benefits
promised under the plan. The guaranteed benefits arefunded in
part by premium payments from employers who sponsor defined benefit
plans. The amount of the required annual PBGC premium for a single-
employer plan is generally a flat rate premium of $19 per participant
and an additional variable-rate premium based on a charge of $9 per
$1,000 of unfunded vested benefits. Unfunded vested benefits under a
plan generally means (1) the unfunded current liability for vested
benefits under the plan, over (2) the value of the plan's assets,
reduced by any credit balance in the funding standard account. No
variable-rate premium is imposed for a year if contributions to the
plan were at least equal to the full funding limit.
The PBGC guarantee is phased in ratably in the case of
plans that have been in effect for less than five years, and
with respect to benefit increases from a plan amendment that
was in effect for less than five years before termination of
the plan.
REASONS FOR CHANGE
The Committee believes that reducing the PBGC premiums for
new plans and small plans will reduce the administrative costs
of establishing and maintaining defined benefit pension plans,
particularly by small employers.
EXPLANATION OF PROVISION
Reduced flat-rate premiums for new plans of small employers
Under the provision, for the first five plan years of a new
single-employer plan of a small employer, the flat-rate PBGC
premium is $5 per plan participant.
A small employer is a contributing sponsor that, on the
first day of the plan year, has 100 or fewer employees. For
this purpose, all employees of the members of the controlled
group of the contributing sponsor are to be taken into account.
In the case of a plan to which more than one unrelated
contributing sponsor contributes, employees of all contributing
sponsors (and their controlled group members) are to be taken
into account in determining whether the plan was a plan of a
small employer.
A new plan means a defined benefit plan maintained by a
contributing sponsor if, during the 36-month period ending on
the date of adoption of the plan, such contributing sponsor (or
controlled group member or a predecessor of either) has not
established or maintained a plan subject to PBGC coverage with
respect to which benefits were accrued for substantially the
same employees as in the new plan.
Reduced variable-rate PBGC premium for new plans
The provision provides that the variable-rate premium is
phased in for new defined benefit plans over a six-year period
starting with the plan's first plan year. The amount of the
variable-rate premium is a percentage of the variable premium
otherwise due, as follows: zero percent of the otherwise
applicable variable-rate premium in the first plan year; 20
percent in the second plan year; 40 percent in the third plan
year; 60 percent in the fourth plan year; 80 percent in the
fifth plan year; and 100 percent in the sixth plan year (and
thereafter).
A new defined benefit plan is defined as described above
under the provision relating to flat-rate premiums for new
small employer plans.
Reduced variable-rate PBGC premium for small plans
In the case of a plan of a small employer, the variable-
rate premium is no more than $5 multiplied by the number of
plan participants in the plan at the end of the preceding plan
year. For purposes of the provision, a small employer is a
contributing sponsor that, on the first day of the plan year,
has 25 or fewer employees. For this purpose, all employees of
the members of the controlled group of the contributing sponsor
are taken into account. In the case of a plan to which more
than one unrelated contributing sponsor contributes, employees
of all contributing sponsors (and their controlled group
members) are taken into account in determining whether the plan
is a plan of a small employer.
EFFECTIVE DATE
The reduction of the flat-rate premium for new plans of
small employers and the reduction of the variable-rate premium
for new plans is effective with respect to plans first
effective after December 31, 2002. The reduction of the
variable-rate premium for small plans is effective with respect
to plan years beginning after December 31, 2002.
G. Authorization For PBGC To Pay Interest on Premium Overpayment
Refunds
(Sec. 408 of the bill and sec. 4007(b) of ERISA)
PRESENT LAW
The PBGC charges interest on underpayments of premiums, but
is not authorized to pay interest on overpayments.
REASONS FOR CHANGE
The Committee believes that an employer or other person who
overpays PBGC premiums should receive interest on a refund of
the overpayment.
EXPLANATION OF PROVISION
The provision allows the PBGC to pay interest on
overpayments made by premium payors. Interest paid on
overpayments is to be calculated at the same rate and in the
same manner as interest charged on premium underpayments.
EFFECTIVE DATE
The provision is effective with respect to interest
accruing for periods beginning not earlier than the date of
enactment.
H. Rules for Substantial Owner Benefits in Terminated Plans
(Sec. 409 of the bill and secs. 4022 and 4044 of ERISA)
PRESENT LAW
Under present law, the Pension Benefit Guaranty Corporation
(``PBGC'') provides participants and beneficiaries in a defined
benefit pension plan with certain minimal guarantees as to the
receipt of benefits under the plan in case of plan termination.
The employer sponsoring the defined benefit pension plan is
required to pay premiums to the PBGC to provide insurance for
the guaranteed benefits. In general, the PBGC will guarantee
all basic benefits which are payable in periodic installments
for the life (or lives) of the participant and his or her
beneficiaries and are non-forfeitable at the time of plan
termination. The amount of the guaranteed benefit is subject to
certain limitations. One limitation is that the plan (or an
amendment to the plan which increases benefits) must be in
effect for 60 months before termination for the PBGC to
guarantee the full amount of basic benefits for a plan
participant, other than a substantial owner. In the case of a
substantial owner, the guaranteed basic benefit is phased in
over 30 years beginning with participation in the plan. A
substantial owner is one who owns, directly or indirectly, more
than 10 percent of the voting stock of a corporation or all the
stock of a corporation. Special rules restricting the amount of
benefit guaranteed and the allocation of assets also apply to
substantial owners.
REASONS FOR CHANGE
The Committee believes that the present-law rules
concerning limitations on guaranteed benefits for substantial
owners are overly complicated and restrictive and thus may
discourage some small business owners from establishing defined
benefit pension plans.
EXPLANATION OF PROVISION
The provision provides that the 60-month phase-in of
guaranteed benefits applies to a substantial owner with less
than 50 percent ownership interest. For a substantial owner
with a 50 percent or more ownership interest (``majority
owner''), the phase-in occurs over a 10-year period and depends
on the number of years the plan has been in effect. The
majority owner's guaranteed benefit is limited so that it
cannot be more than the amount phased in over 60 months for
other participants. The rules regarding allocation of assets
applies to substantial owners, other than majority owners, in
the same manner as other participants.
EFFECTIVE DATE
The provision is effective for plan terminations with
respect to which notices of intent to terminate are provided,
or for which proceedings for termination are instituted by the
PBGC, after December 31, 2002.
I. Benefit Suspension Notice
(Sec. 410 of the bill)
PRESENT LAW
Under present law,\39\ a plan will not fail to satisfy the
vesting requirements with respect to a participant by reason of
suspending payment of the participant's benefits while such
participant is employed. Under the applicable Department of
Labor (``DOL'') regulations, such a suspension is only
permissible if the plan notifies the participant during the
first calendar month or payroll period in which the plan
withholds benefit payments. Such notice must provide certain
information and must also include a copy of the plan's
provisions relating to the suspension of payments.
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\39\ ERISA sec. 203(a)(3)(B).
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In the case of a plan that does not pay benefits to active
participants upon attainment of normal retirement age, the
employer must monitor plan participants to determine when any
participant who is still employed attains normal retirement
age. In order to suspend payment of such a participant's
benefits, generally a plan must, as noted above, promptly
provide the participant with a suspension notice.
REASONS FOR CHANGE
The Committee believes the regulations relating to the
benefit suspension notice should be amended to reduce the
regulatory burden on plan administrators while at the same time
assuring that adequate information is provided to employees.
EXPLANATION OF PROVISION
Under the provision, the Secretary of Labor is required to
modify the regulations relating to the benefit suspension
notice (1) to permit the information currently required to be
set forth in a suspension notice generally to be included in
the summary plan description, rather than in a separate notice,
and (2) not to require that the notice include a copy of
relevant plan provisions. However, individuals reentering the
workforce to resume work with a former employer after having
begun to receive benefits would still receive the notification
of the suspension of benefits (and a copy of the plan's
provisions relating to suspension of payments). Such notice is
required to be provided during the first calendar month, or
during the first four- or five-week payroll period ending in a
calendar month, in which the plan withholds payments.
EFFECTIVE DATE
The provision applies for plan years beginning after
December 31, 2002.
J. Interest Rate Range For Additional Funding Requirements
(Sec. 411 of the bill, sec. 412 of the Code, and secs. 302 and 4006 of
ERISA)
PRESENT LAW
In general
ERISA and the Code impose both minimum and maximum \40\
funding requirements with respect to defined benefit pension
plans. The minimum funding requirements are designed to provide
at least a certain level of benefit security by requiring the
employer to make certain minimum contributions to the plan. The
amount of contributions required for a plan year is generally
the amount needed to fund benefits earned during that year plus
that year's portion of other liabilities that are amortized
over a period of years, such as benefits resulting from a grant
of past service credit.
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\40\ The maximum funding requirement for a defined benefit plan is
referred to as the full funding limitation. Additional contributions
are not required if a plan has reached the full funding limitation.
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Additional contributions for underfunded plans
Additional contributions are required under a special
funding rule if a single-employer defined benefit pension plan
is underfunded.\41\ Under the special rule, a plan is
considered underfunded for a plan year if the value of the plan
assets is less than 90 percent of the plan's current
liability.\42\ The value of plan assets as a percentage of
current liability is the plan's ``funded current liability
percentage.''
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\41\ Plans with no more than 100 participants on any day in the
preceding plan year are not subject to the special funding rule. Plans
with more than 100 but not more than 150 participants are generally
subject to lower contribution requirements under the special funding
rule.
\42\ Under an alternative test, a plan is not considered
underfunded if (1) the value of the plan assets is at least 80 percent
of current liability and (2) the value of the plan assets was at least
90 percent of current liability for each of the two immediately
preceding years or each of the second and third immediately preceding
years.
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If a plan is underfunded, the amount of additional required
contributions is based on certain elements, including whether
the plan has an unfunded liability related to benefits accrued
before 1988 or 1995 or to changes in the mortality table used
to determine contributions, and whether the plan provides for
unpredictable contingent event benefits (that is, benefits that
depend on contingencies that are not reliably and reasonably
predictable, such as facility shutdowns or reductions in
workforce). However, the amount of additional contributions
cannot exceed the amount needed to increase the plan's funded
current liability percentage to 100 percent.
Required interest rate
In general, a plan's current liability means all
liabilities to employees and their beneficiaries under the
plan. The interest rate used to determine a plan's current
liability must be within a permissible range of the weighted
average of the interest rates on 30-year Treasury securities
for the four-year period ending on the last day before the plan
year begins.\43\ The permissible range is from 90 percent to
105 percent. As a result of debt reduction, the Department of
the Treasury does not currently issue 30-year Treasury
securities.
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\43\ The interest rate used under the plan must be consistent with
the assumptions which reflect the purchase rates which would be used by
insurance companies to satisfy the liabilities under the plan (section
412(b)(5)(B)(iii)(II)).
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Timing of plan contributions
In general, plan contributions required to satisfy the
funding rules must be made within 8\1/2\ months after the end
of the plan year. If the contribution is made by such due date,
the contribution is treated as if it were made on the last day
of the plan year.
In the case of a plan with a funded current liability
percentage of less than 100 percent for the preceding plan
year, estimated contributions for the current plan year must be
made in quarterly installments during the current plan year.
The amount of each required installment is 25 percent of the
lesser of (1) 90 percent of the amount required to be
contributed for the current plan year or (2) 100 percent of the
amount required to be contributed for the preceding plan
year.\44\
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\44\ No additional quarterly contributions are due once the plan's
funded current liability percentage for the plan year reaches 100
percent.
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PBGC premiums
Because benefits under a defined benefit pension plan may
be funded over a period of years, plan assets may not be
sufficient to provide the benefits owed under the plan to
employees and their beneficiaries if the plan terminates before
all benefits are paid. In order to protect employees and their
beneficiaries, the Pension Benefit Guaranty Corporation
(``PBGC'') generally insures the benefits owed under defined
benefit pension plans. Employers pay premiums to the PBGC for
this insurance coverage.
In the case of an underfunded plan, additional PBGC
premiums are required based on the amount of unfunded vested
benefits. These premiums are referred to as ``variable rate
premiums.'' In determining the amount of unfunded vested
benefits, the interest rate used is 85 percent of the interest
rate on 30-year Treasury securities for the month preceding the
month in which the plan year begins.
Special interest rate for 2002 and 2003
Section 405 of the Job Creation and Worker Assistance Act
of 2002,\45\ enacted March 9, 2002, provides a special interest
rate rule applicable in determining the amount of additional
contributions for plan years beginning after December 31, 2001,
and before January 1, 2004 (the ``applicable plan years''). The
special rule expands the permissible range of the statutory
interest rate used in calculating a plan's current liability
for purposes of applying the additional contribution
requirements for the applicable plan years. The permissible
range is from 90 percent to 120 percent for these years.
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\45\ Pub. L. No. 107-147.
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Under a related special rule, the interest rate used in
determining the amount of unfunded vested benefits for PBGC
variable rate premium purposes is increased to 100 percent of
the interest rate on 30-year Treasury securities for the month
preceding the month in which the applicable plan year begins.
REASONS FOR CHANGE
Additional contributions are due within 8\1/2\ months after
the end of the plan year if the plan was sufficiently funded
for the preceding plan year. The Committee believes that the
special interest rate rule provided under the Job Creation and
Worker Assistance Act of 2002 should be phased in for
contributions for the 2001 plan year that are due within 8\1/2\
months after the end of the plan year.
EXPLANATION OF PROVISION
The provision expands the permissible range of the
statutory interest rate used in calculating a plan's current
liability for purposes of determining the amount of additional
contributions for a plan year beginning in 2001 (the ``2001
plan year'') that must be contributed to the plan within 8\1/2\
months after the end of the plan year (e.g., by September 15,
2002, in the case of a plan that uses the calendar year as the
plan year). The permissible range is from 90 percent to 108
percent for this purpose.
In addition, with respect to the provision of the Job
Creation and Worker Assistance Act of 2002 providing a special
rule for the interest rate used in determining the amount of
unfunded vested benefits for PBGC variable rate premium
purposes, the provision makes conforming changes so that the
special rule applies for purposes of notices and reporting
required with respect to underfunded plans.
EFFECTIVE DATE
The provision is effective as if included in section 405 of
the Job Creation and Worker Assistance Act of 2002.
K. Voluntary Early Retirement Incentive Plans Maintained by Local
Educational Agencies and Other Entities
(Sec. 412 of the bill, sec. 457 of the Code, sec. 3(2)(B) of ERISA, and
sec. 4(l)(1) of the Age Discrimination in Employment Act)
PRESENT LAW
Eligible deferred compensation plans of State and local governments and
tax-exempt employers
A ``section 457 plan'' is an eligible deferred compensation
plan of a State or local government or tax-exempt employer that
meets certain requirements. For example, amounts that can be
deferred under section 457 cannot exceed certain dollar limits
($11,000 for 2002). Amounts deferred under a section 457 plan
are generally includible in gross income when paid or made
available (or, in the case of governmental section 457 plans,
when paid). Subject to certain exceptions (e.g., a qualified
retirement plan), amounts deferred under a plan that does not
comply with section 457 (an ``ineligible plan'') are includible
in income when the amounts are not subject to a substantial
risk of forfeiture. Section 457 does not apply to any bona fide
vacation leave, sick leave, compensatory time, severance pay,
disability pay, or death benefit plan. Additionally, section
457 does not apply to qualified governmental excess benefit
plans that provide benefits in excess of those that are
provided under a qualified retirement plan maintained by the
governmental employer.
ERISA
ERISA provides rules governing the operation of most
employee benefit plans. The rules to which a plan is subject
depends on whether the plan is an employee welfare benefit plan
or an employee pension benefit plan. For example, employee
pension benefit plans are subject to reporting and disclosure
requirements, participation and vesting requirements, funding
requirements, and fiduciary provisions. Employee welfare
benefit plans are not subject to all of these requirements. In
addition, governmental plans are exempt from ERISA.
Age Discrimination in Employment Act
The Age Discrimination in Employment Act (``ADEA'')
generally prohibits discrimination in employment because of
age. An exemption is provided from certain restrictions in ADEA
for certain defined benefit plans that offer early retirement
benefits or social security supplements and for a voluntary
early retirement incentive plan that is consistent with the
purposes of ADEA.
REASONS FOR CHANGE
The Committee is aware that some public school districts
and related tax-exempt education associations provide certain
employees with voluntary early retirement incentive benefits
similar to benefits that can be provided under a defined
benefit plan. If provided under a defined benefit plan, these
benefits would not be includible in income until paid and would
also generally be permitted under ADEA. However, for reasons
related to the structure ofState-maintained defined benefit
plans covering these employees and fiscal operations of the local
school districts, these benefits are provided to the employees
directly, rather than under the defined benefit plan. The Committee
believes it is appropriate to treat these benefits in a manner similar
to the treatment that would apply if the benefits were provided under
the defined benefit plan. The Committee also believes that it is
appropriate to address the treatment of certain employment retention
plans maintained by local school districts and related tax-exempt
education associations
EXPLANATION OF PROVISION
Early retirement incentive plans of local educational agencies and
education associations
The provision deals with the treatment of certain voluntary
early retirement incentive plans under section 457, ERISA, and
ADEA. The provision applies to voluntary early retirement
incentive plans that are maintained by local educational
agencies and tax-exempt education associations which
principally represent employees of one or more such agencies,
and that make payments or supplements as an early retirement
benefit, a retirement-type subsidy, or a social security
supplement in coordination with a defined benefit plan
maintained by a State or local government or by such an
association.
Under the provision, a voluntary early retirement incentive
plan is treated as a bona fide severance plan for purposes of
section 457, and is therefore not subject to the limits under
section 457, to the extent the payments or supplements could
otherwise be provided under the defined benefit plan. For
purposes of the provision, the payments or supplements that
could otherwise be provided under the defined benefit plan are
to be determined by applying the accrual and vesting rules for
defined benefit plans.\46\
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\46\ The accrual and vesting rules have the effect of limiting the
social security supplements and early retirement benefits that may be
provided under a defined benefit plan; however, government plans are
exempt from these rules.
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Under the provision, a voluntary early retirement incentive
plan is also treated as a welfare plan for purposes of ERISA
(other than a governmental plan that is exempt from ERISA).
Additionally, for purposes of ADEA, the bill provides that a
voluntary early retirement incentive plan is treated as part of
the defined benefit plan and that payments or supplements under
voluntary early retirement incentive plans are not severance
pay that may be subject to certain deductions under ADEA.
Employment retention plans of local educational agencies and education
associations
The provision deals with the treatment of certain
employment retention plans under section 457 and ERISA. The
provision applies to employment retention plans that are
maintained by local educational agencies and tax-exempt
education associations which principally represent employees of
one or more such agencies and that provide compensation to an
employee (payable on termination of employment) for purposes of
retaining the services of the employee or rewarding the
employee for service with educational agencies or associations.
Under the provision, special tax treatment applies to the
portion of an employment retention plan that provides benefits
that do not exceed twice the applicable dollar limit on
deferrals under section 457 ($11,000 for 2002). The provision
provides an exception from the rules under section 457 for
ineligible plans with respect to such portion of an employment
retention plan. This exception applies for years preceding the
year in which benefits under the employment retention plan are
paid or otherwise made available to the employee. In addition,
such portion of an employment retention plan is not treated as
providing for the deferral of compensation for tax purposes.
Under the provision, an employment retention plan is also
treated as a welfare plan for purposes of ERISA (other than a
governmental plan that is exempt from ERISA).
EFFECTIVE DATE
The provision is generally effective on the date of
enactment. The amendments to section 457 apply to taxable years
ending after the date of enactment. The amendments to ERISA
apply to plan years ending after the date of enactment. No
inference is intended to be drawn from the provision as to the
application of any law to any arrangement to which the
provision does not apply or for any period or year for which
the provision does not apply.
L. Automatic Rollovers of Certain Involuntary Distributions
(Sec. 413 of the bill and sec. 404(c) of ERISA)
PRESENT LAW
In general
If a qualified retirement plan participant ceases to be
employed by the employer that maintains the plan, the plan may
distribute the participant's nonforfeitable accrued benefit
without the consent of the participant (an ``involuntary
distribution'') and, if applicable, the participant's spouse,
if the present value of the benefit does not exceed $5,000.
Generally, a participant may roll over an involuntary
distribution from a qualified plan to an individual retirement
account or annuity (an ``IRA'') or to another qualified plan.
Before making a distribution that is eligible for rollover, a
plan administrator must provide the participant with a written
explanation of the ability to have the distribution rolled over
directly to an IRA or another qualified plan and the related
tax consequences.
IRS guidance on default rollovers
Under a 2000 ruling issued by the IRS,\47\ a qualified
retirement plan may provide that the default form of payment of
an involuntary distribution is a direct rollover to an IRA,
unless the participant elects (1) a direct rollover to another
qualified retirement plan or IRA or (2) to receive the payment
in cash. Under the plan described in the ruling, the plan
administrator selected an IRA trustee, custodian or issuer,
established the IRA on behalf of the participant, and made
initial investment choices for the account.
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\47\ Rev. Rul. 2000-36, 2000-2 C.B. 140.
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The ruling noted that the Department of Labor had advised
the Treasury Department and the IRS that, in the context of a
default direct rollover as described in the ruling, the
participant ceases to be a participant covered under the plan
within the meaning of ERISA and the distributed assets cease to
be plan assets for purposes of ERISA if the distribution
constituted the entire benefit rights of the participant. The
ruling also noted that the Department of Labor had advised that
the selection of an IRA trustee, custodian, or issuer and IRA
investment for purposes of a default direct rollover would
constitute a fiduciary act subject to the general fiduciary
standards and prohibited transaction provisions of ERISA. In
addition, the Department of Labor noted that plan provisions
governing the default direct rollover of distributions,
including the participant's ability to affirmatively opt out of
the arrangement, must be described in the plan's summary plan
description furnished to participants and beneficiaries.
Automatic rollover of involuntary distributions
Under the Economic Growth and Tax Relief Reconciliation Act
of 2001 (``EGTRRA''),\48\ a direct rollover to an IRA must be
automatic for an involuntary distribution that exceeds $1,000
and that is an eligible rollover distribution from a qualified
retirement plan.\49\ That is, the distribution must be rolled
over automatically to a designated IRA, unless the participant
affirmatively elects to have the distribution transferred to a
different IRA or a qualified plan or to receive it directly.
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\48\ Pub. L. No. 107-16.
\49\ Section 401(a)(31)(B) of the Code, as added by section 657 of
EGTRRA.
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ERISA fiduciary rules
ERISA contains general fiduciary duty standards that apply
to all fiduciary actions related to employer-sponsored pension
plans, including actions related to the investment of plan
assets. However, these fiduciary rules generally do not apply
to IRAs.
ERISA provides a special rule for a defined contribution
plan that permits participants to exercise control over the
assets in their individual accounts.\50\ Under the special
rule, if a participant exercises control over the assets in his
or her account (as determined under regulations), the
participant is not deemed to be a fiduciary by reason of such
exercise and no person who is otherwise a fiduciary is liable
for any loss, or by reason of any breach, that results from the
participant's exercise of control.
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\50\ ERISA sec. 404(c).
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In connection with the EGTRRA provisions relating to
automatic direct rollovers, the ERISA provision dealing with
fiduciary liability when a participants exercises control over
the assets in his or her account was amended to provide that,
in the case of an automatic direct rollover, the participant is
treated as exercising control over the assets in the IRA upon
(1) the earlier of a rollover of all or a portion of the amount
to another IRA, or one year after the automatic rollover is
made, or (2) the making of an automatic rollover in a manner
consistent with guidance provided by the Secretary of
Labor.\51\ EGTRRA directed the Secretary of Labor to prescribe
regulations, not later than three years after the date of
enactment of EGTRRA, providing safe harbors under which the
designation of an institution and investment of funds in
accordance with the automatic direct rollover provision are
deemed to satisfy the general fiduciary duty requirements of
ERISA.\52\ The automatic rollover provisions apply to
distributions made after the Department of Labor has adopted
final regulations providing the required safe harbor. No such
regulations have been adopted.
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\51\ ERISA sec. 404(c)(3), as added by section 657 of EGTRRA.
Section 411(t) of the Job Creation and Worker Assistance Act of 2002
made clerical corrections to the wording of this provision.
\52\ ERISA sec. 404(a).
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REASONS FOR CHANGE
The Committee recognizes that the provision added to ERISA
in connection with the automatic rollover requirement, under
which the individual is treated as exercising control over the
assets in the IRA, has caused concern as to whether the assets
in the IRA would be treated as plan assets that are subject to
the fiduciary rules of ERISA. Such treatment would be
inconsistent with the Department of Labor's position that, in
the case of a default direct rollover to an IRA, the
distributed assets cease to be plan assets. Confusion over
whether the fiduciary rules of ERISA would apply with respect
to assets held in an IRA has made it difficult for the
Department of Labor to issue guidance related to automatic
rollovers, including safe harbors for the designation of an
institution to hold the distributed assets and the investment
of the assets after distribution. The Committee believes it is
appropriate to clarify the operation of the automatic rollover
provision. This will facilitate the issuance of guidance by the
Department of Labor and the implementation of the automatic
rollover provision.
EXPLANATION OF PROVISION
The provision repeals the ERISA provision relating to when
a participant is considered to exercise control over the assets
in an IRA following an automatic rollover. The provision thus
clarifies that amounts transferred from a qualified retirement
plan to an IRA in an automatic rollover are no longer plan
assets for ERISA purposes, as indicated under the Department of
Labor's position with respect to default direct rollovers
before the enactment of EGTRRA. In addition, the provision
directs the Department of Labor, not later than December 31,
2002, to issue interim final regulations, or other
administrative guidance, under which the designation of an
institution and investment of funds in accordance with the
automatic rollover provision are deemed to satisfy the general
fiduciary duty requirements of ERISA.\53\ The provision
provides that the automatic rollover provision applies to
distributions made after December 31, 2003.
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\53\ Sec. 404(a) of ERISA.
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EFFECTIVE DATE
The provision is effective as if included in the provisions
of EGTRRA.
M. Extension of Transition Rule to Pension Funding Requirements
(Sec. 414 of the bill and sec. 769(c) of the Retirement Protection Act
of 1994)
PRESENT LAW
Under present law, defined benefit pension plans are
required to meet certain minimum funding rules. In some cases,
additional contributions are required if a defined benefit
pension plan is underfunded. Additional contributions generally
are not required in the case of a plan with a funded current
liability percentage of at least 90 percent. A plan's funded
current liability percentage is the value of plan assets as a
percentage of current liability. In general, a plan's current
liability means all liabilities to employees and their
beneficiaries under the plan. Quarterly minimum funding
contributions are required in the case of certain underfunded
plans.
The Pension Benefit Guaranty Corporation (``PBGC'') insures
benefits under most defined benefit pension plans in the event
the plan is terminated with insufficient assets to pay for plan
benefits. The PBGC is funded in part by a flat-rate premium per
plan participant, and a variable rate premium based on plan
underfunding.
Under present law, a special rule modifies the minimum
funding requirements in the case of certain plans. The special
rule applies in the case of plans that (1) were not required to
pay a variable rate PBGC premium for the plan year beginning in
1996, (2) do not, in plan years beginning after 1995 and before
2009, merge with another plan (other than a plan sponsored by
an employer that was a member of the controlled group of the
employer in 1996), and (3) are sponsored by a company that is
engaged primarily in interurban or interstate passenger bus
service.
The special rule treats a plan to which it applies as
having a funded current liability percentage of at least 90
percent for plan years beginning after 1996 and before 2005 if
for such plan year the funded current liability percentage is
at least 85 percent. If the funded current liability of the
plan is less than 85 percent for any plan year beginning after
1996 and before 2005, the relief from the minimum funding
requirements applies only if certain specified contributions
are made.
For plan years beginning after 2004 and before 2010, the
funded current liability percentage will be deemed to be at
least 90 percent if the actual funded current liability
percentage is at least at certain specified levels. The relief
from the minimum funding requirements applies for a plan year
beginning in 2005, 2006, 2007, or 2008 only if contributions to
the plan for the plan year equal at least the expected increase
in current liability due to benefits accruing during the plan
year.
REASONS FOR CHANGE
The present-law funding rules for plans maintained by
certain interstate bus companies were enacted because the
generally applicable funding rules required greater
contributions for such plans than were warranted give the
special characteristics of such plans. In particular, these
plans are closed to new participants and have demonstrated
mortality significantly greater than that predicted under
mortality tables that the plans would otherwise be required to
use for minimum funding purposes. The Committee believes that
it is appropriate to provide an extension of the special
minimum funding rules for these plans for two years.
EXPLANATION OF PROVISION
The provision modifies the special funding rules for plans
sponsored by a company engaged primarily in interurban or
interstate passenger bus service by providing that, for plan
years beginning in 2004 and 2005, the funded current liability
percentage of the plan will be treated as at least 90 percent
for purposes of determining the amount of required
contributions (100 percent for purposes of determining the
timing of plan contributions). In addition, for these years,
the mortality table used under the plan will be used in
determining the amount of unfunded vested benefits under the
plan.
EFFECTIVE DATE
The provision is effective with respect to plan years
beginning after December 31, 2002.
N. Studies
(Secs. 421-425 of the bill)
PRESENT LAW
Present law does not require studies specifically relating
to the revitalization of defined benefit plans, floor-offset
ESOPs, an insurance system for defined contribution plans, or
fees related to the investment of defined contribution plan
assets.
REASONS FOR CHANGE
The Committee has a continuing interest in retirement
income security and in the roles that defined contribution
plans and defined benefit plans play in providing that
security. The Committee believes it is appropriate to conduct
studies of certain issues relating to defined contribution
plans, specifically, the establishment of an insurance
arrangement for defined contribution plans, administrative and
transactions fees charged in connection with the investment of
defined contribution plan assets, and existing floor-offset
ESOP arrangements, as well as a study of possible ways to
revitalize interest in defined benefit plans.
EXPLANATION OF PROVISION
Study regarding insurance system for individual account plans
The Pension Benefit Guaranty Corporation (the ``PBGC'') is
required, as soon as practicable after the date of enactment,
to undertake a study relating to the establishment of an
insurance system for defined contribution plans and to report
the results thereof, with recommendations for legislative
changes, within two years after the date of enactment, to the
House Committees on Ways and Means and on Education and the
Workforce and the SenateCommittees on Finance and on Health,
Education, Labor, and Pensions. In conducting the study, the PBGC is
required to consider the feasibility of such a system, the problem with
insuring investments in employer securities, and options for developing
such a system.
Study regarding fees charged by individual account plans \54\
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\54\ Under ERISA, a defined contribution plan is generally referred
to as an individual account plan.
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The Department of Labor is required to undertake a study of
the administrative and transaction fees incurred by
participants and beneficiaries in connection with the
investment of assets in their accounts under defined
contribution plans and to report the results thereof, with
recommendations for legislative changes, within one year after
the date of enactment, to the House Committees Ways and Means
and on Education and the Workforce and the Senate Committees on
Finance and on Health, Education, Labor, and Pensions. In
conducting the study, the Department of Labor is required to
consider how the fees compare to fees charged for similar
services provided to investors not in defined contribution
plans and whether participants and beneficiaries are adequately
notified of the fees.
Study on revitalizing defined benefit plans
The Secretary of the Treasury is required to undertake a
study on ways to revitalize employer interest in defined
benefit plans and to report the results thereof, with
recommendations for legislative changes, within 18 months after
the date of enactment, to the House Committees on Ways and
Means and on Education and the Workforce and the Senate
Committees on Finance and on Health, Education, Labor, and
Pensions. In conducting the study, the Secretary is required to
consider (1) ways to encourage the establishment of defined
benefit plans by small and mid-sized employers, (2) ways to
encourage the continued maintenance of defined benefit plans by
larger employers, and (3) legislative proposals to accomplish
these objectives.
Study on floor-offset ESOPs \55\
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\55\ A floor-offset arrangement is an arrangement under which
benefits payable to a participant under a defined benefit plan are
reduced by benefits under a defined contribution plan. Generally, in
the case of a floor-offset arrangement, ERISA prohibits the defined
contribution plan from acquiring employer securities if, after the
acquisition, more than 10 percent of the assets of the plan would be
invested in employer stock. However, under a special transition rule,
this prohibition does not apply to a defined contribution plan,
including an ESOP, that is part of a floor-offset arrangement
established on or before December 17, 1987.
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The PBGC is required to undertake a study to determine the
number of floor-offset ESOPs still in existence and the extent
to which such plans pose a risk to plan participants or
beneficiaries or to the PBGC and to report the results thereof,
with legislative proposals, within 12 months after the date of
enactment, to the House Committees on Ways and Means and on
Education and the Workforce and the Senate Committees on
Finance and on Health, Education, Labor, and Pensions.
EFFECTIVE DATE
The provision is effective on the date of enactment.
O. Plan Amendments
(Sec. 431 of the bill)
PRESENT LAW
Plan amendments to reflect amendments to the law generally
must be made by the time prescribed by law for filing the
income tax return of the employer for the employer's taxable
year in which the change in law occurs.
REASONS FOR CHANGE
The Committee believes that employers should have adequate
time to amend their plans to reflect amendments to the law
while operating their plans in compliance with such amendments.
EXPLANATION OF PROVISION
The provision permits certain plan amendments made pursuant
to the changes made by the bill or by the Economic Growth and
Tax Relief Reconciliation Act of 2001 (the ``2001 Act''), or
regulations issued thereunder, to be retroactively effective.
If the plan amendment meets the requirements of the provision,
then the plan will be treated as being operated in accordance
with its terms and the amendment will not violate the
prohibition of reductions of accrued benefits for purposes of
the Internal Revenue Code. In order for this treatment to
apply, the plan amendment is required to be made on or before
the last day of the first plan year beginning on or after
January 1, 2005 (January 1, 2007, in the case of a governmental
plan). If the amendment is required to be made to retain
qualified status as a result of the changes in the law (or
regulations), the amendment is required to be made
retroactively effective as of the date on which the change
became effective with respect to the plan and the plan is
required to be operated in compliance until the amendment is
made. Amendments that are not required to retain qualified
status but that are made pursuant to the changes made by the
bill or the 2001 Act (or applicable regulations) could be made
retroactive as of the first day the plan is operated in
accordance with the amendment.
A plan amendment will not be considered to be pursuant to
the bill or the 2001 Act (or applicable regulations) if it has
an effective date before the effective date of the provision of
the bill or Act (or regulations) to which it relates.
Similarly, the provision does not provide relief from section
411(d)(6) for periods prior to the effective date of the
relevant provision (or regulations) or the plan amendment.
The Secretary is authorized to provide exceptions to the
relief from the prohibition on reductions in accrued benefits.
It is intended that the Secretary will not permit inappropriate
reductions in contributions or benefits that are not directly
related to the provisions of the bill or the 2001 Act. For
example, it is intended that a plan that incorporates the
section 415 limits by reference can be retroactively amended to
impose the section 415 limits in effect before the 2001
Act.\56\ On the other hand, suppose a plan incorporates the
section 401(a)(17) limit on compensation by reference and
provides for an employer contribution of three percent of
compensation. It is expected that the Secretary will provide
that the plan cannot be amended retroactively to reduce the
contribution percentage for those participants not affected by
the section 401(a)(17) limit, even though the reduction will
result in the same dollar level of contributions for some
participants because of the increase in compensation taken into
account under the plan as a result of the increase in the
section 401(a)(17) limit under the 2001 Act. As another
example, suppose that under present law a plan is top-heavy and
therefore a minimum benefit is required under the plan, and
that under the provisions of the 2001 Act, the plan is not be
considered to be top-heavy. It is expected that the Secretary
will generally permit plans to be retroactively amended to
reflect the new top-heavy provisions of the 2001 Act.
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\56\ See also, section 411(j)(3) of the Job Creation and Worker
Assistance Act of 2002, which provides a special rule for plan
amendments adopted on or before June 30, 2002, in connection with the
2001 Act, in the case of a plan that incorporated the section 415
limits by reference on June 7, 2001, the date of enactment of the 2001
Act.
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EFFECTIVE DATE
The provision is effective on the date of enactment.
TITLE V. PROVISIONS RELATING TO EXECUTIVES AND STOCK OPTIONS
A. Repeal of Limitation on Issuance of Treasury Guidance Regarding
Nonqualified Deferred Compensation
(Sec. 501 of the bill)
PRESENT LAW
General tax treatment of nonqualified deferred compensation
The determination of when amounts deferred under a
nonqualified deferred compensation arrangement are includible
in the gross income of the individual earning the compensation
depends on the facts and circumstances of the arrangement. A
variety of tax principles and Code provisions may be relevant
in making this determination, including the doctrine of
constructive receipt, the economic benefit doctrine, the
provisions of section 83 relating generally to transfers of
property in connection with the performance of services, and
provisions relating specifically to nonexempt employee trusts
(sec. 402(b)) and nonqualified annuities (sec. 403(c)).
In general, the time for inclusion of nonqualified deferred
compensation depends on whether the arrangement is unfunded or
funded. If the arrangement is unfunded, then the compensation
is generally includible in income when it is actually or
constructively received. If the arrangement is funded, then
income is includible for the year in which the individual's
rights are transferable or not subject to a substantial risk of
forfeiture.
In general, an arrangement is considered funded if there
has been a transfer of property under section 83. Under that
section, a transfer of property occurs when a person acquires a
beneficial ownership interest in such property. The term
``property'' is defined very broadly for purposes of section
83.\57\ Property includes real and personal property other than
money or an unfunded and unsecured promise to pay money in the
future. Property also includes a beneficial interest in assets
(including money) that are transferred or set aside from claims
of the creditors of the transferor, for example, in a trust or
escrow account. Accordingly, if, in connection with the
performance of services, vested contributions are made to a
trust on an individual's behalf and the trust assets may be
used solely to provide future payments to the individual, the
payment of the contributions to the trust constitutes a
transfer of property to the individual that is taxable under
section 83. On the other hand, deferred amounts are generally
not includible in income in situations where nonqualified
deferred compensation is payable from general corporate funds
that are subject to the claims of general creditors, as such
amounts are treated as unfunded and unsecured promises to pay
money or property in the future.
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\57\ Treas. Reg. sec. 1.83-3(e). This definition in part reflects
previous IRS rulings on nonqualified deferred compensation.
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As discussed above, if the arrangement is unfunded, then
the compensation is generally includible in income when it is
actually or constructively received under section 451. Income
is constructively received when it is credited to an
individuals' account, set apart, or otherwise made available so
that it can be drawn on at any time. Income is not
constructively received if the taxpayer's control of its
receipt is subject to substantial limitations or restrictions.
A requirement to relinquish a valuable right in order to make
withdrawals is generally treated as a substantial limitation or
restriction.
Special statutory provisions govern the timing of the
deduction for nonqualified deferred compensation, regardless of
whether the arrangement covers employees or nonemployees and
regardless of whether the arrangement is funded or
unfunded.\58\ Under these provisions, the amount of
nonqualified deferred compensation that is includible in the
income of the individual performing services is deductible by
the service recipient for the taxable year in which the amount
is includible in the individual's income.
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\58\ Secs. 404(a)(5), (b) and (d) and sec. 83(h).
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Rulings on nonqualified deferred compensation
In the 1960's and early 1970's, various IRS revenue rulings
considered the tax treatment of nonqualified deferred
compensation arrangements.\59\ Under these rulings, a mere
promise to pay, not represented by notes or secured in any way,
was not regarded as the receipt of income for tax purposes.
However, if an amount was contributed to an escrow account or
trust on the individual's behalf, to be paid to the individual
in future years with interest, the amount was held to be
includible in income under the economic benefit doctrine.
Deferred amounts were not currently includible in income in
situations in which nonqualified deferred compensation was
payable from general corporate funds that were subject to the
claims of general creditors and the plan was not funded by a
trust, or any other form of asset segregation to which
individuals had any prior or privileged claim.\60\ Similarly,
current income inclusion did not result when the employer
purchased an annuity contract to provide a source of funds for
its deferred compensation liability if the employer was the
applicant, owner and beneficiary of the annuity contract, and
the annuity contract was subject to the general creditors of
the employer.\61\ In these situations, deferred compensation
amounts were held to be includible in income when actually
received or otherwise made available.
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\59\ The seminal ruling dealing with nonqualified deferred
compensation is Rev. Rul. 60-31, 1960-1 C.B. 174.
\60\ Rev. Rul. 69-650, 1969-2 C.B. 106; Rev. Rul. 69-49, 1969-1
C.B. 138.
\61\ Rev. Rul. 72-25, 1972-1 C.B. 127. See also, Rev. Rul. 68-99,
1968-1 C.B. 193, in which the employer's purchase of an insurance
contract on the life of the employee did not result in an economic
benefit to the employee if all rights to any benefits under the
contract were solely the property of the employer and the proceeds of
the contract were payable only to the employer.
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Proposed Treasury regulation 1.61-16, published in the
Federal Register for February 3, 1978, provided that if a
payment of an amount of a taxpayer's compensation is, at the
taxpayer's option, deferred to a taxable year later than that
in which such amount would have been payablebut for his
exercise of such option, the amount shall be treated as received by the
taxpayer in such earlier taxable year.\62\
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\62\ Prop. Treas. Reg. 1.61-16, 43 Fed. Reg. 4638 (1978).
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Section 132 of the Revenue Act of 1978
Section 132 of the Revenue Act of 1978 \63\ was enacted in
response to proposed Treasury regulation 1.61-16. Section 132
of the Revenue Act of 1978 provides that the taxable year of
inclusion in gross income of any amount covered by a private
deferred compensation plan is determined in accordance with the
principles set forth in regulations, rulings, and judicial
decisions relating to deferred compensation which were in
effect on February 1, 1978. The term, ``private deferred
compensation plan'' means a plan, agreement, or arrangement
under which the person for whom service is performed is not a
State or a tax-exempt organization and under which the payment
or otherwise making available of compensation is deferred.
However, the provision does not apply to certain employer-
provided retirement arrangements (e.g., a qualified retirement
plan), a transfer of property under section 83, or an
arrangement that includes a nonexempt employees trust under
section 402(b). Section 132 was not intended to restrict
judicial interpretation of the law relating to the proper tax
treatment of deferred compensation or interfere with judicial
determinations of what principles of law apply in determining
the timing of income inclusion.\64\
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\63\ Pub. L. No. 95-600.
\64\ The legislative history to the provision states that the
Congress believed that the doctrine of constructive receipt should not
be applied to employees of taxable employers as it would have been
under the proposed regulation. The Congress also believed that the
uncertainty surrounding the status of deferred compensation plans of
taxable organizations under the proposed regulation was not desired and
should not be permitted to continue.
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REASONS FOR CHANGE
The Committee is aware of recent press reports of the
popular use of deferred compensation arrangements by executives
to defer current taxation of substantial amounts of income. It
has been reported that executives often use arrangements which
allow deferral of income, but also provide security of future
payment to the executive, even if the arrangement, on its face,
says otherwise. The Committee is concerned that many
nonqualified deferred compensation arrangements have developed
which allow improper deferral of income. The Committee believes
that the Secretary of the Treasury should issue guidance on
nonqualified deferred compensation targeted to arrangements
which result in improper deferral of income and should not be
bound by the restrictions imposed by Section 132 of the Revenue
Act of 1978, which may impede the Treasury Department from
issuing appropriate guidance to address such arrangements.
EXPLANATION OF PROVISION
The provision repeals section 132 of the Revenue Act of
1978. It is intended that the Secretary of the Treasury issue
guidance with respect to the tax treatment of nonqualified
deferred compensation arrangements focusing on arrangements
that improperly defer income. For example, it is intended that
the Secretary address what is considered a substantial
limitation under the constructive receipt doctrine and
situations in which an individual's right to receive
compensation is, at least in form, subject to substantial
limitations, but in fact is not so limited. It is also intended
that the Secretary address arrangements which purport to not be
funded, but should be treated as so. In addition, it is
intended that the Secretary address arrangements in which
assets, by the technical terms of the arrangements, appear to
be subject to the claims of an employer's general creditors,
but practically are unavailable to creditors. Arrangements that
the Secretary is expected to address include the following: the
ability to receive funds on account of financial hardship, the
use of trusts or other arrangements under which the rights of
general creditors to gain access to funds is limited, the use
of triggers and third-party guarantees to fund arrangements,
and the ability to receive funds subject to a forfeiture of
some portion of the participant's deferred compensation (often
referred to as a ``haircut'').
It is not intended that the Secretary take the position (as
taken in proposed Treasury regulation 1.61-16) that all
elective nonqualified deferred compensation is currently
includible in income.
No inference is intended that the Secretary is prohibited
under present law from issuing guidance with respect to
nonqualified deferred compensation arrangements or that any
existing nonqualified deferred compensation guidance issued by
the Secretary is invalid. In addition, no inference is intended
that any arrangements covered by future guidance provide
permissible deferrals of income under present law.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after the date of enactment.
B. Taxation of Deferred Compensation Provided Through Offshore Trusts
(Sec. 502 of the bill and sec. 83 of the Code)
PRESENT LAW
The determination of when amounts deferred under a
nonqualified deferred compensation arrangement are includible
in the gross income of the individual earning the compensation
depends on the facts and circumstances of the arrangement. A
variety of tax principles and Code provisions may be relevant
in making this determination, including the doctrine of
constructive receipt, the economic benefit doctrine, the
provisions of section 83 relating generally to transfers of
property in connection with the performance of services, and
provisions relating specifically to nonexempt employee trusts
(sec. 402(b)) and nonqualified annuities (sec. 403(c)).
In general, the time for inclusion of nonqualified deferred
compensation depends on whether the arrangement is unfunded or
funded. If the arrangement is unfunded, then the compensation
is generally includible in income when it is actually or
constructively received (i.e., when it is paid or otherwise
made available). If the arrangement is funded, then income
isincludible for the year in which the individual's rights are
transferable or not subject to a substantial risk of forfeiture.
In general, an arrangement is considered funded if there
has been a transfer of property under section 83. Under that
section, a transfer of property occurs when a person acquires a
beneficial ownership interest in such property. The term
``property'' is defined very broadly for purposes of section
83.\65\ Property includes real and personal property other than
money or an unfunded and unsecured promise to pay money in the
future. Property also includes a beneficial interest in assets
(including money) that are transferred or set aside from claims
of the creditors of the transferor, for example, in a trust or
escrow account. Accordingly, if, in connection with the
performance of services, vested contributions are made to a
trust on an individual's behalf and the trust assets may be
used solely to provide future payments to the individual, the
payment of the contributions to the trust constitutes a
transfer of property to the individual that is taxable under
section 83. On the other hand, deferred amounts are generally
not includible in income in situations where nonqualified
deferred compensation is payable from general corporate funds
that are subject to the claims of general creditors, as such
amounts are treated as unfunded and unsecured promises to pay
money or property in the future.
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\65\ Treas. Reg. sec. 1.83-3(e). This definition in part reflects
previous IRS rulings on nonqualified deferred compensation.
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Rabbi trusts
A ``rabbi trust'' is a trust or other fund established by
the employer to hold assets from which nonqualified deferred
compensation payments will be made. The trust or fund is
generally irrevocable and does not permit the employer to use
the assets for purposes other than to provide nonqualified
deferred compensation. However, the terms of the trust or fund
provide that the assets are subject to the claims of the
employer's creditors in the case of bankruptcy.
As discussed above, for purposes of section 83, property
includes a beneficial interest in assets set aside from the
claims of creditors, such as in a trust or fund, but does not
include an unfunded and unsecured promise to pay money in the
future. In the case of a rabbi trust, terms providing that the
assets are subject to the claims of creditors of the employer
in the case of bankruptcy have been the basis for the
conclusion that the creation of a rabbi trust does not cause
the related nonqualified deferred compensation arrangement to
be funded for income tax purposes.\66\ As a result, no amount
is included in income by reason of the rabbi trust; generally
income inclusion occurs as payments are made from the trust.
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\66\ This conclusion was first provided in a 1980 private ruling
issued by the IRS with respect to an arrangement covering a rabbi;
hence the popular name ``rabbi trust.'' Priv. Ltr. Rul. 8113107 (Dec.
31, 1980).
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The Internal Revenue Service has issued guidance setting
forth model rabbi trust provisions.\67\ Revenue Procedure 92-64
provides a safe harbor for taxpayers who adopt and maintain
grantor trusts in connection with unfunded deferred
compensation arrangements. The model trust language requires
that the trust provide that all assets of the trust are subject
to the claims of the general creditors of the company.
---------------------------------------------------------------------------
\67\ Rev. Proc. 92-64, 1992-2 C.B. 422, modified in part by Notice
2000-56, 2000-2 C.B. 393.
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REASONS FOR CHANGE
The Committee is aware of recent press reports of the
popular use of deferred compensation arrangements by executives
to defer current taxation of substantial amounts of income. It
has been reported that executives often use arrangements which
allow deferral of income, but also provide security of future
payment to the executive, even if the arrangement, on its face,
says otherwise. Since the concept of a rabbi trust was
developed, techniques have developed that attempt to protect
the assets from creditors despite the terms of the trust. For
example, the trust or fund may be located in a foreign
jurisdiction, making it difficult or impossible for creditors
to reach the assets. Amounts used to provide deferred
compensation that are held in a trust located in a foreign
jurisdiction are difficult to reach by creditors, in many cases
so difficult that the assets are effectively out of the reach
of general creditors. The Committee believes that except in
limited situations, the primary purpose of such arrangements is
to protect the assets from the claims of general creditors.
Thus, such assets should not be considered to be subject to the
claims of creditors under U.S. tax laws.
EXPLANATION OF PROVISION
The provision provides that assets that are designated or
otherwise available for the use of providing nonqualified
deferred compensation and are located outside the United States
(e.g., in a foreign trust, arrangement or account) are not
treated as subject to the claims of general creditors.
Therefore, to the extent of such assets, nonqualified deferred
compensation amounts are not treated as unfunded and unsecured
promises to pay, but are treated as property under section 83
and includible in income when the right to the compensation is
no longer subject to a substantial risk of forfeiture,
regardless of when the compensation is paid. No inference is
intended that nonqualified deferred compensation assets located
outside of the U.S. would be treated as subject to the claims
of creditors under present law.
The provision does not apply to assets located in a foreign
jurisdiction if substantially all of the services to which the
nonqualified deferred compensation relates are performed in
such foreign jurisdiction.
The provision is specifically intended to apply to foreign
trusts and arrangements that effectively shield from the claims
of general creditors any assets intended to satisfy
nonqualified deferred compensation obligations. The provision
provides the Secretary of the Treasury authority to prescribe
regulations as are necessary to carry out the provision and to
provide additional exceptions for specific arrangements which
do not result in improper deferral of U.S. tax if the assets
involved in the arrangement are readily accessible in any
insolvency or bankruptcy proceeding.
EFFECTIVE DATE
The provision is effective for amounts deferred after the
date of enactment in taxable years ending after such date.
C. Treatment of Loans to Executives
(Sec. 503 of the bill and new sec. 7872A and sec. 7872 of the Code)
PRESENT LAW
In general, gross income includes all income from any
source, including compensation for past, present or future
services, unless an exclusion applies. The proceeds of a bona
fide loan are not income for Federal tax purposes, because the
recipient is obligated to repay the loan. The issue of whether
a payment is a bona fide loan or represents income to the payee
may arise in various contexts (including in an employment
context) and depends on the facts and circumstances. In
analyzing whether there is an obligation to repay an amount,
relevant factors include the existence of (1) a promissory note
or other evidence of indebtedness, (2) a schedule for repayment
of a sum certain in the reasonably foreseeable future, (3)
collateral or security, and (4) the payee's ability to repay,
as well as the actual practice of the parties with respect to
enforcing repayment obligations.
Under present law, a loan that provides for the payment of
interest at a rate below the applicable Federal rate (a
``below-market-rate loan'') between certain parties is
recharacterized as a transaction in which the lender made a
loan to the borrower in exchange for a note requiring the
payment of interest at the applicable Federal rate. In the case
of compensation-related loans, this rule results in the parties
being treated as if: (1) the borrower paid interest to the
lender at the applicable Federal rate which is includible in
income by the lender, and (2) the lender paid compensation to
the employee or other person performing services. A
compensation-related loan is a below-market loan directly or
indirectly between an employer and an employee or between an
independent contractor and a person for whom such independent
contractor provides services.
In general, a below-market-rate loan is either a demand
loan, the interest on which is payable at less than the
applicable Federal rate, or a term loan, under which the amount
of the loan exceeds the present value of all payments due under
the loan, using a discount rate equal to the applicable Federal
rate. A demand loan is any loan which is payable on demand of
the lender; a term loan is any loan other than a demand loan.
REASONS FOR CHANGE
The Committee is aware of recent press reports regarding
loans made to executives by corporations. In some cases, the
total amount loaned to a single individual has been
extraordinary. For example, loans totaling over $90 million and
even several billions of dollars have been reported publicly.
In some cases such loans could not have been obtained from a
commercial lender on similar terms. The Committee is concerned
that there is no business purpose for such loans, other than to
provide a benefit to the executive, and that such loans are in
essence compensatory in nature. Thus, the Committee believes
that loans to executives and certain other individuals in
connection with the performance of services should be treated
as compensation unless certain requirements are satisfied.
In addition, the Committee believes that the present-law
rules regarding below-market-rate loans do not require the
imputation of an adequate rate of interest in the case of very
large loans. Thus, the Committee believes the imputed interest
rate on such loans should be increased.
EXPLANATION OF PROVISION
Certain loans treated as compensation
Under the provision, an arrangement that would otherwise be
a direct or indirect loan \68\ made to an applicable employee
of a C corporation is treated as compensation (and therefore
includible in gross income and wages for payroll tax purposes)
unless certain requirements are satisfied. An applicable
employee is an officer, director,\69\ five-percent owner of the
employer, or any employee of the employer if outstanding loans
from the employer exceed $1 million. In the case of a person
who is an applicable employee solely by reason of having
outstanding loans in excess of $1 million, only the amount of
outstanding loans in excess of such amount is treated as
compensation. Amounts treated as compensation under the
provision are treated as a supplemental wage payment on the
date the loan was made.
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\68\ For example, a loan from the employer to a child or other
family member of the employee would be considered a loan to the
employee.
\69\ All directors are treated as employees for purposes of the
provision.
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A direct or indirect loan is treated as compensation under
the provision unless (1) there is a promissory note or other
written evidence of indebtedness, (2) there is adequate
collateral or security for the debt, and (3) there is a fixed
schedule for repayment providing for substantially equal
payments (or such other form as permitted by the Secretary)
over a period not to exceed 10 years.\70\ The following may not
be taken into account in determining whether there is adequate
collateral or security for the loan: (1) any stock or capital
or profits interest in the employer, (2) any option or other
contract to purchase such stock or interests, (3) any
restricted stock or ownership interest, (4) any nonqualified
deferred compensation, or (5) other similar assets to the
extent provided by the Secretary.
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\70\ An arrangement that would otherwise be treated as a loan will
not be treated as compensation under the provision merely because the
loan is a below-market-rate loan. In such cases, the arrangement is
treated as a loan and the below-market-rate loan rules (as modified
under the provision) will apply to impute interest.
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Loans from qualified plans and relocation loans are not
subject to the provision. A relocation loan is a loan the
proceeds of which are used by the employee to purchase a
principal residence if the purchase is in connection with the
commencement of work by an employee or a change in the
principal place of work of an employee to which section 217
applies (relating to the deduction for moving expenses).
The provision also does not apply to a loan which, without
regard to the provision, is recharacterized as compensation or
dividends with respect to which amounts are otherwiseincludible
in gross income. The provision is not intended to impose tax on amounts
otherwise includible in gross income.
Except in the case of repayments, as described below, the
below-market-rate loan rules do not apply to an arrangement to
the extent that it is treated as compensation under the
provision. In addition, to the extent that a loan is treated as
compensation under the provision, the rules relating to
interest on certain deferred payments (sec. 483), loans from
foreign trusts (sec. 643(i)), and the determination of issue
price in the case of certain debt instruments issued for
property (sec. 1274) do not apply.
The Secretary is directed to prescribe rules for the
application of the Federal tax laws in the event an applicable
employee repays any amount of a loan which was includible in
income under the provision. To the extent the Secretary
determines appropriate, such rules are to provide that (1) the
employee is allowed a deduction (and the employer is to include
in gross income) for the taxable year of the repayment any
portion of the amount repaid that was included in income of the
employee (or allowed as a deduction to the employer), and (2)
the amount treated as compensation for employment tax purposes
(other than income tax withholding) for the calendar year of
the repayment are reduced by the portion of any amount repaid
that was previously treated as compensation. It is intended
that any deduction provided to an applicable employee with
respect to a repayment is to be subject to the two-percent
floor on itemized deductions. It is also intended that the
Secretary prescribe rules, to the extent appropriate, providing
for application of and adjustments to the below-market-rate
loan rules in the case of repayments.
The Secretary is authorized to issue such regulations as
are necessary or appropriate to carry out the provision. It is
expected that such rules will address situations such as the
payment of a bonus that coincides with a payment under the loan
agreement, and rules specifying the proper treatment of an
arrangement treated as a loan when made if the employee
subsequently fails to make scheduled payments when due.
Imputed interest rate for below-market-rate loans
If the amount of all outstanding loans of an applicable
individual (not taking into account loans treated as
compensation) with respect to the same service recipient
exceeds $1 million,\71\ then the interest rate imputed under
the below-market-rate loan rules is the applicable Federal rate
plus three percentage points. This increased interest rate
applies on the outstanding balance in excess of $1 million.
Such amount is treated as a separate loan for this purpose.
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\71\ All loans from the employer (whether or not below-market-rate
loans) are taken into account in determining whether the $1 million
threshold is exceeded.
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EFFECTIVE DATE
The provision is effective for loans made or refinanced
after the date of enactment. Except as provided by the
Secretary, modifications to a loan after the effective date are
considered a new loan. It is intended that a demand loan
outstanding on the effective date is not treated as a new loan
after the effective date merely because it is a demand loan.
D. Required Wage Withholding at Top Marginal Rate for Supplemental Wage
Payments in Excess of $1 Million
(Sec. 504 of the bill and sec. 13273 of the Revenue Reconciliation Act
of 1993)
PRESENT LAW
An employer must withhold income taxes from wages paid to
employees; there are several possible methods for determining
the amount of income tax to be withheld. The IRS publishes
tables (Publication 15, ``Circular E'') to be used in
determining the amount of income tax to be withheld. The tables
generally reflect the income tax rates under the Code so that
withholding approximates the ultimate tax liability with
respect to the wage payments. In some cases, ``supplemental''
wage payments (e.g., bonuses or commissions) may be subject to
withholding at a flat rate,\72\ based on the third lowest
income tax rate under the Code (27 percent for 2002).\73\
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\72\ Sec. 13273 of the Revenue Reconciliation Act of 1993.
\73\ Sec. 101(c)(11) of the Economic Growth and Tax Relief
Reconciliation Act of 2001.
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REASONS FOR CHANGE
The Committee believes that because most employees who
receive annual supplemental wage payments in excess of $1
million will ultimately be taxed at the highest marginal rate,
it is appropriate to raise the withholding rate on such
payments so that withholding more closely approximates the
ultimate tax liability with respect to these payments.
EXPLANATION OF PROVISION
Under the provision, once annual supplemental wage payments
to an employee exceed $1 million, any additional supplemental
wage payments to the employee in that year are subject to
withholding at the highest income tax rate (38.6 percent for
2002), regardless of any other withholding rules and regardless
of the employee's Form W-4.
This rule applies only for purposes of wage withholding;
other types of withholding (such as pension withholding and
backup withholding) are not affected.
EFFECTIVE DATE
The provision is effective with respect to wage payments
made after December 31, 2002.
E. Chief Executive Officer Required To Sign Corporate Income Tax
Returns
(Sec. 511 of the bill and sec. 6062 of the Code)
PRESENT LAW
The Code requires \74\ that the income tax return of a
corporation must be signed by either the president, the vice-
president, the treasurer, the assistant treasurer, the chief
accounting officer, or any other officer of the corporation
authorized by the corporation to sign the return.
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\74\ Sec. 6062.
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The Code also imposes \75\ a criminal penalty on any person
who willfully signs any tax return under penalties of perjury
that that person does not believe to be true and correct with
respect to every material matter at the time of filing. If
convicted, the person is guilty of a felony; the Code imposes a
fine of not more than $100,000 \76\ ($500,000 in the case of a
corporation) or imprisonment of not more than three years, or
both, together with the costs of prosecution.
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\75\ Sec. 7206.
\76\ Pursuant to 18 U.S.C. 3571, the maximum fine for an individual
convicted of a felony is $250,000.
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REASONS FOR CHANGE
The Committee believes that the filing of accurate tax
returns is essential to the proper functioning of the tax
system. The Committee believes that requiring that the chief
executive officer of a corporation sign its corporate income
tax returns will elevate the level of care given to the
preparation of those returns.
EXPLANATION OF PROVISION
The bill requires that the chief executive officer of a
corporation sign that corporation's income tax returns. If the
corporation does not have a chief executive officer, the IRS
may designate another officer of the corporation; otherwise, no
other person is permitted to sign the income tax return of a
corporation. The Committee intends that the IRS issue general
guidance, such as a revenue procedure, to (1) address
situations when a corporation does not have a chief executive
officer, and (2) define who the chief executive officer is, in
situations (for example) when the primary official bears a
different title or when a corporation has multiple chief
executive officers. The Committee intends that, in every
instance, the highest ranking corporate officer (regardless of
title) sign the tax return.
EFFECTIVE DATE
The provision is effective for returns filed after the date
of enactment.
F. Exclusion of Incentive Stock Options and Employee Stock Purchase
Plan Stock Options From Wages
(Sec. 521 of the bill and secs. 421(b), 423(c), 3121(a), 3231, and
3306(b) of the Code)
PRESENT LAW
Generally, when an employee exercises a compensatory option
on employer stock, the difference between the option price and
the fair market value of the stock (i.e., the ``spread'') is
includible in income as compensation. In the case of an
incentive stock option or an option to purchase stock under an
employee stock purchase plan (collectively referred to as
``statutory stock options''), the spread is not included in
income at the time of exercise.\77\
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\77\ Sec. 421.
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If the statutory holding period requirements are satisfied
with respect to stock acquired through the exercise of a
statutory stock option, the spread, and any additional
appreciation, will be taxed as capital gain upon disposition of
such stock. Compensation income is recognized, however, if
there is a disqualifying disposition (i.e., if the statutory
holding period is not satisfied) of stock acquired pursuant to
the exercise of a statutory stock option.
Federal Insurance Contribution Act (``FICA'') and Federal
Unemployment Tax Act (``FUTA'') taxes (collectively referred to
as ``employment taxes'') are generally imposed in an amount
equal to a percentage of wages paid by the employer with
respect to employment.\78\ The applicable Code provisions \79\
do not provide an exception from FICA and FUTA taxes for wages
paid to an employee arising from the exercise of a statutory
stock option.
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\78\ Secs. 3101, 3111 and 3301.
\79\ Secs. 3121 and 3306.
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There has been uncertainty in the past as to employer
withholding obligations upon the exercise of statutory stock
options. On June 25, 2002, the IRS announced in Notice 2002-47
\80\ that until further guidance is issued, it would not assess
FICA or FUTA taxes, or impose Federal income tax withholding
obligations, upon either the exercise of a statutory stock
option or the disposition of the stock acquired pursuant to the
exercise of a statutory stock option.
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\80\ Notice 2002-47, 2002-28 I.R.B. 1.
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REASONS FOR CHANGE
The Committee agrees with the position taken by the IRS in
Notice 2002-47 and believes that it is appropriate to clarify
statutorily the treatment of statutory stock options for
employment tax and income tax withholding purposes. The
Committee believes that it is appropriate to provide specific
exclusions from withholding requirements for wages attributable
to statutory stock options.
EXPLANATION OF PROVISION
The provision provides specific exclusions from FICA and
FUTA wages for remuneration on account of the transfer of stock
pursuant to the exercise of an incentive stock option or under
an employee stock purchase plan, or any disposition of such
stock. Thus, under the provision, FICA and FUTA taxes do not
apply upon the exercise of a statutory stock option.\81\ The
provision also provides that such remuneration is not taken
into account for purposes of determining Social Security
benefits.
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\81\ The provision also provides a similar exclusion for wages
under the Railroad Retirement Tax Act.
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Additionally, the provision provides that Federal income
tax withholding is not required on a disqualifying disposition,
nor when compensation is recognized in connection with an
employee stock purchase plan discount. Present law reporting
requirements continue to apply.
EFFECTIVE DATE
The provision is effective on the date of enactment.
G. Capital Gain Treatment on Sale of Stock Acquired From Exercise of
Statutory Stock Options To Comply With Conflict of Interest
Requirements
(Sec. 522 of the bill and sec. 421 of the Code)
PRESENT LAW
Statutory stock options
Generally, when an employee exercises a compensatory option
on employer stock, the difference between the option price and
the fair market value of the stock (i.e., the ``spread'') is
includible in income as compensation. Upon such exercise, an
employer is allowed a corresponding compensation deduction. In
the case of an incentive stock option or an option to purchase
stock under an employee stock purchase plan (collectively
referred to as ``statutory stock options''), the spread is not
included in income at the time of exercise.\82\
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\82\ Sec. 421.
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If an employee disposes of stock acquired upon the exercise
of a statutory option, the employee generally is taxed at
capital gains rates with respect to the excess of the fair
market value of the stock on the date of disposition over the
option price, and no compensation expense deduction is
allowable to the employer, unless the employee fails to meet a
holding period requirement. The employee fails to meet this
holding period requirement if the disposition occurs within two
years after the date the option is granted or one year after
the date the option is exercised. A disposition that occurs
prior to the expiration of the applicable holding period(s) (a
``disqualifying disposition'') does not qualify for capital
gains treatment. In the event of a disqualifying disposition,
the income attributable to the disposition is treated by the
employee as income received in the taxable year in which the
disposition occurs, and a corresponding deduction is allowable
to the employer for the taxable year in which the disposition
occurs.
Sale of property to comply with conflict of interest requirements
The Code provides special rules for recognizing gain on
sales of property which are required in order to comply with
certain conflict of interest requirements imposed by the
Federal government.\83\ Certain executive branch Federal
employees (and their spouses and minor or dependent children)
who are required to divest property in order to comply with
conflict of interest requirements may elect to postpone the
recognition of resulting gains by investing in certain
replacement property within a 60-day period. The basis of the
replacement property is reduced by the amount of the gain not
recognized. Permitted replacement property is limited to any
obligation of the United States or any diversified investment
fund approved by regulations issued by the Office of Government
Ethics. The rule applies only to sales under certificates of
divestiture issued by the President or the Director of the
Office of Government Ethics.
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\83\ Sec. 1043.
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REASONS FOR CHANGE
To comply with Federal conflict of interest requirements,
executive branch personnel may be required, before the
statutory holding period requirements have been satisfied, to
divest holdings of stock acquired pursuant to the exercise of
statutory stock options. Because Federal conflict of interest
requirements mandate the sale of such shares, the Committee
believes that such individuals should be afforded the tax
treatment that would be imposed had the individual held the
stock for the required holding period.
EXPLANATION OF PROVISION
Under the provision, an eligible person who, in order to
comply with Federal conflict of interest requirements, is
required to sell shares of stock acquired pursuant to the
exercise of a statutory stock option is treated as satisfying
the statutory holding period requirements, regardless of how
long the stock was actually held. An eligible person generally
includes an officer or employee of the executive branch of the
Federal Government (and any spouse or minor or dependent
children whose ownership in property is attributable to the
officer or employee). Because the sale is not treated as a
disqualifying disposition, the individual is afforded capital
gain treatment on any resulting gains. Such gains are eligible
for deferral treatment under section 1043.
The employer granting the option is not allowed a deduction
upon the sale of the stock by the individual.
EFFECTIVE DATE
The provision is effective for sales after July 1, 2002.
III. BUDGET EFFECTS OF THE BILL
A. Committee Estimates
In compliance with paragraph 11(a) of rule XXVI of the
Standing Rules of the Senate, the following statement is made
concerning the estimated budget effects of the provisions of
the committee amendment to the bill as reported.
B. Budget Authority and Tax Expenditures
Budget authority
In compliance with section 308(a)(1) of the Budget Act, the
Committee states that the revenue provisions of the committee
amendment to the bill do not involve new or increased budget
authority.
Tax expenditures
In compliance with section 308(a)(2) of the Budget Act, the
Committee states that the revenue-reducing provisions of the
committee amendment to the bill involve increased tax
expenditures (see revenue table in Part III.A., above). The
revenue increasing provisions of the Committee amendment to the
bill generally involve reduced tax expenditures (see revenue
table in Part III.A., above).
C. Consultation With Congressional Budget Office
In accordance with section 403 of the Budget Act, the
Committee advises that the Congressional Budget Office has not
submitted a statement on the committee amendment to the bill.
The letter from the Congressional Budget Office has not been
received, and therefore will be provided separately.
IV. VOTES OF THE COMMITTEE
In compliance with paragraph 7(b) of rule XXVI of the
Standing Rules of the Senate, the following statements are made
concerning the votes taken on the Committee's consideration of
the amendment to the bill.
Rollcall votes
No rollcall votes were taken on the amendment to the bill.
Motion to report the committee amendment
The amendment to the bill was ordered favorably reported by
voice vote, a quorum being present, on July 11, 2002.
V. REGULATORY IMPACT AND OTHER MATTERS
A. Regulatory Impact
Pursuant to paragraph 11(b) of Rule XXVI of the Standing
Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact that might be
incurred in carrying out the provisions of the bill as amended.
Impact on individuals and businesses
The Committee amendment to the bill includes provisions
relating to qualified retirement plans, including provisions
designed to increase retirement income security by (1)
providing employees with greater opportunity to diversify plan
investments in employer securities, (2) requiring plans to
provide additional information with respect to plan benefits
and investments, and (3) clarifying fiduciary requirements
under ERISA. The Committee amendment to the bill also includes
a variety of provisions intended to reduce administrative
burdens on employers with regard to pension plans, including
provisions relating to required funding contributions,
reductions of Pension Benefit Guaranty Corporation premiums for
certain plans, and other plan administration issues. The
Committee amendment also includes directives for a number of
studies relating to specific issues that affect retirement
income security. Some of these provisions may impose additional
administrative requirements on employers that sponsor
retirement plans; however, in some cases the employer may avoid
application of the provisions through plan design. In addition,
some of the provisions will reduce regulatory burdens on
employers that sponsor retirement plans.
The Committee amendment also includes provisions relating
to certain executive compensation arrangements and the proper
tax treatment of such arrangements. The Committee amendment
requires that tax returns be signed by a company's chief
executive officer. This provision is not expected to affect
paperwork burdens.
The Committee amendment provides that certain stock options
are not subject to withholding and provides for the treatment
of stock acquired pursuant to the exercise of stock options to
comply with Federal conflict-of-interest requirements.
Impact on personal privacy and paperwork
The provisions of the Committee amendment to the bill do
not impact personal privacy.
Some provisions of the bill relating to pension plans will
reduce paperwork burdens on employers that sponsor qualified
retirement plans. Other provisions may impose additional
burdens on employers; however, in many cases an employer may
reduce such burdens through plan design. The provision
regarding withholding requirements with respect to certain
stock options will reduce regulatory burdens on individuals and
businesses that currently apply withholding to these options.
The provision relating to the sale of stock to comply with
conflict of interest rules may require individuals who seek to
take advantage of the tax benefits provided by the provision to
maintain records to demonstrate eligibility for the tax
benefits.
B. Unfunded Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
The Committee has determined that the revenue provisions of
the bill do not contain Federal mandates on the private sector.
The Committee has determined that the revenue provisions of the
bill do not impose a Federal intergovernmental mandate on
State, local, or tribal governments.
C. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the
Joint Committee on Taxation (in consultation with the Internal
Revenue Service and the Department of the Treasury) to provide
a tax complexity analysis. The complexity analysis is required
for all legislation reported by the Senate Committee on
Finance, the House Committee on Ways and Means, or any
committee of conference if the legislation includes a provision
that directly or indirectly amends the Internal Revenue Code
(the ``Code'') and has widespread applicability to individuals
or small businesses.
The staff of the Joint Committee on Taxation has determined
that a complexity analysis is not required under section
4022(b) of the IRS Reform Act because the bill contains no
provisions that amend the Code and that have ``widespread
applicability'' to individuals or small businesses.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL AS REPORTED
In the opinion of the Committee, it is necessary in order
to expedite the business of the Senate, to dispense with the
requirements of paragraph 12 of rule XXVI of the Standing Rules
of the Senate (relating to the showing of changes in existing
law made by the bill as reported by the Committee).