[Senate Report 106-411]
[From the U.S. Government Publishing Office]
Calendar No. 802
106th Congress Report
SENATE
2d Session 106-411
_______________________________________________________________________
RETIREMENT SECURITY AND SAVINGS
ACT OF 2000
R E P O R T
of the
COMMITTEE ON FINANCE
UNITED STATES SENATE
to accompany
H.R. 1102
September 13, 2000.--Ordered to be printed
__________
U.S. GOVERNMENT PRINTING OFFICE
79-012 WASHINGTON : 2000
C O N T E N T S
Page
I. Legislative Background............................................1
II. Explanation of the Bill...........................................2
Title I. Individual Retirement Arrangements (``IRAs'')... 2
Title II. Expanding Coverage............................. 7
A. Increase in Benefit and Contribution Limits....... 7
B. Plan Loans for Subchapter S Shareholders,
Partners, and Sole Proprietors................... 9
C. Modification of Top-Heavy Rules................... 11
D. Elective Deferrals Not Taken into Account for
Purposes of Deduction Limits..................... 15
E. Repeal of Coordination Requirements for Deferred
Compensation Plans of State and Local Governments
and Tax-Exempt Organizations..................... 16
F. Deduction Limits.................................. 17
G. Option to Treat Elective Deferrals as Roth After-
Tax Contributions................................ 18
H. Credit for Low- and Middle-Income Savers.......... 20
I. Small Business Tax Credit for Qualified Retirement
Plan Contributions............................... 22
J. Small Business Tax Credit for New Retirement Plan
Expenses......................................... 24
Title III. Enhancing Fairness for Women.................. 25
A. Additional Salary Reduction Catch-Up Contributions 25
B. Equitable Treatment for Contributions of Employees
to Defined Contribution Plans.................... 27
C. Faster Vesting of Employer Matching Contributions. 29
D. Simplify and Update the Minimum Distribution Rules 30
E. Clarification of Tax Treatment of Division of
Section 457 Plan Benefits Upon Divorce........... 33
F. Modifications Relating to Hardship Withdrawals.... 34
G. Pension Coverage for Domestic and Similar Workers. 35
Title IV. Increasing Portability for Participants........ 36
A. Rollovers of Retirement Plan and IRA Distributions 36
B. Waiver of 60-Day Rule............................. 40
C. Treatment of Forms of Distribution................ 40
D. Rationalization of Restrictions on Distributions.. 43
E. Purchase of Service Credit under Governmental
Pension Plans.................................... 44
F. Employers May Disregard Rollovers for Purposes of
Cash-Out Rules................................... 45
G. Time of Inclusion of Benefits Under Section 457
Plans............................................ 46
Title V. Strengthening Pension Security and Enforcement.. 47
A. Phase in Repeal of 155 Percent of Current
Liability Funding Limit; Deduction For
Contributions to Fund Termination Liability...... 47
B. Excise Tax Relief for Sound Pension Funding....... 49
C. Notice of Significant Reduction in Plan Benefit
Accruals......................................... 50
D. Modifications to Section 415 Limits for
Multiemployer Plans.............................. 56
E. Investment of Employee Contributions in 401(k)
Plans............................................ 57
F. Periodic Pension Benefit Statements............... 58
G. Prohibited Allocations of Stock in an S
Corporation ESOP................................. 59
Title VI. Reducing Regulatory Burdens.................... 62
A. Modification of Timing of Plan Valuations......... 62
B. ESOP Dividends May Be Reinvested Without Loss of
Dividend Deduction............................... 63
C. Repeal Transition Rule Relating to Certain Highly
Compensated Employees............................ 64
D. Employees of Tax-Exempt Entities.................. 65
E. Treatment of Employer-Provided Retirement Advice.. 66
F. Reporting Simplification.......................... 67
G. Improvement to Employee Plans Compliance
Resolution System................................ 68
H. Repeal of the Multiple Use Test................... 69
I. Flexibility in Nondiscrimination and Line of
Business Rules................................... 71
J. Extension to All Governmental Plans of Moratorium
on Application of Certain Nondiscrimination Rules
Applicable to State and Local Government Plans... 72
K. Notice and Consent Period Regarding Distributions;
Disclosure of Optional Forms of Benefit.......... 73
L. Annual Report Dissemination....................... 74
M. Modifications to SAVER Act........................ 75
N. Studies........................................... 76
Title VII. Provisions Relating to Plan Amendments........ 77
Title VIII. Compliance With Congressional Budget Act..... 77
III.Budget Effects of the Bill.......................................78
A. Committee Estimates................................... 78
B. Budget Authority and Tax Expenditures................. 82
C. Consultation with the Congressional Budget Office..... 82
IV. Votes of the Committee...........................................82
V. Regulatory Impact and Other Matters..............................82
A. Regulatory Impact..................................... 82
B. Unfunded Mandates Statement........................... 83
C. Tax Complexity Analysis............................... 83
VI. Changes to Existing Law Made by the Bill as Reported.............83
Calendar No. 802
106th Congress Report
SENATE
2d Session 106-411
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RETIREMENT SECURITY AND SAVINGS ACT OF 2000
_______
September 13, 2000.--Ordered to be printed
_______
Mr. Roth, from the Committee on Finance, submitted the following
R E P O R T
[To accompany H.R. 1102]
The Committee on Finance reported a substitute to H.R. 1102
to provide for pension reform, and for other purposes, having
considered the same, reports favorably thereon and recommends
that the bill do pass.
I. LEGISLATIVE BACKGROUND
Committee markup
On September 7, 2000, the Senate Committee on Finance
marked up H.R. 1102 and ordered the bill, as amended, favorably
reported by a roll call vote of 17 yeas and 0 nays (the vote
would be 19 yeas and 0 nays if votes by proxy were included in
the tally of votes for favorably reporting a bill out of
Committee). The Committee action on the bill was in response to
the reconciliation instructions contained in section 104 of the
concurrent resolution on the budget for fiscal year 2001 (H.
Con. Res. 290) for a net tax reduction of up to $16 billion for
fiscal year 2001 (adjusted from $11.6 billion by the Chairman
of the Senate Budget Committee on July 20, 2000) and of up to
$150 billion for fiscal years 2001-2005.
Committee hearings
The following related Committee hearings were held during
the 106th Congress:
President's fiscal year 2000 budget and tax
proposals (February 2, 1999);
Increasing savings for retirement (February 24,
1999);
Complexity of the individual income tax (April 15,
1999); and
Pension reform proposals (June 30, 1999).
II. EXPLANATION OF THE BILL
TITLE I. INDIVIDUAL RETIREMENT ARRANGEMENTS (``IRAs'')
(Secs. 101-104 of the Bill and Secs. 219, 408, and 408A of the Code)
Present Law
In general
There are two general types of individual retirement
arrangements (``IRAs'') under present law: traditional IRAs, to
which both deductible and nondeductible contributions may be
made, and Roth IRAs. The Federal income tax rules regarding
each type of IRA (and IRA contribution) differ.
Traditional IRAs
Under present law, an individual may make deductible
contributions to an IRA up to the lesser of $2,000 or the
individual's compensation if neither the individual nor the
individual's spouse is an active participant in an employer-
sponsored retirement plan. In the case of a married couple,
deductible IRA contributions of up to $2,000 can be made for
each spouse (including, for example, a homemaker who does not
work outside the home), if the combined compensation of both
spouses is at least equal to the contributed amount. If the
individual (or the individual's spouse) is an active
participant in an employer-sponsored retirement plan, the
$2,000 deduction limit is phased out for taxpayers with
modified adjusted gross income (``AGI'') over certain levels
for the taxable year.
The AGI phase-out limits for taxpayers who are active
participants in employer-sponsored plans are as follows:
Single Taxpayers
Taxable years beginning in: AGI Phase-out range
2000.................................................... $32,000-42,000
2001.................................................... 33,000-43,000
2002.................................................... 34,000-44,000
2003.................................................... 40,000-50,000
2004.................................................... 45,000-55,000
2005 and thereafter..................................... 50,000-60,000
Taxpayers Filing Joint Returns
Taxable years beginning in: Phase-out range
2000.................................................... $52,000-62,000
2001.................................................... 53,000-63,000
2002.................................................... 54,000-64,000
2003.................................................... 60,000-70,000
2004.................................................... 65,000-75,000
2005.................................................... 70,000-80,000
2006.................................................... 75,000-85,000
2007 and thereafter..................................... 80,000-100,000
The AGI phase-out range for married taxpayers filing a
separate return is $0 to $10,000.
If the individual is not an active participant in an
employer-sponsored retirement plan, but the individual's spouse
is, the $2,000 deduction limit is phased out for taxpayers with
AGI between $150,000 and $160,000.
To the extent an individual cannot or does not make
deductible contributions to an IRA or contributions to a Roth
IRA, the individual may make nondeductible contributions to a
traditional IRA.
Amounts held in a traditional IRA are includible in income
when withdrawn (except to the extent the withdrawal is a return
of nondeductible contributions). Includible amounts withdrawn
prior to attainment of age 59\1/2\ are subject to an additional
10-percent early withdrawal tax, unless the withdrawal is due
to death or disability, is made in the form of certain periodic
payments, is used to pay medical expenses in excess of 7.5
percent of AGI, is used to purchase health insurance for an
unemployed individual, is used for education expenses, or is
used for first-time homebuyer expenses of up to $10,000.
Roth IRAs
Individuals with AGI below certain levels may make
nondeductible contributions to a Roth IRA. The maximum annual
contribution that may be made to a Roth IRA is the lesser of
$2,000 or the individual's compensation for the year. The
contribution limit is reduced to the extent an individual makes
contributions to any other IRA for the same taxable year. As
under the rules relating to IRAs generally, a contribution of
up to $2,000 for each spouse may be made to a Roth IRA provided
the combined compensation of the spouses is at least equal to
the contributed amount. The maximum annual contribution that
can be made to a Roth IRA is phased out for single taxpayers
with AGI between $95,000 and $110,000 and for taxpayers filing
a joint return with AGI between $150,000 and $160,000. For
married taxpayers filing a separate return, the phase-out range
is $0 to $10,000.
Taxpayers with modified AGI of $100,000 or less generally
may convert a traditional IRA into a Roth IRA. The amount
converted is includible in income as if a withdrawal had been
made, except that the 10-percent early withdrawal tax does not
apply and, if the conversion occurred in 1998, the income
inclusion may be spread ratably over 4 years. Married taxpayers
who file separate returns cannot convert a traditional IRA into
a Roth IRA.
Amounts held in a Roth IRA that are withdrawn as a
qualified distribution are neither includible in income, nor
subject to the additional 10-percent tax on early withdrawals.
A qualified distribution is a distribution that (1) is made
after the 5-taxable year period beginning with the first
taxable year for which the individual made a contribution to a
Roth IRA, and (2) which is made after attainment of age 59\1/
2\, on account of death or disability, or is made for first-
time homebuyer expenses of up to $10,000.
Distributions from a Roth IRA that are not qualified
distributions are includible in income to the extent
attributable to earnings, and subject to the 10-percent early
withdrawal tax (unless an exception applies).1 The
same exceptions to the early withdrawal tax that apply to IRAs
apply to Roth IRAs.
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\1\ Early distribution of converted amounts may also accelerate
income inclusion of converted amounts that are taxable under the 4-year
rule applicable to 1998 conversions.
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Taxation of charitable contributions
Generally, a taxpayer who itemizes deductions may deduct
cash contributions to charity, as well as the fair market value
of contributions of property. The amount of the deduction
otherwise allowable for the taxable year with respect to a
charitable contribution may be reduced, depending on the type
of property contributed, the type of charitable organization to
which the property is contributed, and the income of the
taxpayer.
For donations of cash by individuals, total deductible
contributions to public charities may not exceed 50 percent of
a taxpayer's AGI for a taxable year. To the extent a taxpayer
has not exceeded the 50-percent limitation, contributions of
cash to private foundations and certain other nonprofit
organizations and contributions of capital gain property to
public charities generally may be deducted up to 30 percent of
the taxpayer's AGI. If a taxpayer makes a contribution in one
year which exceeds the applicable 50-percent or 30-percent
limitation, the excess amount of the contribution may be
carried over and deducted during the next five taxable years.
In addition to the percentage limitations imposed
specifically on charitable contributions, present law imposes a
reduction on most itemized deductions, including charitable
contribution deductions, for taxpayers with AGI in excess of a
threshold amount, which is indexed annually for inflation. The
threshold amount for 1999 is $126,600 ($63,300 for married
individuals filing separate returns). For those deductions that
are subject to the reduction, the total amount of itemized
deductions is reduced by 3 percent of AGI over the threshold
amount, but not by more than 80 percent of itemized deductions
subject to the reduction. The effect of this reduction may be
to limit a taxpayer's ability to deduct charitable
contributions.
Reasons for Change
The Committee is concerned about the low national savings
rate and that individuals may not be saving adequately for
retirement. Present law provides tax incentives for savings,
including the opportunity to make contributions to traditional
and Roth IRAs. However, deductible contributions to traditional
IRAs and Roth IRAs are not available to all Americans. The
Committee believes that IRAs should be available to more
individuals.
The present-law IRA contribution limit has not been
increased since 1981. The Committee believes that the limit
should be raised in order to allow greater savings
opportunities.
The Committee believes it is appropriate to eliminate the
marriage penalties with respect to the Roth IRA provisions.
The Committee believes it appropriate to facilitate the
making of charitable contributions from IRAs.
Explanation of Provision
Increase in annual contribution limits
The bill increases the maximum annual dollar contribution
limit for IRA contributions from $2,000 to $3,000 in 2001,
$4,000 in 2002, and $5,000 in 2003. The limit is indexed in
$500 increments in 2004 and thereafter.
Increase in AGI limits for deductible IRA contributions
Under the bill, the increases in the AGI phase-out limits
for active participants in an employer-sponsored plan are
evened out. In addition, the phase-out range for married
taxpayers filing separately is conformed to the phase-out range
for single taxpayers. The AGI phase-out limits under the bill
are as follows.
Taxpayers Filing Returns Other Than Joint Returns
Taxable years beginning in: AGI Phase-out range
2001.................................................... $36,000-46,000
2002.................................................... 40,000-50,000
2003.................................................... 44,000-54,000
2004.................................................... 48,000-58,000
2005 and thereafter..................................... 50,000-60,000
Taxpayers Filing Joint Returns
Taxable years beginning in: AGI Phase-out range
2001.................................................... $56,000-66,000
2002.................................................... 60,000-70,000
2003.................................................... 64,000-74,000
2004.................................................... 68,000-78,000
2005.................................................... 72,000-82,000
2006.................................................... 76,000-86,000
2007 and thereafter..................................... 80,000-100,000
The present-law income phase-out range for an individual
who is not an active participant in an employer-sponsored plan,
but whose spouse is, remains at $150,000 to $160,000.
Roth IRAs
The bill increases the income phase-out range for Roth IRA
contributions to $190,000 to $220,000 for married couples
filing a joint return. In addition, the bill applies to married
taxpayers filing a separate return the same phase-out range
that applies to single taxpayers.
Under the bill, the income limit for conversions of
traditional IRAs to Roth IRAs is $200,000 for married couples
filing a joint return. For all other taxpayers (including
married taxpayers filing a separate return), the limit is
$100,000.
Additional catch-up contributions
The bill provides that individuals who have attained age 50
may make additional catch-up IRA contributions. The otherwise
maximum contribution limit (before application of the AGI
phase-out limits) for an individual who has attained age 50
before the end of the taxable year is increased by 50 percent.
Deemed IRAs under employer plans
The bill provides that, if an eligible retirement plan
permits employees to make voluntary employee contributions to a
separate account or annuity that (1) is established under the
plan, and (2) meets the requirements applicable to either
traditional IRAs or Roth IRAs, then the separate account or
annuity is deemed a traditional IRA or a Roth IRA, as
applicable, for all purposes of the Code. For example, the
reporting requirements applicable to IRAs apply. The deemed
IRA, and contributions thereto, are not subject to the Code
rules pertaining to the eligible retirement plan. In addition,
the deemed IRA, and contributions thereto, are not taken into
account in applying such rules to any other contributions under
the plan. The deemed IRA, and contributions thereto, are
subject to the exclusive benefit and fiduciary rules of ERISA
to the extent otherwise applicable to the plan, and are not
subject to the ERISA reporting and disclosure, participation,
vesting, funding, and enforcement requirements that apply to
the eligible retirement plan.2 An eligible
retirement plan is a qualified plan (sec. 401(a)), tax-
sheltered annuity (sec. 403(b)), or a governmental section 457
plan.
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\2\ The provision does not specify the treatment of deemed IRAs for
purposes other than the Code and ERISA.
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Tax-free IRA withdrawals for charitable purposes
The bill provides an exclusion from gross income for
qualified charitable distributions from an IRA: (1) to a
charitable organization to which deductible contributions can
be made; (2) to a charitable remainder annuity trust or
charitable remainder unitrust; (3) to a pooled income fund (as
defined in sec. 642(c)(5)); or (4) for the issuance of a
charitable gift annuity. The exclusion applies with respect to
distributions described in (2), (3), or (4) only if no person
holds an income interest in the trust, fund, or annuity
attributable to such distributions other than the IRA owner,
his or her spouse, or a charitable organization.
In determining the character of distributions from a
charitable remainder annuity trust or a charitable remainder
unitrust to which a qualified charitable distribution from an
IRA is made, the charitable remainder trust is required to
treat as ordinary income the portion of the distribution from
the IRA to the trust which would have been includible in income
but for the provision, and is required to treat any remaining
portion of the distribution as corpus. Similarly, in
determining the amount includible in gross income by reason of
a payment from a charitable gift annuity purchased with a
qualified charitable distribution from an IRA, the taxpayer is
not permitted to treat the portion of the distribution from the
IRA that would have been taxable but for the provision and
which is used to purchase the annuity as an investment in the
annuity contract.
A qualified charitable distribution is any distribution
from an IRA which (1) is made after age 70\1/2\ of the account
holder, (2) qualifies as a charitable contribution (within the
meaning of sec. 170(c)), and (3) is made directly to the
charitable organization or to a charitable remainder annuity
trust, charitable remainder unitrust, pooled income fund, or
charitable gift annuity (as described above).3 A
taxpayer is not permitted to claim a charitable contribution
deduction for amounts transferred from his or her IRA to a
charity or to a trust, fund, or annuity that, because of the
provision, are excluded from the taxpayer's income. Conversely,
if the amounts transferred would otherwise be nontaxable, e.g.,
a qualified distribution from a Roth IRA, the regularly
applicable deduction rules would apply.
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\3\ It is intended that, in the case of transfer to a trust, fund,
or annuity, the full amount distributed from an IRA will meet the
definition of a qualified charitable distribution if the charitable
organization's interest in the distribution would qualify as a
charitable contribution under section 170.
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Effective Date
The provision is generally effective for taxable years
beginning after December 31, 2000. The provision relating to
deemed IRAs under employer plans is effective for plan years
beginning after December 31, 2001. The provision relating to
tax-free withdrawals from IRAs for charitable purposes is
effective for distributions after December 31, 2000.
TITLE II. EXPANDING COVERAGE
A. Increase in Benefit and Contribution Limits (Sec. 201 of the Bill
and Secs. 401(a)(17), 402(g), 408(p) 415, and 457 of the Code)
Present Law
In general
Under present law, limits apply to contributions and
benefits under qualified plans (sec. 415), the amount of
compensation that may be taken into account under a plan for
determining benefits (sec. 401(a)(17)), the maximum amount of
elective deferrals that an individual may make to a salary
reduction plan or tax sheltered annuity (sec. 402(g)), and
deferrals under an eligible deferred compensation plan of a
tax-exempt organization or a State or local government (sec.
457).
Limitations on contributions and benefits
Under present law, the limits on contributions and benefits
under qualified plans are based on the type of plan. Under a
defined contribution plan, the qualification rules limit the
annual additions to the plan with respect to each plan
participant to the lesser of (1) 25 percent of compensation or
(2) $30,000 (for 2000). Annual additions are the sum of
employer contributions, employee contributions, and forfeitures
with respect to an individual under all defined contribution
plans of the same employer. The $30,000 limit is indexed for
cost-of-living adjustments in $5,000 increments.
Under a defined benefit plan, the maximum annual benefit
payable at retirement is generally the lesser of (1) 100
percent of average compensation, or (2) $135,000 (for 2000).
The dollar limit is adjusted for cost-of-living increases in
$5,000 increments.
Under present law, in general, the dollar limit on annual
benefits is reduced if benefits under the plan begin before the
social security retirement age (currently, age 65) and
increased if benefits begin after social security retirement
age.
Compensation limitation
Under present law, the annual compensation of each
participant that may be taken into account for purposes of
determining contributions and benefits under a plan, applying
the deduction rules, and for nondiscrimination testing purposes
is limited to $170,000 (for 2000). The compensation limit is
indexed for cost-of-living adjustments in $10,000 increments.
Elective deferral limitations
Under certain salary reduction arrangements, an employee
may elect to have the employer make payments as contributions
to a plan on behalf of the employee, or to the employee
directly in cash. Contributions made at the election of the
employee are called elective deferrals.
The maximum annual amount of elective deferrals that an
individual may make to a qualified cash or deferred arrangement
(a ``section 401(k) plan''), a tax-sheltered annuity (``section
403(b) annuity''), or a salary reduction simplified employee
pension plan (``SEP'') is $10,500 (for 2000). The maximum
annual amount of elective deferrals that an individual may make
to a SIMPLE plan is $6,000. These limits are indexed for
inflation in $500 increments.
Section 457 plans
The maximum annual deferral under a deferred compensation
plan of a State or local government or a tax-exempt
organization (a ``section 457 plan'') is the lesser of (1)
$8,000 (for 2000) or (2) 33\1/3\ percent of compensation. The
$8,000 dollar limit is increased for inflation in $500
increments. Under a special catch-up rule, the section 457 plan
may provide that, for one or more of the participant's last 3
years before retirement, the otherwise applicable limit is
increased to the lesser of (1) $15,000 or (2) the sum of the
otherwise applicable limit for the year plus the amount by
which the limit applicable in preceding years of participation
exceeded the deferrals for that year.
Reasons for Change
The tax benefits provided under tax-favored retirement
plans are a departure from the normally applicable income tax
rules. The special tax benefits for such plans are generally
justified on the ground that they serve an important social
policy objective, i.e., the provision of retirement benefits to
a broad group of employees. The limits on contributions,
benefits, and compensation that may be taken into account under
a plan serve to limit the tax benefits associated with such
plans. The level at which to place such limits involves a
balancing of different policy objectives and a judgment as to
what limits are most likely to best further such policy goals.
One of the factors that may influence the decision of an
employer, particularly a small employer, to adopt a plan is the
extent to which the owners of the business, the decision-
makers,or other highly compensated employees will benefit under
the plan. The Committee believes that increasing the benefit limits
under qualified plans will encourage employers to establish tax-favored
retirement plans for their employees.
The Committee understands that, in recent years, section
401(k) plans have become prevalent. The Committee believes it
is important to increase the amount of employee elective
deferrals allowed under such plans, and other plans that allow
elective deferrals, to better enable plan participants to save
for their retirement.
Explanation of Provision
Limits on contributions and benefits
The bill provides faster indexing of the $30,000 limit on
annual additions to a defined contribution plan. Under the
bill, this limit is indexed in $1,000 increments.\4\
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\4\ The 25 percent of compensation limitation is increased to 100
percent of compensation under another provision of the bill.
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The bill increases the $135,000 annual benefit limit under
a defined benefit plan to $160,000. The dollar limit is reduced
for benefit commencement before age 62 and increased for
benefit commencement after age 65.
Compensation limitation
The bill increases the limit on compensation that may be
taken into account under a plan to $200,000. This amount is
indexed in $5,000 increments.
Elective deferral limitations
In 2001, the bill increases the dollar limit on annual
elective deferrals under section 401(k) plans, section 403(b)
annuities and salary reduction SEPs to $11,000. In 2002 and
thereafter, these limits increase in $1,000 annual increments
until the limits reach $15,000 in 2005, with indexing in $500
increments thereafter. Beginning in 2001, the bill increases
the maximum annual elective deferrals that may be made to a
SIMPLE plan in $1,000 annual increments until the limit reaches
$10,000 in 2004. Beginning after 2004, the $10,000 dollar limit
is indexed in $500 increments.
Section 457 plans
The bill increases the dollar limit on deferrals under a
section 457 plan to conform to the elective deferral
limitation. Thus, the limit is $11,000 in 2001, and is
increased in $1,000 annual increments thereafter until the
limit reaches $15,000 in 2005. The limit is indexed thereafter
in $500 increments. The limit is twice the otherwise applicable
dollar limit in the three years prior to retirement.\5\
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\5\ Another provision of the bill increases the 33\1/3\ percentage
of compensation limit to 100 percent.
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Effective Date
The provisions are effective for years beginning after
December 31, 2000.
B. Plan Loans for Subchapter S Shareholders, Partners, and Sole
Proprietors (Sec. 202 of the Bill and Sec. 4975 of the Code)
Present Law
The Internal Revenue Code prohibits certain transactions
(``prohibited transactions'') between a qualified plan and a
disqualified person in order to prevent persons with a close
relationship to the qualified plan from using that relationship
to the detriment of plan participants and beneficiaries.\6\
Certain types of transactions are exempt from the prohibited
transaction rules, including loans from the plan to plan
participants, if certain requirements are satisfied. In
addition, the Secretary of Labor can grant an administrative
exemption from the prohibited transaction rules if she finds
the exemption is administratively feasible, in the interest of
the plan and plan participants and beneficiaries, and
protective of the rights of participants and beneficiaries of
the plan. Pursuant to this exemption process, the Secretary of
Labor grants exemptions both with respect to specific
transactions and classes of transactions.
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\6\ Title I of the Employee Retirement Income Security Act of 1974,
as amended (``ERISA''), also contains prohibited transaction rules. The
Code and ERISA provisions are substantially similar, although not
identical.
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The statutory exemptions to the prohibited transaction
rules do not apply to certain transactions in which the plan
makes a loan to an owner-employee.\7\ Loans to participants
other than owner-employees are permitted if loans are available
to all participants on a reasonably equivalent basis, are not
made available to highly compensated employees in an amount
greater than made available to other employees, are made in
accordance with specific provisions in the plan, bear a
reasonable rate of interest, and are adequately secured. In
addition, the Code places limits on the amount of loans and
repayment terms.
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\7\ Certain transactions involving a plan and Subchapter S
shareholders are permitted.
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For purposes of the prohibited transaction rules, an owner-
employee means (1) a sole proprietor, (2) a partner who owns
more than 10 percent of either the capital interest or the
profits interest in the partnership, (3) an employee or officer
of an S corporation who owns morethan 5 percent of the
outstanding stock of the corporation, and (4) the owner of an IRA. The
term owner-employee also includes certain family members of an owner-
employee and certain corporations owned by an owner-employee.
Under the Internal Revenue Code, a two-tier excise tax is
imposed on disqualified persons who engage in a prohibited
transaction. The first level tax is equal to 15 percent of the
amount involved in the transaction. The second level tax is
imposed if the prohibited transaction is not corrected within a
certain period, and is equal to 100 percent of the amount
involved.
reasons for change
The Committee believes that the present-law prohibited
transaction rules regarding loans unfairly discriminate against
the owners of unincorporated businesses and S corporations. For
example, under present law, the sole shareholder of a C
corporation may take advantage of the statutory exemption to
the prohibited transaction rules for loans, but an individual
who does business as a sole proprietor may not.
explanation of provision
The bill generally eliminates the special present-law rules
relating to plan loans made to an owner-employee. Thus, the
general statutory exemption applies to such transactions.
Present law continues to apply with respect to IRAs.
effective date
The provision is effective with respect to years beginning
after December 31, 2000. Thus, a loan that is a prohibited
transaction solely because of the present-law restriction would
cease to be a prohibited transaction on January 1, 2000.
However, the loan would continue to be a prohibited transaction
prior to January 1, 2000.
C. Modification of Top-Heavy Rules (Sec. 203 of the Bill and Sec. 416
of the Code)
present law
In general
Under present law, additional qualification requirements
apply to plans that primarily benefit an employer's key
employees (``top-heavy plans''). These additional requirements
provide (1) more rapid vesting for plan participants who are
non-key employees and (2) minimum nonintegrated employer
contributions or benefits for plan participants who are non-key
employees.
Definition of top-heavy plan
In general, a top-heavy plan is a plan under which more
than 60 percent of the contributions or benefits are provided
to key employees. A defined benefit plan is a top-heavy plan if
more than 60 percent of the cumulative accrued benefits under
the plan are for key employees. A defined contribution plan is
top heavy if the sum of the account balances of key employees
is more than 60 percent of the total account balances under the
plan. For each plan year, the determination of top-heavy status
generally is made as of the last day of the preceding plan year
(``the determination date'').
For purposes of determining whether a plan is a top-heavy
plan, benefits derived both from employer and employee
contributions, including employee elective contributions, are
taken into account. In addition, the accrued benefit of a
participant in a defined benefit plan and the account balance
of a participant in a defined contribution plan includes any
amount distributed within the 5-year period ending on the
determination date.
An individual's accrued benefit or account balance is not
taken into account in determining whether a plan is top-heavy
if the individual has not performed services for the employer
during the 5-year period ending on the determination date.
In some cases, two or more plans of a single employer must
be aggregated for purposes of determining whether the group of
plans is top-heavy. The following plans must be aggregated: (1)
plans which cover a key employee (including collectively
bargained plans); and (2) any plan upon which a plan covering a
key employee depends for purposes of satisfying the Code's
nondiscrimination rules. The employer may be required to
include terminated plans in the required aggregation group. In
some circumstances, an employer may elect to aggregate plans
for purposes of determining whether they are top heavy.
SIMPLE plans are not subject to the top-heavy rules.
Definition of key employee
A key employee is an employee who, during the plan year
that ends on the determination date or any of the 4 preceding
plan years, is (1) an officer earning over one-half of the
defined benefit plan dollar limitation of section 415 ($67,500
for 2000), (2) a 5-percent owner of the employer, (3) a 1-
percent owner of the employer earning over $150,000, or (4) one
of the 10 employees earning more than the defined contribution
plan dollar limit ($30,000 for 2000) with the largest ownership
interests in the employer. A family ownership attribution rule
applies to the determination of 1-percent owner status, 5-
percent owner status, and largest ownership interest. Under
this attribution rule, an individual is treated as owning stock
owned by the individual's spouse, children, grandchildren, or
parents.
Minimum benefit for non-key employees
A minimum benefit generally must be provided to all non-key
employees in a top-heavy plan. In general, a top-heavy defined
benefit plan must provide a minimum benefit equal to the lesser
of (1) 2 percent of compensation multiplied by the employee's
years of service, or (2) 20 percent of compensation. A top-
heavy defined contribution plan must provide a minimum annual
contribution equal to the lesser of (1) 3 percent of
compensation, or (2) the percentage of compensation at which
contributions were made for key employees (including employee
elective contributions made by key employees and employer
matching contributions).
For purposes of the minimum benefit rules, only benefits
derived from employer contributions (other than amounts
employees have elected to defer) to the plan are taken into
account, and an employee's social security benefits are
disregarded (i.e., the minimum benefit is nonintegrated).
Employer matching contributions may be used to satisfy the
minimum contribution requirement; however, in such a case the
contributions are not treated as matching contributions for
purposes of applying the special nondiscrimination requirements
applicable to employee elective contributions and matching
contributions under sections 401(k) and (m). Thus, such
contributions would have to meet the general nondiscrimination
test of section 401(a)(4). 8
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\8\ Tres. Reg. sec. 1.416-1 Q&A M-19.
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Top-heavy vesting
Benefits under a top-heavy plan must vest at least as
rapidly as under one of the following schedules: (1) 3-year
cliff vesting, which provides for 100 percent vesting after 3
years of service; and (2) 2-6 year graduated vesting, which
provides for 20 percent vesting after 2 years of service, and
20 percent more each year thereafter so that a participant is
fully vested after 6 years of service. 9
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\9\ Benefits under a plan that is not top heavy must vest at least
as rapidly as under one of the following schedules: (1) 5-year cliff
vesting; and (2) 3-7 year graded vesting, which provides for 20 percent
vesting after 3 years and 20 percent more each year thereafter so that
a participant is fully vested after 7 years of service.
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Qualified cash or deferred arrangements
Under a qualified cash or deferred arrangement (a ``section
401(k) plan''), an employee may elect to have the employer make
payments as contributions to a qualified plan on behalf of the
employee, or to the employee directly in cash. Contributions
made at the election of the employee are called elective
deferrals. A special nondiscrimination test applies to elective
deferrals under cash or deferred arrangements, which compares
the elective deferrals of highly compensated employees with
elective deferrals of nonhighly compensated employees. (This
test is called the actual deferral percentage test or the
``ADP'' test). Employer matching contributions under qualified
defined contribution plans are also subject to a similar
nondiscrimination test. (This test is called the actual
contribution percentage test or the ``ACP'' test.)
Under a design-based safe harbor, a cash or deferred
arrangement is deemed to satisfy the ADP test if the plan
satisfies one of two contribution requirements and satisfies a
notice requirement. A plan satisfies the contribution
requirement under the safe harbor rule for qualified cash or
deferred arrangements if the employer either (1) satisfies a
matching contribution requirement or (2) makes a nonelective
contribution to a defined contribution plan of at least 3
percent of an employee's compensation on behalf of each
nonhighly compensated employee who is eligible to participate
in the arrangement without regard to the permitted disparity
rules (sec. 401(1)). A plan satisfies the matching contribution
requirement if, under the arrangement: (1) the employer makes a
matching contribution on behalf of each nonhighly compensated
employee that is equal to (a) 100 percent of the employee's
elective deferrals up to 3 percent of compensation and (b) 50
percent of the employee's elective deferrals from 3 to 5
percent of compensation; and (2), the rate of match with
respect to any elective contribution for highly compensated
employees is not greater than the rate of match for nonhighly
compensated employees. Matching contributions that satisfy the
design-based safe harbor for cash or deferred arrangements are
deemed to satisfy the ACP test. Certain additional matching
contributions are also deemed to satisfy the ACP test.
reasons for change
The top-heavy rules primarily affect the plans of small
employers. While the top-heavy rules were intended to provide
additional minimum benefits to rank-and-file employees, the
Committee is concerned that in some cases the top-heavy rules
may act as a deterrent to the establishment of a plan by a
small employer. The Committee believes that simplification of
the top-heavy rules will help alleviate the additional
administrative burdens the rules place on small employers. The
Committee also believes that, in applying the top-heavy minimum
benefit rules, the employer should receive credit for all
contributions the employer makes, including matching
contributions.
The Committee understands that some employers may have been
discouraged from adopting a safe harbor section 401(k) plan due
to concerns about the top-heavy rules. The Committee believes
that facilitating the adoption of such plans will broaden
coverage. Thus, the Committee believes it appropriate to
provide that such plans are not subject to the top-heavy rules.
explanation of provision
Definition of top-heavy plan
The bill provides that a plan consisting of a cash-or-
deferred arrangement that satisfies the design-based safe
harbor for such plans and matching contributions that satisfy
the safeharbor rule for such contributions is not a top-heavy
plan. Matching or nonelective contributions provided under such a plan
may be taken into account in satisfying the minimum contribution
requirements applicable to top-heavy plans.10
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\10\ This provision is not intended to preclude the use of
nonelective contributions that are used to satisfy the safe harbor
rules from being used to satisfy other qualified retirement plan
nondiscrimination rules, including those involving cross-testing.
---------------------------------------------------------------------------
In determining whether a plan is top-heavy, the bill
provides that distributions during the year ending on the date
the top-heavy determination is being made are taken into
account. The present-law 5-year rule applies with respect to
in-service distributions. Similarly, the proposal provides that
an individual's accrued benefit or account balance is not taken
into account if the individual has not performed services for
the employer during the 1-year period ending on the date the
top-heavy determination is being made.
Definition of key employee
The bill (1) provides that an employee is not considered a
key employee by reason of officer status unless the employee
earns more than the compensation limit for determining whether
an employee is highly compensated ($85,000 for 2000) \11\ and
(2) repeals the top-10 owner key employee category. The
proposal repeals the 4-year lookback rule for determining key
employee status and provides that an employee is a key employee
only if he or she is a key employee during the preceding plan
year. An employee who was not an employee in the preceding plan
year, or who was an employee only for part of the year, is
treated as a key employee if it can be reasonably anticipated
that the employee will meet the definition of a key employee
for current plan year.
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\11\ The compensation limit would be determined without regard to
the top-paid group election.
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Thus, under the bill, an employee is considered a key
employee if, during the prior year, the employee was (1) an
officer with compensation in excess of $85,000 (for 2000), (2)
a 5-percent owner, or (3) a 1-percent owner with compensation
in excess of $150,000. The present- law limits on the number of
officers treated as key employees under (1) continue to apply.
The family ownership attribution rule no longer applies
solely in determining whether an individual is a 5-percent
owner of the employer for purposes of the top-heavy rules. The
family ownership attribution rule continues to apply to other
provisions that cross reference the top-heavy rules, such as
the definition of highly compensated employee and the
definition of 1-percent owner under the top-heavy rules.
Minimum benefit for non-key employees
Under the bill, matching contributions are taken into
account in determining whether the minimum benefit requirement
has been satisfied.\12\
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\12\ Thus, this provision overrides the provision in Treasury
regulations that, if matching contributions are used to satisfy the
minimum benefit requirement, then they are not treated as matching
contributions for purposes of the section 401(m) nondiscrimination
rules.
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The bill provides that, in determining the minimum benefit
required under a defined benefit plan, a year of service does
not include any year in which no key employee benefits under
the plan (as determined under sec. 410).
Effective Date
The provision is effective for years beginning after
December 31, 2000.
D. Elective Deferrals Not Taken Into Account for Purposes of Deduction
Limits (Sec. 204 of the Bill and Sec. 404 of the Code)
Present Law
Employer contributions to one or more qualified retirement
plans are deductible subject to certain limits. In general, the
deduction limit depends on the kind of plan.
In the case of a defined benefit pension plan or a money
purchase pension plan, the employer generally may deduct the
amount necessary to satisfy the minimum funding cost of the
plan for the year. If a defined benefit pension plan has more
than 100 participants, the maximum amount deductible is at
least equal to the plan's unfunded current liabilities.
In the case of a profit-sharing or stock bonus plan, the
employer generally may deduct an amount equal to 15 percent of
compensation of the employees covered by the plan for the year.
If an employer sponsors both a defined benefit pension plan
and a defined contribution plan that covers some of the same
employees (or a money purchase pension plan and another kind of
defined contribution plan), the total deduction for all plans
for a plan year generally is limited to the greater of (1) 25
percent of compensation or (2) the contribution necessary to
meet the minimum funding requirements of the defined benefit
pension plan for the year (or the amount of the plan's unfunded
current liabilities, in the case of a plan with more than 100
participants).
For purposes of the deduction limits, employee elective
deferral contributions to a section 401(k) plan are treated as
employer contributions and, thus, are subject to the generally
applicable deduction limits.
Subject to certain exceptions, nondeductible contributions
are subject to a 10-percent excise tax.
Reasons for Change
Subjecting elective deferrals to the normally applicable
deduction limits may cause employers either to restrict the
amount of elective contributions an employee may make or
restrict employer contributions to the plan, thereby reducing
participants' ultimate retirement benefits and their ability to
save adequately for retirement. The Committee believes that the
amount of elective deferrals otherwise allowable should not be
further limited through application of the deduction rules.
Explanation of Provision
Under the bill, elective deferral contributions are not
subject to the deduction limits, and the application of a
deduction limitation to any other employer contribution to a
qualified retirement plan does not take into account elective
deferral contributions.
Effective Date
The provision is effective for years beginning after
December 31, 2000.
E. Repeal of Coordination Requirements for Deferred Compensation Plans
of State and Local Governments and Tax-Exempt Organizations (Sec. 205
of the Bill and Sec. 457 of the Code)
Present Law
Compensation deferred under an eligible deferred
compensation plan of a tax-exempt or State and local government
employer (a ``section 457 plan'') is not includible in gross
income until paid or made available. In general, the maximum
permitted annual deferral under such a plan is the lesser of
(1) $8,000 (in 2000) or (2) 33\1/3\ percent of compensation.
The $8,000 limit is increased for inflation in $500 increments.
Under a special catch-up rule, a section 457 plan may provide
that, for one or more of the participant's last 3 years before
retirement, the otherwise applicable limit is increased to the
lesser of (1) $15,000 or (2) the sum of the otherwise
applicable limit for the year plus the amount by which the
limit applicable in preceding years of participation exceeded
the deferrals for that year.
The $8,000 limit (as modified under the catch-up rule),
applies to all deferrals under all section 457 plans in which
the individual participates. In addition, in applying the
$8,000 limit, contributions under a tax-sheltered annuity
(``section 403(b) annuity''), elective deferrals under a
qualified cash or deferred arrangement (``section 401(k)
plan''), salary reduction contributions under a simplified
employee pension plan (``SEP''), and contributions under a
SIMPLE plan are taken into account. Further, the amount
deferred under a section 457 plan is taken into account in
applying a special catch-up rule for section 403(b) annuities.
Reasons for Change
The Committee believes that individuals participating in a
section 457 plan should also be able to participate fully in a
section 403(b) annuity or section 401(k) plan of the employer.
Eliminating the coordination rule may also encourage the
establishment of section 403(b) or 401(k) plans by tax-exempt
and governmental employers (as permitted under present law).
Explanation of Provision
The bill repeals the rules coordinating the section 457
dollar limit with contributions under other types of plans.\13\
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\13\ The limits on deferrals under a section 457 plan are modified
under other provisions of the bill.
---------------------------------------------------------------------------
Effective Date
The provision is effective for years beginning after
December 31, 2000.
F. Deduction Limits (Sec. 206 of the Bill and Sec. 404 of the Code)
Present Law
Employer contributions to one or more qualified retirement
plans are deductible subject to certain limits. In general, the
deduction limit depends on the kind of plan. Subject to certain
exceptions, nondeductible contributions are subject to a 10-
percent excise tax.
In the case of a defined benefit pension plan or a money
purchase pension plan, the employer generally may deduct the
amount necessary to satisfy the minimum funding cost of the
plan for the year. If a defined benefit pension plan has more
than 100 participants, the maximum amount deductible is at
least equal to the plan's unfunded current liabilities.
In some cases, the amount of deductible contributions is
limited by compensation. In the case of a profit-sharing or
stock bonus plan, the employer generally may deduct an amount
equal to 15 percent of compensation of the employees covered by
the plan for the year.
If an employer sponsors both a defined benefit pension plan
and a defined contribution plan that covers some of the same
employees (or a money purchase pension plan and anotherkind of
defined contribution plan), the total deduction for all plans for a
plan year generally is limited to the greater of (1) 25 percent of
compensation or (2) the contribution necessary to meet the minimum
funding requirements of the defined benefit pension plan for the year
(or the amount of the plan's unfunded current liabilities, in the case
of a plan with more than 100 participants).
In the case of an employee stock ownership plan (``ESOP''),
principal payments on a loan used to acquire qualifying
employer securities are deductible up to 25 percent of
compensation.
For purposes of the deduction limits, employee elective
deferral contributions to a qualified cash or deferred
arrangement (``section 401(k) plan'') are treated as employer
contributions and, thus, are subject to the generally
applicable deduction limits.\14\
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\14\ Another provision of the bill provides that elective deferrals
are not subject to the deduction limits.
---------------------------------------------------------------------------
For purposes of the deduction limits, compensation means
the compensation otherwise paid or accrued during the taxable
year to the beneficiaries under the plan, and the beneficiaries
under a profit-sharing or stock bonus plan are the employees
who benefit under the plan with respect to the employer's
contribution.\15\ An employee who is eligible to make elective
deferrals under a section 401(k) plan is treated as benefitting
under the arrangement even if the employee elects not to
defer.\16\
---------------------------------------------------------------------------
\15\ Rev. Rul. 65-295, 1965-2 C.B. 148.
\16\ Treas. Reg. sec. 1.410(b)-3.
---------------------------------------------------------------------------
For purposes of the deduction rules, compensation generally
includes only taxable compensation, and thus does not include
salary reduction amounts, such as elective deferrals under a
section 401(k) plan or a tax-sheltered annuity (``section
403(b) annuity''), elective contributions under a deferred
compensation plan of a tax-exempt organization or a State or
local government (``section 457 plan''), and salary reduction
contributions under a section 125 cafeteria plan. For purposes
of the contribution limits under section 415, compensation does
include such salary reduction amounts.
Reasons for Change
The Committee believes that compensation unreduced by
employee elective contributions is a more appropriate measure
of compensation for plan purposes, including deduction limits,
than the present-law rule. Applying the same definition of
compensation for deduction purposes as is generally used for
other qualified plan purposes will also simplify application of
the qualified plan rules. The Committee also believes that the
15 percent of compensation limit may restrict the amount of
employer contributions to the plan, thereby reducing
participants' ultimate retirement benefits and their ability to
adequately save for retirement.
Explanation of Provision
Under the bill, the definition of compensation for purposes
of the deduction rules would include salary reduction amounts
treated as compensation under section 415. In addition, the
annual limitation on the amount of deductible contributions to
a profit-sharing or stock bonus plan would be increased from 15
percent to 25 percent of compensation of the employees covered
by the plan for the year.
Effective Date
The provision is effective for years beginning after
December 31, 2000.
G. Option to Treat Elective Deferrals as Roth After-Tax Contributions
(Sec. 207 of the Bill and Sec. 402A of the Code)
Present Law
A qualified cash or deferred arrangement (``section 401(k)
plan'') or a tax-sheltered annuity (``section 403(b) annuity'')
may permit a participant to elect to have the employer make
payments as contributions to the plan or to the participant
directly in cash. Contributions made to the plan at the
election of a participant are elective deferrals. Elective
deferrals must be nonforfeitable and are subject to an annual
dollar limitation (sec. 402(g)) and distribution restrictions.
In addition, elective deferrals under a section 401(k) plan are
subject to special nondiscrimination rules. Elective deferrals
(and earnings attributable thereto) are not includible in a
participant's gross income until distributed from the plan.
Individuals with adjusted gross income below certain levels
generally may make nondeductible contributions to a Roth IRA
and may convert a deductible or nondeductible IRA into a Roth
IRA. Amounts held in a Roth IRA that are withdrawn as a
qualified distribution are neither includible in income nor
subject to the additional 10-percent tax on early withdrawals.
A qualified distribution is a distribution that (1) is made
after the 5-taxable year period beginning with the first
taxable year for which the individual made a contribution to a
Roth IRA, and (2) is made after attainment of age 59\1/2\, is
made on account of death or disability, or is a qualified
special purpose distribution (i.e., for first-time homebuyer
expenses of up to $10,000). A distribution from a Roth IRA that
is not a qualified distribution is includible in income to the
extent attributable to earnings, and is subject to the 10-
percent tax on early withdrawals (unless an exception
applies).\17\
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\17\ Early distributions of converted amounts may also accelerate
income inclusion of converted amounts that are taxable under the 4-year
rule applicable to 1998 conversions.
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Reasons for Change
The recently-enacted Roth IRA provisions have provided
individuals with another form of tax-favored retirement
savings. For a variety of reasons, some individuals may prefer
to save through a Roth IRA rather than a traditional deductible
IRA. The Committee believes that similar savings choices should
be available to participants in section 401(k) plans and tax-
ssheltered annuities.
Explanation of Provision
A section 401(k) plan or a section 403(b) annuity is
permitted to include a ``qualified Roth contribution program''
that permits a participant to elect to have all or a portion of
the participant's elective deferrals under the plan treated as
designated Roth contributions. Designated Roth contributions
are elective deferrals that the participant designates (at such
time and in such manner as the Secretary may prescribe) \18\ as
not excludable from the participant's gross income.
---------------------------------------------------------------------------
\18\ It is intended that the Secretary will generally not permit
retroactive designations of elective deferrals as Roth contributions.
---------------------------------------------------------------------------
The annual dollar limitation on a participant's designated
Roth contributions is the section 402(g) annual limitation on
elective deferrals, reduced by the participant's elective
deferrals that the participant does not designate as designated
Roth contributions. Designated Roth contributions are treated
as any other elective deferral for purposes of
nonforfeitability requirements and distribution
restrictions.\19\ Under a section 401(k) plan, designated Roth
contributions also are treated as any other elective deferral
for purposes of the special nondiscrimination requirements.\20\
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\19\ Similarly, Roth contributions to a section 403(b) annuity are
treated the same as other salary reduction contributions to the annuity
(except that Roth contributions are includible in income).
\20\ It is intended that the Secretary will provide ordering rules
regarding the return of excess contributions under the special
nondiscrimination rules (pursuant to sec. 401(k)(8)) in the event a
participant has made both regular elective deferrals and Roth
contributions. It is intended that such rules will generally permit a
plan to allow participants to designate which contributions are
returned first or to permit the plan to specify which contributions are
returned first.
---------------------------------------------------------------------------
The plan would be required to establish a separate account,
and maintain separate recordkeeping, for a participant's
designated Roth contributions (and earnings allocable thereto).
A qualified distribution from a participant's designated Roth
contributions account would not be includible in the
participant's gross income. A qualified distribution is a
distribution that is made after the end of a specified
nonexclusion period and that is (1) made on or after the date
on which the participant attains age 59\1/2\, (2) made to a
beneficiary (or to the estate of the participant) on or after
the death of the participant, or (3) attributable to the
participant's being disabled.\21\ The nonexclusion period is
the 5-year-taxable period beginning with the earlier of (1) the
first taxable year for which the participant made a designated
Roth contribution to any designated Roth contribution account
established for the participant under the plan, or (2) if the
participant has made a rollover contribution to the designated
Roth contribution account that is the source of the
distribution from a designated Roth contribution account
established for the participant under another plan, the first
taxable year for which the participant made a designated Roth
contribution to the previously established account.
---------------------------------------------------------------------------
\21\ A qualified special purpose distribution, as defined under the
rules relating to Roth IRAs, does not qualify as a tax-free
distribution from a designated Roth contributions account.
---------------------------------------------------------------------------
A distribution from a designated Roth contributions account
that is a corrective distribution of an elective deferral (and
income allocable thereto) that exceeds the section 402(g)
annual limit on elective deferrals or a distribution of excess
contributions (and income allocable thereto) is not is a
qualified distribution.\22\
---------------------------------------------------------------------------
\22\ Such distributions are not includible in income to the extent
they are a return of Roth contributions, because the initial
contribution is includible in income.
---------------------------------------------------------------------------
A participant is permitted to roll over a distribution from
a designated Roth contributions account only to another
designated Roth contributions account or a Roth IRA of the
participant.
The Secretary of the Treasury is directed to require the
plan administrator of each section 401(k) plan or section
403(b) annuity that permits participants to make designated
Roth contributions to make such returns and reports regarding
designated Roth contributions to the Secretary, plan
participants and beneficiaries, and other persons that the
Secretary may designate.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2000.
H. Credit for Low-and Middle-Income Savers (Sec. 208 of the Bill and
New Sec. 25B of the Code)
Present Law
Present law provides favorable tax treatment for a variety
of retirement savings vehicles, including employer-sponsored
retirement plans and individual retirement arrangements
(``IRAs'').
Several different types of tax-favored employer-sponsored
retirement plans exist, such as section 401(a) qualified plans
(including plans with a section 401(k) qualified cash-or-
deferredarrangement), section 403(a) qualified annuity plans,
section 403(b) annuities, section 408(k) simplified employee pensions
(``SEPs''), section 408(p) SIMPLE retirement accounts, and section
457(b) eligible deferred compensation plans. In general, an employer
and, in certain cases, employees, contribute to the plan. Taxation of
the contributions and earnings thereon is generally deferred until
benefits are distributed from the plan to participants or their
beneficiaries.23 Contributions and benefits under tax-
favored employer-sponsored retirement plans are subject to specific
limitations.
---------------------------------------------------------------------------
\23\ In the case of after-tax employee contributions, only earnings
are taxed upon withdrawal.
---------------------------------------------------------------------------
Coverage and nondiscrimination rules also generally apply
to tax-favored employer-sponsored retirement plans to ensure
that plans do not disproportionately cover higher-paid
employees and that benefits provided to moderate- and lower-
paid employees are generally proportional to those provided to
higher-paid employees.
IRAs include both traditional IRAs and Roth IRAs. In
general, an individual makes contributions to an IRA, and
investment earnings on those contributions accumulate on a tax-
deferred basis. Total annual IRA contributions per individual
are limited to $2,000 (or the compensation of the individual or
the individual's spouse, if smaller). Contributions to a
traditional IRA may be deducted from gross income if an
individual's adjusted gross income (``AGI'') is below certain
levels or the individual is not an active participant in
certain employer-sponsored retirement plans. Contributions to a
Roth IRA are not deductible from gross income, regardless of
adjusted gross income. A distribution from a traditional IRA is
includible in the individual's gross income except to the
extent of individual contributions made on a nondeductible
basis. A qualified distribution from a Roth IRA is excludable
from gross income.
Taxable distributions made from employer retirement plans
and IRAs before the employee or individual has reached age
59\1/2\ are subject to a 10-percent additional tax, unless an
exception applies.
Reasons for Change
The Committee recognizes that the rate of private savings
in the United States is low; in particular many low- and
middle-income individuals have inadequate savings or no savings
at all. A key reason for these low levels of saving is that
lower-income families are likely to be more budget constrained
with competing needs such as food, clothing, shelter, and
medical care taking a larger portion of their income. The
Committee believes providing an additional tax incentive for
low- and middle-income individuals will enhance their ability
to save adequately for retirement.
Explanation of Provision
The bill provides a temporary nonrefundable tax credit for
contributions made by eligible taxpayers to a qualified plan.
The maximum annual contribution eligible for the credit is
$2,000. The credit rate depends on the adjusted gross income
(``AGI'') 24 of the taxpayer. Only taxpayers filing
joint returns with AGI of $50,000 or less, taxpayers filing
head of household returns of $37,500 or less, and taxpayers
filing single returns of $25,000 or less are eligible for the
credit.25 The credit is in addition to any deduction
or exclusion that would otherwise apply with respect to the
contribution. The credit offsets minimum tax liability as well
as regular tax liability. The credit is available to
individuals age 18 or over, other than individuals who are
full-time students or claimed as a dependent on another
taxpayer's return.
---------------------------------------------------------------------------
\24\ AGI is determined without regard to the exclusion provided by
sections 911, 931, or 933.
\25\ The AGI limits applicable to taxpayers filing single returns
apply to married taxpayers filing separate returns.
---------------------------------------------------------------------------
The credit is available with respect to (1) elective
contributions to a section 401(k) plan, tax-sheltered annuity,
eligible deferred compensation arrangement of a State or local
government (a ``sec. 457 plan''), SIMPLE, or SEP; (2)
contributions to a traditional or Roth IRA; and (3) voluntary
after-tax employee contributions to a qualified retirement
plan. The present-law rules governing such contributions
continue to apply. Thus, for example, an individual is not
entitled to a deduction for contributions to a Roth IRA to
which the credit applies; distributions of such contributions
are taxable under the rules applicable to Roth IRAs.
The amount of any contribution eligible for the credit is
reduced by taxable distributions received by the taxpayer and
his or her spouse from any savings arrangement described above
or any other qualified retirement plan during the taxable year
for which the credit is claimed, the two taxable years prior to
the year the credit is claimed, and during the period after the
end of the taxable year and prior to the due date (including
extensions) for filing the taxpayer's return for the year. This
rule applies to any distributions from a Roth IRA which are not
rolled over.26
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\26\ The following distributions are excluded for purposes of the
rule reducing the credit: (1) loans treated as distributions (sec.
72(p)); (2) distributions of excess contributions under a 401(k) plan
(sec. 401(k)(8)); (3) distributions of excess matching or after-tax
voluntary contributions (sec. 401(m)(6)); (4) distributions of elective
deferrals that exceed the limits on such deferrals (sec. 402(g)); (5)
distributions of ESOP dividends (404(k)); (6) returns of certain IRA
contributions (sec. 408(d)(4)); and (7) distributions from a
traditional IRA that are converted to a Roth IRA.
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The credit rates based on AGI are as shown in the following
table.
----------------------------------------------------------------------------------------------------------------
Credit rate
Joint filers Heads of households All other filers (in percent)
----------------------------------------------------------------------------------------------------------------
$0-$20,000.............................. $0-$15,000................ $0-$10,000................ 50
$20,001-$25,000......................... $15,001-$18,750........... $10,001-$12,500........... 30
$25,001-$30,000......................... $18,751-$22,500........... $12,501-$15,000........... 25
$30,001-$35,000......................... $22,501-$26,250........... $15,001-$17,500........... 20
$35,001-$40,000......................... $26,250-$30,000........... $17,501-$20,000........... 15
$40,001-$45,000......................... $30,001-$33,750........... $20,001-$22,500........... 10
$45,001-$50,000......................... $33,751-$37,500........... $22,501-$25,000........... 5
Over $50,000............................ Over $37,500.............. Over $25,000.............. 0
----------------------------------------------------------------------------------------------------------------
The bill directs the General Accounting Office to report
annually to the Senate Finance Committee and the House
Committee on Ways and Means regarding the number of individuals
who claim the credit.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2000, and before January 1, 2006.
I. Small Business Tax Credit for Qualified Retirement Plan
Contributions (Sec. 209 of the Bill and New Sec. 450 of the Code)
Present Law
The timing of an employer's deduction for compensation paid
to an employee generally corresponds to the employee's
recognition of the compensation. However, an employer that
contributes to a qualified retirement plan is entitled to a
deduction (within certain limits) for the employer's
contribution to the plan on behalf of an employee even though
the employee does not recognize income with respect to the
contribution until the amount is distributed to the employee.
Reasons for Change
The Committee understands that many small employers are
reluctant to establish a qualified retirement plan for
employees that provides nonelective or matching contributions
to all employees. Plans that offer only salary reduction
contributions may not provide sufficient incentive for lower-
and middle-income employees to save. The Committee believes
that providing a credit for employers who provide nonelective
and matching contributions for nonhighly compensated employees
will result in greater retirement saving for such employees.
Explanation of Provision
The bill provides a nonrefundable income tax credit for
small employers equal to 50 percent of certain qualifying
employer contributions made to new qualified retirement plans
on behalf of nonhighly compensated employees.27 For
purposes of the provision, a small employer means an employer
with no more than 50 employees who received at least $5,000 of
earnings in the preceding year. A nonhighly compensated
employee is defined as an employee who neither (1) was a five-
percent owner of the employer at any time during the current
year or the preceding year, nor (2) for the preceding year, had
compensation in excess of $80,000 (indexed for
inflation).28 The credit is available for the first
three plan years.
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\27\ The credit is not available with respect to contributions to a
SIMPLE IRA or SEP.
\28\ The top paid group election, which under present law permits
an employer to classify an employee as a nonhighly compensated employee
if the employee had compensation in excess of $80,000 during the
preceding year but was not among the top 20 percent of employees of the
employer when ranked on the basis of compensation paid to employees
during the preceding year, would not be taken into account in
determining nonhighly compensated employees for purposes of the
proposal.
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A plan is considered a new plan if, during the 3-taxable
year period immediately preceding the first taxable year for
which the credit is allowable, neither the employer (or any
member of the employer's controlled group) established or
maintained a qualified retirement plan with respect to which
contributions were made or benefits accrued for substantially
the same employees covered by the plan with respect to which
the credit is claimed.
The bill requires a small employer to make nonelective
contributions equal to at least one percent of compensation to
qualify for the credit. The credit applies to both qualifying
nonelective employer contributions and qualifying employer
matching contributions, but only up to a total of three percent
of the nonhighly compensated employee's compensation. The
credit is available for 50 percent of qualifying benefit
accruals under a nonintegrated defined benefit plan if the
benefits are equivalent, as defined in regulations, to a three-
percent nonelective contribution to a defined contribution
plan. For purposes of applying the limit on contributions with
respect to which the credit may be claimed, all plans of the
employer are treated as a single plan.
To qualify for the credit, the nonelective and matching
contributions to a defined contribution plan and the benefit
accruals under a defined benefit plan are required to vest at
least as rapidly as under either a three-year cliff vesting
schedule or a graded schedule that provides 20-percent vesting
per year for five years. In order to qualify for the credit,
contributions to plansother than pension plans must be subject
to the same distribution restrictions that apply to qualified
nonelective employer contributions to a section 401(k) plan, i.e.,
distribution only upon separation from service, death, disability,
attainment of age 59\1/2\, plan termination without a successor plan,
or acquisition of a subsidiary or substantially all the assets of a
trade or business that employs the participant.29 Qualifying
contributions to pension plans are subject to the distribution
restrictions applicable to such plans.
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\29\ The rules relating to distribution upon separation from
service are modified under another provision of the bill.
---------------------------------------------------------------------------
The plan to which the small employer makes the qualifying
contributions (and any plan aggregated with that plan for
nondiscrimination testing purposes) are required to allocate
any nonelective employer contributions proportionally to
participants' compensation from the employer (or on a flat-
dollar basis) and, accordingly, without the use of permitted
disparity or cross-testing.
Forfeited nonvested qualifying contributions or accruals
for which the credit was claimed generally results in recapture
of the credit at a rate of 35 percent. However, recapture does
not apply to the extent that forfeitures of contributions are
reallocated to nonhighly compensated employees or applied to
future contributions on behalf of nonhighly compensated
employees. The Secretary of the Treasury is authorized to issue
administrative guidance, including de minimis rules, to
simplify or facilitate claiming and recapturing the credit.
The credit is a general business credit.30 The
50 percent of qualifying contributions that are effectively
offset by the tax credit are not deductible; the other 50
percent of the qualifying contributions (and other
contributions) are deductible to the extent otherwise
permitted.
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\30\ The credit could not be carried back to years before the
effective date.
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Effective Date
The credit is effective for taxable years beginning after
December 31, 2000, with respect to plans established after such
date.
J. Small Business Tax Credit for New Retirement Plan Expenses (Sec. 210
of the Bill and New Sec. 45E of the Code)
Present Law
The costs incurred by an employer related to the
establishment and maintenance of a retirement plan (e.g.,
payroll system changes, investment vehicle set-up fees,
consulting fees) generally are deductible by the employer as
ordinary and necessary expenses in carrying on a trade or
business.
Reasons for Change
One of the reasons some small employers may not adopt a
tax-favored retirement plan is the administrative costs
associated with such plans. The Committee believes that
providing a tax credit for certain administrative costs will
reduce one of the barriers to retirement plan coverage.
Explanation of Provision
The bill provides a nonrefundable income tax credit for 50
percent of the administrative and retirement-education expenses
for any small business that adopts a new qualified defined
benefit or defined contribution plan (including a section
401(k) plan), SIMPLE plan, or simplified employee pension
(``SEP''). The credit applies to 50 percent of the first $1,000
in administrative and retirement-education expenses for the
plan for each of the first three years of the plan.
A plan is considered a new plan if, during the 3-taxable
year period immediately preceding the first taxable year for
which the credit is allowable, neither the employer (or any
member of the employer's controlled group) established or
maintained a qualified retirement plan with respect to which
contributions were made or benefits accrued for substantially
the same employees covered by the plan with respect to which
the credit is claimed.
The credit is available to an employer that did not employ,
in the preceding year, more than 100 employees with
compensation in excess of $5,000. In order for an employer to
be eligible for the credit, the plan must cover at least one
nonhighly compensated employee.
The credit is a general business credit.31 The
50 percent of qualifying expenses that are effectively offset
by the tax credit are not deductible; the other 50 percent of
the qualifying expenses (and other expenses) are deductible to
the extent otherwise permitted.
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\31\ The credit may not be carried back to years before the
effective date.
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Effective Date
The credit is effective for taxable years beginning after
December 31, 2000, with respect to plans established after such
date.
TITLE III. ENHANCING FAIRNESS FOR WOMEN
A. Additional Salary Reduction Catch-Up Contributions (Sec. 301 of the
Bill and Sec. 414 of the Code)
Present Law
Elective deferral limitations
Under present law, under certain salary reduction
arrangements, an employee may elect to have the employer make
payments as contributions to a plan on behalf of the employee,
or to the employee directly in cash. Contributions made at the
election of the employee are called elective deferrals.
The maximum annual amount of elective deferrals that an
individual may make to a qualified cash or deferred arrangement
(a ``401(k) plan''), a tax-sheltered annuity (``section 403(b)
annuity'') or a salary reduction simplified employee pension
plan (``SEP'') is $10,500 (for 2000). The maximum annual amount
of elective deferrals that an individual may make to a SIMPLE
plan is $6,000. These limits are indexed for inflation in $500
increments.
Section 457 plans
The maximum annual deferral under a deferred compensation
plan of a State or local government or a tax-exempt
organization (a ``section 457 plan'') is the lesser of (1)
$8,000 (for 2000) or (2) 33\1/3\ percent of compensation. The
$8,000 dollar limit is increased for inflation in $500
increments. Under a special catch-up rule, the section 457 plan
may provide that, for one or more of the participant's last 3
years before retirement, the otherwise applicable limit is
increased to the lesser of (1) $15,000 or (2) the sum of the
otherwise applicable limit for the year plus the amount by
which the limit applicable in preceding years of participation
exceeded the deferrals for that year.
Reasons for Change
Although the Committee believes that individuals should be
saving for retirement throughout their working lives, as a
practical matter, many individuals simply do not focus on the
amount of retirement savings they need until they near
retirement. In addition, many individuals may have difficulty
saving more in earlier years, e.g., because an employee leaves
the workplace to care for a family. Some individuals may have a
greater ability to save as they near retirement.
The Committee believes that the pension laws should assist
individuals who are nearing retirement to save more for their
retirement.
Explanation of Provision
The bill provides that individuals who have attained age 50
may be permitted to make additional catch-up elective
contributions to employer-sponsored retirement
plans.32
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\32\ Another provision of the bill provides for catch-up
contributions to IRAs.
---------------------------------------------------------------------------
In the case of employer-sponsored retirement plans, the
provision applies to elective deferrals under a section 401(k)
plan, section 403(b) annuity, SIMPLE, or a section 457 plan.
Additional contributions may be made by an individual who has
attained age 50 before the end of the plan year and with
respect to whom no other elective deferrals may otherwise be
made to the plan for the year because of the application of any
limitation of the Code (e.g., the annual limit on elective
deferrals) or of the plan.33 Under the bill, the
additional amount of elective contributions that could be made
by an eligible individual participating in such a plan is the
lesser of (1) the applicable percent of the maximum dollar
amount of elective deferrals otherwise excludable from the
gross income of the participant for the year (under sec.
402(g)) or (2) the participant's compensation for the year
reduced by any other elective deferrals of the participant for
the year.34 The applicable percent is 10 percent in
2001, and increases by 10 percentage points until the
applicable percent is 50 in 2005 and thereafter.
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\33\ A plan is not required to permit participants to make catch-up
contributions.
\34\ In the case of a section 457 plans, this catch-up rule does
not apply during the participant's last 3 years before retirement (in
those years, the regularly applicable dollar limit is doubled).
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Catch-up contributions made under the bill are not subject
to any other contribution limits and are not taken into account
in applying other contribution limits. In addition, such
contributions are not subject to otherwise applicable
nondiscrimination rules.
An employer is permitted to make matching contributions
with respect to catch-up contributions. Any such matching
contributions are subject to the normally applicable rules.
The following examples illustrate the application of the
provision, assuming the catch-up percentage is 50 percent.
Example 1: Employee A is a highly compensated employee who
is over 50 and who participates in a section 401(k) plan
sponsored by A's employer. The plan provides for catch-up
contributions up to the maximum permitted by law. The maximum
annual deferral limit (without regard to the catch-up
provision) is $15,000. After application ofthe special
nondiscrimination rules applicable to section 401(k) plans, the maximum
elective deferral A may make for the year is $10,000. Under the bill, A
is able to make additional catch-up salary reduction contributions of
up to $7,500.
Example 2: Employee B, who is over 50, is a participant in
a section 401(k) plan. The plan provides for catch-up
contributions up to the maximum permitted by law. B's
compensation for the year is $30,000. The maximum annual
deferral limit (without regard to the provision) is $15,000.
Under the terms of the plan, the maximum permitted deferral is
10 percent of compensation or, in B's case, $3,000. Under the
bill, B can contribute up to $10,500 for the year ($3,000 under
the normal operation of the plan, and an additional $7,500
under the provision).
Effective Date
The provision is effective for taxable years beginning
after December 31, 2000.
B. Equitable Treatment for Contributions of Employees to Defined
Contribution Plans (Sec. 302 of the Bill and Secs. 413(b), 415, and 452
of the Code)
Present Law
Present law imposes limits on the contributions that may be
made to tax-favored retirement plans.
Defined contribution plans
In the case of a tax-qualified defined contribution plan,
the limit on annual additions that can be made to the plan on
behalf of an employee is the lesser of $30,000 (for 2000) or 25
percent of the employee's compensation (sec. 415(c)). Annual
additions include employer contributions, including
contributions made at the election of the employee (i.e.,
employee elective deferrals), after-tax employee contributions,
and any forfeitures allocated to the employee. For this
purpose, compensation means taxable compensation of the
employee, plus elective deferrals, and similar salary reduction
contributions. A separate limit applies to benefits under a
defined benefit plan.
For years before January 1, 2000, an overall limit applies
if an employee is a participant in both a defined contribution
plan and a defined benefit plan of the same employer.
Tax-sheltered annuities
In the case of a tax-sheltered annuity (a ``section 403(b)
annuity''), the annual contribution generally cannot exceed the
lesser of the exclusion allowance or the section 415(c) defined
contribution limit. The exclusion allowance for a year is equal
to 20 percent of the employee's includible compensation,
multiplied by the employee's years of service, minus excludable
contributions for prior years under qualified plans, tax-
sheltered annuities or section 457 plans of the employer.
In addition to this general rule, employees of nonprofit
educational institutions, hospitals, home health service
agencies, health and welfare service agencies, and churches may
elect application of one of several special rules that increase
the amount of the otherwise permitted contributions. The
election of a special rule is irrevocable; an employee may not
elect to have more than one special rule apply.
Under one special rule, in the year the employee separates
from service, the employee may elect to contribute up to the
exclusion allowance, without regard to the 25 percent of
compensation limit under section 415. Under this rule, the
exclusion allowance is determined by taking into account no
more than 10 years of service.
Under a second special rule, the employee may contribute up
to the lesser of: (1) the exclusion allowance; (2) 25 percent
of the participant's includible compensation; or (3) $15,000.
Under a third special rule, the employee may elect to
contribute up to the section 415(c) limit, without regard to
the exclusion allowance. If this option is elected, then
contributions to other plans of the employer are also taken
into account in applying the limit.
For purposes of determining the contribution limits
applicable to section 403(b) annuities, includible compensation
means the amount of compensation received from the employer for
the most recent period which may be counted as a year of
service under the exclusion allowance. In addition, includible
compensation includes elective deferrals and similar salary
reduction amounts.
Treasury regulations include provisions regarding
application of the exclusion allowance in cases where the
employee participates in a section 403(b) annuity and a defined
benefit plan. The Taxpayer Relief Act of 1997 directed the
Secretary of the Treasury to revise these regulations,
effective for years beginning after December 31, 1999, to
reflect the repeal of the overall limit on contributions and
benefits.
Section 457 plans
Compensation deferred under an eligible deferred
compensation plan of a tax-exempt or State and local
governmental employer (a ``section 457 plan'') is not
includible in gross income until paid or made available. In
general, the maximum permitted annual deferral under such a
plan is the lesser of (1) $8,000 (in 2000) or (2) 33\1/3\
percent of compensation. The $8,000 limit is increased for
inflation in $500 increments.
Reasons for Change
The present-law rules that limit contributions to defined
contribution plans by a percentage of compensation reduce the
amount that non-highly paid workers can save for retirement.
The present-law limits may not allow such workers to accumulate
adequate retirement benefits, particularly if a defined
contribution plan is the only type of retirement plan
maintained by the employer.
Conforming the contribution limits for tax-sheltered
annuities to the limits applicable to retirement plans will
simplify the administration of the pension laws, and provide
more equitable treatment for participants in similar types of
plans.
Explanation of Provision
Increase in defined contribution plan limit
The bill increases the 25 percent of compensation
limitation on annual additions under a defined contribution
plan to 100 percent.\35\
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\35\ Another provision of the bill increases the defined
contribution plan dollar limit.
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Conforming limits on tax-sheltered annuities
The bill repeals the exclusion allowance applicable to
contributions to tax-sheltered annuities. Thus, such annuities
are subject to the limits applicable to tax-qualified plans.
The bill also directs the Secretary of the Treasury to
revise the regulations relating to the exclusion allowance
under section 403(b)(2) to render void the requirement that
contributions to a defined benefit plan be treated as
previously excluded amounts for purposes of the exclusion
allowance. For taxable years beginning after December 31, 1999,
the regulatory provisions regarding the exclusion allowance are
to be applied as if the requirement that contributions to a
defined benefit plan be treated as previously excluded amounts
for purposes of the exclusion allowance were void.
Section 457 plans
The bill increases the 33\1/3\ percent of compensation
limitation on deferrals under a section 457 plan to 100 percent
of compensation.
Effective Date
The provision generally is effective for years beginning
after December 31, 2000. The provision regarding the
regulations under section 403(b)(2) is effective on the date of
enactment.
C. Faster Vesting of Employer Matching Contributions (Sec. 303 of the
Bill and Sec. 417 of the Code)
Present Law
Under present law, a plan is not a qualified plan unless a
participant's employer-provided benefit vests at least as
rapidly as under one of two alternative minimum vesting
schedules. A plan satisfies the first schedule if a participant
acquires a nonforfeitable right to 100 percent of the
participant's accrued benefit derived from employer
contributions upon the completion of 5 years of service. A plan
satisfies the second schedule if a participant has a
nonforfeitable right to at least 20 percent of the
participant's accrued benefit derived from employer
contributions after 3 years of service, 40 percent after 4
years of service, 60 percent after 5 years of service, 80
percent after 6 years of service, and 100 percent after 7 years
of service.\36\
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\36\ The minimum vesting requirements are also contained in Title I
of the Employee Retirement Income Security Act of 1974, as amended
(``ERISA'').
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Reasons for Change
The Committee understands that many employees, particularly
lower- and middle-income employees, do not take full advantage
of the retirement savings opportunities provided by their
employer's section 401(k) plan. The Committee believes that
providing faster vesting for matching contributions will make
section 401(k) plans more attractive for employees,
particularly lower- and middle-income employees, and will
encourage employees to save more for their own retirement. In
addition, faster vesting for matching contributions will enable
short-service employees to accumulate greater retirement
savings.
Explanation of Provision
The bill applies faster vesting schedules to employer
matching contributions. Under the provision, employer matching
contributions must vest at least as rapidly as under one of the
following two alternative minimum vesting schedules. A plan
satisfies the first schedule if a participant acquires a
nonforfeitable right to 100 percent of employer matching
contributions upon the completion of 3 years of service. A plan
satisfies the second schedule if a participant has a
nonforfeitable right to 20 percent of employer matching
contributions for each year of service beginning with the
participant's second year of service and ending with 100
percent after 6 years of service.
Effective Date
The provision is effective for plan years beginning after
December 31, 2000, with a delayed effective date for plans
maintained pursuant to a collective bargaining agreement. The
provision does not apply to any employee until the employee has
an hour of service after the effective date. In applying the
new vesting schedule, service before theeffective date must be
taken into account.
D. Simplify and Update the Minimum Distribution Rules (Sec. 304 of the
Bill and Secs. 401(a)19 and 457 of the Code)
Present Law
In general
Minimum distribution rules apply to all types of tax-
favored retirement vehicles, including qualified plans,
individual retirement arrangements (``IRAs''), tax-sheltered
annuities (``section 403(b) annuities''), and eligible deferred
compensation plans of tax-exempt and State and local government
employers (``section 457 plans''). In general, under these
rules, distribution of minimum benefits must begin no later
than the required beginning date. Minimum distribution rules
also apply to benefits payable with respect to a plan
participant who has died. Failure to comply with the minimum
distribution rules results in an excise tax imposed on the
individual plan participant equal to 50 percent of the required
minimum distribution not distributed for the year. The excise
tax can be waived if the individual establishes to the
satisfaction of the Secretary that the shortfall in the amount
distributed was due to reasonable error and reasonable steps
are being taken to remedy the shortfall.
Distributions prior to the death of the individual
In the case of distributions prior to the death of the plan
participant, the minimum distribution rules are satisfied if
either (1) the participant's entire interest in the plan is
distributed by the required beginning date, or (2) the
participant's interest in the plan is to be distributed (in
accordance with regulations), beginning not later than the
required beginning date, over a permissible period. The
permissible periods are (1) the life of the participant, (2)
the lives of the participant and a designated beneficiary, (3)
the life expectancy of the participant, or (4) the joint life
and last survivor expectancy of the participant and a
designated beneficiary. In calculating minimum required
distributions, life expectancies of the participant and the
participant's spouse may be recomputed annually.
In the case of qualified plans, tax-sheltered annuities,
and section 457 plans, the required beginning date is the April
1 of the calendar year following the later of (1) the calendar
year in which the employee attains age 70\1/2\ or (2) the
calendar year in which the employee retires. However, in the
case of a 5-percent owner of the employer, distributions are
required to begin no later than the April 1 of the calendar
year following the year in which the 5-percent owner attains
age 70\1/2\. If commencement of benefits is delayed beyond age
70\1/2\ from a defined benefit plan, then the accrued benefit
of the employee must be actuarially increased to take into
account the period after age 70\1/2\ in which the employee was
not receiving benefits under the plan.\37\ In the case of
distributions from an IRA other than a Roth IRA, the required
beginning date is the April 1 following the calendar year in
which the IRA owner attains age 70\1/2\. The pre-death minimum
distribution rules do not apply to Roth IRAs.
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\37\ State and local government plans and church plans are not
required to actuarially increase benefits that begin after age 70\1/2\.
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In general, under proposed regulations, in order to satisfy
the minimum distribution rules, annuity payments under a
defined benefit plan must be paid in period payments made at
intervals not longer than one year over a permissible period,
and must be nonincreasing, or increase only as a result of the
following: (1) cost-of-living adjustments; (2) cash refunds of
employee contributions; (3) benefit increases under the plan;
or (4) an adjustment due to death of the employee's
beneficiary. In the case of a defined contribution plan, the
minimum required distribution is determined by dividing the
employee's benefit by the applicable life expectancy.
Distributions after the death of the plan participant
The minimum distribution rules also apply to distributions
to beneficiaries of deceased participants. In general, if the
participant dies after minimum distributions have begun, the
remaining interest must be distributed at least as rapidly as
under the minimum distribution method being used as of the date
of death. If the participant dies before minimum distributions
have begun, then the entire remaining interest must generally
be distributed within 5 years of the participant's death. The
5-year rule does not apply if distributions begin within 1 year
of the participant's death and are payable over the life of a
designated beneficiary or over the life expectancy of a
designated beneficiary. A surviving spouse beneficiary is not
required to begin distribution until the date the deceased
participant would have attained age 70\1/2\.
Special rules for section 457 plans
Eligible deferred compensation plans of State and local and
tax-exempt employers (``section 457 plans'') are subject to the
minimum distribution rules described above. Such plans are also
subject to additional minimum distribution requirements (sec.
457(d)(2)(b)).
Reasons for Change
The Committee believes that the minimum distribution rules
are among the most complex of the rules relating to tax-favored
savings arrangements. While a plan or IRA trustee may assist
the individual in complying with the minimum distribution
rules, ultimately the responsibility for compliance falls on
the individual. Many of the complexities of the present-law
rules are contained in Treasury regulations, which have not yet
been finalized. The Committee believes that the present-law
rules impose undue burdens on individuals and plan
administrators.
The sanction for failure to comply with the minimum
distribution rules is severe. The Committee believes this
sanction is inappropriate, particularly given the complexity of
the rules, and the likelihood of inadvertent mistakes.
explanation of provision
Modification of post-death distribution rules
The provision applies the present-law rules applicable if
the participant dies before distribution of minimum benefits
has begun to all post-death distributions. Thus, in general, if
the employee dies before his or her entire interest has been
distributed, distribution of the remaining interest is required
to be made within 5 years of the date of death, or begin within
one year of the date of death and paid over the life or life
expectancy of a designated beneficiary. In the case of a
surviving spouse, distributions would not be required to begin
until the surviving spouse attains age 70\1/2\. Minimum
distributions that have already begun would be permitted to be
recalculated under the new rule.
Reduction in excise tax
The bill reduces the excise tax on failures to satisfy the
minimum distribution rules to 10 percent of the amount that was
required to be distributed but was not distributed.
Treasury regulations
The Secretary of the Treasury is directed to update,
simplify, and finalize the regulations relating to the minimum
distribution rules by December 31, 2001. The Secretary is
directed to reflect in the regulations current life
expectancies and to revise the required distribution methods so
that, under reasonable assumptions, the amount of the required
distribution does not decrease over time. The regulations are
to permit recalculation of distributions for future years to
reflect the change in the regulations, and to permit the
election of a new designated beneficiary and method of
calculating life expectancy. The regulations are to apply
regardless of whether minimum distributions had begun.
Section 457 plans
The bill repeals the special minimum distribution rules
applicable to section 457 plans. Thus, such plans are subject
to the same minimum distribution rules applicable to other
types of tax-favored arrangements.
effective date
In general, the provision is effective for years beginning
after December 31, 2000. The provision regarding Treasury
regulations is effective on the date of enactment.
E. Clarification of Tax Treatment of Division of Section 457 Plan
Benefits Upon Divorce (Sec. 305 of the Bill and Sec. 457 of the Code)
present law
Under present law, benefits provided under a qualified
retirement plan for a participant may not be assigned or
alienated to creditors of the participant, except in very
limited circumstances. One exception to the prohibition on
assignment or alienation rule is a qualified domestic relations
order (``QDRO''). A QDRO is a domestic relations order that
creates or recognizes a right of an alternate payee to any plan
benefit payable with respect to a participant, and that meets
certain procedural requirements.
Under present law, a distribution from a governmental plan
or a church plan is treated as made pursuant to a QDRO if it is
made pursuant to a domestic relations order that creates or
recognizes a right of an alternate payee to any plan benefit
payable with respect to a participant. Such distributions are
not required to meet the procedural requirements that apply
with respect to distributions from qualified plans.
Under present law, amounts distributed from a qualified
plan generally are taxable to the participant in the year of
distribution. However, if amounts are distributed to the spouse
(or former spouse) of the participant by reason of a QDRO, the
benefits are taxable to the spouse (or former spouse). Amounts
distributed pursuant to a QDRO to an alternate payee other than
the spouse (or former spouse) are taxable to the plan
participant.
Section 457 of the Internal Revenue Code provides rules for
deferral of compensation by an individual participating in an
eligible deferred compensation plan (``section 457 plan'') of a
tax-exempt or State and local government employer. The QDRO
rules do not apply to section 457 plans.
reasons for change
The Committee believes that the rules regarding qualified
domestic relations orders should apply to all types of
employer-sponsored retirement plans.
explanation of provision
The bill applies the taxation rules for qualified plan
distributions pursuant to a QDRO to distributions made pursuant
to a domestic relations order from a section 457 plan. In
addition, a section 457 plan is not treated as violating the
restrictions on distributions from such plans due to payments
to an alternate payee under a QDRO. The special rule applicable
to governmental plans and church plans applies for purposes of
determining whether a distribution is pursuant to a QDRO.
Effective Date
The provision relating to taxation of distributions is
effective for transfers, distributions, and payments made after
December 31, 2000. The other provisions are effective on
January 1, 2001, except that, in the case of a domestic
relations order entered into before such date, the plan
administrator (1) shall treat such order as a QDRO if the
administrator is paying benefits pursuant to the order and (2)
may treat any other such order entered into before the
effective date as a QDRO.
F. Modifications Relating to Hardship Withdrawals (Sec. 306 of the Bill
and Secs. 401(k) and 402 of the Code)
Present Law
Elective deferrals under a qualified cash or deferred
arrangement (a ``section 401(k) plan'') may not be
distributable prior to the occurrence of one or more specified
events. One event upon which distribution is permitted is the
financial hardship of the employee. Applicable Treasury
regulations 38 provide that a distribution is made
on account of hardship only if the distribution is made on
account of an immediate and heavy financial need of the
employee and is necessary to satisfy the heavy need.
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\38\ Treas. Reg. sec. 1.401(k)-1.
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The Treasury regulations provide a safe harbor under which
a distribution may be deemed necessary to satisfy an immediate
and heavy financial need. One requirement of this safe harbor
is that the employee be prohibited from making elective
contributions and employee contributions to the plan and all
other plans maintained by the employer for at least 12 months
after receipt of the hardship distribution.
Under present law, hardship withdrawals of elective
deferrals from a qualified cash or deferred arrangement (or
403(b) annuity) are not eligible rollover distributions. Other
types of hardship distributions, e.g., employer matching
contributions distributed on account of hardship, are eligible
rollover distributions. Eligible rollover distributions that
are not directly rolled over are subject to withholding at a
flat rate of 20-percent.
Reasons for Change
Although the Committee believes that it is appropriate to
restrict the circumstances in which an in-service distribution
from a 401(k) plan is permitted and to encourage participants
to take such distributions only when necessary to satisfy an
immediate and heavy financial need, the Committee is concerned
about the impact that a 12-month suspension of contributions
may have on the retirement savings of a participant who
experiences a hardship. The Committee believes that the
combination of a 6-month contribution suspension and the other
elements of the regulatory safe harbor will provide an adequate
incentive for a participant to seek sources of funds other than
his or her 401(k) plan account balance in order to satisfy
financial hardships.
The present-law rules regarding the ability to rollover
hardship distributions create administrative burdens for plan
administrators and confusion on the part of plan participants.
The Committee believes that providing a uniform rule for all
hardship distributions will simplify application of the
rollover rules.
Explanation of Provision
The Secretary of the Treasury is directed to revise the
applicable regulations to reduce from 12 months to 6 months the
period during which an employee must be prohibited from making
elective contributions and employee contributions in order for
a distribution to be deemed necessary to satisfy an immediate
and heavy financial need.
The bill also provides that any hardship distribution made
pursuant to the terms of a plan is not an eligible rollover
distribution. The bill does not modify the rules under which
hardship distributions may be made. For example, as under
present law, hardship distributions of qualified employer
matching contributions may only be made under the rules
applicable to elective deferrals.
Effective Date
The provision relating to safe harbor hardship
distributions is effective for years beginning after December
31, 2000.
The provision providing that hardship distributions are not
eligible rollover distributions is effective for distributions
made after December 31, 2000. The Secretary has the authority
to issue transitional guidance with respect to this provision
to provide sufficient time for plans to implement the new rule.
G. Pension Coverage for Domestic and Similar Workers (Sec. 307 of the
Bill and Sec. 4972 of the Code)
Present Law
Under present law, within limits, employers may make
deductible contributions to qualified retirement plans for
employees. Subject to certain exception, a 10-percent excise
tax applies to nondeductible contributions to such plans.
Employers of household workers may establish a pension plan
for such workers. Contributions to such plans are not
deductible.
Reasons for Change
Under present law, individuals who employ domestic and
similar workers may be discouraged from providing pension plan
coverage for such employees because of the possible adverse tax
consequences from making nondeductible contributions. As a
result, such workers, who are typically lower income, may be
denied the opportunity for tax-favored retirement savings. The
Committee believes that such individuals who employ such
workers should be encouraged to provide pension coverage.
Explanation of Provision
Under the provision, the 10-percent excise tax on
nondeductible contributions does not apply to contributions to
a SIMPLE plan or a SIMPLE IRA which are nondeductible solely
because the contributions are not a trade or business expense
under section 162. Thus, for example, employers of household
workers could make contributions to such plans without
imposition of the excise tax. As under present law, the
contributions are not deductible. The present-law rules
applicable to such plans, e.g., contribution limits and
nondiscrimination rules, continue to apply. The provision does
not apply with respect to contributions on behalf of the
individual and members of his or her family.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2000.
TITLE IV. INCREASING PORTABILITY FOR PARTICIPANTS
A. Rollovers of Retirement Plan and IRA Distributions (Secs. 401-403 of
the Bill and Secs. 401, 402, 403(b), 408, 457, and 3405 of the Code)
Present Law
In general
Present law permits the rollover of funds from a tax-
favored retirement plan to another tax-favored retirement plan.
The rules that apply depend on the type of plan involved.
Similarly, the rules regarding the tax treatment of amounts
that are not rolled over depend on the type of plan involved.
Distributions from qualified plans
Under present law, an ``eligible rollover distribution''
from a tax-qualified employer- sponsored retirement plan may be
rolled over tax free to a traditional individual retirement
arrangement (``IRA'') 39 or another qualified
plan.40 An ``eligible rollover distribution'' means
any distribution to an employee of all or any portion of the
balance to the credit of the employee in a qualified plan,
except the term does not include (1) any distribution which is
one of a series of substantially equal periodic payments made
(a) for the life (or life expectancy) of the employee or the
joint lives (or joint life expectancies) of the employee and
the employee's designated beneficiary, or (b) for a specified
period of 10 years or more, (2) any distribution to the extent
such distribution is required under the minimum distribution
rules, and (3) certain hardship distributions. The maximum
amount that can be rolled over is the amount of the
distribution includible in income, i.e., after-tax employee
contributions cannot be rolled over. Qualified plans are not
required to accept rollovers.
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\39\ A ``traditional'' IRA refers to IRAs other than Roth IRAs or
SIMPLE IRAs. All references to IRAs refers only to traditional IRAs.
\40\ An eligible rollover distribution may either be rolled over by
the distributee within 60 days of the date of the distribution or, as
described below, directly rolled over by the distributing plan.
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Distributions from tax-sheltered annuities
Eligible rollover distributions from a tax-sheltered
annuity (``section 403(b) annuity'') may be rolled over into an
IRA or another section 403(b) annuity. Distributions from a
section 403(b) annuity cannot be rolled over into a tax-
qualified plan. Section 403(b) annuities are not required to
accept rollovers.
IRA distributions
Distributions from a traditional IRA, other than minimum
required distributions, can be rolled over into another IRA. In
general, distributions from an IRA cannot be rolled over into a
qualified plan or section 403(b) annuity. An exception to this
rule applies in the case of so-called ``conduit IRAs.'' Under
the conduit IRA rule, amounts can be rolled from a qualified
plan into an IRA and then subsequently rolled back to another
qualified plan if the amounts in the IRA are attributable
solely to rollovers from a qualified plan. Similarly, an amount
may be rolled over from a section 403(b) annuity to an IRA and
subsequently rolled back into a section 403(b) annuity if the
amounts in the IRA are attributable solely to rollovers from a
section 403(b) annuity.
Distributions from section 457 plans
A ``section 457 plan'' is an eligible deferred compensation
plan of a State or local government or tax-exempt employer that
meets certain requirements. In some cases, different rules
apply under section 457 to governmental plans and plans of tax-
exempt employers. For example, governmental section 457 plans
are like qualified plans in that plan assets are requiredto be
held in a trust for the exclusive benefit of plan participants and
beneficiaries. In contrast, benefits under a section 457 plan of a tax-
exempt employer are unfunded, like nonqualified deferred compensation
plans of private employers.
Section 457 benefits can be transferred to another section
457 plan. Distributions from a section 457 plan cannot be
rolled over to another section 457 plan, a qualified plan, a
section 403(b) annuity, or an IRA.
Rollovers by surviving spouses
A surviving spouse that receives an eligible rollover
distribution may roll over the distribution into an IRA, but
not a qualified plan or section 403(b) annuity.
Direct rollovers and withholding requirements
Qualified plans and section 403(b) annuities are required
to provide that a plan participant has the right to elect that
an eligible rollover distribution be directly rolled over to
another eligible retirement plan. If the plan participant does
not elect the direct rollover option, then withholding is
required on the distribution at a 20-percent rate.
Notice of eligible rollover distribution
The plan administrator of a qualified plan or a section
403(b) annuity is required to provide a written explanation of
rollover rules to individuals who receive a distribution
eligible for rollover. In general, the notice is to be provided
within a reasonable period of time before making the
distribution and is to include an explanation of (1) the
provisions under which the individual may have the distribution
directly rolled over to another eligible retirement plan, (2)
the provision that requires withholding if the distribution is
not directly rolled over, (3) the provision under which the
distribution may be rolled over within 60 days of receipt, and
(4) if applicable, certain other rules that may apply to the
distribution. The Treasury Department has provided more
specific guidance regarding timing and content of the notice.
Taxation of distributions
As is the case with the rollover rules, different rules
regarding taxation of benefits apply to different types of tax-
favored arrangements. In general, distributions from a
qualified plan, section 403(b) annuity, or IRA are includible
in income in the year received. In certain cases, distributions
from qualified plans are eligible for capital gains treatment
and averaging. These rules do not apply to distributions from
another type of plan. Distributions from a qualified plan, IRA,
and section 403(b) annuity generally are subject to an
additional 10-percent early withdrawal tax if made before age
59\1/2\. There are a number of exceptions to the early
withdrawal tax. Some of the exceptions apply to all three types
of plans, and others apply only to certain types of plans. For
example, the 10-percent early withdrawal tax does not apply to
IRA distributions for educational expenses, but does apply to
similar distributions from qualified plans and section 403(b)
annuities. Benefits under a section 457 plan are generally
includible in income when paid or made available. The 10-
percent early withdrawal tax does not apply to section 457
plans.
Reasons for Change
Present law encourages individuals who receive
distributions from qualified plans and similar arrangements to
save those distributions for retirement by facilitating tax-
free rollovers to an IRA or another qualified plan. The
Committee believes that expanding the rollover options for
individuals in employer-sponsored retirement plans and owners
of IRAs will provide further incentives for individuals to
continue to accumulate funds for retirement. The Committee
believes it appropriate to extend the same rollover rules to
governmental section 457 plans; like qualified plans, such
plans are required to hold plan assets in trust for employees.
Explanation of Provision
In general
The bill provides that eligible rollover distributions from
qualified retirement plans, section 403(b) annuities, and
governmental section 457 plans generally may be rolled over to
any of such plans or arrangements. Similarly, distributions
from an IRA generally may be rolled over into a qualified plan,
section 403(b) annuity, or governmental section 457 plan. The
direct rollover and withholding rules are extended to
distributions from a governmental section 457 plan, and such
plans are required to provide the written notification
regarding eligible rollover distributions. The rollover notice
(with respect to all plans) is required to include a
description of the provisions under which distributions from
the plan to which the distribution is rolled over may be
subject to restrictions and tax consequences different than
those applicable to distributions from the distributing plan.
Qualified plans, section 403(b) annuities, and section 457
plans are not required to accept rollovers.
Some special rules apply in certain cases. A distribution
from a qualified plan is not eligible for capital gains or
averaging treatment if there was a rollover to the plan that
would not have been permitted under present law. Thus, in order
to preserve capital gains and averaging treatment for a
qualified plan distribution that is rolled over, the rollover
must be made to a ``conduit IRA'' as under present law, and
then rolled back into a qualified plan. Amounts distributed
from a section 457 plan are subject to the early withdrawal tax
to the extent the distribution consists of amounts attributable
to rollovers from another type of plan. Section 457 plans are
required to separately account for such amounts.
Rollover of after-tax contributions
The bill provides that employee after-tax contributions may
be rolled over into another qualified plan or a traditional
IRA. In the case of a rollover from a qualified plan to another
qualified plan, the rollover may be accomplished only through a
direct rollover. In addition, a qualified plan is permitted to
accept rollovers of after-tax contributions unless the plan
provides separate accounting for such contributions (and
earnings thereon). After-tax contributions (including
nondeductible contributions to an IRA) may not be rolled over
from an IRA into a qualified plan, tax-sheltered annuity, or
section 457 plan.
In the case of a distribution from a traditional IRA that
is rolled over into an eligible rollover plan that is not an
IRA, the distribution is attributed first to amounts other than
after-tax contributions.
Expansion of spousal rollovers
The bill provides that surviving spouses may roll over
distributions to a qualified plan, section 403(b) annuity, or
governmental section 457 plan in which the spouse participates.
Treasury regulations
The Secretary is directed to prescribe rules necessary to
carry out the provisions. Such rules may include, for example,
reporting requirements and mechanisms to address mistakes
relating to rollovers. It is expected that the IRS will develop
forms to assist individuals who roll over after-tax
contributions to an IRA in keeping track of such contributions.
Such forms could, for example, expand Form 8606--Nondeductible
IRAs, to include information regarding after-tax contributions.
Effective Date
The provisions are effective for distributions made after
December 31, 2001.
B. Waiver of 60-Day Rule (Sec. 404 of the Bill and Secs. 402 and 408 of
the Code)
Present Law
Under present law, amounts received from an IRA or
qualified plan may be rolled over tax free if the rollover is
made within 60 days of the date of the distribution. The
Secretary does not have the authority to waive the 60-day
requirement.
Reasons for Change
The inability of the Secretary to waive the 60-day rollover
period can result in adverse tax consequences for individuals.
The Committee believes such harsh results are inappropriate and
that providing for waivers of the rule will help facilitate
rollovers.
Explanation of Provision
The bill provides that the Secretary may waive the 60-day
rollover period if the failure to waive such requirement would
be against equity or good conscience, including cases of
casualty, disaster, or other events beyond the reasonable
control of the individual subject to such requirement.
Effective Date
The provision applies to distributions made after December
31, 2000.
C. Treatment of Forms of Distribution (Sec. 405 of the Bill and Sec.
411(d)(6) of the Code)
Present Law
An amendment of a qualified retirement plan may not
decrease the accrued benefit of a plan participant. An
amendment is treated as reducing an accrued benefit if, with
respect to benefits accrued before the amendment is adopted,
the amendment has the effect of either (1) eliminating or
reducing an early retirement benefit or a retirement-type
subsidy, or (2) except as provided by Treasury regulations,
eliminating an optional form of benefit (sec.
411(d)(6)).41
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\41\ A similar provision is contained in Title I of ERISA.
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The prohibition against the elimination of an optional form
of benefit applies to plan mergers, spinoffs, transfers, and
transactions amending or having the effect of amending a plan
or plans to transfer plan benefits. For example, if Plan A, a
profit-sharing plan that provides for distribution of benefits
in annual installments over ten or twenty years, is merged with
Plan B, a profit-sharing plan that provides for distribution of
benefits in annual installments over life expectancy at the
time of retirement, the merged plan must preserve the ten- or
twenty-year installment option with respect to benefits accrued
under Plan A as of the date of the merger and the installments
over life expectancy with respect to benefits accrued under
Plan B as of the date of the merger. Similarly, for example, if
a participant's benefit under a defined contribution plan is
transferred to another defined contribution plan maintained by
the same or a different employer, the optional forms of benefit
available with respect to the participant's accrued benefit
under the transferor plan must be preserved.42
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\42\ Treas. Reg. sec. 1.411(d)-4, Q&A-2(a)(3)(i).
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A plan that is a transferee of a plan that is subject to
the joint and survivor rules is also subject to those rules.
Reasons for Change
The Committee understands that the application of the
prohibition against the elimination of any optional form of
benefit frequently results in complexity and confusion,
especially in the context of business acquisitions and similar
transactions, and makes it difficult for participants to
understand their benefit options and make choices that are
best-suited to their needs. The Committee believes that it is
appropriate to permit the elimination of duplicative benefit
options that develop following plan mergers and similar events
while ensuring that meaningful early retirement benefit payment
options and subsidies may not be eliminated.
Explanation of Provision
A defined contribution plan to which benefits are
transferred is not treated as reducing a participant's or
beneficiary's accrued benefit even though it does not provide
all of the forms of distribution previously available under the
transferor plan if (1) the plan receives from another defined
contribution plan a direct transfer of the participant's or
beneficiary's benefit accrued under the transferor plan, or the
plan results from a merger or other transaction that has the
effect of a direct transfer (including consolidations of
benefits attributable to different employers within a multiple
employer plan), (2) the terms of both the transferor plan and
the transferee plan authorize the transfer, (3) the transfer
occurs pursuant to a voluntary election by the participant or
beneficiary that is made after the participant or beneficiary
received a notice describing the consequences of making the
election, and (4) the transferee plan allows the participant or
beneficiary to receive distribution of his or her benefit under
the transferee plan in the form of a single sum distribution.
The provision does not modify the rules relating to survivor
annuities under section 417. Thus, as under present law, if the
transferor plan is required to provide an annuity as the normal
form of benefit, the transferee plan must comply with the rules
of section 417.
Furthermore, the provision directs the Secretary of the
Treasury to provide by regulations that the prohibitions
against eliminating or reducing an early retirement benefit, a
retirement-type subsidy, or an optional form of benefit do not
apply to plan amendments that eliminate or reduce early
retirement benefits, retirement-type subsidies, and optional
forms of benefit that create significant burdens and
complexities for a plan and its participants, but only if such
an amendment does not adversely affect the rights of any
participant in more than a de minimis manner.
For this purpose, the factors to be considered in
determining whether an amendment has more than a de minimis
adverse effect on any participant include (1) all of the
participant's early retirement benefits, retirement-type
subsidies, and optional forms of benefits that are reduced or
eliminated by the amendment, (2) the extent to which early
retirement benefits, retirement-type subsidies, and optional
forms of benefit in effect with respect to a participant after
the amendment effective date provide rights that are comparable
to the rights that are reduced or eliminated by the plan
amendment, (3) the number of years before the participant
attains normal retirement age under the plan (or early
retirement age, as applicable), (4) the amount of the
participant's benefit that is affected by the plan amendment,
in relation to the amount of the participant's
compensation,\43\ and (5) the number of years before the plan
amendment is effective.
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\43\ In determining the amount of any subsidy under the provision,
it is expected that the regulations will value the subsidy by reference
to the date on which it would be the most valuable with respect to the
participant.
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This provision of the bill does not affect the rules
relating to involuntary cash outs (sec. 411(a)(11)) \44\ or
survivor annuity requirements (sec. 417). Accordingly, if a
participant is entitled to protections of the joint and
survivor rules, those protections may not be eliminated. The
intent of the provision authorizing regulations is solely to
permit the elimination of early retirement benefits,
retirement-type subsidies, or optional forms of benefit that
have no more than a de minimis effect on any participant but
create disproportionate burdens and complexities for a plan and
its participants.
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\44\ Another provision of the bill provides that rollover amounts
are not taken into account for purposes of the cash-out rules.
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For example, assume the following. Employer A acquires
employer B and merges B's defined benefit plan into A's defined
benefit plan. The defined benefit plan maintained by B before
the merger provides an early retirement subsidy for individuals
age 55 with a specified number of years of service. E1 and E2
are employees of B and who transfer to A in connection with the
merger. E1 is 25 years old and has compensation of $40,000. The
present value of E1's early retirement subsidy under B's plan
is $75. E2 is 50 years old and also has compensation of
$40,000. The present value of E2's early retirement subsidy
under B's plan is $10,000.
Assume that A's plan has an early retirement subsidy for
individuals who have attained age 50 with a specified number of
years of service, but the subsidy is not the same as under B's
plan. Under A's plan, the present value of E2's early
retirement subsidy is $9,500. Maintenance of both subsidies
would create burdens for the plan and complexities for the plan
and its participants.
Treasury regulations could permit E1's early retirement
subsidy under B's plan to be eliminated entirely (i.e., even if
A's plan did not have an early retirement subsidy). Taking into
account all relevant factors, including the value of the
benefit, E1's compensation, and the number of years until E1
would be eligible to receive the subsidy, the subsidy is de
minimis. Treasury regulations could permit E2's early
retirement subsidy under B's plan to be eliminated as to be
replaced by the subsidy under A's plan, because the difference
in the subsidies is de minimis. However, A's subsidy could not
be entirely eliminated.
The Secretary is directed to issue, not later than December
31, 2001, regulations under section 411(d)(6), including
regulations required under the provision.
Effective Date
The provision is effective for years beginning after
December 31, 2000, except that the direction to the Secretary
is effective on the date of enactment.
D. Rationalization of Restrictions on Distributions (Sec. 406 of the
Bill and Secs. 401(k), 403(b), and 457 of the Code)
Present Law
Elective deferrals under a qualified cash or deferred
arrangement (``section 401(k) plan''), tax-sheltered annuity
(``section 403(b) annuity''), or an eligible deferred
compensation plan of a tax-exempt organization or State or
local government (``section 457 plan''), may not be
distributable prior to the occurrence of one or more specified
events. These permissible distributable events include
``separation from service.''
A separation from service occurs only upon a participant's
death, retirement, resignation or discharge, and not when the
employee continues on the same job for a different employer as
a result of the liquidation, merger, consolidation or other
similar corporate transaction. A severance from employment
occurs when a participant ceases to be employed by the employer
that maintains the plan. Under a so-called ``same desk rule,''
a participant's severance from employment does not necessarily
result in a separation from service. 45
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\45\ Rev. Rul. 79-336, 1979-2 C.B. 187.
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In addition to separation from service and other events, a
section 401(k) plan that is maintained by a corporation may
permit distributions to certain employees who experience a
severance from employment with the corporation that maintains
the plan but does not experience a separation from service
because the employee continues on the same job for a different
employer as a result of a corporate transaction. If the
corporation disposes of substantially all of the assets used by
the corporation in a trade or business, a distributable event
occurs with respect to the accounts of the employees who
continue employment with the corporation that acquires the
assets. If the corporation disposes of its interest in a
subsidiary, a distributable event occurs with respect to the
accounts of the employees who continue employment with the
subsidiary.
Reasons for Change
The Committee believes that application of the ``same
desk'' rule is inappropriate because it hinders portability of
retirement benefits, creates confusion for employees, and
results in significant administrative burdens for employers
that engage in business acquisition transactions.
Explanation of Provision
The bill modifies the distribution restrictions applicable
to section 401(k) plans, section 403(b) annuities, and section
457 plans to provide that distribution may occur upon severance
from employment rather than separation from service. In
addition, the provisions for distribution from a section 401(k)
plan based upon a corporation's disposition of its assets or a
subsidiary is repealed; this special rule is no longer be
necessary as a result of the changes made by the provision.
Effective Date
The provision is effective for distributions after December
31, 2000, regardless of when the severance of employment
occurred.
E. Purchase of Service Credit Under Governmental Pension Plans (Sec.
407 of the Bill and Secs. 403(b) and 457 of the Code)
Present Law
A qualified retirement plan maintained by a State or local
government employer may provide that a participant may make
after-tax employee contributions in order to purchase
permissive service credit, subject to certain limits (sec.
415). Permissive service credit means credit for a period of
service recognized by the governmental plan only if the
employee voluntarily contributes to the plan an amount (as
determined by the plan) that does not exceed the amount
necessary to fund the benefit attributable to the period of
service and that is in addition to the regular employee
contributions, if any, under the plan.
In the case of any repayment of contributions and earnings
to a governmental plan with respect to an amount previously
refunded upon a forfeiture of service credit under the plan (or
another plan maintained by a State or local government employer
within the same State), any such repayment is not taken into
account for purposes of the section 415 limits on contributions
and benefits. Also, service credit obtained as a result of such
a repayment is not considered permissive service credit for
purposes of the section 415 limits.
A participant may not use a rollover or direct transfer of
benefits from a tax-sheltered annuity (``section 403(b)
annuity'') or an eligible deferred compensation plan of a tax-
exempt organization of a State or local government (``section
457 plan'') to purchase permissive service credits or repay
contributions and earnings with respect to a forfeiture of
service credit.
Reasons for Change
The Committee understands that many employees work for
multiple State or local government employers during their
careers. The Committee believes that allowing suchemployees to
use their section 403(b) annuity and section 457 plan accounts to
purchase permissive service credits or make repayments with respect to
forfeitures of service credit will result in more significant
retirement benefits.
Explanation of Provision
A participant in a State or local governmental plan is not
required to include in gross income a direct trustee-to-trustee
transfer to a governmental defined benefit plan from a section
403(b) annuity or a section 457 plan if the transferred amount
is used (1) to purchase permissive service credits under the
plan, or (2) to repay contributions and earnings with respect
to an amount previously refunded under a forfeiture of service
credit under the plan (or another plan maintained by a State or
local government employer within the same State).
Effective Date
The provision is effective for transfers after December 31,
2000.
F. Employers May Disregard Rollovers for Purposes of Cash-out Rules
(Sec. 408 of the Bill and Sec. 411(a)(11) of the Code)
Present Law
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 and, if applicable, the
participant's spouse, if the present value of the benefit does
not exceed $5,000. If such an involuntary distribution occurs
and the participant subsequently returns to employment covered
by the plan, then service taken into account in computing
benefits payable under the plan after the return need not
include service with respect to which a benefit was
involuntarily distributed unless the employee repays the
benefit. 46
---------------------------------------------------------------------------
\46\ A similar provision is contained in Title I of ERISA.
---------------------------------------------------------------------------
Generally, a participant may roll over an involuntary
distribution from a qualified plan to an IRA or to another
qualified plan. 47
---------------------------------------------------------------------------
\47\ Other provisions of the bill expand the kinds of plans to
which benefits may be rolled over.
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Reasons for Change
The present-law cash-out rule reflects a balancing of
various policies. On the one hand is the desire to assist
individuals to save for retirement by making it easier to keep
retirement funds in tax-favored vehicles. On the other hand is
the recognition that keeping track of small account balances of
former employees creates administrative burdens for plans.
The Committee is concerned that, in some cases, the cash-
out rule may discourage plans from accepting rollovers because
the rollover will increase participants' benefits to above the
cash-out amount, and increase administrative burdens. The
Committee believes that disregarding rollovers for purposes of
the cash-out rule will further the intent of the cash-out rule
by removing a possible disincentive for plans to accept
rollovers.
Explanation of Provision
A plan is permitted to provide that the present value of a
participant's nonforfeitable accrued benefit is determined
without regard to the portion of such benefit that is
attributable to rollover contributions (and any earnings
allocable thereto) for purposes of the cash-out rule.
Effective Date
The proposal would be effective for distributions after
December 31, 2000.
G. Time of Inclusion of Benefits Under Section 457 Plans (Sec. 409 of
the Bill and Sec. 457 of the Code)
Present Law
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 deferred under
a section 457 plan cannot exceed certain limits. Amounts
deferred under a section 457 plan are generally includible in
income when paid or made available. Amounts deferred under a
plan of deferred compensation of a State or local government or
tax-exempt employer that does not meet the requirements of
section 457 are includible in income when the amounts are not
subject to a substantial risk of forfeiture, regardless of
whether the amounts have been paid or made available.
48
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\48\ This rule of inclusion does not apply to amounts deferred
under a tax-qualified retirement plan or similar plans.
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The limits on section 457 plans were first applied to plans
of tax-exempt employers pursuant to the Tax Reform Act of 1986
(the ``1986 Act''), generally effective for taxable years
beginning after December 31, 1986. The limitations of section
457 do not apply to amounts deferred under a plan of a tax-
exempt employer by an individual covered under such a plan on
August 16, 1986, if the amounts (1) were deferred from taxable
years beginning before January 1, 1987, or (2) are deferred
from taxable years beginning after December 31, 1986, pursuant
to an agreement that was in writing on August 16, 1986, and on
such date provided for a deferral foreach taxable year covered
by the agreement of a fixed amount or of an amount determined pursuant
to a fixed formula. The provision in (2) ceases to apply if there is
any modification to the agreement or formula.
Reasons for Change
The Committee believes that the rules for timing of
inclusion of benefits under a governmental section 457 plan
should be conformed to the rules relating to qualified plans.
The Committee believes it appropriate to extend the
grandfather rule for certain section 457 plan benefits to cost-
of-living adjustments.
Explanation of Provision
The bill provides that amounts deferred under a section 457
plan of a State or local government are includible in income
when paid.
In addition, the bill modifies the transition rule adopted
in the 1986 Act relating to deferred compensation plans of tax-
exempt employers. Under the bill, the transition rule applies
to agreements providing cost-of-living adjustments to amounts
that otherwise satisfy the requirements of the transition rule.
The grandfather does not apply to the extent that the annual
amount provided under such an agreement exceeds the annual
grandfathered amount multiplied by the cumulative increase in
the Consumer Price Index (as published by the Department of
Labor).
Effective Date
The provision relating to governmental section 457 plans
would be effective for distributions beginning after December
31, 2000. The provision relating to plans of tax-exempt
organizations is effective for taxable years ending after the
date of enactment for cost-of-living increases after September
1993.
TITLE V. STRENGTHENING PENSION SECURITY AND ENFORCEMENT
A. Phase in Repeal of 155 Percent of Current Liability Funding Limit;
Deduction for Contributions to Fund Termination Liability (Secs. 501
and 502 of the Bill and Secs. 404(a)(1), 412(c)(7), and 4972(c) of the
Code)
Present Law
Under present law, defined benefit pension plans are
subject to minimum funding requirements designed to ensure that
pension plans have sufficient assets to pay benefits. A defined
benefit pension plan is funded using one of a number of
acceptable actuarial cost methods.
No contribution is required under the minimum funding rules
in excess of the full funding limit. The full funding limit is
generally defined as the excess, if any, of (1) the lesser of
(a) the accrued liability under the plan (including normal
cost) or (b) 155 percent of the plan's current liability, over
(2) the value of the plan's assets (sec. 412(c)(7)).
49 In general, current liability is all liabilities
to plan participants and beneficiaries accrued to date, whereas
the accrued liability full funding limit is based on projected
benefits. The current liability full funding limit is scheduled
to increase as follows: 160 percent for plan years beginning in
2001 or 2002, 165 percent for plan years beginning in 2003 and
2004, and 170 percent for plan years beginning in 2005 and
thereafter. 50 In no event is a plan's full funding
limit less than 90 percent of the plan's current liability over
the value of the plan's assets.
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\49\ The minimum funding requirements, including the full funding
limit, are also contained in title I of ERISA.
\50\ As originally enacted in the Pension Protection Act of 1997,
the current liability full funding limit was 150 percent of current
liability. The Taxpayer Relief Act of 1997 increased the current
liability full funding limit to 155 percent in 1999 and 2000, and
adopted the scheduled increases described in the text.
---------------------------------------------------------------------------
An employer sponsoring a defined benefit pension plan
generally may deduct amounts contributed to satisfy the minimum
funding standard for the plan year. Contributions in excess of
the full funding limit generally are not deductible. Under a
special rule, an employer that sponsors a defined benefit
pension plan (other than a multiemployer plan) which has more
than 100 participants for the plan year may deduct amounts
contributed of up to 100 percent of the plan's unfunded current
liability.
Reasons for Change
The Committee is concerned that the current liability full
funding limit may result in inadequate funding of pension plans
and thus jeopardize pension security. Also, the
Committeebelieves that the special deduction rule should be expanded to
give more plan sponsors incentives to adequately fund their plans.
Explanation of Provision
Current liability full funding limit
The bill gradually increases and then repeals the current
liability full funding limit. The current liability full
funding limit is 160 percent of current liability for plan
years beginning in 2001, 165 percent for plan years beginning
in 2002, and 170 percent for plan years beginning in 2003. The
current liability full funding limit is repealed for plan years
beginning in 2004 and thereafter. Thus, in 2004 and thereafter,
the full funding limit will be the excess, if any, of (1) the
accrued liability under the plan (including normal cost), over
(2) the value of the plan's assets.
Deduction for contributions to fund termination liability
The special rule allowing a deduction for unfunded current
liability generally is extended to all defined benefit pension
plans, i.e., the provision applies to multiemployer plans and
plans with 100 or fewer participants. The special rule does not
apply to plans not covered by the PBGC termination insurance
program.51
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\51\ The PBGC termination insurance program does not cover plans of
professional service employers that have fewer than 25 participants.
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The bill also modifies the rule by providing that the
deduction is for up to 100 percent of unfunded termination
liability, determined as if the plan terminated at the end of
the plan year. In the case of a plan with less than 100
participants for the plan year, termination liability does not
include the liability attributable to benefit increases for
highly compensated employees resulting from a plan amendment
which was made or became effective, whichever is later, within
the last two years.
Effective Date
The provision is effective for plan years beginning after
December 31, 2000.
B. Excise Tax Relief for Sound Pension Funding (Sec. 503 of the Bill
and Sec. 4972 of the Code)
Present Law
Under present law, defined benefit pension plans are
subject to minimum funding requirements designed to ensure that
pension plans have sufficient assets to pay benefits. A defined
benefit pension plan is funded using one of a number of
acceptable actuarial cost methods.
No contribution is required under the minimum funding rules
in excess of the full funding limit. The full funding limit is
generally defined as the excess, if any, of (1) the lesser of
(a) the accrued liability under the plan (including normal
cost) or (b) 155 percent of the plan's current liability, over
(2) the value of the plan's assets (sec. 412(c)(7)). In
general, current liability is all liabilities to plan
participants and beneficiaries accrued to date, whereas the
accrued liability full funding limit is based on projected
benefits. The current liability full funding limit is scheduled
to increase as follows: 160 percent for plan years beginning in
2001 or 2002, 165 percent for plan years beginning in 2003 and
2004, and 170 percent for plan years beginning in 2005 and
thereafter.52 In no event is a plan's full funding
limit less than 90 percent of the plan's current liability over
the value of the plan's assets.
---------------------------------------------------------------------------
\52\ As originally enacted in the Pension Protection Act of 1997,
the current liability full funding limit was 150 percent of current
liability. The Taxpayer Relief Act of 1997 increased the current
liability full funding limit to 155 percent in 1999 and 2000, and
adopted the scheduled increases described in the text. Another proposal
would gradually increase and then repeal the current liability full
funding limit.
---------------------------------------------------------------------------
An employer sponsoring a defined benefit pension plan
generally may deduct amounts contributed to satisfy the minimum
funding standard for the plan year. Contributions in excess of
the full funding limit generally are not deductible. Under a
special rule, an employer that sponsors a defined benefit
pension plan (other than a multiemployer plan) which has more
than 100 participants for the plan year may deduct amounts
contributed of up to 100 percent of the plan's unfunded current
liability.
Present law also provides that contributions to defined
contribution plans are deductible, subject to certain
limitations.
Subject to certain exceptions, an employer that makes
nondeductible contributions to a plan is subject to an excise
tax equal to 10 percent of the amount of the nondeductible
contributions for the year. The 10-percent excise tax does not
apply to contributions to certain terminating defined benefit
plans. The 10-percent excise tax also does not apply to
contributions of up to 6 percent of compensation to a defined
contribution plan for employer matching and employee elective
deferrals.
Reasons for Change
The Committee believes that employers should be encouraged
to adequately fund their pension plans. Therefore, the
Committee does not believe that an excise tax should be imposed
on employer contributions that do not exceed the accrued
liability full funding limit.
Explanation of Provision
In determining the amount of nondeductible contributions,
the employer is permitted to elect not to take into account
contributions to a defined benefit pension plan except to the
extent they exceed the accrued liability full funding limit.
Thus, if an employer elects, contributions in excess of the
current liability full funding limit are not subject to the
excise tax on nondeductible contributions. An employer making
such an election for a year is not permitted to take advantage
of the present-law exceptions for certain terminating plans and
certain contributions to defined contribution plans. The
provision applies to terminated plans as well as on-going
plans.
Effective Date
The provision is effective for years beginning after
December 31, 2000.
C. Notice of Significant Reduction in Plan Benefit Accruals (Sec. 504
of the Bill and Secs. 411(d) and 417(e) and New Sec. 4980F of the Code)
Present Law
Section 204(h) of Title I of ERISA provides that a defined
benefit pension plan or a money purchase pension plan may not
be amended so as to provide for a significant reduction in the
rate of future benefit accrual, unless, after adoption of the
plan amendment and not less than 15 days before the effective
date of the plan amendment, the plan administrator provides a
written notice (``section 204(h) notice''), setting forth the
plan amendment (or a summary of the amendment written in a
manner calculated to be understood by the average plan
participant) and its effective date. The plan administrator
must provide the section 204(h) notice to each plan
participant, each alternate payee under an applicable qualified
domestic relations order (``QDRO''), and each employee
organization representing participants in the plan. The
applicable Treasury regulations 53 provide, however,
that a plan administrator need not provide the section 204(h)
notice to any participant or alternate payee whose rate of
future benefit accrual is reasonably expected not to be reduced
by the amendment, nor to an employee organization that does not
represent a participant to whom the section 204(h) notice must
be provided. In addition, the regulations provide that the rate
of future benefit accrual is determined without regard to
optional forms of benefit, early retirement benefits,
retirement-type subsidiaries, ancillary benefits, and certain
other rights and features.
---------------------------------------------------------------------------
\53\ Treas. Reg. sec. 1.411(d)-6.
---------------------------------------------------------------------------
A covered amendment generally will not become effective
with respect to any participants and alternate payees whose
rate of future benefit accrual is reasonably expected to be
reduced by the amendment but who do not receive a section
204(h) notice. An amendment will become effective with respect
to all participants and alternate payees to whom the section
204(h) notice was required to be provided if the plan
administrator (1) has made a good faith effort to comply with
the section 204(h) notice requirements, (2) has provided a
section 204(h) notice to each employee organization that
represents any participant to whom a section 204(h) notice was
required to be provided, (3) has failed to provide a section
204(h) notice to no more than a de minimis percentage of
participants and alternate payees to whom a section 204(h)
notice was required to be provided, and (4) promptly upon
discovering the oversight, provides a section 204(h) notice to
each omitted participant and alternate payee.
The Internal Revenue Code does not require any notice
concerning a plan amendment that provides for a significant
reduction in the rate of future benefit accrual.
The Internal Revenue Code prohibits the reduction of a
participant's accrued benefit by plan amendment (sec.
411(d)(6)), and, for this purpose, except to the extent set
forth in Treasury regulations, treats the elimination or
reduction of an early retirement benefit or retirement-type
subsidy or an optional form of benefit as a reduction of a
participant's accrued benefit. However, this prohibition does
not prevent a plan amendment from ceasing or reducing future
accruals.
In the case of a pension plan that is subject to the joint
and survivor annuity rules, the Internal Revenue Code (sec.
417(e)) restricts distributions before normal retirement age
without the consent of the participant and the participant's
spouse unless the value of the distribution does not exceed a
dollar limit ($5,000 under sec. 411(a)(11)(A)). For this
purpose, under Treasury regulations, a specific interest rate
and mortality table are prescribed for purposes of determining
whether the distribution exceeds the dollar limit and prohibits
a lump sum distribution of an amount less than the amount
determined under the applicable interest rate and mortality
table even if the distribution exceeds the dollar limit.
Reasons for Change
The Committee is aware of recent significant publicity
concerning conversions of traditional defined benefit pension
plans to ``cash balance'' plans, with particular focus on the
impact such conversions have on affected workers. Several
legislative proposals have been introduced to address some of
the issues relating to such conversions.
The Committee believes that employees are entitled to
meaningful disclosure concerning plan amendments that may
result in reductions of future benefit accruals. The Committee
has determined that present law does not require employers to
provide such disclosure, particularly in cases where
traditional defined benefit plans are converted to cash balance
plans. The Committee also believes that any disclosure
requirements applicable to plan amendments should strike a
balance between providing meaningful disclosure and avoiding
the imposition of unnecessary administrative burdens on
employers.
The Committee understands that there are other issues in
addition to disclosure that have arisen with respect to the
conversion of defined benefit plans to cash balance or other
hybrid plans, particularly situations in which plan
participants do not earn any additional benefit under the plan
for some time after conversion (called a ``wear away''). The
Committee believes that theInternal Revenue Code and ERISA
should contain requirements designed to prevent the use of ``wear
away'' provisions in these conversions.
Explanation of Provision
The provision adds to the Internal Revenue Code a
requirement that the plan administrator of a pension plan
furnish a written notice concerning a plan amendment that
provides for a significant reduction in the rate of future
benefit accrual, including any elimination or reduction of an
early retirement benefit or retirement-type
subsidy.54 The notice is required to set forth: (1)
a summary of the amendment and the effective date of the
amendment; (2) a statement that the amendment is expected to
significantly reduce the rate of future benefit accrual; (3) a
description of the classes of employees reasonably expected to
be affected by the reduction in the rate of future benefit
accrual; (4) examples illustrating the plan changes for these
classes of employees; (5) in the event of an amendment that
results in a conversion of a traditional defined benefit plan
to a cash balance plan (described below), a notice that the
plan administrator will provide, generally no later than 15
days prior to the effective date of the amendment, a ``benefit
estimation tool kit'' (described below) that will enable
affected participants who have completed at least 1 year of
participation to personalize the illustrative examples; and (6)
notice of each affected participant's right to request, and of
the procedures for requesting, an annual benefit statement as
provided under present law. The plan administrator is required
to provide the notice not less than 45 days before the
effective date of the plan amendment.
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\54\ The provision also modifies the present-law notice requirement
contained in section 204(h) of Title I of ERISA to provide that an
applicable pension plan may not be amended to provide for a significant
reduction in the rate of future benefit accrual in the event of an
egregious failure by the plan administrator to comply with a notice
requirement similar to the notice requirement that the provision adds
to the Internal Revenue Code. In addition, the provision expands the
current ERISA notice requirement regarding significant reductions in
normal retirement benefit accrual rates to early retirement benefits
and retirement-type subsidies.
---------------------------------------------------------------------------
The notice requirement does not apply to plans to which
ERISA sec. 204(h) does not apply, including governmental plans
or church plans with respect to which an election to have the
qualified plan participation, vesting, and funding rules apply
has not been made (sec. 410(d)).
The plan administrator is required to provide this
generalized notice to each affected participant and each
affected alternate payee. For purposes of the provision, an
affected participant or alternate payee is a participant or
alternate payee to whom the reduction in the rate of future
benefit accrual, including any elimination or significant
reduction in early retirement benefit or retirement-type
subsidy, is reasonably expected to apply.
As noted above, the provision requires the plan
administrator to provide a benefit estimation tool kit, no
later than 15 days prior to the amendment effective date, to a
participant for whom the amendment may reasonably be expected
to produce a significant reduction in the rate of future
benefit accrual if the amendment has the effect of converting a
traditional defined benefit plan to a cash balance plan. The
plan administrator is not required to provide this benefit
estimation tool kit to any participant who has less than 1 year
of participation in the plan. For purposes of the provision, a
``cash balance plan'' means a defined benefit plan under which
the accrued benefit is determined as an amount other than an
annual benefit commencing at normal retirement age, and any
defined benefit plan, or portion of such a plan, that has an
effect similar to a defined benefit plan under which the
accrued benefit is determined as an amount other than an annual
benefit commencing at normal retirement age (as determined
under Treasury regulations). If the benefits of 2 or more
defined benefit plans established or maintained by an employer
are coordinated in such a manner as to have the effect of a
conversion to a cash balance plan, the provision treats the
sponsor of the plan or plans providing for such coordination as
having adopted such a conversion as of the date such
coordination begins. If a plan sponsor represents in
communications to participants and beneficiaries that a plan
amendment has an effect equivalent to a cash balance
conversion, such amendment is (to the extent provided in
Treasury regulations) treated as a cash balance conversion. In
addition, the provision provides for the Secretary of the
Treasury to issue regulations to prevent avoidance of the
requirements of the provision through the use of 2 or more plan
amendments rather than a single amendment.
The benefit estimation tool kit is designed to enable
participants to estimate benefits under the old and new plan
provisions. The provision permits the tool kit to be in the
form of software (for use at home, at a workplace kiosk, or on
a company intranet), worksheets, or calculation instructions,
or other formats to be determined by the Secretary of the
Treasury. The tool kit is required to include any necessary
actuarial assumptions and formulas and to permit the
participant to estimate both a single life annuity at
appropriate ages and, when available, a lump sum distribution.
The tool kit is required to disclose the interest rate used to
compute a lump sum distribution and whether the value of early
retirement benefits is included in the lump sum distribution.
The provision requires the benefit estimation tool kit to
accommodate employee-provided variables with respect to age,
years of service, retirement age, covered compensation, and
interest rate (when variable rates apply). The tool kit is
required to permit employees to recalculate estimated benefits
by changing the values of these variables. The provision does
not require the tool kit to accommodate employee variables with
respect to qualified domestic relations orders, factors that
result in unusual patterns of credited service (such as
extended time away from the job), special benefit formulas for
unusual situations, offsets from other plans, and forms of
annuity distributions.
In the case of a cash balance conversion that occurs in
connection with a business disposition or acquisition
transaction and within 1 year following the date of the
transaction, the provision requires the plan administrator to
provide the benefit estimation tool kit prior to the end of the
2-year period following the date of the transaction to the
affected participants who become participants as a result of
the transaction.
The provision permits a plan administrator to provide any
notice required under the provision to a person designated in
writing by the individual to whom it would otherwise be
provided. In addition, the provision authorizes the Secretary
of the Treasury to allow any notice required under the
provision to be provided by using new technologies.
The provision imposes on a plan administrator that fails to
comply with the notice requirement an excise tax equal to $100
per day per omitted participant and alternate payee. For
failures due to reasonable cause and not to willful neglect,
the total excise tax imposed during a taxable year of the
employer will not exceed $500,000. Furthermore, 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 is excessive or
otherwise inequitable relative to the failure involved.
The provision adds to the Internal Revenue Code and ERISA
requirements designed to prevent the use of ``wear away''
provisions under which participants earn no additional benefits
for a period of time after a conversion of a traditional
defined benefit plan to a cash balance plan. These requirements
are in addition to the other provisions of the Internal Revenue
Code that prohibit the reduction of a participant's accrued
benefit by plan amendment (sec. 411(d)(6)). In the event of a
conversion of a traditional defined benefit plan to a cash
balance plan, the provision applies a minimum benefit
requirement. This minimum benefit requirement requires a
participant's accrued benefit under the cash balance plan to
equal not less than (1) the benefit accrued for years of
service prior to the conversion under the traditional defined
benefit plan formula (not taking into account any early
retirement benefit or retirement-type subsidy), plus (2) any
benefit accrued for years of service after the conversion under
the cash balance plan benefit formula. If the amendment
provides that the accrued benefit initially credited to a
participant's accumulation account (or its equivalent) on the
effective date of the amendment satisfies the present value
rules described below, the plan will not be treated as failing
to provide to the participant an accrued benefit that includes
such pre-conversion accrued benefit at any time after the
effective date of the amendment merely because of a fluctuation
in interest rates. The provision does not apply the minimum
benefit requirement designed to prevent ``wear away'' to a cash
balance conversion amendment to the extent that the amendment
permits a participant to continue to accrue benefits in the
same manner as under the terms of the plan in effect prior to
the amendment (for example, by providing for the participant to
receive the greater of the old or new formulas).
Under the provision, a plan is treated as satisfying the
minimum benefit requirement designed to prevent ``wear away''
if a plan amendment provides that the present value of a
participant's benefit accrued under a traditional defined
benefit plan formula prior to a cash balance conversion is not
less than the greater of (1) the present value determined using
the applicable mortality table and the applicable interest rate
in effect under the plan on the effective date of the cash
balance conversion, or (2) the amount of the lump sum
distribution that would be payable as of such effective date if
the participant were eligible to receive a distribution under
the terms of the plan as in effect immediately before such
effective date, but not taking into account any early
retirement benefit or retirement-type subsidy.
Except as provided in regulations, the provision generally
requires the present value of the accrued benefit of any
participant under a cash balance plan to be equal to the
balance in the participant's accumulation account (or its
equivalent) as of the time of the present value determination.
This requirement will not apply to any portion of the
participant's benefit accrued prior to a cash balance
conversion except to the extent the plan provides that the
amount initially credited to a participant's accumulation
account (or its equivalent) on the effective date of the
conversion is not less than the benefit accrued for years of
service prior to the conversion under the traditional defined
benefit formula (not taking into account any early retirement
benefit or retirement-type subsidy). This provision is solely
intended to permit plan sponsors to provide interest credits in
an amount greater than the amount currently permitted under the
Internal Revenue Code. Regulations may condition satisfaction
of this requirement on the plan crediting interest at rates not
in excess of a maximum and not less than a minimum specified in
the regulations.
Failure to comply with the requirements of the provision
designed to prevent ``wear away'' results in the
disqualification of the plan.
The provision directs the Secretary of the Treasury to
define in regulations, within 12 months after the date of
enactment, the terms ``early retirement benefit'' and
``retirement-type subsidy.'' In addition, with respect to a
participant who is eligible to accrue benefits under the terms
of a defined benefit plan as in effect either before or after
an amendment that results in a conversion to a cash balance
plan, the provision directs the Secretary of the Treasury to
prescribe regulations under which (1) the plan will be treated
as meeting the requirements of sec. 411(b)(1)(A), (B), or (C)
if such requirements are met separately with respect to each of
the plan's methods of accruing benefits, and (2) the plan will
not be treated as failing to meet the requirements of sec.
401(a)(4) merely because only participants as of the effective
date of the amendment are so eligible, if the plan met the
requirements of sec. 401(a)(4) under the terms of the plan as
in effect before the amendment (subject to the terms and
conditions provided by the regulations).
Under the provision, no inference is intended with respect
to the proper treatment of cash balance plans or conversions to
cash balance plans under the laws in effect prior to the
effective date of the provision or under laws not affected by
the provision. In addition, the provision is not intended to
result in the treatment of a cash balance plan as a defined
contribution plan, or to affect the rules relating to
involuntary cash outs (sec. 411(a)(11)) 55 or
survivor annuity requirements (sec. 417).
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\55\ Another provision provides that rollover amounts are not taken
into account for purposes of the cash-out rules.
---------------------------------------------------------------------------
effective date
The provision is effective for plan amendments taking
effect on or after the date of enactment, with a delayed
effective date for plans maintained pursuant to a collective
bargaining agreement. The period for providing any notice
required under the provision will not end before the last day
of the 3-month period following the date of enactment. The
notice requirements under the provision do not apply to any
plan amendment taking effect on or after the date of enactment
if, before September 5, 2000, notice is provided to
participants and beneficiaries adversely affected by the plan
amendment (or their representatives) that is reasonably
expected to notify them of the nature and effective date of the
plan amendment.
D. Modifications to Section 415 Limits for Multiemployer Plans (Sec.
505 of the Bill and Sec. 415 of the Code)
present law
Under present law, limits apply to contributions and
benefits under qualified plans (sec. 415). The limits on
contributions and benefits under qualified plans are based on
the type of plan.
Under a defined benefit plan, the maximum annual benefit
payable at retirement is generally the lesser of (1) 100
percent of average compensation for the highest three years, or
(2) $135,000 (for 2000). The dollar limit is adjusted for cost-
of-living increases in $5,000 increments. The dollar limit is
reduced in the case of retirement before the social security
retirement age and increases in the case of retirement after
the social security retirement age.
A special rule applies to governmental defined benefit
plans. In the case of such plans, the defined benefit dollar
limit is reduced in the case of retirement before age 62 and
increased in the case of retirement after age 65. In addition,
there is a floor on early retirement benefits. Pursuant to this
floor, the minimum benefit payable at age 55 is $75,000.
In the case of a defined contribution plan, the limit on
annual is additions if the lesser of (1) 25 percent of
compensation 56 or (2) $30,000 (for 2000). In
applying the limits on contributions and benefits, plans of the
same employer are aggregated.
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\56\ Another provision of the bill increases this limit to 100
percent of compensation.
---------------------------------------------------------------------------
reasons for change
The Committee understands that, because pension benefits
under multiemployer plans are typically based upon factors
other than compensation, the 100 percent of compensation limit
frequently results in benefit reductions for employees in
industries in which wages vary annually.
Explanation of Provision
Under the bill, the 100 percent of compensation defined
benefit plan limit does not apply to multiemployer plans. In
addition, multiemployer plans are not aggregated with single-
employer defined benefit plans maintained by an employer
contributing to the multiemployer plan for purposes of applying
the 100 percent of compensation limit to such single-employer
plan.
effective date
The provision is effective for years beginning after
December 31, 2000.
E. Investment of Employee Contributions in 401(k) Plans (Sec. 506 of
the Bill and Sec. 1524(b) of the Taxpayer Relief Act of 1997)
present law
The Employee Retirement Income Security Act of 1974, as
amended (``ERISA'') prohibits certain employee benefit plans
from acquiring securities or real property of the employer who
sponsors the plan if, after the acquisition, the fair market
value of such securities and property exceeds 10 percent of the
fair market value of plan assets. The 10-percent limitation
does not apply to any ``eligible individual account plans''
that specifically authorize such investments. Generally,
eligible individual account plans are defined contribution
plans, including plans containing a cash or deferred
arrangement (``401(k) plans'').
The term ``eligible individual account plan'' does not
include the portion of a plan that consists of elective
deferrals (and earnings on the elective deferrals) made under
section 401(k) if elective deferrals equal to more than 1
percent of any employee's eligible compensation are required to
be invested in employer securities and employer real property.
Eligible compensation is compensation that is eligible to be
deferred under the plan. The portion of the plan that consists
of elective deferrals (and earnings thereon) is still treated
as an individual account plan, and the 10-percent limitation
does not apply, as long as elective deferrals (and earnings
thereon) are not required to be invested in employer securities
or employer real property.
The rule excluding elective deferrals (and earnings
thereon) from the definition of individual account plan does
not apply if individual account plans are a small part of the
employer's retirement plans. In particular, that rule does not
apply to an individual account plan for a plan year if the
value of the assets of all individual account plans maintained
by the employer do not exceed 10 percent of the value of the
assets of all pension plans maintained by the employer
(determined as of the last day of the preceding plan year).
Multiemployer plans are not taken into account in determining
whether the value of the assets of all individual account plans
maintained by the employer exceed 10 percent of the value of
the assets of all pension plans maintained by the employer. The
rule excluding elective deferrals (and earnings thereon)from
the definition of individual account plan does not apply to an employee
stock ownership plan as defined in section 4975(e)(7) of the Internal
Revenue Code.
The rule excluding elective deferrals (and earnings
thereon) from the definition of individual account plan applies
to elective deferrals for plan years beginning after December
31, 1998 (and earnings thereon). It does not apply with respect
to earnings on elective deferrals for plan years beginning
before January 1, 1999.
reasons for change
The Committee believes that the effective date provided in
the Taxpayer Relief Act of 1997 with respect to the rule
excluding elective deferrals (and earnings thereon) from the
definition of individual account plan has produced unintended
results.
explanation of provision
The bill modifies the effective date of the rule excluding
certain elective deferrals (and earnings thereon) from the
definition of individual account plan by providing that the
rule does not apply to any elective deferral used to acquire an
interest in the income or gain from employer securities or
employer real property acquired (1) before January 1, 1999, or
(2) after such date pursuant to a written contract which was
binding on such date and at all times thereafter.
effective date
The provision is effective as if included in the section of
the Taxpayer Relief Act of 1997 that contained the rule
excluding certain elective deferrals (and earnings thereon).
F. Periodic Pension Benefit Statements (Sec. 507 of the Bill and Sec.
105(a) of ERISA)
present law
Title I of ERISA provides that a pension plan administrator
must furnish a benefit statement to any participant or
beneficiary who makes a written request for such a statement.
This 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 1 benefit
statement during any 12-month period. The plan administrator
must furnish the benefit statement no later than 60 days after
receipt of the request or, if later, 120 days after the close
of the immediately preceding plan year.
In addition, the plan administrator must furnish a benefit
statement to each participant whose employment terminates or
who has a 1-year break in service. For purposes of this benefit
statement requirement, a ``1-year break in service'' is a
calendar year, plan year, or other 12-month period designated
by the plan during which the participant does not complete more
than 500 hours of service for the employer. A participant is
not entitled to receive more than 1 benefit statement with
respect to consecutive breaks in service. The plan
administrator must provide a benefit statement required upon
termination of employment or a break in service no later than
180 days after the end of the plan year in which the
termination of employment or break in service occurs.
reasons for change
The Committee believes that periodic disclosure 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.
explanation of provision
A plan administrator of a defined contribution plan
generally is required to furnish a benefit statement to each
participant at least once annually and to a beneficiary upon
written request.
In addition to providing a benefit statement to a
beneficiary upon written request, the plan administrator of a
defined benefit plan generally is required either (1) to
furnish a benefit statement at least once every 3 years to each
participant who has a vested accrued benefit and who is
employed by the employer at the time the plan administrator
furnishes the benefit statements to participants, or (2) to
annually furnish written, electronic, telephonic, or other
appropriate notice to each participant of the availability of
and the manner in which the participant may obtain the benefit
statement.
The plan administrator of a multiemployer plan or a
multiple employer plan is required to furnish a benefit
statement only upon written request of a participant or
beneficiary.57
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\57\ A multiple employer plan is a plan that is maintained by 2 or
more unrelated employers but that is not maintained pursuant to a
collective-bargaining agreement (sec. 413(c)).
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The plan administrator is required to write the benefit
statement in a manner calculated to be understood by the
average plan participant and is permitted to furnish the
statement in written, electronic, telephonic, or other
appropriate form.
effective date
The provision is effective for plan years beginning after
December 31, 2000.
G. Prohibited Allocations of Stock in an S Corporation ESOP (Sec. 508
of the Bill and Sec. 409 and 4979A of the Code)
Present Law
The Small Business Job Protection Act of 1996 allowed
qualified retirement plan trusts described in section 401(a) to
own stock in an S corporation. That Act treated the plan's
share of the S corporation's income (and gain on the
disposition of the stock) as includible in full in the trust's
unrelated business taxable income (``UBTI'').
The Tax Relief Act of 1997 repealed the provision treating
items of income or loss of an S corporation as UBTI in the case
of an employee stock ownership plan (``ESOP''). Thus, the
income of an S corporation allocable to an ESOP is not subject
to current taxation.
Present law provides a deferral of income on the sales of
certain employer securities to an ESOP (sec. 1042). A 50-
percent excise tax is imposed on certain prohibited allocations
of securities acquired by an ESOP in a transaction to which
section 1042 applies. In addition, such allocations are
currently includible in the gross income of the individual
receiving the prohibited allocation.
Reasons for Change
In enacting the 1996 Act provision allowing ESOPs to be
shareholders of S corporations, the Congress intended to
encourage employee ownership of closely-held businesses, and to
facilitate the establishment of ESOPs by S corporations. At the
same time, the Congress provided that all income flowing
through to an ESOP (or other tax-exempt S shareholder), and
gains and losses from the disposition of the stock, was treated
as unrelated business taxable income. This treatment was
consistent with the premise underlying the S corporation rules
that all income of an S corporation (including all gains of the
sale of the stock of the corporation) should be subject to a
shareholder-level tax.
In enacting the present-law rule relating to S corporation
ESOPs in 1997, the Congress was concerned that the 1996 Act
rule imposed double taxation on such ESOPs and ESOP
participants. The Congress believed such a result was
inappropriate. Since the enactment of the 1997 Act, however,
the Committee has become aware that the present-law rules allow
inappropriate deferral and possibly tax avoidance in some
cases.
The Committee continues to believe that S corporations
should be able to encourage employee ownership through an ESOP.
The Committee does not believe, however, that ESOPs should be
used by S corporations owners to obtain inappropriate tax
deferral or avoidance. Specifically, the Committee believes
that the tax deferral opportunities provided by an S
corporation ESOP should be limited to those situations in which
there is broad-based employee coverage under the ESOP and the
ESOP benefits rank-and-file employees as well as highly
compensated employees and historical owners.
Explanation of Provision
In general
Under the provision, if there is a nonallocation year with
respect to an ESOP maintained by an S corporation: (1) the
amount allocated in a prohibited allocation to an individual
who is a disqualified person is treated as distributed to such
individual (i.e., the value of the prohibited allocation is
includible in the gross income of the individual receiving the
prohibited allocation); (2) an excise tax is imposed on the S
corporation equal to 50 percent of the amount involved in a
prohibited allocation; and (3) an excise tax is imposed on the
S corporation with respect to any synthetic equity owned by a
disqualified person.58
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\58\ The plan is not disqualified merely because an excise tax is
imposed under the provision.
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It is intended that the provision will limit the
establishment of ESOPs by S corporations to those that provide
broad-based employee coverage and that benefit rank-and-file
employees as well as highly compensated employees and
historical owners.
Definition of nonallocation year
A nonallocation year means any plan year of an ESOP holding
shares in an S corporation if, at any time during the plan
year, disqualified persons own at least 50 percent of the
number of outstanding shares of the S corporation.
A person is a disqualified person if the person is either
(1) a member of a ``deemed 20-percent shareholder group'' or
(2) a ``deemed 10-percent shareholder.'' A person is a member
of a ``deemed 20-percent shareholder group'' if the aggregate
number of deemed-owned shares of the person and his or her
family members is at least 20 percent of the number of deemed-
owned shares of stock in the S corporation.59 A
person is a deemed 10-percent shareholder if the person is not
a member of a deemed 20-percent shareholder group and the
number of the person's deemed-owned shares is at least 10
percent of the number of deemed-owned shares of stock of the
corporation.
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\59\ A family member of a member of a ``deemed 20-percent
shareholder group'' with deemed owned shares also is treated as a
disqualified person.
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In general, ``deemed-owned shares'' means: (1) stock
allocated to the account of an individual under the ESOP, and
(2) an individual's share of unallocated stock held by the
ESOP. An individual's share of unallocated stock held by an
ESOP is determined in the same manner as the most recent
allocation of stock under the terms of the plan.
For purposes of determining whether there is a
nonallocation year, ownership of stock generally is attributed
under the rules of section 318, 60 except that: (1)
the family attribution rules are modified to include certain
other family members, as described below, (2) option
attribution does not apply (but instead special rules relating
to synthetic equity described below apply), and (3) ``deemed-
owned shares'' held by the ESOP are treated as held by the
individual with respect to whom they are deemed owned.
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\60\ These attribution rules also apply to stock treated as owned
by reason of the ownership of synthetic equity.
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Under the provision, family members of an individual
include (1) the spouse 61 of the individual, (2) an
ancestor or lineal descendant of the individual or his or her
spouse, (3) a sibling of the individual (or the individual's
spouse) and any lineal descendant of the brother or sister, and
(4) the spouse of any person described in (2) or (3).
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\61\ As under section 318, an individual's spouse is not treated as
a member of the individual's family if the spouses are legally
separated.
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The bill contains special rules applicable to synthetic
equity interests. Except to the extent provided in regulations,
the stock on which a synthetic equity interest is based is
treated as outstanding stock of the S corporation and as
deemed-owned shares of the person holding the synthetic equity
interest if such treatment would result in the treatment of any
person as a disqualified person or the treatment of any year as
a nonallocation year. Thus, for example, disqualified persons
for a year include those individuals who are disqualified
persons under the general rule (i.e., treating only those
shares held by the ESOP as deemed-owned shares) and those
individuals who are disqualified individuals if synthetic
equity interests are treated as deemed-owned shares.
``Synthetic equity'' means any stock option, warrant,
restricted stock, deferred issuance stock right, or similar
interest that gives the holder the right to acquire or receive
stock of the S corporation in the future. Except to the extent
provided in regulations, synthetic equity also includes a stock
appreciation right, phantom stock unit, or similar right to a
future cash payment based on the value of such stock or
appreciation in such value. 62
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\62\ The provisions relating to synthetic equity do not modify the
rules relating to S corporations, e.g., the circumstances in which
options or similar interests are treated as creating a second class of
stock.
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Ownership of synthetic equity is attributed in the same
manner as stock is attributed under the provision (as described
above). In addition, ownership of synthetic equity is
attributed under the rules of section 318(a) (2) and (3) in the
same manner as stock.
Definition of prohibited allocation
An ESOP of an S corporation is required to provide that no
portion of the assets of the plan attributable to (or allocable
in lieu of) S corporation stock may, during a nonallocation
year, accrue (or be allocated directly or indirectly under any
qualified plan of the S corporation) for the benefit of a
disqualified person. A ``prohibited allocation'' refers to
violations of this provision. A prohibited allocation occurs,
for example, if income on S corporation stock held by an ESOP
is allocated to the account of an individual who is a
disqualified person.
Application of excise tax
In the case of a prohibited allocation, the S corporation
is liable for an excise tax equal to 50 percent of the amount
of the allocation. For example, if S corporation stock is
allocated in a prohibited allocation, the excise tax is equal
to 50 percent of the fair market value of such stock.
A special rule applies in the case of the first
nonallocation year, regardless of whether there is a prohibited
allocation. In that year, the excise tax also applies to the
fair market value of the deemed-owned shares of any
disqualified person held by the ESOP, even though those shares
are not allocated to the disqualified person in that year.
As mentioned above, the S corporation also is liable for an
excise tax with respect to any synthetic equity interest owned
by any disqualified person in a nonallocation year. The excise
tax is 50 percent of the value of the shares on which synthetic
equity is based.
Treasury regulations
The Treasury Department is given the authority to prescribe
such regulations as may be necessary to carry out the purposes
of the provision.
Effective Date
The provision generally is effective with respect to plan
years beginning after December 31, 2001. In the case of an ESOP
established after July 11, 2000, or an ESOP established on or
before such date if the employer maintaining the plan was not
an S corporation on such date, the proposal is effective with
respect to plan years ending after July 11, 2000.
TITLE VI. REDUCING REGULATORY BURDENS
A. Modification of Timing of Plan Valuations (Sec. 601 of the Bill and
Sec. 412 of the Code)
Present Law
Under present law, plan valuations are generally required
annually for plans subject to the minimum funding rules. Under
proposed Treasury regulations, except as provided by
theCommissioner, the valuation must be as of a date within the plan
year to which the valuation refers or within the month prior to the
beginning of that year.63
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\63\ Prop. reg. sec. 1.412(c)(9)-1(b)(1).
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Reasons for Change
While plan valuations are necessary to ensure adequate
funding of defined benefit pension plans, they also create
administrative burdens for employers. The Committee believes
that permitting employers to use prior-year data for valuations
in certain cases will provide an appropriate balance between
employer concerns and the desire that plans be adequately
funded.
Explanation of Provision
The bill incorporates into the statute the proposed
regulation regarding the date of valuations. The bill also
provides, as an exception to this general rule, that the
valuation date with respect to a plan year may be any date
within the immediately preceding plan year if, as of such date,
plan assets are not less than 125 percent of the plan's current
liability. Information determined as of such date is required
to be adjusted actuarially, in accordance with Treasury
regulations, to reflect significant differences in plan
participants. An election to use a prior plan year valuation
date, once made, may only be revoked with the consent of the
Secretary.
Effective Date
The provision is effective for plan years beginning after
December 31, 2000.
B. ESOP Dividends May Be Reinvested Without Loss of Dividend Deduction
(Sec. 602 of the Bill and Sec. 404 of the Code)
Present Law
An employer is entitled to deduct certain dividends paid in
cash during the employer's taxable year with respect to stock
of the employer that is held by an employee stock ownership
plan (``ESOP''). The deduction is allowed with respect to
dividends that, in accordance with plan provisions, are (1)
paid in cash directly to the plan participants or their
beneficiaries, (2) paid to the plan and subsequently
distributed to the participants or beneficiaries in cash no
later than 90 days after the close of the plan year in which
the dividends are paid to the plan, or (3) used to make
payments on loans (including payments of interest as well as
principal) that were used to acquire the employer securities
(whether or not allocated to participants) with respect to
which the dividend is paid.
The Secretary may disallow the deduction for any ESOP
dividend if he determines that the dividend constitutes, in
substance, an evasion of taxation (sec. 404(k)(5)).
Reasons for Change
The Committee believes that it is appropriate to provide
incentives for the accumulation of retirement benefits and
expansion of employee ownership. The Committee has determined
that the present-law rules concerning the deduction of
dividends on employer stock held by an ESOP discourage
employers from permitting such dividends to be reinvested in
employer stock and accumulated for retirement purposes.
Explanation of Provision
In addition to the deductions permitted under present law
for dividends paid with respect to employer securities that are
held by an ESOP, an employer is entitled to deduct dividends
that, at the election of plan participants or their
beneficiaries, are (1) payable in cash directly to plan
participants or beneficiaries, (2) paid to the plan and
subsequently distributed to the participants or beneficiaries
in cash no later than 90 days after the close of the plan year
in which the dividends are paid to the plan, or (3) paid to the
plan and reinvested in qualifying employer securities.
As under present law, the Secretary may disallow the
deduction for any ESOP dividend if he determines that the
dividend constitutes, in substance, an evasion of taxation
(sec. 404(k)(5)).
Effective Date
The provision is effective for taxable years beginning
after December 31, 2000.
C. Repeal Transition Rule Relating to Certain Highly Compensated
Employees (Sec. 603 of the Bill and Sec. 1114(c)(4) of the Tax Reform
Act of 1986)
Present Law
Under present law, for purposes of the rules relating to
qualified plans, a highly compensated employee is generally
defined as an employee 64 who (1) was a 5-percent
owner of the employer at any time during the year or the
preceding year or (2) either (a) had compensation for the
preceding year in excess of $85,000 (for 2000) or (b) at the
election of the employer, had compensation in excess of $85,000
for the preceding year and was in the top 20 percent of
employees by compensation for such year.
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\64\ An employee includes a self-employed individual.
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Under a rule enacted in the Tax Reform Act of 1986, a
special definition of highly compensated employee applies for
purposes of the nondiscrimination rules relating to qualified
cash or deferred arrangements (``section 401(k) plans'') and
matching contributions. This specialdefinition applies to an
employer incorporated on December 15, 1924, that meets certain specific
requirements.
Reasons for Change
The Committee believes that it is appropriate to repeal the
special definition of highly compensated employee in light of
the substantial modification of the general definition of
highly compensated employee in the Small Business Job
Protection Act of 1996.
Explanation of Provision
The provision repeals the special definition of highly
compensated employee under the Tax Reform Act of 1986. Thus,
the present-law definition applies.
Effective Date
The provision is effective for plan years beginning after
December 31, 2000.
D. Employees of Tax-Exempt Entities (Sec. 604 of the Bill)
Present Law
The Tax Reform Act of 1986 provided that nongovernmental
tax-exempt employers were not permitted to maintain a qualified
cash or deferred arrangement (``section 401(k) plan''). This
prohibition was repealed, effective for years beginning after
December 31, 1996, by the Small Business Job Protection Act of
1996.
Treasury regulations provide that, in applying the
nondiscrimination rules to a section 401(k) plan (or a section
401(m) plan that is provided under the same general arrangement
as the section 401(k) plan), the employer may treat as
excludable those employees of a tax-exempt entity who could not
participate in the arrangement due to the prohibition on
maintenance of a section 401(k) plan by such entities. Such
employees may be disregarded only if more than 95 percent of
the employees who could participate in the section 401(k) plan
benefit under the plan for the plan year. 65
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\65\ Treas. Reg. sec. 1.410(b)-6(g).
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Tax-exempt charitable organizations may maintain a tax-
sheltered annuity (a ``section 403(b) annuity'') that allows
employees to make salary reduction contributions.
Reasons for Change
The Committee believes that it is appropriate to modify the
special rule regarding the treatment of certain employees of a
tax-exempt organization as excludable for section 401(k) plan
nondiscrimination testing purposes in light of the provision of
the Small Business Job Protection Act of 1996 that permits such
organizations to maintain section 401(k) plans.
Explanation of Provision
The Treasury Department is directed to revise its
regulations under section 410(b) to provide that employees of a
tax-exempt charitable organization who are eligible to make
salary reduction contributions under a section 403(b) annuity
may be treated as excludable employees for purposes of testing
a section 401(k) plan, or a section 401(m) plan that is
provided under the same general arrangement as the section
401(k) plan of the employer if (1) no employee of such tax-
exempt entity is eligible to participate in the section 401(k)
or 401(m) plan and (2) at least 95 percent of the employees who
are not employees of the charitable employer are eligible to
participate in such section 401(k) plan or section 401(m) plan.
The revised regulations are to be effective for years
beginning after December 31, 1996.
Effective Date
The provision is effective on the date of enactment.
E. Treatment of Employer-Provided Retirement Advice (Sec. 605 of the
Bill and Sec. 132 of the Code)
Present Law
Under present law, certain employer-provided fringe
benefits are excludable from gross income (sec. 132) and wages
for employment tax purposes. These excludable fringe benefits
include working condition fringe benefits and de minimis
fringes. In general, a working condition fringe benefit is any
property or services provided by an employer to an employee to
the extent that, if the employee paid for such property or
services, such payment would be allowable as a deduction as a
business expense. A de minimis fringe benefit is any property
or services provided by the employer the value of which, after
taking into account the frequency with which similar fringes
are provided, is so small as to make accounting for it
unreasonable or administratively impracticable.
In addition, if certain requirements are satisfied, up to
$5,250 annually of employer- provided educational assistance is
excludable from gross income (sec. 127) and wages. This
exclusion expires with respect to courses beginning after
December 31, 2001.66 Education not excludable under
section 127 may be excludable as a working condition fringe.
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\66\ The exclusion does not apply with respect to graduate-level
courses.
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There is no specific exclusion under present law for
employer-provided retirement planning services. However, such
services may be excludable as employer-provided educational
assistance or a fringe benefit.
Reasons for Change
In order to plan adequately for retirement, individuals
must anticipate retirement income needs and understand how
their retirement income goals can be achieved. Employer-
sponsored plans are a key part of retirement income planning.
The Committee believes that employers sponsoring retirement
plans should be encouraged to provide retirement planning
services for their employees in order to assist them in
preparing for retirement.
explanation of provision
Qualified retirement planning services provided to an
employee and his or her spouse by an employer maintaining a
qualified plan are excludable from income and wages. Qualified
retirement planning services are advice and information
regarding retirement planning. The exclusion is not limited to
information regarding the qualified plan, and, thus, for
example, applies to advice and information regarding retirement
income planning for an individual and his or her spouse and how
the employer's plan fits into the individual's overall
retirement income plan. On the other hand, the exclusion does
not apply to services that may be related to retirement
planning, such as tax preparation, accounting, legal, or
brokerage services.
The exclusion does not apply with respect to highly
compensated employees unless the services are available on
substantially the same terms to each member of the group of
employees normally provided education and information regarding
the employer's qualified plan.
effective date
The provision is effective with respect to taxable years
beginning after December 31, 2000.
F. Reporting Simplification (Sec. 606 of the Bill)
present law
A plan administrator of a pension, annuity, stock bonus,
profit-sharing or other funded plan of deferred compensation
generally must file with the Secretary of the Treasury an
annual return for each plan year containing certain information
with respect to the qualification, financial condition, and
operation of the plan. Title I of ERISA also may require the
plan administrator to file annual reports concerning the plan
with the Department of Labor and the Pension Benefit Guaranty
Corporation (``PBGC''). The plan administrator must use the
Form 5500 series as the format for the required annual
return.67 The Form 5500 series annual return/report,
which consists of a primary form and various schedules,
includes the information required to be filed with all three
agencies. The plan administrator satisfies the reporting
requirement with respect to each agency by filing the Form 5500
series annual return/report with the Internal Revenue Service
(``IRS''), which forwards the form to the Department of Labor
and the PBGC.
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\67\ Treas. Reg. sec. 301.6058-1(a).
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The Form 5500 series consists of 3 different forms: Form
5500, Form 5500-C/R, and Form 5500-EZ. Form 5500 is the most
comprehensive of the forms and requires the most detailed
financial information. Form 5500-C/R requires less information
than Form 5500, and Form 5500-EZ, which consists of only 1
page, is the simplest of the forms.
The size of the plan determines which form a plan
administrator must file. If the plan has more than 100
participants at the beginning of the plan year, the plan
administrator generally must file Form 5500. If the plan has
fewer than 100 participants at the beginning of the plan year,
the plan administrator generally may file Form 5500-C/R. A plan
administrator generally may file Form 5500-EZ if (1) the only
participants in the plan are the sole owner of a business that
maintains the plan (and such owner's spouse), or partners in a
partnership that maintains the plan (and such partners'
spouses), (2) the plan is not aggregated with another plan in
order to satisfy the minimum coverage requirements of section
410(b), (3) the employer is not a member of a related group of
employers, and (4) the employer does not receive the services
of leased employees. If the plan satisfies the eligibility
requirements for Form 5500-EZ and the total value of the plan
assets as of the end of the plan year and all prior plan years
does not exceed $100,000, the plan administrator is not
required to file a return.
reasons for change
The Committee believes that it is appropriate to simplify
the reporting requirements for plans eligible to file Form
5500-EZ, because such plans do not cover any employees of the
business owner.
explanation of provision
The Secretary of the Treasury is directed to modify the
annual return filing requirements with respect to plans that
satisfy the eligibility requirements for Form 5500-EZ to
provide that if the total value of the plan assets of such a
plan as of the end of the plan year and all prior plan years
does not exceed $250,000, the plan administrator is not
required to file a return.
effective date
The provision is effective on the date of enactment.
G. Improvement to Employee Plans Compliance Resolution System (Sec. 607
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) and
section 403(b), as applicable.68 EPCRS permits
employers to correct compliance failures and continue to
provide their employees with retirement benefits on a tax-
favored basis.
---------------------------------------------------------------------------
\68\ Rev. Proc. 98-22, 1998-12 I.R.B. 11, as modified by Rev.
Proc. 99-13, 1999-5, I.R.B. 52.
---------------------------------------------------------------------------
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 Administrative Policy Regarding Self-
Correction (``APRSC'') 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
Compliance Resolution (``VCR'') program, the Walk-In Closing
Agreement Program (``Walk-In CAP''), and the Tax-Sheltered
Annuity Voluntary Correction (``TVC'') program permit 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 Secretary of the Treasury is directed to continue to
update and improve EPCRS, 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 APRSC for significant compliance failures, (4)
expanding the availability to correct insignificant compliance
failures under APRSC 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.
H. Repeal of the Multiple Use Test (Sec. 608 of the Bill and Sec.
401(m) of the Code)
present law
Elective deferrals under a qualified cash or deferred
arrangement (``section 401(k) plan'') are subject to a special
annual nondiscrimination test (``ADP test''). The ADP test
compares the actual deferral percentages (``ADPs'') of the
highly compensated employee group and the nonhighly compensated
employee group. The ADP for each group generally is the average
of the deferral percentages separately calculated for the
employees in the group who are eligible to make elective
deferrals for all or a portion of the relevant plan year. Each
eligible employee's deferral percentage generally is the
employee's elective deferrals for the year divided by the
employee's compensation for the year.
The plan generally satisfies the ADP test if the ADP of the
highly compensated employee group for the current plan year is
either (1) not more than 125 percent of the ADP of the
nonhighly compensated employee group for the prior plan year,
or (2) not more than 200 percent of the ADP of the nonhighly
compensated employee group for the prior plan year and not
morethan 2 percentage points greater than the ADP of the nonhighly
compensated employee group for the prior plan year.
Employer matching contributions and after-tax employee
contributions under a defined contribution plan also are
subject to a special annual nondiscrimination test (``ACP
test''). The ACP test compares the actual deferral percentages
(``ACPs'') of the highly compensated employee group and the
nonhighly compensated employee group. The ACP for each group
generally is the average of the contribution percentages
separately calculated for the employees in the group who are
eligible to make after-tax employee contributions or who are
eligible for an allocation of matching contributions for all or
a portion of the relevant plan year. Each eligible employee's
contribution percentage generally is the employee's aggregate
after-tax employee contributions and matching contributions for
the year divided by the employee's compensation for the year.
The plan generally satisfies the ACP test if the ACP of the
highly compensated employee group for the current plan year is
either (1) not more than 125 percent of the ACP of the
nonhighly compensated employee group for the prior plan year,
or (2) not more than 200 percent of the ACP of the nonhighly
compensated employee group for the prior plan year and not more
than 2 percentage points greater than the ACP of the nonhighly
compensated employee group for the prior plan year.
For any year in which (1) at least one highly compensated
employee is eligible to participate in an employer's plan or
plans that are subject to both the ADP test and the ACP test,
(2) the plan subject to the ADP test satisfies the ADP test but
the ADP of the highly compensated employee group exceeds 125
percent of the ADP of the nonhighly compensated employee group,
and (3) the plan subject to the ACP test satisfies the ACP test
but the ACP of the highly compensated employee group exceeds
125 percent of the ACP of the nonhighly compensated employee
group, an additional special nondiscrimination test (``multiple
use test'') applies to the elective deferrals, employer
matching contributions, and after-tax employee contributions.
The plan or plans generally satisfy the multiple use test if
the sum of the ADP and the ACP of the highly compensated
employee group does not exceed the greater of (1) the sum of
(A) 1.25 times the greater of the ADP or the ACP of the
nonhighly compensated employee group, and (B) 2 percentage
points plus (but not more than 2 times) the lesser of the ADP
or the ACP of the nonhighly compensated employee group, or (2)
the sum of (A) 1.25 times the lesser of the ADP or the ACP of
the nonhighly compensated employee group, and (B) 2 percentage
points plus (but not more than 2 times) the greater of the ADP
or the ACP of the nonhighly compensated employee group.
reasons for change
The Committee believes that the ADP test and the ACP test
are adequate to prevent discrimination in favor of highly
compensated employees under 401(k) plans and has determined
that the multiple use test unnecessarily complicates 401(k)
plan administration.
explanation of provision
The provision repeals the multiple use test.
effective date
The provision is effective for years beginning after
December 31, 2000.
I. Flexibility in Nondiscrimination and Line of Business Rules (Sec.
609 of the Bill and Secs. 401(a)(4), 410(b), and 414(r) of the Code)
present law
A plan is not a qualified retirement plan if the
contributions or benefits provided under the plan discriminate
in favor of highly compensated employees (sec. 401(a)(4)). The
applicable Treasury regulations set forth the exclusive rules
for determining whether a plan satisfies the nondiscrimination
requirement. These regulations state that the form of the plan
and the effect of the plan in operation determine whether the
plan is nondiscriminatory and that intent is irrelevant.
Similarly, a plan is not a qualified retirement plan if the
plan does not benefit a minimum number of employees (sec.
410(b)). A plan satisfies this minimum coverage requirement if
and only if it satisfies one of the tests specified in the
applicable Treasury regulations. If an employer is treated as
operating separate lines of business, the employer may apply
the minimum coverage requirements to a plan separately with
respect to the employees in each separate line of business
(sec. 414(r)). Under a so-called ``gateway'' requirement,
however, the plan must benefit a classification of employees
that does not discriminate in favor of highly compensated
employees in order for the employer to apply the minimum
coverage requirements separately for the employees in each
separate line of business. A plan satisfies this gateway
requirement only if it satisfies one of the tests specified in
the applicable Treasury regulations.
reasons for change
It has been brought to the attention of the Committee that
some plans are unable to satisfy the mechanical tests used to
determine compliance with the nondiscrimination and line of
business requirements solely as a result of relatively minor
plan provisions. The Committee believes that, in such cases, it
may be appropriate to expand the consideration of facts and
circumstances in the application of the mechanical tests.
explanation of provision
The Secretary of the Treasury is directed to provide by
regulation applicable to years beginning after December 31,
2001, that a plan is deemed to satisfy the
nondiscriminationrequirements of section 401(a)(4) if the plan
satisfies the pre-1994 facts and circumstances test, satisfies the
conditions prescribed by the Secretary to appropriately limit the
availability of such test, and is submitted to the Secretary for a
determination of whether it satisfies such test (to the extent provided
by the Secretary).
Similarly, a plan complies with the minimum coverage
requirement of section 410(b) if the plan satisfies the pre-
1989 coverage rules, is submitted to the Secretary for a
determination of whether it satisfies the pre-1989 coverage
rules (to the extent provided by the Secretary), and satisfies
conditions prescribed by the Secretary by regulation that
appropriately limit the availability of the pre-1989 coverage
rules.
The Secretary of the Treasury is directed to modify, on or
before December 31, 2001, the existing regulations issued under
section 414(r) in order to expand (to the extent that the
Secretary may determine to be appropriate) the ability of a
plan to demonstrate compliance with the line of business
requirements based upon the facts and circumstances surrounding
the design and operation of the plan, even though the plan is
unable to satisfy the mechanical tests currently used to
determine compliance.
effective date
The provision is effective on the date of enactment.
J. Extension to All Governmental Plans of Moratorium on Application of
Certain Nondiscrimination Rules Applicable to State and Local
Government Plans (Sec. 610 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, 2000.
K. Notice and Consent Period Regarding Distributions; Disclosure of
Optional Forms of Benefit (Sec. 611 of the Bill and Sec. 411 of the
Code)
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.69
---------------------------------------------------------------------------
\69\ Similar provisions are contained in Title I of ERISA.
---------------------------------------------------------------------------
If the present value of the participant's vested accrued
benefit exceeds $5,000, 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.
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. The plan generally is
required, however, 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, and (2) the rules concerning
the taxation of a distribution. The plan generally mustprovide
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
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.
The provision also requires that plan participants be
notified of the existence of certain differences between the
values of optional forms of benefit. If a plan provides
optional forms of benefits and the present values of such
optional forms of benefits are not actuarially equivalent as of
the annuity starting date, then the plan is required to provide
certain information regarding such benefits in the notice
required to be provided regarding joint and survivor annuities.
The information must be sufficient (as determined in accordance
with Treasury regulations) to allow the participant to
understand the differences in the present values of the
optional forms of benefits and the effect the participant's
election as to the form of benefit will have on the value of
the benefits provided under the plan. The information must be
provided in a manner calculated to be reasonably understood by
the average plan participant.
Effective Date
The provision is effective for years beginning after
December 31, 2000.
L. Annual Report Dissemination (Sec. 612 of the Bill and Sec. 104(b)(3)
of ERISA)
Present Law
Title I of ERISA generally requires the plan administrator
of each employee pension benefit plan and each employee welfare
benefit plan to file an annual report concerning the plan with
the Secretary of Labor within seven months after the end of the
plan year. Within nine months after the end of the plan year,
the plan administrator generally must provide to each
participant and to each beneficiary receiving benefits under
the plan a summary of the annual report filed with the
Secretary of Labor for the plan year.
Reasons for Change
The Committee believes that simplification of the summary
annual report requirement will reduce the burden and cost of
plan administration and disclosure, thereby encouraging more
employers to establish and maintain retirement plans, without
denying participants the opportunity to obtain information
concerning plan status and operation.
Explanation of Provision
Within nine months after the end of each plan year, the
plan administrator is required to make available for
examination a summary of the annual report filed with the
Secretary of Labor for the plan year. In addition, the plan
administrator is required to furnish the summary to a
participant, or to a beneficiary receiving benefits under the
plan, upon request.
Effective Date
The provision is effective for reports for years beginning
after December 31, 1999.
M. Modifications to the SAVER Act (Sec. 613 of the Bill and Sec. 517 of
ERISA)
Present Law
The Savings Are Vital to Everyone's Retirement (``SAVER'')
Act 70 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, and
to be held again in 2001 and 2005, 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 of the 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.
---------------------------------------------------------------------------
\70\ Pub. L. No. 105-92.
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Reasons for Change
The Committee believes it appropriate to make modifications
and clarifications regarding the administration of future
National Summits on Retirement Savings.
Explanation of Provision
The provision clarifies that future National Summits on
Retirement Savings are to be held in the month of September in
2001 and 2005, and would add an additional National Summit in
2009. 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 its 1999 summit
partner, the American Savings Education Council.
Six new statutory delegates are added to future National
Summits: the Chairman and Ranking Member of the House Ways and
Means Committee, the Senate Finance Committee, 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,
may appoint up to three percent of the delegates (not to exceed
10) 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, give the Department of
Labor limited reception and representation authority, and
mandates 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.
N. Studies (Sec. 614 of the Bill)
Present Law
No provision.
Reasons for Change
The Committee has a continuing interest in retirement
income security and the national saving rate, and believes
information regarding such issues, and the effects on such
issues would be useful in developing and evaluating future
legislation.
Explanation of Provision
Report on pension coverage
The bill directs the Secretary to report to the Senate
Committee on Finance and the House Committee on Ways and Means
regarding the effect of the bill on pension coverage, including
any expansion of coverage for low- and moderate-income workers,
levels of pension benefits, quality of coverage, worker's
access to and participation in plans, and retirement security.
This report is required to be submitted no later than five
years after the date of enactment.
Study of preretirement uses of benefits
The bill directs the Secretary to conduct a study of the
present-law rules that permit individuals to access their IRA
or qualified retirement plan benefits prior to retirement,
including an analysis of the use of the existing rules and the
extent to which such rules undermine the goal of accumulating
adequate resources for retirement. In addition, the Secretary
of the Treasury is directed to conduct a study of the types of
investment decisions made by IRA owners and participants in
self-directed qualified retirement plans, including an analysis
of the existing restrictions on investments and the extent to
which additional restrictions would facilitate the accumulation
of adequate income for retirement. The studies are required to
be submitted to the Senate Committee on Finance and the House
Committee on Ways and Means no later than January 1, 2002.
Effective Date
The provision is effective on the date of enactment.
TITLE VII. PROVISIONS RELATING TO PLAN AMENDMENTS
(Sec. 701 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
Any amendments to a plan or annuity contract made pursuant
to the provisions of the bill or any regulations issued under
the bill are not required to be made before the last day of the
first plan year beginning on or after January 1, 2003. In the
case of a governmental plan, the date for amendments is
extended to the last day of the first plan year beginning on or
after January 1, 2005. The delayed amendment date does not
apply to any amendment required or permitted by the bill
unless, during the period beginning on the date the applicable
section of the bill takes effect and ending on the delayed
amendment date, (1) the plan or annuity contract is operated as
if such amendment were in effect, and (2) such amendment
applies retroactively for such period.
Effective Date
The provision is effective on the date of enactment.
TITLE VIII. COMPLIANCE WITH CONGRESSIONAL BUDGET ACT
(Sec. 801 of the Bill)
Present Law
Reconciliation is a procedure under the Congressional
Budget Act of 1974 (the ``Budget Act'') by which the Congress
implements spending and tax policies contained in a budget
resolution. The Budget Act contains numerous rules enforcing
the scope of items permitted to be considered under the budget
reconciliation process. One such rule, the so-called ``Byrd
rule,'' was incorporated into the Budget Act in 1990. The Byrd
rule, named after its principal sponsor, Senator Robert C.
Byrd, is contained in section 313 of the Budget Act. The Byrd
rule is generally interpreted to permit members to make a
motion to strike extraneous provisions (those which are
unrelated to the deficit reduction goals of the reconciliation
process) from either a budget reconciliation bill or a
conference report on such bill.
Under the Byrd rule, a provision is considered to be
extraneous if it:
(1) does not produce a change in outlays or revenues;
(2) produces an outlay increase or revenue decrease
when the instructed committee is not in compliance with
its instructions;
(3) is outside of the jurisdiction of the committee
that submitted the title or provision for inclusion in
the reconciliation measure;
(4) produces a change in outlays or revenues which is
merely incidental to the non-budgetary components of
the provision;
(5) would increase the deficit for a fiscal year
beyond those covered by the revenue measure; or
(6) recommends a change in Social Security.
Reasons for Change
The Committee intends to comply with the Budget Act.
Explanation of Provision
To ensure compliance with the Budget Act, all provisions
of, and amendments made by, the bill cease to apply for years
beginning after December 31, 2004.
Effective Date
The provision is effective on the date of enactment.
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 bill as reported.
The bill, as reported, is estimated to have the following
budget effects for fiscal years 2001-2010.
ESTIMATED REVENUE EFFECTS OF H.R. 1102, THE ``RETIREMENT SECURITY AND SAVINGS ACT OF 2000,'' INCLUDING CONGRESSIONAL BUDGET ACT SUNSET FOR YEARS AFTER DECEMBER 31, 2004, AS REPORTED BY THE
COMMITTEE ON FINANCE
[Fiscal years 2001-2010, in millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Provision Effective 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2001-05 2001-10
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Individual Retirement Arrangement
Provisions
1. Modification of IRA Contribution tyba 12/31/00................ -395 -1,194 -2,013 -2,726 -2,050 -1,088 -1,113 -1,135 -1,155 -1,173 -8,378 -14,042
Limits--increase the maximum
contribution limit for traditional and
Roth IRAs to: $3,000 in 2001, $4,000
in 2002, $5,000 in 2003, and index for
inflation thereafter.
2. Increase AGI limits for deductible tyba 12/31/00................ -103 -357 -475 -411 -199 -17 -13 -8 -1 (\1\) -1,544 -1,584
IRA contributions, including for
married filing separately.
3. Increase maximum contribution limits yba 12/31/00................. -178 -305 -236 -214 -135 -59 -58 -56 -54 -53 -1,068 -1,348
for IRAs for individuals age 50 and
above by 50%.
4. Increase income limits for tyba 12/31/00................ -9 -54 -128 -216 -301 -343 -350 -354 -358 -361 -709 -2,475
contributions to Roth IRAs for joint
filers to twice the limits for single
filers.
5. Deemed IRAs under employer plans.... tyba 12/31/00................ Negligible Revenue Effect
6. Allow tax-free withdrawals from IRAs tyba 12/31/00................ -168 -340 -347 -416 -259 -37 -38 -38 -39 -40 -1,530 -1,722
for charitable purposes.
7. Increase the income limit for tyba 12/31/00................ 400 1,046 719 166 -675 -1,185 -954 -553 -128 -135 -1,656 -1,298
conversions of an IRA to a Roth IRA to
$200,000 for joint filers.
-------------------------------------------------------------------------------------------------------------------------
Total of Individual Retirement ............................. -453 -1,204 -2,480 -3,817 -3,619 -2,729 -2,526 -2,144 -1,735 -1,762 -11,573 -22,469
Arrangement Provisions.
=========================================================================================================================
Provisions for Expanding Coverage
1. Increase contribution and benefit
limits:
a. Increase limitation on exclusion yba 12/31/00................. -130 -310 -452 -557 -235 -84 -82 -79 -75 -71 -1,684 -2,075
for elective deferrals to: $11,000
in 2001, $12,000 in 2002, $13,000
in 2003, $14,000 in 2004, and
$15,000 in 2005; index thereafter
\2\ \3\.
b. Increase limitation on SIMPLE yba 12/31/00................. -4 -14 -21 -26 -11 -4 -4 -4 -3 -3 -76 -94
elective contributions to: $7,000
in 2001, $8,000 in 2002, $9,000 in
2003, and $10,000 in 2004; index
thereafter \2\ \3\.
c. Increase defined benefit dollar yba 12/31/00................. -18 -31 -40 -45 -14 ........ ........ ........ ........ ........ -148 -148
limit to $160,000.
d. Lower early retirement age to yba 12/31/00................. -3 -4 -4 -4 -1 ........ ........ ........ ........ ........ -17 -17
62; lower normal retirement age to
65.
e. Increase indexing on limitation yba 12/31/00................. ........ -2 -4 -5 -2 -1 -1 -1 -1 -1 -13 -16
for defined contribution plans in
$1,000 increments \2\.
f. Increase qualified plan yba 12/31/00................. -43 -74 -84 -91 -40 -17 -16 -16 -15 -14 -333 -410
compensation limit to $200,000 \2\.
g. Increase limits on deferrals yba 12/31/00................. -52 -91 -104 -114 -50 -20 -20 -19 -18 -17 -410 -503
under deferred compensation plans
of State and local governments and
tax-exempt organizations to:
$11,000 in 2001, $12,000 in 2002,
$13,000 in 2003, $14,000 in 2004,
and $15,000 in 2005; index
thereafter \2\,\3\.
2. Plan loans for subchapter S owners, pa 12/31/00.................. -18 -30 -33 -35 -12 -2 -2 -2 -2 -2 -128 -138
partners, and sole proprietors.
3. Modification of top-heavy rules..... yba 12/31/00................. -4 -9 -11 -12 -5 -2 -2 -2 -2 -2 -41 -50
4. Elective deferrals not taken into yba 12/31/00................. -40 -75 -87 -94 -51 -22 -21 -20 -19 -20 -324 -426
account for purposes of deduction
limits.
5. Repeal of coordination requirements yba 12/31/00................. -16 -22 -22 -22 -10 -4 -4 -4 -4 -3 -92 -110
for deferred compensation plans of
State and local governments and tax-
exempt organizations.
6. Definition of compensation for yba 12/31/00................. -1 -2 -3 -3 -2 -1 -1 -1 -1 -(\1\) -11 -15
purposes of deduction limits \2\.
7. Increase stock bonus and profit tyba 12/31/00................ -6 -12 -14 -15 -8 -3 -3 -3 -3 -3 -51 -66
sharing plan deduction limit from 15%
to 25%.
8. Option to treat elective deferrals tyba 12/31/00................ 50 100 131 144 -73 -169 -171 -172 -171 -170 352 -500
as after-tax contributions.
9. Nonrefundable credit to certain tyba 12/31/00................ -911 -2,052 -1,994 -1,947 -1,111 -72 -65 -64 -64 -62 -8,016 -8,344
individuals for elective deferrals and
IRA contributions.
10. Small business (50 or fewer (\4\)........................ -43 -264 -580 -895 -728 -601 -599 -582 -552 -510 -2,511 -5,355
employees) tax credit for new
qualified retirement plan
contributions--first 3 years of the
plan.
11. Small business (100 or fewer (\4\)........................ -22 -31 -33 -32 -28 -19 -9 -2 -1 ........ -146 -177
employees) tax credit for new
retirement plan expenses.
-------------------------------------------------------------------------------------------------------------------------
Total of Provisions for Expanding ............................. -1,261 -2,923 -3,355 -3,753 -2,381 -1,021 -1,000 -971 -931 -878 -13,649 -18,444
Coverage.
=========================================================================================================================
Provisions for Enhancing Fairness for
Women
1. Additional catch-up contributions yba 12/31/00................. -8 -23 -39 -57 -24 -7 -7 -6 -6 -5 -151 -181
for individuals age 50 and above--
increase maximum contribution limits
for pension plans by 10% annually
beginning in 2001, not to exceed 50%.
2. Equitable treatment for yba 12/31/00................. -51 -78 -84 -91 -40 -17 -16 -16 -15 -14 -344 -421
contributions of employees to defined
contribution plans \2\.
3. Faster vesting of certain employer pyba 12/31/00................ Negligible Revenue Effect
matching contributions.
4. Simplify and update the minimum yba 12/31/00................. -118 -212 -239 -268 -107 -39 -36 -34 -32 -30 -944 -1,115
distribution rules--modify post-death
distribution rules, reduce the excise
tax on failures to make minimum
distributions to 10%, and direct the
Treasury to simplify and finalize
regulations relating to the minimum
distribution rules.
5. Clarification of tax treatment of tdapma 12/31/00.............. Negligible Revenue Effect
division of section 457 plan benefits
upon divorce.
6. Modification of safe harbor relief yba 12/31/00................. Negligible Revenue Effect
for hardship withdrawals from 401(k)
plans; modify definition of hardship
for rollover purposes.
7. Eliminate the excise tax on tyba 12/31/00................ (\1\) (\1\) -1 -3 -4 -5 -5 -5 -5 -5 -8 -35
employers who make nondeductible
contributions to SIMPLE plans on
behalf of domestic and similar workers.
-------------------------------------------------------------------------------------------------------------------------
Total of Provisions for Enhancing ............................. -177 -313 -363 -419 -175 -68 -64 -61 -58 -54 -1,447 -1,752
Fairness for Women.
=========================================================================================================================
Provisions for Increasing Portability
for Participants
1. Rollovers allowed among governmental dma 12/31/01................. ........ 27 -5 -5 -35 -2 -2 -1 -1 -1 -18 -25
section 457 plans, section 403(b)
plans, and qualified plans.
2. Rollovers of IRAs to workplace dma 12/31/01................. Negligible Revenue Effect
retirement plans.
3. Rollovers of after-tax retirement dma 12/31/01................. Negligible Revenue Effect
plan contributions.
4. Waiver of 60-day rule............... dma 12/31/01................. Negligible Revenue Effect
5. Treatment of forms of qualified plan yba 12/31/00................. Negligible Revenue Effect
distributions.
6. Rationalization of restrictions on da 12/31/00.................. Negligible Revenue Effect
distributions.
7. Purchase of service credit in ta 12/31/00.................. Negligible Revenue Effect
governmental defined benefit plans.
8. Employers may disregard rollovers da 12/31/00.................. Negligible Revenue Effect
for cash-out amounts.
9. Minimum distribution and inclusion da 12/31/00.................. Considered in Other Provisions
requirements for section 457 plans.
-------------------------------------------------------------------------------------------------------------------------
Total of Provisions for ............................. ........ 27 -5 -5 -35 -2 -2 -1 -1 -1 -18 -25
Increasing Portability for
Participants.
=========================================================================================================================
Provisions for Strengthening Pension
Security and Enforcement
1. Phase in repeal of 155% of current pyba 12/31/00................ ........ -14 -20 -36 -9 ........ ........ ........ ........ ........ -79 -79
liability funding limit; extend
maximum deduction rule.
2. Excise tax relief for sound pension yba 12/31/00................. -2 -3 -3 -3 -1 ........ ........ ........ ........ ........ -12 -12
funding.
3. Notice of significant reduction in pateo/a DOE.................. -1 -4 -7 -9 -2 ........ ........ ........ ........ ........ -23 -23
plan benefit accruals and wear-away
prevention.
4. Modification of section 415 yba 12/31/00................. -1 -1 -1 -1 (\1\) ........ ........ ........ ........ ........ -4 -4
aggregation rules for multiemployer
plans.
5. Repeal 100% of compensation limit yba 12/31/00................. -2 -4 -4 -4 -2 ........ ........ ........ ........ ........ -16 -16
for multiemployer plans.
6. Investment of employee contributions aiii TRA'97.................. Negligible Revenue Effect
in 401(k) plans.
7. Periodic pension benefit statements. pyba 12/31/00................ No Revenue Effect
8. Prohibited allocations of stock in (\15\)....................... 1 4 5 6 2 ........ ........ ........ ........ ........ 18 18
an ESOP of an S corporation.
9. Amendments to the SAVER Act......... DOE.......................... No Revenue Effect
-------------------------------------------------------------------------------------------------------------------------
Total of Provisions for ............................. -5 -22 -30 -47 -12 (\6\) (\6\) (\6\) (\6\) (\6\) -116 -116
Strengthening Pension Security
and Enforcement.
=========================================================================================================================
Provisions for Reducing Regulatory
Burdens
1. Modification of timing of plan pyba 12/31/00................ Negligible Revenue Effect
valuations.
2. ESOP dividends may be reinvested tyba 12/31/00................ -19 -44 -56 -61 -31 ........ ........ ........ ........ ........ -211 -211
without loss of dividend deduction.
3. Repeal transition rule relating to pyba 12/31/00................ -2 -3 -3 -3 -1 -1 (\1\) (\1\) (\1\) (\1\) -12 -14
certain highly compensated employees.
4. Employees of tax-exempt entities \7\ DOE.......................... Negligible Revenue Effect
5. Treatment of employer-provided tyba 12/31/00................ Negligible Revenue Effect
retirement advice.
6. Pension plan reporting DOE.......................... Negligible Revenue Effect
simplification.
7. Improvement to Employee Plans DOE.......................... Negligible Revenue Effect
Compliance Resolution System \7\.
8. Repeal of the multiple use test..... yba 12/31/00................. Considered in Other Provisions
9. Flexibility in nondiscrimination, DOE.......................... Negligible Revenue Effect
coverage, and line of business rules
\7\.
10. Extension to all governmental plans pyba 12/31/00................ Negligible Revenue Effect
of moratorium on application of
certain nondiscrimination rules
applicable to State and local
government plans.
11. Notice and consent period regarding yba 12/31/00................. No Revenue Effect
distributions.
12. Annual report dissemination........ yba 12/31/00................. No Revenue Effect
-----------
Total of Provisions for Reducing ............................. -21 -47 -59 -64 -32 -1 ((-\1\) (-\1\) (-\1\) (-\1\) -223 -225
Regulatory Burdens.
===========
Provisions Relating to Plan Amendments. DOE.......................... No Revenue Effect
Congressional Budget Act Sunset of the DOE.......................... Considered in Each Individual Provisions
``Retirement Security and Savings Act
of 2000'' for Years Beginning After 12/
31/04.
-------------------------------------------------------------------------------------------------------------------------
Net Total........................ ............................. -1,917 -4,428 -6,292 -8,105 -6,254 -3,821 -3,592 -3,177 -2,725 -2,695 -27,026 -43,031
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Loss of less than $500,000.
\2\ Provision includes interaction with other provisions in Provisions for Expanding Coverage.
\3\ Provision includes interaction with the Individual Retirement Arrangement provisions.
\4\ Effective for taxable years beginning after 12/31/00, with respect to plans established after such date.
\5\ Generally effective with respect to years beginning after December 31, 2001. In the case of an ESOP established after July 11, 2000, or an ESOP established on or before such date if the
employer maintaining the plan was not an S corporation on such date, the proposal would be effective with respect to plan years ending after July 11, 2000.
\6\ Negligible revenue effect.
\7\ Directs the Secretary of the Treasury to modify rules through regulations.
Legend for ``Effective'' column: aiii TRA'97 = as if included in the Taxpayer Relief Act of 1997; da = distributions after; dma = distributions made after; DOE = date of enactment; pa =
periods after; pateo/a = plan amendments taking effect on or after; pyba = plan years beginning after; ta = transfers after; tdapma = transfers, distributions, and payments made after; tyba
= taxable years beginning after; and yba = years beginning after.
Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.
B. Budget Authority and Tax Expenditures
Budget authority
In compliance with section 308(a)(1) of the Budget Act, the
Committee states that the provisions of the bill as reported
involve no 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 income tax
provisions generally involve increased tax expenditures and the
revenue-raising provision (prohibited allocations of stock in
an ESOP of an S corporation) involves decreased tax
expenditures. (See revenue table in Part III.A., above.)
C. Consultation With the 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 this bill.
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 roll call votes in the Committee's consideration
of the bill.
Motion to report the bill
The bill was ordered favorably reported by a roll call vote
of 17 yeas and 0 nays (19 yeas and 0 nays if proxy votes were
included in the tally of votes for favorably reporting a bill
out of Committee) on September 7, 2000. The vote, with a quorum
present, was as follows:
Yeas.--Senators Roth, Grassley, Hatch, Murkowski (proxy),
Nickles, Gramm, Lott (proxy), Jeffords, Mack, Thompson,
Moynihan, Baucus, Rockefeller, Breaux, Conrad, Graham, Bryan,
Kerrey, and Robb.
Nays.--No Senators voted in the negative.
V. REGULATORY IMPACT AND OTHER MATTERS
A. Regulatory Impact
Impact on individuals and business
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
reported.
The bill expands retirement savings tax relief relating to
individual retirement arrangements, and includes various
provisions expanding pension coverage, enhancing pension
fairness for women, increasing pension portability,
strengthening pension security and enforcement, encouraging
retirement education, and reducing pension regulatory burdens.
These provisions generally will reduce the tax burdens on
individuals, small businesses, and others.
Impact on personal privacy and paperwork
The bill should not have any adverse impact on personal
privacy.
B. Unfunded Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Act of 1995 (P.L. 104-4).
The Committee has determined that the following provision
of the bill contains Federal mandates on the private sector
(for amounts, see tables in Part III.A., above): prohibited
allocation of stock in ESOP of an S corporation.
The costs required to comply with the Federal private
sector mandate generally are no greater than the estimated
budget effects of the provision. Benefits from the provision
include improved administration of the Federal tax laws and a
more accurate measurement of income for Federal income tax
purposes.
The bill will not impose a Federal intergovernmental
mandate on State, local, and 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 House Committee on Ways and
Means, the Senate Committee on Finance, or any committee of
conference if the legislation includes a provision that
directly or indirectly amends the Internal Revenue 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 Internal Revenue Code and that have
widespread applicability to individuals or small businesses.
VI. CHANGES TO 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).