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115th Congress} { Rept. 115-959
HOUSE OF REPRESENTATIVES
2d Session } { Part 1
_______________________________________________________________________
FAMILY SAVINGS ACT OF 2018
__________
R E P O R T
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
together with
DISSENTING VIEWS
[To accompany H.R. 6757]
[Including cost estimate of the Congressional Budget Office]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
September 24, 2018.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
________
U.S. GOVERNMENT PUBLISHING OFFICE
31-586 WASHINGTON: 2018
_____________________________________________________________________________
C O N T E N T S
----------
Page
I. SUMMARY AND BACKGROUND..........................................21
A. Purpose and Summary............................... 21
B. Background and Need for Legislation............... 22
C. Legislative History............................... 22
II. EXPLANATION OF THE BILL.........................................23
TITLE I--EXPANDING AND PRESERVING RETIREMENT SAVINGS............23
A. Multiple Employer Plans; Pooled Employer Plans
(sec. 101 of the bill, sec. 413 of the Code, and
secs. 3, 103, and 104 of ERISA).................. 23
B. Rules Relating to Election of Safe Harbor 401(k)
Status (sec. 102 of the bill and sec. 401(k) of
the Code)........................................ 34
C. Certain Taxable Non-Tuition Fellowship and Stipend
Payments Treated as Compensation For IRA Purposes
(sec. 103 of the bill and sec. 219 of the Code).. 38
D. Repeal of Maximum Age for Traditional IRA
Contributions (sec. 104 of the bill and sec. 219
of the Code)..................................... 39
E. Qualified Employer Plans Prohibited From Making
Loans Through Credit Cards and Other Similar
Arrangements (sec. 105 of the bill and sec. 72(p)
of the Code)..................................... 40
F. Portability of Lifetime Income Investments (sec.
106 of the bill and secs. 401(a), 401(k), 403(b),
and 457(d) of the Code).......................... 41
G. Treatment of Custodial Accounts on Termination of
Section 403(b) Plans (sec. 107 of the bill and
sec. 403(b) of the Code)......................... 44
H. Clarification of Retirement Income Account Rules
Relating to Church-Controlled Organizations (sec.
108 of the bill and sec. 403(b)(9) of the Code).. 46
I. Exemption from Required Minimum Distribution Rules
for Individuals with Certain Account Balances
(sec. 109 of the bill and secs. 401(a)(9) and
6047 of the Code)................................ 48
J. Clarification of Treatment of Certain Retirement
Plan Contributions Picked Up by Governmental
Employers For New or Existing Employees (sec. 110
of the bill and sec. 414(h)(2) of the Code)...... 51
K. Elective Deferrals by Members of the Ready Reserve
of a Reserve Component of the Armed Forces (sec.
111 of the bill and sec. 402(g) of the Code)..... 54
TITLE II--ADMINISTRATIVE IMPROVEMENTS...........................56
A. Plan Adopted by Filing Due Date for Year May be
Treated as in Effect as of Close of Year (sec.
201 of the bill and sec. 401(b) of the Code)..... 56
B. Modification of Nondiscrimination Rules to Protect
Older, Longer Service Participants (sec. 202 of
the bill and secs. 401(a)(4) and (a)(26) of the
Code)............................................ 57
C. Study of Appropriate PBGC Premiums (sec. 203 of
the bill)........................................ 67
TITLE III--OTHER SAVINGS PROVISIONS.............................69
A. Universal Savings Accounts (sec. 301 of the bill
and new sec. 530U of the Code)................... 69
B. Expansion of 529 Plans (sec. 302 of the bill and
sec. 529 of the Code)............................ 73
C. Penalty-Free Withdrawals from Retirement Plans for
Individuals in Case of Birth of Child or Adoption
(sec. 303 of the bill and secs. 72(t), 401-403,
408, 457, and 3405 of the Code).................. 76
III. VOTES OF THE COMMITTEE..........................................78
IV. BUDGET EFFECTS OF THE BILL......................................79
A. Committee Estimate of Budgetary Effects........... 79
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority.................... 82
C. Cost Estimate Prepared by the Congressional Budget
Office........................................... 82
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE......89
A. Committee Oversight Findings and Recommendations.. 89
B. Statement of General Performance Goals and
Objectives....................................... 89
C. Information Relating to Unfunded Mandates......... 89
D. Applicability of House Rule XXI 5(b).............. 89
E. Tax Complexity Analysis........................... 90
F. Congressional Earmarks, Limited Tax Benefits, and
Limited Tariff Benefits.......................... 98
G. Duplication of Federal Programs................... 98
H. Disclosure of Directed Rule Makings............... 98
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED...........98
A. Changes in Existing Law Proposed by the Bill as
Reported......................................... 98
VII. DISSENTING VIEWS...............................................348
115th Congress } { Rept. 115-959
HOUSE OF REPRESENTATIVES
2d Session } { Part 1
======================================================================
FAMILY SAVINGS ACT OF 2018
_______
September 24, 2018.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______
Mr. Brady of Texas, from the Committee on Ways and Means, submitted the
following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 6757]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 6757) to amend the Internal Revenue Code of 1986 to
encourage retirement and family savings, and for other
purposes, having considered the same, report favorably thereon
with an amendment and recommend that the bill as amended do
pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE; ETC.
(a) Short Title.--This Act may be cited as the ``Family Savings Act
of 2018''.
(b) Table of Contents.--The table of contents for this Act is as
follows:
Sec. 1. Short title; etc.
TITLE I--EXPANDING AND PRESERVING RETIREMENT SAVINGS
Sec. 101. Multiple employer plans; pooled employer plans.
Sec. 102. Rules relating to election of safe harbor 401(k) status.
Sec. 103. Certain taxable non-tuition fellowship and stipend payments
treated as compensation for IRA purposes.
Sec. 104. Repeal of maximum age for traditional IRA contributions.
Sec. 105. Qualified employer plans prohibited from making loans through
credit cards and other similar arrangements.
Sec. 106. Portability of lifetime income investments.
Sec. 107. Treatment of custodial accounts on termination of section
403(b) plans.
Sec. 108. Clarification of retirement income account rules relating to
church-controlled organizations.
Sec. 109. Exemption from required minimum distribution rules for
individuals with certain account balances.
Sec. 110. Clarification of treatment of certain retirement plan
contributions picked up by governmental employers for new or existing
employees.
Sec. 111. Elective deferrals by members of the Ready Reserve of a
reserve component of the Armed Forces.
TITLE II--ADMINISTRATIVE IMPROVEMENTS
Sec. 201. Plan adopted by filing due date for year may be treated as in
effect as of close of year.
Sec. 202. Modification of nondiscrimination rules to protect older,
longer service participants.
Sec. 203. Study of appropriate PBGC premiums.
TITLE III--OTHER SAVINGS PROVISIONS
Sec. 301. Universal Savings Accounts.
Sec. 302. Expansion of section 529 plans.
Sec. 303. Penalty-free withdrawals from retirement plans for
individuals in case of birth of child or adoption.
TITLE I--EXPANDING AND PRESERVING RETIREMENT SAVINGS
SEC. 101. MULTIPLE EMPLOYER PLANS; POOLED EMPLOYER PLANS.
(a) Qualification Requirements.--
(1) In general.--Section 413 of the Internal Revenue Code of
1986 is amended by adding at the end the following new
subsection:
``(e) Application of Qualification Requirements for Certain Multiple
Employer Plans With Pooled Plan Providers.--
``(1) In general.--Except as provided in paragraph (2), if a
defined contribution plan to which subsection (c) applies--
``(A) is maintained by employers which have a common
interest other than having adopted the plan, or
``(B) in the case of a plan not described in
subparagraph (A), has a pooled plan provider,
then the plan shall not be treated as failing to meet the
requirements under this title applicable to a plan described in
section 401(a) or to a plan that consists of individual
retirement accounts described in section 408 (including by
reason of subsection (c) thereof), whichever is applicable,
merely because one or more employers of employees covered by
the plan fail to take such actions as are required of such
employers for the plan to meet such requirements.
``(2) Limitations.--
``(A) In general.--Paragraph (1) shall not apply to
any plan unless the terms of the plan provide that in
the case of any employer in the plan failing to take
the actions described in paragraph (1)--
``(i) the assets of the plan attributable to
employees of such employer (or beneficiaries of
such employees) will be transferred to a plan
maintained only by such employer (or its
successor), to an eligible retirement plan as
defined in section 402(c)(8)(B) for each
individual whose account is transferred, or to
any other arrangement that the Secretary
determines is appropriate, unless the Secretary
determines it is in the best interests of the
employees of such employer (and the
beneficiaries of such employees) to retain the
assets in the plan, and
``(ii) such employer (and not the plan with
respect to which the failure occurred or any
other employer in such plan) shall, except to
the extent provided by the Secretary, be liable
for any liabilities with respect to such plan
attributable to employees of such employer (or
beneficiaries of such employees).
``(B) Failures by pooled plan providers.--If the
pooled plan provider of a plan described in paragraph
(1)(B) does not perform substantially all of the
administrative duties which are required of the
provider under paragraph (3)(A)(i) for any plan year,
the Secretary may provide that the determination as to
whether the plan meets the requirements under this
title applicable to a plan described in section 401(a)
or to a plan that consists of individual retirement
accounts described in section 408 (including by reason
of subsection (c) thereof), whichever is applicable,
shall be made in the same manner as would be made
without regard to paragraph (1).
``(3) Pooled plan provider.--
``(A) In general.--For purposes of this subsection,
the term `pooled plan provider' means, with respect to
any plan, a person who--
``(i) is designated by the terms of the plan
as a named fiduciary (within the meaning of
section 402(a)(2) of the Employee Retirement
Income Security Act of 1974), as the plan
administrator, and as the person responsible to
perform all administrative duties (including
conducting proper testing with respect to the
plan and the employees of each employer in the
plan) which are reasonably necessary to ensure
that--
``(I) the plan meets any requirement
applicable under the Employee
Retirement Income Security Act of 1974
or this title to a plan described in
section 401(a) or to a plan that
consists of individual retirement
accounts described in section 408
(including by reason of subsection (c)
thereof), whichever is applicable, and
``(II) each employer in the plan
takes such actions as the Secretary or
such person determines are necessary
for the plan to meet the requirements
described in subclause (I), including
providing to such person any
disclosures or other information which
the Secretary may require or which such
person otherwise determines are
necessary to administer the plan or to
allow the plan to meet such
requirements,
``(ii) registers as a pooled plan provider
with the Secretary, and provides such other
information to the Secretary as the Secretary
may require, before beginning operations as a
pooled plan provider,
``(iii) acknowledges in writing that such
person is a named fiduciary (within the meaning
of section 402(a)(2) of the Employee Retirement
Income Security Act of 1974), and the plan
administrator, with respect to the plan, and
``(iv) is responsible for ensuring that all
persons who handle assets of, or who are
fiduciaries of, the plan are bonded in
accordance with section 412 of the Employee
Retirement Income Security Act of 1974.
``(B) Audits, examinations and investigations.--The
Secretary may perform audits, examinations, and
investigations of pooled plan providers as may be
necessary to enforce and carry out the purposes of this
subsection.
``(C) Aggregation rules.--For purposes of this
paragraph, in determining whether a person meets the
requirements of this paragraph to be a pooled plan
provider with respect to any plan, all persons who
perform services for the plan and who are treated as a
single employer under subsection (b), (c), (m), or (o)
of section 414 shall be treated as one person.
``(D) Treatment of employers as plan sponsors.--
Except with respect to the administrative duties of the
pooled plan provider described in subparagraph (A)(i),
each employer in a plan which has a pooled plan
provider shall be treated as the plan sponsor with
respect to the portion of the plan attributable to
employees of such employer (or beneficiaries of such
employees).
``(4) Guidance.--The Secretary shall issue such guidance as
the Secretary determines appropriate to carry out this
subsection, including guidance--
``(A) to identify the administrative duties and other
actions required to be performed by a pooled plan
provider under this subsection,
``(B) which describes the procedures to be taken to
terminate a plan which fails to meet the requirements
to be a plan described in paragraph (1), including the
proper treatment of, and actions needed to be taken by,
any employer in the plan and the assets and liabilities
of the plan attributable to employees of such employer
(or beneficiaries of such employees), and
``(C) identifying appropriate cases to which the
rules of paragraph (2)(A) will apply to employers in
the plan failing to take the actions described in
paragraph (1).
The Secretary shall take into account under subparagraph (C)
whether the failure of an employer or pooled plan provider to
provide any disclosures or other information, or to take any
other action, necessary to administer a plan or to allow a plan
to meet requirements applicable to the plan under section
401(a) or 408, whichever is applicable, has continued over a
period of time that demonstrates a lack of commitment to
compliance.
``(5) Model plan.--The Secretary shall publish model plan
language which meets the requirements of this subsection and of
paragraphs (43) and (44) of section 3 of the Employee
Retirement Income Security Act of 1974 and which may be adopted
in order for a plan to be treated as a plan described in
paragraph (1)(B).''.
(2) Conforming amendment.--Section 413(c)(2) of such Code is
amended by striking ``section 401(a)'' and inserting ``sections
401(a) and 408(c)''.
(3) Technical amendment.--Section 408(c) of such Code is
amended by inserting after paragraph (2) the following new
paragraph:
``(3) There is a separate accounting for any interest of an
employee or member (or spouse of an employee or member) in a
Roth IRA.''.
(b) No Common Interest Required for Pooled Employer Plans.--Section
3(2) of the Employee Retirement Income Security Act of 1974 (29 U.S.C.
1002(2)) is amended by adding at the end the following:
``(C) A pooled employer plan shall be treated as--
``(i) a single employee pension benefit plan
or single pension plan; and
``(ii) a plan to which section 210(a)
applies.''.
(c) Pooled Employer Plan and Provider Defined.--
(1) In general.--Section 3 of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1002) is amended by adding at
the end the following:
``(43) Pooled employer plan.--
``(A) In general.--The term `pooled employer plan'
means a plan--
``(i) which is an individual account plan
established or maintained for the purpose of
providing benefits to the employees of 2 or
more employers;
``(ii) which is a plan described in section
401(a) of the Internal Revenue Code of 1986
which includes a trust exempt from tax under
section 501(a) of such Code or a plan that
consists of individual retirement accounts
described in section 408 of such Code
(including by reason of subsection (c)
thereof); and
``(iii) the terms of which meet the
requirements of subparagraph (B).
Such term shall not include a plan maintained by
employers which have a common interest other than
having adopted the plan.
``(B) Requirements for plan terms.--The requirements
of this subparagraph are met with respect to any plan
if the terms of the plan--
``(i) designate a pooled plan provider and
provide that the pooled plan provider is a
named fiduciary of the plan;
``(ii) designate one or more trustees meeting
the requirements of section 408(a)(2) of the
Internal Revenue Code of 1986 (other than an
employer in the plan) to be responsible for
collecting contributions to, and holding the
assets of, the plan and require such trustees
to implement written contribution collection
procedures that are reasonable, diligent, and
systematic;
``(iii) provide that each employer in the
plan retains fiduciary responsibility for--
``(I) the selection and monitoring in
accordance with section 404(a) of the
person designated as the pooled plan
provider and any other person who, in
addition to the pooled plan provider,
is designated as a named fiduciary of
the plan; and
``(II) to the extent not otherwise
delegated to another fiduciary by the
pooled plan provider and subject to the
provisions of section 404(c), the
investment and management of the
portion of the plan's assets
attributable to the employees of the
employer (or beneficiaries of such
employees);
``(iv) provide that employers in the plan,
and participants and beneficiaries, are not
subject to unreasonable restrictions, fees, or
penalties with regard to ceasing participation,
receipt of distributions, or otherwise
transferring assets of the plan in accordance
with section 208 or paragraph (44)(C)(i)(II);
``(v) require--
``(I) the pooled plan provider to
provide to employers in the plan any
disclosures or other information which
the Secretary may require, including
any disclosures or other information to
facilitate the selection or any
monitoring of the pooled plan provider
by employers in the plan; and
``(II) each employer in the plan to
take such actions as the Secretary or
the pooled plan provider determines are
necessary to administer the plan or for
the plan to meet any requirement
applicable under this Act or the
Internal Revenue Code of 1986 to a plan
described in section 401(a) of such
Code or to a plan that consists of
individual retirement accounts
described in section 408 of such Code
(including by reason of subsection (c)
thereof), whichever is applicable,
including providing any disclosures or
other information which the Secretary
may require or which the pooled plan
provider otherwise determines are
necessary to administer the plan or to
allow the plan to meet such
requirements; and
``(vi) provide that any disclosure or other
information required to be provided under
clause (v) may be provided in electronic form
and will be designed to ensure only reasonable
costs are imposed on pooled plan providers and
employers in the plan.
``(C) Exceptions.--The term `pooled employer plan'
does not include--
``(i) a multiemployer plan; or
``(ii) a plan established before the date of
the enactment of the Family Savings Act of 2018
unless the plan administrator elects that the
plan will be treated as a pooled employer plan
and the plan meets the requirements of this
title applicable to a pooled employer plan
established on or after such date.
``(D) Treatment of employers as plan sponsors.--
Except with respect to the administrative duties of the
pooled plan provider described in paragraph (44)(A)(i),
each employer in a pooled employer plan shall be
treated as the plan sponsor with respect to the portion
of the plan attributable to employees of such employer
(or beneficiaries of such employees).
``(44) Pooled plan provider.--
``(A) In general.--The term `pooled plan provider'
means a person who--
``(i) is designated by the terms of a pooled
employer plan as a named fiduciary, as the plan
administrator, and as the person responsible
for the performance of all administrative
duties (including conducting proper testing
with respect to the plan and the employees of
each employer in the plan) which are reasonably
necessary to ensure that--
``(I) the plan meets any requirement
applicable under this Act or the
Internal Revenue Code of 1986 to a plan
described in section 401(a) of such
Code or to a plan that consists of
individual retirement accounts
described in section 408 of such Code
(including by reason of subsection (c)
thereof), whichever is applicable; and
``(II) each employer in the plan
takes such actions as the Secretary or
pooled plan provider determines are
necessary for the plan to meet the
requirements described in subclause
(I), including providing the
disclosures and information described
in paragraph (43)(B)(v)(II);
``(ii) registers as a pooled plan provider
with the Secretary, and provides to the
Secretary such other information as the
Secretary may require, before beginning
operations as a pooled plan provider;
``(iii) acknowledges in writing that such
person is a named fiduciary, and the plan
administrator, with respect to the pooled
employer plan; and
``(iv) is responsible for ensuring that all
persons who handle assets of, or who are
fiduciaries of, the pooled employer plan are
bonded in accordance with section 412.
``(B) Audits, examinations and investigations.--The
Secretary may perform audits, examinations, and
investigations of pooled plan providers as may be
necessary to enforce and carry out the purposes of this
paragraph and paragraph (43).
``(C) Guidance.--The Secretary shall issue such
guidance as the Secretary determines appropriate to
carry out this paragraph and paragraph (43), including
guidance--
``(i) to identify the administrative duties
and other actions required to be performed by a
pooled plan provider under either such
paragraph; and
``(ii) which requires in appropriate cases
that if an employer in the plan fails to take
the actions required under subparagraph
(A)(i)(II)--
``(I) the assets of the plan
attributable to employees of such
employer (or beneficiaries of such
employees) are transferred to a plan
maintained only by such employer (or
its successor), to an eligible
retirement plan as defined in section
402(c)(8)(B) of the Internal Revenue
Code of 1986 for each individual whose
account is transferred, or to any other
arrangement that the Secretary
determines is appropriate in such
guidance; and
``(II) such employer (and not the
plan with respect to which the failure
occurred or any other employer in such
plan) shall, except to the extent
provided in such guidance, be liable
for any liabilities with respect to
such plan attributable to employees of
such employer (or beneficiaries of such
employees).
The Secretary shall take into account under clause (ii)
whether the failure of an employer or pooled plan
provider to provide any disclosures or other
information, or to take any other action, necessary to
administer a plan or to allow a plan to meet
requirements described in subparagraph (A)(i)(II) has
continued over a period of time that demonstrates a
lack of commitment to compliance. The Secretary may
waive the requirements of subclause (ii)(I) in
appropriate circumstances if the Secretary determines
it is in the best interests of the employees of the
employer referred to in such clause (and the
beneficiaries of such employees) to retain the assets
in the plan with respect to which the employer's
failure occurred.
``(D) Aggregation rules.--For purposes of this
paragraph, in determining whether a person meets the
requirements of this paragraph to be a pooled plan
provider with respect to any plan, all persons who
perform services for the plan and who are treated as a
single employer under subsection (b), (c), (m), or (o)
of section 414 of the Internal Revenue Code of 1986
shall be treated as one person.''.
(2) Bonding requirements for pooled employer plans.--The last
sentence of section 412(a) of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1112(a)) is amended by
inserting ``or in the case of a pooled employer plan (as
defined in section 3(43))'' after ``section 407(d)(1))''.
(3) Conforming and technical amendments.--Section 3 of the
Employee Retirement Income Security Act of 1974 (29 U.S.C.
1002) is amended--
(A) in paragraph (16)(B)--
(i) by striking ``or'' at the end of clause
(ii); and
(ii) by striking the period at the end and
inserting ``, or (iv) in the case of a pooled
employer plan, the pooled plan provider.''; and
(B) by striking the second paragraph (41).
(d) Pooled Employer and Multiple Employer Plan Reporting.--
(1) Additional information.--Section 103 of the Employee
Retirement Income Security Act of 1974 (29 U.S.C. 1023) is
amended--
(A) in subsection (a)(1)(B), by striking ``applicable
subsections (d), (e), and (f)'' and inserting
``applicable subsections (d), (e), (f), and (g)''; and
(B) by amending subsection (g) to read as follows:
``(g) Additional Information With Respect to Pooled Employer and
Multiple Employer Plans.--An annual report under this section for a
plan year shall include--
``(1) with respect to any plan to which section 210(a)
applies (including a pooled employer plan), a list of employers
in the plan, a good faith estimate of the percentage of total
contributions made by such employers during the plan year, and
the aggregate account balances attributable to each employer in
the plan (determined as the sum of the account balances of the
employees of such employer (and the beneficiaries of such
employees)); and
``(2) with respect to a pooled employer plan, the identifying
information for the person designated under the terms of the
plan as the pooled plan provider.''.
(2) Simplified annual reports.--Section 104(a) of the
Employee Retirement Income Security Act of 1974 (29 U.S.C.
1024(a)) is amended by striking paragraph (2)(A) and inserting
the following:
``(2)(A) With respect to annual reports required to be filed
with the Secretary under this part, the Secretary may by
regulation prescribe simplified annual reports for any pension
plan that--
``(i) covers fewer than 100 participants; or
``(ii) is a plan described in section 210(a) that
covers fewer than 1,000 participants, but only if no
single employer in the plan has 100 or more
participants covered by the plan.''.
(e) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to plan years beginning after December 31, 2019.
(2) Rule of construction.--Nothing in the amendments made by
subsection (a) shall be construed as limiting the authority of
the Secretary of the Treasury or the Secretary's delegate
(determined without regard to such amendments) to provide for
the proper treatment of a failure to meet any requirement
applicable under the Internal Revenue Code of 1986 with respect
to one employer (and its employees) in a multiple employer
plan.
SEC. 102. RULES RELATING TO ELECTION OF SAFE HARBOR 401(K) STATUS.
(a) Limitation of Annual Safe Harbor Notice to Matching Contribution
Plans.--
(1) In general.--Section 401(k)(12)(A) of the Internal
Revenue Code of 1986 is amended by striking ``if such
arrangement'' and all that follows and inserting ``if such
arrangement--
``(i) meets the contribution requirements of
subparagraph (B) and the notice requirements of
subparagraph (D), or
``(ii) meets the contribution requirements of
subparagraph (C).''.
(2) Automatic contribution arrangements.--Section
401(k)(13)(B) of such Code is amended by striking ``means'' and
all that follows and inserting ``means a cash or deferred
arrangement--
``(i) which is described in subparagraph
(D)(i)(I) and meets the applicable requirements
of subparagraphs (C) through (E), or
``(ii) which is described in subparagraph
(D)(i)(II) and meets the applicable
requirements of subparagraphs (C) and (D).''.
(b) Nonelective Contributions.--Section 401(k)(12) of such Code is
amended by redesignating subparagraph (F) as subparagraph (G), and by
inserting after subparagraph (E) the following new subparagraph:
``(F) Timing of plan amendment for employer making
nonelective contributions.--
``(i) In general.--Except as provided in
clause (ii), a plan may be amended after the
beginning of a plan year to provide that the
requirements of subparagraph (C) shall apply to
the arrangement for the plan year, but only if
the amendment is adopted--
``(I) at any time before the 30th day
before the close of the plan year, or
``(II) at any time before the last
day under paragraph (8)(A) for
distributing excess contributions for
the plan year.
``(ii) Exception where plan provided for
matching contributions.--Clause (i) shall not
apply to any plan year if the plan provided at
any time during the plan year that the
requirements of subparagraph (B) or paragraph
(13)(D)(i)(I) applied to the plan year.
``(iii) 4-percent contribution requirement.--
Clause (i)(II) shall not apply to an
arrangement unless the amount of the
contributions described in subparagraph (C)
which the employer is required to make under
the arrangement for the plan year with respect
to any employee is an amount equal to at least
4 percent of the employee's compensation.''.
(c) Automatic Contribution Arrangements.--Section 401(k)(13) of such
Code is amended by adding at the end the following:
``(F) Timing of plan amendment for employer making
nonelective contributions.--
``(i) In general.--Except as provided in
clause (ii), a plan may be amended after the
beginning of a plan year to provide that the
requirements of subparagraph (D)(i)(II) shall
apply to the arrangement for the plan year, but
only if the amendment is adopted--
``(I) at any time before the 30th day
before the close of the plan year, or
``(II) at any time before the last
day under paragraph (8)(A) for
distributing excess contributions for
the plan year.
``(ii) Exception where plan provided for
matching contributions.--Clause (i) shall not
apply to any plan year if the plan provided at
any time during the plan year that the
requirements of subparagraph (D)(i)(I) or
paragraph (12)(B) applied to the plan year.
``(iii) 4-percent contribution requirement.--
Clause (i)(II) shall not apply to an
arrangement unless the amount of the
contributions described in subparagraph
(D)(i)(II) which the employer is required to
make under the arrangement for the plan year
with respect to any employee is an amount equal
to at least 4 percent of the employee's
compensation.''.
(d) Effective Date.--The amendments made by this section shall apply
to plan years beginning after December 31, 2018.
SEC. 103. CERTAIN TAXABLE NON-TUITION FELLOWSHIP AND STIPEND PAYMENTS
TREATED AS COMPENSATION FOR IRA PURPOSES.
(a) In General.--Section 219(f)(1) of the Internal Revenue Code of
1986 is amended by adding at the end the following: ``The term
`compensation' shall include any amount included in gross income and
paid to an individual to aid the individual in the pursuit of graduate
or postdoctoral study.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2018.
SEC. 104. REPEAL OF MAXIMUM AGE FOR TRADITIONAL IRA CONTRIBUTIONS.
(a) In General.--Section 219(d) of the Internal Revenue Code of 1986
is amended by striking paragraph (1).
(b) Conforming Amendment.--Section 408A(c) of the Internal Revenue
Code of 1986 is amended by striking paragraph (4) and by redesignating
paragraphs (5), (6), and (7) as paragraphs (4), (5), and (6),
respectively.
(c) Effective Date.--The amendments made by this section shall apply
to contributions made for taxable years beginning after December 31,
2018.
SEC. 105. QUALIFIED EMPLOYER PLANS PROHIBITED FROM MAKING LOANS THROUGH
CREDIT CARDS AND OTHER SIMILAR ARRANGEMENTS.
(a) In General.--Section 72(p)(2) of the Internal Revenue Code of
1986 is amended by redesignating subparagraph (D) as subparagraph (E)
and by inserting after subparagraph (C) the following new subparagraph:
``(D) Prohibition of loans through credit cards and
other similar arrangements.--Notwithstanding
subparagraph (A), paragraph (1) shall apply to any loan
which is made through the use of any credit card or any
other similar arrangement.''.
(b) Effective Date.--The amendments made by subsection (a) shall
apply to loans made after the date of the enactment of this Act.
SEC. 106. PORTABILITY OF LIFETIME INCOME INVESTMENTS.
(a) In General.--Section 401(a) of the Internal Revenue Code of 1986
is amended by inserting after paragraph (37) the following new
paragraph:
``(38) Portability of lifetime income investments.--
``(A) In general.--Except as may be otherwise
provided by regulations, a trust forming part of a
defined contribution plan shall not be treated as
failing to constitute a qualified trust under this
section solely by reason of allowing--
``(i) qualified distributions of a lifetime
income investment, or
``(ii) distributions of a lifetime income
investment in the form of a qualified plan
distribution annuity contract,
on or after the date that is 90 days prior to the date
on which such lifetime income investment is no longer
authorized to be held as an investment option under the
plan.
``(B) Definitions.--For purposes of this subsection--
``(i) the term `qualified distribution' means
a direct trustee-to-trustee transfer described
in paragraph (31)(A) to an eligible retirement
plan (as defined in section 402(c)(8)(B)),
``(ii) the term `lifetime income investment'
means an investment option which is designed to
provide an employee with election rights--
``(I) which are not uniformly
available with respect to other
investment options under the plan, and
``(II) which are to a lifetime income
feature available through a contract or
other arrangement offered under the
plan (or under another eligible
retirement plan (as so defined), if
paid by means of a direct trustee-to-
trustee transfer described in paragraph
(31)(A) to such other eligible
retirement plan),
``(iii) the term `lifetime income feature'
means--
``(I) a feature which guarantees a
minimum level of income annually (or
more frequently) for at least the
remainder of the life of the employee
or the joint lives of the employee and
the employee's designated beneficiary,
or
``(II) an annuity payable on behalf
of the employee under which payments
are made in substantially equal
periodic payments (not less frequently
than annually) over the life of the
employee or the joint lives of the
employee and the employee's designated
beneficiary, and
``(iv) the term `qualified plan distribution
annuity contract' means an annuity contract
purchased for a participant and distributed to
the participant by a plan or contract described
in subparagraph (B) of section 402(c)(8)
(without regard to clauses (i) and (ii)
thereof).''.
(b) Cash or Deferred Arrangement.--
(1) In general.--Section 401(k)(2)(B)(i) of such Code is
amended by striking ``or'' at the end of subclause (IV), by
striking ``and'' at the end of subclause (V) and inserting
``or'', and by adding at the end the following new subclause:
``(VI) except as may be otherwise
provided by regulations, with respect
to amounts invested in a lifetime
income investment (as defined in
subsection (a)(38)(B)(ii)), the date
that is 90 days prior to the date that
such lifetime income investment may no
longer be held as an investment option
under the arrangement, and''.
(2) Distribution requirement.--Section 401(k)(2)(B) of such
Code, as amended by paragraph (1), is amended by striking
``and'' at the end of clause (i), by striking the semicolon at
the end of clause (ii) and inserting ``, and'', and by adding
at the end the following new clause:
``(iii) except as may be otherwise provided
by regulations, in the case of amounts
described in clause (i)(VI), will be
distributed only in the form of a qualified
distribution (as defined in subsection
(a)(38)(B)(i)) or a qualified plan distribution
annuity contract (as defined in subsection
(a)(38)(B)(iv)),''.
(c) Section 403(b) Plans.--
(1) Annuity contracts.--Section 403(b)(11) of such Code is
amended by striking ``or'' at the end of subparagraph (B), by
striking the period at the end of subparagraph (C) and
inserting ``, or'', and by inserting after subparagraph (C) the
following new subparagraph:
``(D) except as may be otherwise provided by
regulations, with respect to amounts invested in a
lifetime income investment (as defined in section
401(a)(38)(B)(ii))--
``(i) on or after the date that is 90 days
prior to the date that such lifetime income
investment may no longer be held as an
investment option under the contract, and
``(ii) in the form of a qualified
distribution (as defined in section
401(a)(38)(B)(i)) or a qualified plan
distribution annuity contract (as defined in
section 401(a)(38)(B)(iv)).''.
(2) Custodial accounts.--Section 403(b)(7)(A) of such Code is
amended by striking ``if--'' and all that follows and inserting
``if the amounts are to be invested in regulated investment
company stock to be held in that custodial account, and under
the custodial account--
``(i) no such amounts may be paid or made
available to any distributee (unless such
amount is a distribution to which section
72(t)(2)(G) applies) before--
``(I) the employee dies,
``(II) the employee attains age 59\1/
2\,
``(III) the employee has a severance
from employment,
``(IV) the employee becomes disabled
(within the meaning of section
72(m)(7)),
``(V) in the case of contributions
made pursuant to a salary reduction
agreement (within the meaning of
section 3121(a)(5)(D)), the employee
encounters financial hardship, or
``(VI) except as may be otherwise
provided by regulations, with respect
to amounts invested in a lifetime
income investment (as defined in
section 401(a)(38)(B)(ii)), the date
that is 90 days prior to the date that
such lifetime income investment may no
longer be held as an investment option
under the contract, and
``(ii) in the case of amounts described in
clause (i)(VI), such amounts will be
distributed only in the form of a qualified
distribution (as defined in section
401(a)(38)(B)(i)) or a qualified plan
distribution annuity contract (as defined in
section 401(a)(38)(B)(iv)).''.
(d) Eligible Deferred Compensation Plans.--
(1) In general.--Section 457(d)(1)(A) of such Code is amended
by striking ``or'' at the end of clause (ii), by inserting
``or'' at the end of clause (iii), and by adding after clause
(iii) the following:
``(iv) except as may be otherwise provided by
regulations, in the case of a plan maintained
by an employer described in subsection
(e)(1)(A), with respect to amounts invested in
a lifetime income investment (as defined in
section 401(a)(38)(B)(ii)), the date that is 90
days prior to the date that such lifetime
income investment may no longer be held as an
investment option under the plan,''.
(2) Distribution requirement.--Section 457(d)(1) of such Code
is amended by striking ``and'' at the end of subparagraph (B),
by striking the period at the end of subparagraph (C) and
inserting ``, and'', and by inserting after subparagraph (C)
the following new subparagraph:
``(D) except as may be otherwise provided by
regulations, in the case of amounts described in
subparagraph (A)(iv), such amounts will be distributed
only in the form of a qualified distribution (as
defined in section 401(a)(38)(B)(i)) or a qualified
plan distribution annuity contract (as defined in
section 401(a)(38)(B)(iv)).''.
(e) Effective Date.--The amendments made by this section shall apply
to plan years beginning after December 31, 2018.
SEC. 107. TREATMENT OF CUSTODIAL ACCOUNTS ON TERMINATION OF SECTION
403(B) PLANS.
(a) In General.--Section 403(b)(7) of the Internal Revenue Code of
1986 is amended by adding at the end the following:
``(D) Treatment of custodial account upon plan
termination.--
``(i) In general.--If--
``(I) an employer terminates the plan
under which amounts are contributed to
a custodial account under subparagraph
(A), and
``(II) the person holding the assets
of the account has demonstrated to the
satisfaction of the Secretary under
section 408(a)(2) that the person is
qualified to be a trustee of an
individual retirement plan,
then, as of the date of the termination, the
custodial account shall be deemed to be an
individual retirement plan for purposes of this
title.
``(ii) Treatment as roth ira.--Any custodial
account treated as an individual retirement
plan under clause (i) shall be treated as a
Roth IRA only if the custodial account was a
designated Roth account.''.
(b) Effective Date.--The amendment made by this section shall apply
to plan terminations occurring after December 31, 2018.
SEC. 108. CLARIFICATION OF RETIREMENT INCOME ACCOUNT RULES RELATING TO
CHURCH-CONTROLLED ORGANIZATIONS.
(a) In General.--Section 403(b)(9)(B) of the Internal Revenue Code of
1986 is amended by inserting ``(including an employee described in
section 414(e)(3)(B))'' after ``employee described in paragraph (1)''.
(b) Effective Date.--The amendment made by this section shall apply
to plan years beginning after December 31, 2008.
SEC. 109. EXEMPTION FROM REQUIRED MINIMUM DISTRIBUTION RULES FOR
INDIVIDUALS WITH CERTAIN ACCOUNT BALANCES.
(a) In General.--Section 401(a)(9) of the Internal Revenue Code of
1986 is amended by adding at the end the following new subparagraph:
``(H) Exception from required minimum distributions
during life of employee where assets do not exceed
$50,000.--
``(i) In general.--If on the last day of any
calendar year the aggregate value of an
employee's entire interest under all applicable
eligible retirement plans does not exceed
$50,000, then the requirements of subparagraph
(A) with respect to any distribution relating
to such year shall not apply with respect to
such employee.
``(ii) Applicable eligible retirement plan.--
For purposes of this subparagraph, the term
`applicable eligible retirement plan' means an
eligible retirement plan (as defined in section
402(c)(8)(B)) other than a defined benefit
plan.
``(iii) Limit on required minimum
distribution.--The required minimum
distribution determined under subparagraph (A)
for an employee under all applicable eligible
retirement plans shall not exceed an amount
equal to the excess of--
``(I) the aggregate value of an
employee's entire interest under such
plans on the last day of the calendar
year to which such distribution
relates, over
``(II) the dollar amount in effect
under clause (i) for such calendar
year.
The Secretary in regulations or other guidance
may provide how such amount shall be
distributed in the case of an individual with
more than one applicable eligible retirement
plan.
``(iv) Inflation adjustment.--In the case of
any calendar year beginning after 2019, the
$50,000 amount in clause (i) shall be increased
by an amount equal to--
``(I) such dollar amount, multiplied
by
``(II) the cost of living adjustment
determined under section 1(f)(3) for
the calendar year, determined by
substituting `calendar year 2018' for
`calendar year 2016' in subparagraph
(A)(ii) thereof.
Any increase determined under this clause shall
be rounded to the next lowest multiple of
$5,000.
``(v) Plan administrator reliance on employee
certification.--An applicable eligible
retirement plan described in clause (iii),
(iv), (v), or (vi) of section 402(c)(8)(B)
shall not be treated as failing to meet the
requirements of this paragraph in the case of
any failure to make a required minimum
distribution for a calendar year if--
``(I) the aggregate value of an
employee's entire interest under all
applicable eligible retirement plans of
the employer on the last day of the
calendar year to which such
distribution relates does not exceed
the dollar amount in effect for such
year under clause (i), and
``(II) the employee certifies that
the aggregate value of the employee's
entire interest under all applicable
eligible retirement plans on the last
day of the calendar year to which such
distribution relates did not exceed the
dollar amount in effect for such year
under clause (i).
``(vi) Aggregation rule.--All employers
treated as a single employer under subsection
(b), (c), (m), or (o) of section 414 shall be
treated as a single employer for purposes of
clause (v).''.
(b) Plan Administrator Reporting.--Section 6047 of such Code is
amended by redesignating subsection (h) as subsection (h) and by
inserting after subsection (g) the following new subsection:
``(h) Account Balance for Participants Who Have Attained Age 69.--
``(1) In general.--Not later than January 31 of each year,
the plan administrator (as defined in section 414(g)) of each
applicable eligible retirement plan (as defined in section
401(a)(9)(H)) shall make a return to the Secretary with respect
to each participant of such plan who has attained age 69 as of
the end of the preceding calendar year which states--
``(A) the name and plan number of the plan,
``(B) the name and address of the plan administrator,
``(C) the name, address, and taxpayer identification
number of the participant, and
``(D) the account balance of such participant as of
the end of the preceding calendar year.
``(2) Statement furnished to participant.--Every person
required to make a return under paragraph (1) with respect to a
participant shall furnish a copy of such return to such
participant.
``(3) Application to individual retirement plans and
annuities.--In the case of an applicable eligible retirement
plan described in clause (i) or (ii) of section 402(c)(8)(B)--
``(A) any reference in this subsection to the plan
administrator shall be treated as a reference to the
trustee or issuer, as the case may be, and
``(B) any reference in this subsection to the
participant shall be treated as a reference to the
individual for whom such account or annuity is
maintained.''.
(c) Effective Date.--The amendments made by this section shall apply
to distributions required to be made in calendar years beginning more
than 120 days after the date of the enactment of this Act.
SEC. 110. CLARIFICATION OF TREATMENT OF CERTAIN RETIREMENT PLAN
CONTRIBUTIONS PICKED UP BY GOVERNMENTAL EMPLOYERS
FOR NEW OR EXISTING EMPLOYEES.
(a) In General.--Section 414(h)(2) of the Internal Revenue Code of
1986 is amended--
(1) by striking ``For purposes of paragraph (1)'' and
inserting the following:
``(A) In general.--For purposes of paragraph (1)'',
and
(2) by adding at the end the following new subparagraph:
``(B) Treatment of elections between alternative
benefit formulas.--For purposes of subparagraph (A), a
contribution shall not fail to be treated as picked up
by an employing unit merely because the employee may
make an irrevocable election between the application of
two alternative benefit formulas involving the same or
different levels of employee contributions.''.
(b) Effective Date.--The amendment made by this section shall apply
to plan years beginning after the date of the enactment of this Act.
SEC. 111. ELECTIVE DEFERRALS BY MEMBERS OF THE READY RESERVE OF A
RESERVE COMPONENT OF THE ARMED FORCES.
(a) In General.--Section 402(g) of the Internal Revenue Code of 1986
is amended by adding at the end the following new paragraph:
``(9) Elective deferrals by members of ready reserve.--
``(A) In general.--In the case of a qualified ready
reservist for any taxable year, the limitations of
subparagraphs (A) and (C) of paragraph (1) shall be
applied separately with respect to--
``(i) elective deferrals of such qualified
ready reservist with respect to compensation
described in subparagraph (B), and
``(ii) all other elective deferrals of such
qualified ready reservist.
``(B) Qualified ready reservist.--For purposes of
this paragraph, the term `qualified ready reservist'
means any individual for any taxable year if such
individual received compensation for service as a
member of the Ready Reserve of a reserve component (as
defined in section 101 of title 37, United States Code)
during such taxable year.''.
(b) Effective Date.--The amendment made by this section shall apply
to plan years beginning after December 31, 2018.
TITLE II--ADMINISTRATIVE IMPROVEMENTS
SEC. 201. PLAN ADOPTED BY FILING DUE DATE FOR YEAR MAY BE TREATED AS IN
EFFECT AS OF CLOSE OF YEAR.
(a) In General.--Section 401(b) of the Internal Revenue Code of 1986
is amended--
(1) by striking ``Retroactive Changes in Plan.--A stock
bonus'' and inserting ``Plan Amendments.--
``(1) Certain retroactive changes in plan.--A stock bonus'',
and
(2) by adding at the end the following new paragraph:
``(2) Adoption of plan.--If an employer adopts a stock bonus,
pension, profit-sharing, or annuity plan after the close of a
taxable year but before the time prescribed by law for filing
the employer's return of tax for the taxable year (including
extensions thereof), the employer may elect to treat the plan
as having been adopted as of the last day of the taxable
year.''.
(b) Effective Date.--The amendments made by this section shall apply
to plans adopted for taxable years beginning after December 31, 2018.
SEC. 202. MODIFICATION OF NONDISCRIMINATION RULES TO PROTECT OLDER,
LONGER SERVICE PARTICIPANTS.
(a) In General.--Section 401 of the Internal Revenue Code of 1986 is
amended--
(1) by redesignating subsection (o) as subsection (p), and
(2) by inserting after subsection (n) the following new
subsection:
``(o) Special Rules for Applying Nondiscrimination Rules to Protect
Older, Longer Service and Grandfathered Participants.--
``(1) Testing of defined benefit plans with closed classes of
participants.--
``(A) Benefits, rights, or features provided to
closed classes.--A defined benefit plan which provides
benefits, rights, or features to a closed class of
participants shall not fail to satisfy the requirements
of subsection (a)(4) by reason of the composition of
such closed class or the benefits, rights, or features
provided to such closed class, if--
``(i) for the plan year as of which the class
closes and the 2 succeeding plan years, such
benefits, rights, and features satisfy the
requirements of subsection (a)(4) (without
regard to this subparagraph but taking into
account the rules of subparagraph (I)),
``(ii) after the date as of which the class
was closed, any plan amendment which modifies
the closed class or the benefits, rights, and
features provided to such closed class does not
discriminate significantly in favor of highly
compensated employees, and
``(iii) the class was closed before April 5,
2017, or the plan is described in subparagraph
(C).
``(B) Aggregate testing with defined contribution
plans permitted on a benefits basis.--
``(i) In general.--For purposes of
determining compliance with subsection (a)(4)
and section 410(b), a defined benefit plan
described in clause (iii) may be aggregated and
tested on a benefits basis with 1 or more
defined contribution plans, including with the
portion of 1 or more defined contribution plans
which--
``(I) provides matching contributions
(as defined in subsection (m)(4)(A)),
``(II) provides annuity contracts
described in section 403(b) which are
purchased with matching contributions
or nonelective contributions, or
``(III) consists of an employee stock
ownership plan (within the meaning of
section 4975(e)(7)) or a tax credit
employee stock ownership plan (within
the meaning of section 409(a)).
``(ii) Special rules for matching
contributions.--For purposes of clause (i), if
a defined benefit plan is aggregated with a
portion of a defined contribution plan
providing matching contributions--
``(I) such defined benefit plan must
also be aggregated with any portion of
such defined contribution plan which
provides elective deferrals described
in subparagraph (A) or (C) of section
402(g)(3), and
``(II) such matching contributions
shall be treated in the same manner as
nonelective contributions, including
for purposes of applying the rules of
subsection (l).
``(iii) Plans described.--A defined benefit
plan is described in this clause if--
``(I) the plan provides benefits to a
closed class of participants,
``(II) for the plan year as of which
the class closes and the 2 succeeding
plan years, the plan satisfies the
requirements of section 410(b) and
subsection (a)(4) (without regard to
this subparagraph but taking into
account the rules of subparagraph (I)),
``(III) after the date as of which
the class was closed, any plan
amendment which modifies the closed
class or the benefits provided to such
closed class does not discriminate
significantly in favor of highly
compensated employees, and
``(IV) the class was closed before
April 5, 2017, or the plan is described
in subparagraph (C).
``(C) Plans described.--A plan is described in this
subparagraph if, taking into account any predecessor
plan--
``(i) such plan has been in effect for at
least 5 years as of the date the class is
closed, and
``(ii) during the 5-year period preceding the
date the class is closed, there has not been a
substantial increase in the coverage or value
of the benefits, rights, or features described
in subparagraph (A) or in the coverage or
benefits under the plan described in
subparagraph (B)(iii) (whichever is
applicable).
``(D) Determination of substantial increase for
benefits, rights, and features.--In applying
subparagraph (C)(ii) for purposes of subparagraph
(A)(iii), a plan shall be treated as having had a
substantial increase in coverage or value of the
benefits, rights, or features described in subparagraph
(A) during the applicable 5-year period only if, during
such period--
``(i) the number of participants covered by
such benefits, rights, or features on the date
such period ends is more than 50 percent
greater than the number of such participants on
the first day of the plan year in which such
period began, or
``(ii) such benefits, rights, and features
have been modified by 1 or more plan amendments
in such a way that, as of the date the class is
closed, the value of such benefits, rights, and
features to the closed class as a whole is
substantially greater than the value as of the
first day of such 5-year period, solely as a
result of such amendments.
``(E) Determination of substantial increase for
aggregate testing on benefits basis.--In applying
subparagraph (C)(ii) for purposes of subparagraph
(B)(iii)(IV), a plan shall be treated as having had a
substantial increase in coverage or benefits during the
applicable 5-year period only if, during such period--
``(i) the number of participants benefitting
under the plan on the date such period ends is
more than 50 percent greater than the number of
such participants on the first day of the plan
year in which such period began, or
``(ii) the average benefit provided to such
participants on the date such period ends is
more than 50 percent greater than the average
benefit provided on the first day of the plan
year in which such period began.
``(F) Certain employees disregarded.--For purposes of
subparagraphs (D) and (E), any increase in coverage or
value or in coverage or benefits, whichever is
applicable, which is attributable to such coverage and
value or coverage and benefits provided to employees--
``(i) who became participants as a result of
a merger, acquisition, or similar event which
occurred during the 7-year period preceding the
date the class is closed, or
``(ii) who became participants by reason of a
merger of the plan with another plan which had
been in effect for at least 5 years as of the
date of the merger,
shall be disregarded, except that clause (ii) shall
apply for purposes of subparagraph (D) only if, under
the merger, the benefits, rights, or features under 1
plan are conformed to the benefits, rights, or features
of the other plan prospectively.
``(G) Rules relating to average benefit.--For
purposes of subparagraph (E)--
``(i) the average benefit provided to
participants under the plan will be treated as
having remained the same between the 2 dates
described in subparagraph (E)(ii) if the
benefit formula applicable to such participants
has not changed between such dates, and
``(ii) if the benefit formula applicable to 1
or more participants under the plan has changed
between such 2 dates, then the average benefit
under the plan shall be considered to have
increased by more than 50 percent only if--
``(I) the total amount determined
under section 430(b)(1)(A)(i) for all
participants benefitting under the plan
for the plan year in which the 5-year
period described in subparagraph (E)
ends, exceeds
``(II) the total amount determined
under section 430(b)(1)(A)(i) for all
such participants for such plan year,
by using the benefit formula in effect
for each such participant for the first
plan year in such 5-year period, by
more than 50 percent.
In the case of a CSEC plan (as defined in
section 414(y)), the normal cost of the plan
(as determined under section 433(j)(1)(B))
shall be used in lieu of the amount determined
under section 430(b)(1)(A)(i).
``(H) Treatment as single plan.--For purposes of
subparagraphs (E) and (G), a plan described in section
413(c) shall be treated as a single plan rather than as
separate plans maintained by each employer in the plan.
``(I) Special rules.--For purposes of subparagraphs
(A)(i) and (B)(iii)(II), the following rules shall
apply:
``(i) In applying section 410(b)(6)(C), the
closing of the class of participants shall not
be treated as a significant change in coverage
under section 410(b)(6)(C)(i)(II).
``(ii) 2 or more plans shall not fail to be
eligible to be aggregated and treated as a
single plan solely by reason of having
different plan years.
``(iii) Changes in the employee population
shall be disregarded to the extent attributable
to individuals who become employees or cease to
be employees, after the date the class is
closed, by reason of a merger, acquisition,
divestiture, or similar event.
``(iv) Aggregation and all other testing
methodologies otherwise applicable under
subsection (a)(4) and section 410(b) may be
taken into account.
The rule of clause (ii) shall also apply for purposes
of determining whether plans to which subparagraph
(B)(i) applies may be aggregated and treated as 1 plan
for purposes of determining whether such plans meet the
requirements of subsection (a)(4) and section 410(b).
``(J) Spun-off plans.--For purposes of this
paragraph, if a portion of a defined benefit plan
described in subparagraph (A) or (B)(iii) is spun off
to another employer and the spun-off plan continues to
satisfy the requirements of--
``(i) subparagraph (A)(i) or (B)(iii)(II),
whichever is applicable, if the original plan
was still within the 3-year period described in
such subparagraph at the time of the spin off,
and
``(ii) subparagraph (A)(ii) or (B)(iii)(III),
whichever is applicable,
the treatment under subparagraph (A) or (B) of the
spun-off plan shall continue with respect to such other
employer.
``(2) Testing of defined contribution plans.--
``(A) Testing on a benefits basis.--A defined
contribution plan shall be permitted to be tested on a
benefits basis if--
``(i) such defined contribution plan provides
make-whole contributions to a closed class of
participants whose accruals under a defined
benefit plan have been reduced or eliminated,
``(ii) for the plan year of the defined
contribution plan as of which the class
eligible to receive such make-whole
contributions closes and the 2 succeeding plan
years, such closed class of participants
satisfies the requirements of section
410(b)(2)(A)(i) (determined by applying the
rules of paragraph (1)(I)),
``(iii) after the date as of which the class
was closed, any plan amendment to the defined
contribution plan which modifies the closed
class or the allocations, benefits, rights, and
features provided to such closed class does not
discriminate significantly in favor of highly
compensated employees, and
``(iv) the class was closed before April 5,
2017, or the defined benefit plan under clause
(i) is described in paragraph (1)(C) (as
applied for purposes of paragraph
(1)(B)(iii)(IV)).
``(B) Aggregation with plans including matching
contributions.--
``(i) In general.--With respect to 1 or more
defined contribution plans described in
subparagraph (A), for purposes of determining
compliance with subsection (a)(4) and section
410(b), the portion of such plans which
provides make-whole contributions or other
nonelective contributions may be aggregated and
tested on a benefits basis with the portion of
1 or more other defined contribution plans
which--
``(I) provides matching contributions
(as defined in subsection (m)(4)(A)),
``(II) provides annuity contracts
described in section 403(b) which are
purchased with matching contributions
or nonelective contributions, or
``(III) consists of an employee stock
ownership plan (within the meaning of
section 4975(e)(7)) or a tax credit
employee stock ownership plan (within
the meaning of section 409(a)).
``(ii) Special rules for matching
contributions.--Rules similar to the rules of
paragraph (1)(B)(ii) shall apply for purposes
of clause (i).
``(C) Special rules for testing defined contribution
plan features providing matching contributions to
certain older, longer service participants.--In the
case of a defined contribution plan which provides
benefits, rights, or features to a closed class of
participants whose accruals under a defined benefit
plan have been reduced or eliminated, the plan shall
not fail to satisfy the requirements of subsection
(a)(4) solely by reason of the composition of the
closed class or the benefits, rights, or features
provided to such closed class if the defined
contribution plan and defined benefit plan otherwise
meet the requirements of subparagraph (A) but for the
fact that the make-whole contributions under the
defined contribution plan are made in whole or in part
through matching contributions.
``(D) Spun-off plans.--For purposes of this
paragraph, if a portion of a defined contribution plan
described in subparagraph (A) or (C) is spun off to
another employer, the treatment under subparagraph (A)
or (C) of the spun-off plan shall continue with respect
to the other employer if such plan continues to comply
with the requirements of clauses (ii) (if the original
plan was still within the 3-year period described in
such clause at the time of the spin off) and (iii) of
subparagraph (A), as determined for purposes of
subparagraph (A) or (C), whichever is applicable.
``(3) Definitions.--For purposes of this subsection--
``(A) Make-whole contributions.--Except as otherwise
provided in paragraph (2)(C), the term `make-whole
contributions' means nonelective allocations for each
employee in the class which are reasonably calculated,
in a consistent manner, to replace some or all of the
retirement benefits which the employee would have
received under the defined benefit plan and any other
plan or qualified cash or deferred arrangement under
subsection (k)(2) if no change had been made to such
defined benefit plan and such other plan or
arrangement. For purposes of the preceding sentence,
consistency shall not be required with respect to
employees who were subject to different benefit
formulas under the defined benefit plan.
``(B) References to closed class of participants.--
References to a closed class of participants and
similar references to a closed class shall include
arrangements under which 1 or more classes of
participants are closed, except that 1 or more classes
of participants closed on different dates shall not be
aggregated for purposes of determining the date any
such class was closed.
``(C) Highly compensated employee.--The term `highly
compensated employee' has the meaning given such term
in section 414(q).''.
(b) Participation Requirements.--Section 401(a)(26) of such Code is
amended by adding at the end the following new subparagraph:
``(I) Protected participants.--
``(i) In general.--A plan shall be deemed to
satisfy the requirements of subparagraph (A)
if--
``(I) the plan is amended--
``(aa) to cease all benefit
accruals, or
``(bb) to provide future
benefit accruals only to a
closed class of participants,
``(II) the plan satisfies
subparagraph (A) (without regard to
this subparagraph) as of the effective
date of the amendment, and
``(III) the amendment was adopted
before April 5, 2017, or the plan is
described in clause (ii).
``(ii) Plans described.--A plan is described
in this clause if the plan would be described
in subsection (o)(1)(C), as applied for
purposes of subsection (o)(1)(B)(iii)(IV) and
by treating the effective date of the amendment
as the date the class was closed for purposes
of subsection (o)(1)(C).
``(iii) Special rules.--For purposes of
clause (i)(II), in applying section
410(b)(6)(C), the amendments described in
clause (i) shall not be treated as a
significant change in coverage under section
410(b)(6)(C)(i)(II).
``(iv) Spun-off plans.--For purposes of this
subparagraph, if a portion of a plan described
in clause (i) is spun off to another employer,
the treatment under clause (i) of the spun-off
plan shall continue with respect to the other
employer.''.
(c) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall take effect on the date
of the enactment of this Act, without regard to whether any
plan modifications referred to in such amendments are adopted
or effective before, on, or after such date of enactment.
(2) Special rules.--
(A) Election of earlier application.--At the election
of the plan sponsor, the amendments made by this
section shall apply to plan years beginning after
December 31, 2013.
(B) Closed classes of participants.--For purposes of
paragraphs (1)(A)(iii), (1)(B)(iii)(IV), and (2)(A)(iv)
of section 401(o) of the Internal Revenue Code of 1986
(as added by this section), a closed class of
participants shall be treated as being closed before
April 5, 2017, if the plan sponsor's intention to
create such closed class is reflected in formal written
documents and communicated to participants before such
date.
(C) Certain post-enactment plan amendments.--A plan
shall not be treated as failing to be eligible for the
application of section 401(o)(1)(A), 401(o)(1)(B)(iii),
or 401(a)(26) of such Code (as added by this section)
to such plan solely because in the case of--
(i) such section 401(o)(1)(A), the plan was
amended before the date of the enactment of
this Act to eliminate 1 or more benefits,
rights, or features, and is further amended
after such date of enactment to provide such
previously eliminated benefits, rights, or
features to a closed class of participants, or
(ii) such section 401(o)(1)(B)(iii) or
section 401(a)(26), the plan was amended before
the date of the enactment of this Act to cease
all benefit accruals, and is further amended
after such date of enactment to provide benefit
accruals to a closed class of participants. Any
such section shall only apply if the plan
otherwise meets the requirements of such
section and in applying such section, the date
the class of participants is closed shall be
the effective date of the later amendment.
SEC. 203. STUDY OF APPROPRIATE PBGC PREMIUMS.
(a) In General.--The Pension Benefit Guaranty Corporation (hereafter
in this section referred to as ``the Corporation'') shall enter into a
contract with an appropriate agency or organization to conduct an
independent study of the Corporation's Single Employer Pension
Insurance Modeling System.
(b) Selection of Independent Organization.--The appropriate agency or
organization referred to in subsection (a) shall be selected by the
Board of Directors of the Corporation. Such agency or organization
shall be the Social Security Administration or any other agency or
organization that such Board determines is independent from the
Corporation and has the expertise to conduct the study described in
this section.
(c) Study.--The independent study referred to in subsection (a) shall
begin not later than 6 months after the date of the enactment of this
Act and shall--
(1) examine the current structure and level of premiums
required to be paid by single employer plans (including fixed,
variable and termination premiums) to the Corporation to
evaluate whether such premiums are sufficient for the
Corporation to pay the benefits guaranteed by the Corporation,
(2) evaluate whether there are alternative structures and
levels of premiums that would better account for the risks
posed by various categories of single employer plans, including
on the basis of--
(A) industry, ownership structure, or size of the
plan sponsor,
(B) plan funded status, risk or volatility of plan
investments, or credit worthiness of the plan sponsor,
or
(C) a combination of factors described in
subparagraphs (A) and (B),
(3) evaluate whether other methods of estimating the value of
assets and liabilities should be used in the financial
statements of the Corporation (including methods described in
the report titled ``The Risk Exposure of the Pension Benefit
Guaranty Corporation'' published by the Congressional Budget
Office in September 2005 and methods described in the report
titled ``Options to Improve the Financial Condition of the
Pension Benefit Guaranty Corporation's Multiemployer Program''
published by the Congressional Budget Office in August 2016),
(4) evaluate whether multiple employer plans in general, and
multiple employer plans that are CSEC plans (as defined in
section 414(y) of the Internal Revenue Code of 1986) in
particular, have characteristics that warrant a separate
structure and level of premiums, and
(5) include an explanation of the assumptions underlying each
analysis involved in conducting such study.
TITLE III--OTHER SAVINGS PROVISIONS
SEC. 301. UNIVERSAL SAVINGS ACCOUNTS.
(a) In General.--Subchapter F of chapter 1 of the Internal Revenue
Code of 1986 is amended by adding at the end the following new part:
``PART IX--UNIVERSAL SAVINGS ACCOUNTS
``Sec. 530U. Universal Savings Accounts.
``SEC. 530U. UNIVERSAL SAVINGS ACCOUNTS.
``(a) General Rule.--A Universal Savings Account shall be exempt from
taxation under this subtitle. Notwithstanding the preceding sentence,
such account shall be subject to the taxes imposed by section 511
(relating to imposition of tax on unrelated business income of
charitable organizations).
``(b) Universal Savings Account.--For purposes of this section, the
term `Universal Savings Account' means a trust created or organized in
the United States by an individual for the exclusive benefit of such
individual and which is designated (in such manner as the Secretary may
prescribe) at the time of the establishment of the trust as a Universal
Savings Account, but only if the written governing instrument creating
the trust meets the following requirements:
``(1) Except in the case of a qualified rollover contribution
described in subsection (d)--
``(A) no contribution will be accepted unless it is
in cash, and
``(B) contributions will not be accepted for the
taxable year in excess of the contribution limit
specified in subsection (c)(2).
``(2) No distribution will be made unless it is--
``(A) cash, or
``(B) property that--
``(i) has a readily ascertainable fair market
value, and
``(ii) is identified by the Secretary in
regulations or other guidance as property to
which this subparagraph applies.
``(3) The trustee is a bank (as defined in section 408(n)) or
another person who demonstrates to the satisfaction of the
Secretary that the manner in which that person will administer
the trust will be consistent with the requirements of this
section.
``(4) No part of the trust assets will be invested in life
insurance contracts or collectibles (as defined in section
408(m)).
``(5) The interest of an individual in the balance of his
account is nonforfeitable.
``(6) The assets of the trust shall not be commingled with
other property except in a common trust fund or common
investment fund.
``(c) Treatment of Distributions and Contributions.--
``(1) Distributions.--
``(A) In general.--Except as provided in subparagraph
(B), any distribution from a Universal Savings Account
shall not be includible in gross income.
``(B) Net income attributable to excess
contributions.--Any distribution of net income
described in section 4973(i)(2) shall be includible in
the gross income of the account holder in the taxable
year in which the contribution to which such net income
relates was made.
``(2) Contribution limit.--
``(A) In general.--The aggregate amount of
contributions (other than qualified rollover
contributions described in subsection (d)) for any
taxable year to all Universal Savings Accounts
maintained for the benefit of an individual shall not
exceed the lesser of--
``(i) $2,500, or
``(ii) an amount equal to the compensation
(within the meaning of section 219) includible
in such individual's gross income for such
taxable year.
``(B) No contributions for dependents.--In the case
of an individual who is a dependent of another taxpayer
for a taxable year beginning in the calendar year in
which such individual's taxable year begins, the dollar
amount under subparagraph (A) for such individual's
taxable year shall be zero.
``(C) Special rule in case of joint return.--
``(i) In general.--In the case of an
individual to whom this clause applies, the
amount determined under subparagraph (A)(ii)
with respect to such individual for the taxable
year shall not be less than an amount equal to
the sum of--
``(I) the compensation of such
individual includible in gross income
for the taxable year, plus
``(II) the compensation of such
individual's spouse includible in gross
income for the taxable year reduced
(but not below zero) by the amount
contributed for the taxable year to all
Universal Savings Accounts maintained
for the benefit of such spouse.
``(ii) Individual to whom clause (i)
applies.--Clause (i) shall apply to any
individual--
``(I) who files a joint return for
the taxable year, and
``(II) whose compensation includible
in gross income for the taxable year is
less than the compensation of such
individual's spouse includible in gross
income for the taxable year.
``(D) Cost-of-living adjustment.--In the case of any
taxable year beginning in a calendar year after 2019,
the $2,500 amount under subparagraph (A)(i) shall be
increased by an amount equal to--
``(i) such dollar amount, multiplied by
``(ii) the cost-of-living adjustment
determined under section 1(f)(3) for the
calendar year, determined by substituting
`calendar year 2018' for `calendar year 2016'
in subparagraph (A)(ii) thereof.
If any amount after adjustment under the preceding
sentence is not a multiple of $100, such amount shall
be rounded to the next lower multiple of $100.
``(d) Qualified Rollover Contribution.--For purposes of this section,
the term `qualified rollover contribution' means a contribution to a
Universal Savings Account from another such account of the same
individual, but only if such amount is contributed not later than the
60th day after the distribution from such other account.
``(e) Treatment of Account Upon Death.--Upon death of any account
holder of a Universal Savings Account--
``(1) Spouse.--In the case of the account holder's surviving
spouse acquiring such account holder's interest in such account
by reason of the death of the account holder, such account
shall be treated as if the spouse were the account holder.
``(2) Other cases.--In any other case--
``(A) all amounts in such account shall be treated as
distributed on the date of such individual's death, and
``(B) such account shall cease to be treated as a
Universal Savings Account.
``(f) Other Special Rules.--
``(1) Community property laws.--This section shall be applied
without regard to any community property laws.
``(2) Loss of taxation exemption of account where individual
engages in prohibited transaction; effect of pledging account
as security.--Rules similar to the rules of paragraphs (2) and
(4) of section 408(e) shall apply to any Universal Savings
Account.
``(g) Reports.--The trustee of a Universal Savings Account shall make
such reports regarding such account to the Secretary and to the account
holder with respect to contributions, distributions, and such other
matters as the Secretary may require. Such reports shall be--
``(1) filed at such time and in such manner as the Secretary
provides, and
``(2) furnished to account holders--
``(A) not later than January 31 of the calendar year
following the calendar year to which such reports
relate, and
``(B) in such manner as the Secretary provides.''.
(b) Tax on Excess Contributions.--
(1) In general.--Section 4973(a) of such Code is amended by
striking ``or'' at the end of paragraph (5), by inserting
``or'' at the end of paragraph (6), and by inserting after
paragraph (6) the following new paragraph:
``(7) a Universal Savings Account (as defined in section
530U),''.
(2) Excess contribution.--Section 4973 of such Code is
amended by adding at the end the following new subsection:
``(i) Excess Contributions to Universal Savings Accounts.--For
purposes of this section--
``(1) In general.--In the case of Universal Savings Accounts
(within the meaning of section 530U), the term `excess
contributions' means the sum of--
``(A) the amount (if any) by which the amount
contributed for the taxable year to such accounts
(other than qualified rollover contributions (as
defined in section 530U(d))) exceeds the contribution
limit under section 530U(c)(2) for such taxable year,
and
``(B) the amount determined under this subsection for
the preceding taxable year, reduced by the sum of--
``(i) the distributions out of the account
for the taxable year, and
``(ii) the amount (if any) by which the
maximum amount allowable as a contribution
under section 530U(c)(2) for the taxable year
exceeds the amount contributed to the accounts
for the taxable year.
``(2) Special rule.--A contribution shall not be taken into
account under paragraph (1) if such contribution (together with
the amount of net income attributable to such contribution) is
distributed to the account holder on or before the due date of
the account holder's return of tax for such taxable year.''.
(c) Tax on Prohibited Transactions.--Section 4975(e)(1) of such Code
is amended by striking ``or'' at the end of subparagraph (F), by
striking the period at the end of subparagraph (G) and inserting ``,
or'', and by adding at the end the following new subparagraph:
``(H) a Universal Savings Account (as defined in
section 530U).''.
(d) Failure to Provide Reports on Universal Savings Accounts.--
Section 6693(a)(2) of such Code is amended by striking ``and'' at the
end of subparagraph (E), by striking the period at the end of
subparagraph (F) and inserting ``, and'', and by inserting after
subparagraph (F) the following new subparagraph:
``(G) section 530U(g) (relating to Universal Savings
Accounts).''.
(e) Conforming Amendment.--The table of parts for subchapter F of
chapter 1 of such Code is amended by adding at the end the following
new item:
``Part IX. Universal Savings Accounts''.
(f) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2018.
SEC. 302. EXPANSION OF SECTION 529 PLANS.
(a) Distributions for Certain Expenses Associated With Registered
Apprenticeship Programs.--Section 529(c) of the Internal Revenue Code
of 1986 is amended by adding at the end the following new paragraph:
``(8) Treatment of certain expenses associated with
registered apprenticeship programs.--Any reference in this
subsection to the term `qualified higher education expense'
shall include a reference to expenses for fees, books,
supplies, and equipment required for the participation of a
designated beneficiary in an apprenticeship program registered
and certified with the Secretary of Labor under section 1 of
the National Apprenticeship Act (29 U.S.C. 50).''.
(b) Distributions for Certain Homeschooling Expenses.--Section
529(c)(7) of such Code is amended by striking ``include a reference
to'' and all that follows and inserting ``include a reference to--
``(A) expenses for tuition in connection with
enrollment or attendance of a designated beneficiary at
an elementary or secondary public, private, or
religious school, and
``(B) expenses, with respect to a designated
beneficiary, for--
``(i) curriculum and curricular materials,
``(ii) books or other instructional
materials,
``(iii) online educational materials,
``(iv) tuition for tutoring or educational
classes outside of the home (but only if the
tutor or class instructor is not related
(within the meaning of section 152(d)(2)) to
the student),
``(v) dual enrollment in an institution of
higher education, and
``(vi) educational therapies for students
with disabilities,
in connection with a homeschool (whether treated as a
homeschool or a private school for purposes of
applicable State law).''.
(c) Distributions for Qualified Education Loan Repayments.--
(1) In general.--Section 529(c) of such Code, as amended by
subsection (a), is amended by adding at the end the following
new paragraph:
``(9) Treatment of qualified education loan repayments.--
``(A) In general.--Any reference in this subsection
to the term `qualified higher education expense' shall
include a reference to amounts paid as principal or
interest on any qualified education loan (as defined in
section 221(d)) of the designated beneficiary or a
sibling of the designated beneficiary.
``(B) Limitation.--The amount of distributions
treated as a qualified higher education expense under
this paragraph with respect to the loans of any
individual shall not exceed $10,000 (reduced by the
amount of distributions so treated for all prior
taxable years).
``(C) Special rules for siblings of the designated
beneficiary.--
``(i) Separate accounting.--For purposes of
subparagraph (B) and subsection (d), amounts
treated as a qualified higher education expense
with respect to the loans of a sibling of the
designated beneficiary shall be taken into
account with respect to such sibling and not
with respect to such designated beneficiary.
``(ii) Sibling defined.--For purposes of this
paragraph, the term `sibling' means an
individual who bears a relationship to the
designated beneficiary which is described in
section 152(d)(2)(B).''.
(2) Coordination with deduction for student loan interest.--
Section 221(e)(1) of such Code is amended by adding at the end
the following: ``The deduction otherwise allowable under
subsection (a) (prior to the application of subsection (b)) to
the taxpayer for any taxable year shall be reduced (but not
below zero) by so much of the distributions treated as a
qualified higher education expense under section 529(c)(9) with
respect to loans of the taxpayer as would be includible in
gross income under section 529(c)(3)(A) for such taxable year
but for such treatment.''.
(d) Distributions for Certain Elementary and Secondary School
Expenses in Addition to Tuition.--Section 529(c)(7)(A), as amended by
subsection (b), is amended to read as follows:
``(A) expenses described in section 530(b)(3)(A)(i)
in connection with enrollment or attendance of a
designated beneficiary at an elementary or secondary
public, private, or religious school, and''.
(e) Effective Date.--The amendments made by this section shall apply
to distributions made after December 31, 2018.
SEC. 303. PENALTY-FREE WITHDRAWALS FROM RETIREMENT PLANS FOR
INDIVIDUALS IN CASE OF BIRTH OF CHILD OR ADOPTION.
(a) In General.--Section 72(t)(2) of the Internal Revenue Code of
1986 is amended by adding at the end the following new subparagraph:
``(H) Distributions from retirement plans in case of
birth of child or adoption.--
``(i) In general.--Any qualified birth or
adoption distribution.
``(ii) Limitation.--The aggregate amount
which may be treated as qualified birth or
adoption distributions by any individual with
respect to any birth or adoption shall not
exceed $7,500.
``(iii) Qualified birth or adoption
distribution.--For purposes of this
subparagraph--
``(I) In general.--The term
`qualified birth or adoption
distribution' means any distribution
from an applicable eligible retirement
plan to an individual if made during
the 1-year period beginning on the date
on which a child of the individual is
born or on which the legal adoption by
the individual of an eligible child is
finalized.
``(II) Eligible child.--The term
`eligible child' means any individual
(other than a child of the taxpayer's
spouse) who has not attained age 18 or
is physically or mentally incapable of
self-support.
``(iv) Treatment of plan distributions.--
``(I) In general.--If a distribution
to an individual would (without regard
to clause (ii)) be a qualified birth or
adoption distribution, a plan shall not
be treated as failing to meet any
requirement of this title merely
because the plan treats the
distribution as a qualified birth or
adoption distribution, unless the
aggregate amount of such distributions
from all plans maintained by the
employer (and any member of any
controlled group which includes the
employer) to such individual exceeds
$7,500.
``(II) Controlled group.--For
purposes of subclause (I), the term
`controlled group' means any group
treated as a single employer under
subsection (b), (c), (m), or (o) of
section 414.
``(v) Amount distributed may be repaid.--
``(I) In general.--Any individual who
receives a qualified birth or adoption
distribution may make one or more
contributions in an aggregate amount
not to exceed the amount of such
distribution to an applicable eligible
retirement plan of which such
individual is a beneficiary and to
which a rollover contribution of such
distribution could be made under
section 402(c), 403(a)(4), 403(b)(8),
408(d)(3), or 457(e)(16), as the case
may be.
``(II) Limitation on contributions to
applicable eligible retirement plans
other than IRAs.--The aggregate amount
of contributions made by an individual
under subclause (I) to any applicable
eligible retirement plan which is not
an individual retirement plan shall not
exceed the aggregate amount of
qualified birth or adoption
distributions which are made from such
plan to such individual. Subclause (I)
shall not apply to contributions to any
applicable eligible retirement plan
which is not an individual retirement
plan unless the individual is eligible
to make contributions (other than those
described in subclause (I)) to such
applicable eligible retirement plan.
``(III) Treatment of repayments of
distributions from applicable eligible
retirement plans other than IRAs.--If a
contribution is made under subclause
(I) with respect to a qualified birth
or adoption distribution from an
applicable eligible retirement plan
other than an individual retirement
plan, then the taxpayer shall, to the
extent of the amount of the
contribution, be treated as having
received such distribution in an
eligible rollover distribution (as
defined in section 402(c)(4)) and as
having transferred the amount to the
applicable eligible retirement plan in
a direct trustee to trustee transfer
within 60 days of the distribution.
``(IV) Treatment of repayments for
distributions from iras.--If a
contribution is made under subclause
(I) with respect to a qualified birth
or adoption distribution from an
individual retirement plan, then, to
the extent of the amount of the
contribution, such distribution shall
be treated as a distribution described
in section 408(d)(3) and as having been
transferred to the applicable eligible
retirement plan in a direct trustee to
trustee transfer within 60 days of the
distribution.
``(vi) Definition and special rules.--For
purposes of this subparagraph--
``(I) Applicable eligible retirement
plan.--The term `applicable eligible
retirement plan' means an eligible
retirement plan (as defined in section
402(c)(8)(B)) other than a defined
benefit plan.
``(II) Exemption of distributions
from trustee to trustee transfer and
withholding rules.--For purposes of
sections 401(a)(31), 402(f), and 3405,
a qualified birth or adoption
distribution shall not be treated as an
eligible rollover distribution.
``(III) Taxpayer must include tin.--A
distribution shall not be treated as a
qualified birth or adoption
distribution with respect to any child
or eligible child unless the taxpayer
includes the name, age, and TIN of such
child or eligible child on the
taxpayer's return of tax for the
taxable year.
``(IV) Distributions treated as
meeting plan distribution
requirements.--Any qualified birth or
adoption distribution shall be treated
as meeting the requirements of sections
401(k)(2)(B)(i), 403(b)(7)(A)(ii),
403(b)(11), and 457(d)(1)(A).''.
(b) Effective Date.--The amendments made by this section shall apply
to distributions made after December 31, 2018.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
H.R. 6757, as reported by the Committee on Ways and Means,
expands the ability of Americans to use a variety of savings
vehicles. The bill includes a series of important reforms to
make it easier for employers, especially small employers, to
provide retirement plans to their employees. The bill also
includes reforms that make it easier for employees to
participate in employer-sponsored retirement plans and
individual retirement arrangements (IRAs). In addition, the
bill establishes universal savings accounts, which are
individual accounts that Americans can use to save for any
purpose, in order to encourage families to save earlier and in
greater amounts. The bill further expands the permitted uses of
529 education savings plans. Furthermore, the bill includes a
provision that allows individuals to withdraw funds from their
retirement accounts, penalty-free, at the birth of a child or
adoption.
B. Background and Need for Legislation
Private-sector employer-sponsored retirement plans and IRAs
are valuable tools successfully used by millions of Americans
to help save for retirement. In 2015 there were approximately
131 million civilian workers. Of those, approximately 69
percent had access to either or both a defined benefit or
defined contribution retirement plan at work and approximately
53 percent participated in one or more of these types of
retirement plans. An estimated 50 million workers participated
in a defined contribution plan and 31 million workers
participated in a defined benefit plan.\1\ Total financial
assets for private, State, and local defined benefit and
defined contribution plans in 2015 were $13.7 trillion,
comprised of $8.1 trillion in defined benefit plans and $5.6
trillion in defined contribution plans.\2\
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\1\U.S. Bureau of Labor Statistics, Bulletin 2782, DOL: National
Compensation Survey: Employee Benefits in the United States, March
2015, 4, 572 (September 2015).
\2\Board of Governors of the Federal Reserve System, First Quarter
2018: Financial Accounts of the United States--Flow of Funds, Balance
Sheets, and Integrated Macroeconomic Accounts, 95, 98.
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The Committee believes that it is valuable for employees to
have access to a retirement plan at work and that these reforms
will expand the ability of employers to offer retirement plans.
C. Legislative History
Background
H.R. 6757 was introduced on September 10, 2018, and was
referred to the Committee on Ways and Means.
Committee action
The Committee on Ways and Means marked up H.R. 6757, the
``Family Savings Act of 2018,'' on September 13, 2018, and
ordered the bill, as amended, favorably reported (with a quorum
being present).
Committee hearings
On July 9, 2017, the Subcommittee on Tax Policy of the
Committee on Ways and Means held a public hearing on how the
tax code affects families, including the tax code retirement
savings provisions. On September 30, 2015, the Subcommittee on
Oversight of the Committee on Ways and Means held a public
hearing on various retirement issues. On April 17, 2012, the
Committee on Ways and Means held a public hearing on the tax
code provisions affecting retirement savings.
II. EXPLANATION OF THE BILL
TITLE I--EXPANDING AND PRESERVING RETIREMENT SAVINGS
A. Multiple Employer Plans; Pooled Employer Plans (sec. 101 of the
bill, sec. 413 of the Code, and secs. 3, 103, and 104 of ERISA)
PRESENT LAW
Retirement savings under the Code and ERISA
Tax-favored arrangements
The Internal Revenue Code (``Code'') provides two general
vehicles for tax-favored retirement savings: employer-sponsored
plans and individual retirement arrangements (``IRAs''). Code
provisions are generally within the jurisdiction of the
Secretary of the Treasury (``Secretary''), through his or her
delegate, the Internal Revenue Service (``IRS'').
The most common type of tax-favored employer-sponsored
retirement plan is a qualified retirement plan,\3\ which may be
a defined contribution plan or a defined benefit plan. Under a
defined contribution plan, separate individual accounts are
maintained for participants, to which accumulated
contributions, earnings, and losses are allocated, and
participants' benefits are based on the value of their
accounts.\4\ Defined contribution plans commonly allow
participants to direct the investment of their accounts,
usually by choosing among investment options offered under the
plan. Under a defined benefit plan, benefits are determined
under a plan formula and paid from general plan assets, rather
than individual accounts.\5\ Besides qualified retirement
plans, certain tax-exempt employers and public schools may
maintain tax-deferred annuity plans.\6\
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\3\ Sec. 401(a). A qualified annuity plan under section 403(a) is
similar to and subject to requirements similar to those applicable to
qualified retirement plans. Unless otherwise stated, all section
references are to the Internal Revenue Code of 1986, as amended (the
``Code'').
\4\Sec. 414(i). Defined contribution plans generally provide for
contributions by employers and may include a qualified cash or deferred
arrangement under a section 401(k) plan, under which employees may
elect to contribute to the plan.
\5\Sec. 414(j).
\6\ Sec. 403(b). Private and governmental employers that are exempt
from tax under section 501(c)(3), including tax-exempt private schools,
may maintain tax-deferred annuity plans. State and local governmental
employers may maintain another type of tax-favored retirement plan, an
eligible deferred compensation plan under section 457(b).
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An IRA is generally established by the individual for whom
the IRA is maintained.\7\ However, in some cases, an employer
may establish IRAs on behalf of employees and provide
retirement contributions to the IRAs.\8\ In addition, IRA
treatment may apply to accounts maintained for employees under
a trust created by an employer (or an employee association) for
the exclusive benefit of employees or their beneficiaries,
provided that the trust complies with the relevant IRA
requirements and separate accounting is maintained for the
interest of each employee or beneficiary (referred to herein as
an ``IRA trust'').\9\ In that case, the assets of the trust may
be held in a common fund for the account of all individuals who
have an interest in the trust.
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\7\Sections 219, 408 and 408A provide rules for IRAs. Under section
408(a)(2) and (n), only certain entities are permitted to be the
trustee of an IRA. The trustee of an IRA generally must be a bank, an
insured credit union, or a corporation subject to supervision and
examination by the Commissioner of Banking or other officer in charge
of the administration of the banking laws of the State in which it is
incorporated. Alternatively, an IRA trustee may be another person who
demonstrates to the satisfaction of the Secretary that the manner in
which the person will administer the IRA will be consistent with the
IRA requirements.
\8\Simplified employee pension (``SEP'') plans under section 408(k)
and SIMPLE IRA plans under section 408(p) are employer-sponsored
retirement plans funded using IRAs for employees.
\9\Sec. 408(c).
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ERISA
Retirement plans of private employers, including qualified
retirement plans and tax-deferred annuity plans, are generally
subject to requirements under the Employee Retirement Income
Security Act of 1974 (``ERISA'').\10\ A plan covering only
business owners (or business owners and their spouses)--that
is, it covers no other employees--is exempt from ERISA.\11\
Thus, a plan covering only self-employed individuals is exempt
from ERISA. Tax-deferred annuity plans that provide solely for
salary reduction contributions by employees may be exempt from
ERISA.\12\ IRAs are generally exempt from ERISA.
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\10\ERISA applies to employee welfare benefit plans, such as health
plans, of private employers, as well as to employer-sponsored
retirement (or pension) plans. Employer-sponsored welfare and pension
plans are both referred to under ERISA as employee benefit plans. Under
ERISA sec. 4(b)(1) and (2), governmental plans and church plans are
generally exempt from ERISA.
\11\29 C.F.R. 2510.3-3(b)-(c).
\12\29 C.F.R. 2510.3-2(f).
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The provisions of Title I of ERISA are under the
jurisdiction of the Secretary of Labor.\13\ Many of the
requirements under Title I of ERISA parallel Code requirements
for qualified retirement plans. Under ERISA, in carrying out
provisions relating to the same subject matter, the Secretary
(of the Treasury) and the Secretary of Labor are required to
consult with each other and develop rules, regulations,
practices, and forms that, to the extent appropriate for
efficient administration, are designed to reduce duplication of
effort, duplication of reporting, conflicting or overlapping
requirements, and the burden of compliance by plan
administrators, employers, and participants and
beneficiaries.\14\ In addition, interpretive jurisdiction over
parallel Code and ERISA provisions relating to retirement plans
is divided between the two Secretaries by Executive Order,
referred to as the Reorganization Plan No. 4 of 1978.\15\
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\13\The provisions of Title I of ERISA are codified at 29 U.S.C.
1001-734. Under Title IV of ERISA, defined benefit plans of private
employers are generally covered by the Pension Benefit Guaranty
Corporation's pension insurance program.
\14\ERISA sec. 3004.
\15\43 Fed. Reg. 47713 (October 17, 1978).
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Multiple employer plans under the Code
In general
Qualified retirement plans, either defined contribution or
defined benefit plans, are categorized as single-employer plans
or multiple employer plans. A single-employer plan is a plan
maintained by one employer. For this purpose, businesses and
organizations that are members of a controlled group of
corporations, a group under common control, or an affiliated
service group are treated as one employer (referred to as
``aggregation'').\16\
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\16\Secs. 414(b), (c), (m) and (o).
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A multiple employer plan generally is a single plan
maintained by two or more unrelated employers (that is,
employers that are not treated as a single employer under the
aggregation rules).\17\ Multiple employer plans are commonly
maintained by employers in the same industry and are used also
by professional employer organizations (``PEOs'') to provide
qualified retirement plan benefits to employees working for PEO
clients.\18\
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\17\Sec. 413(c). Multiple employer status does not apply if the
plan is a multiemployer plan. Multiemployer plans are different from
single employer plans and multiple employer plans. A multiemployer plan
is defined under sec. 414(f) as a plan maintained pursuant to one or
more collective bargaining agreements with two or more unrelated
employers and to which the employers are required to contribute under
the collective bargaining agreement(s). Multiemployer plans are also
known as Taft-Hartley plans.
\18\Rev. Proc. 2003-86, 2003-2 C.B. 1211, and Rev. Proc. 2002-21,
2002-1 C.B. 911, address the application of the multiple employer plan
rules to qualified defined contribution plans maintained by PEOs.
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Application of Code requirements to multiple employer plans
and EPCRS
Some requirements are applied to a multiple employer plan
on a plan-wide basis.\19\ For example, all employees covered by
the plan are treated as employees of all employers
participating in the plan for purposes of the exclusive benefit
rule. Similarly, an employee's service with all participating
employers is taken into account in applying the minimum
participation and vesting requirements. In applying the limits
on contributions and benefits, compensation, contributions, and
benefits attributable to all employers are taken into
account.\20\ Other requirements are applied separately,
including the minimum coverage requirements, nondiscrimination
requirements (both the general requirements and the special
tests for section 401(k) plans), and the top-heavy rules.\21\
However, the qualified status of the plan as a whole is
determined with respect to all employers maintaining the plan,
and the failure by one employer (or by the plan itself) to
satisfy an applicable qualification requirement may result in
disqualification of the plan with respect to all employers
(sometimes referred to as the ``one bad apple'' rule).\22\
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\19\Sec. 413(c).
\20\Treas. Reg. sec. 1.415(a)-1(e).
\21\Treas. Reg. secs. 1.413-2(a)(3)(ii)-(iii) and 1.416-1, G-2.
\22\Treas. Reg. secs. 1.413-2(a)(3)(iv) and 1.416-1, G-2.
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Because of the complexity of the requirements for qualified
retirement plans, errors in plan documents, as well as plan
operation and administration, commonly occur. Under a strict
application of these requirements, such an error would cause a
plan to lose its tax-favored status, which would fall most
heavily on plan participants because of the resulting current
income inclusion of vested amounts under the plan. As a
practical matter, therefore, the IRS rarely disqualifies a
plan. Instead, the IRS has established the Employee Plans
Compliance Resolution System (``EPCRS''), a formal program
under which employers and other plan sponsors can correct
compliance failures and continue to provide their employees
with retirement benefits on a tax-favored basis.\23\
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\23\Rev. Proc. 2016-51, 2016-42 I.R.B. 465.
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EPCRS has three components, providing for self-correction,
voluntary correction with IRS approval, and correction on
audit. The Self-Correction Program (``SCP'') generally permits
a plan sponsor that has established compliance practices and
procedures to correct certain insignificant failures at any
time (including during an audit), and certain significant
failures generally within a two-year period, without payment of
any fee or sanction. The Voluntary Correction Program (``VCP'')
permits an employer, at any time before an audit, to pay a
limited fee and receive IRS approval of a correction. For a
failure that is discovered on audit and corrected, the Audit
Closing Agreement Program (``Audit CAP'') provides for a
sanction that bears a reasonable relationship to the nature,
extent, and severity of the failure and that takes into account
the extent to which correction occurred before audit.
Multiple employer plans are eligible for EPCRS, and certain
special procedures apply.\24\ A VCP request with respect to a
multiple employer plan must be submitted to the IRS by the plan
administrator, rather than an employer maintaining the plan,
and must be made with respect to the entire plan, rather than a
portion of the plan affecting any particular employer. In
addition, if a failure applies to fewer than all of the
employers under the plan, the plan administrator may choose to
have a VCP compliance fee or audit CAP sanction calculated
separately for each employer based on the participants
attributable to that employer, rather than having the
compliance fee calculated based on the participants of the
entire plan. For example, the plan administrator may choose
this option when the failure is attributable to the failure of
an employer to provide the plan administrator with full and
complete information.
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\24\Section 10.11 of Rev. Proc. 2016-51.
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ERISA
Fiduciary and bonding requirements
Among other requirements, ERISA requires a plan to be
established and maintained pursuant to a written instrument
(that is, a plan document) that contains certain terms.\25\ The
terms of the plan must provide for one or more named
fiduciaries that jointly or severally have authority to control
and manage the operation and administration of the plan.\26\
Among other required plan terms are a procedure for the
allocation of responsibilities for the operation and
administration of the plan and a procedure for amending the
plan and for identifying the persons who have authority to
amend the plan. Among other permitted terms, a plan may provide
also that any person or group of persons may serve in more than
one fiduciary capacity with respect to the plan (including
service both as trustee and administrator) and that a person
who is a named fiduciary with respect to the control or
management of plan assets may appoint an investment manager or
managers to manage plan assets.
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\25\ERISA sec. 402.
\26\Fiduciary is defined in ERISA section 3(21), and named
fiduciary is defined in ERISA section 402(a)(2).
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In general, a plan fiduciary is responsible for the
investment of plan assets. However, ERISA section 404(c)
provides a special rule in the case of a defined contribution
plan that permits participants to direct the investment of
their individual accounts.\27\ Under the special rule, if
various requirements are met, a participant is not deemed to be
a fiduciary by reason of directing the investment of the
participant's account and no person who is otherwise a
fiduciary is liable for any loss, or by reason of any breach,
that results from the participant's investments. Defined
contribution plans that provide for participant-directed
investments commonly offer a set of investment options among
which participants may choose. The selection of investment
options to be offered under a plan is subject to ERISA
fiduciary requirements.
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\27\ERISA sec. 404(c). Under ERISA, a defined contribution plans is
also referred to as an individual account plan.
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Under ERISA, any plan fiduciary or person that handles plan
assets is required to be bonded, generally for an amount not to
exceed $500,000.\28\ In some cases, the maximum bond amount is
$1 million, rather than $500,000.
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\28\ERISA sec. 412.
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Multiple employer plan status under ERISA
Like the Code, ERISA contains rules for multiple employer
retirement plans.\29\ However, a different concept of multiple
employer plan applies under ERISA.
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\29\ERISA sec. 210(a).
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Under ERISA, an employee benefit plan (whether a pension
plan or a welfare plan) must be sponsored by an employer, by an
employee organization, or by both.\30\ The definition of
employer is any person acting directly as an employer, or
indirectly in the interest of an employer, in relation to an
employee benefit plan, and includes a group or association of
employers acting for an employer in such capacity.\31\
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\30\ERISA secs. 3(1) and (2).
\31\ERISA sec. 3(5).
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These definitional provisions of ERISA are interpreted as
permitting a multiple employer plan to be established or
maintained by a cognizable, bona fide group or association of
employers, acting in the interests of its employer members to
provide benefits to their employees.\32\ This approach is based
on the premise that the person or group that maintains the plan
is tied to the employers and employees that participate in the
plan by some common economic or representational interest or
genuine organizational relationship unrelated to the provision
of benefits. Based on the facts and circumstances, the
employers that participate in the benefit program must, either
directly or indirectly, exercise control over that program,
both in form and in substance, in order to act as a bona fide
employer group or association with respect to the program, or
the plan is sponsored by one or more employers as defined in
section 3(5) of ERISA.\33\ However, an employer association
does not exist where several unrelated employers merely execute
participation agreements or similar documents as a means to
fund benefits, in the absence of any genuine organizational
relationship between the employers. In that case, each
participating employer establishes and maintains a separate
employee benefit plan for the benefit of its own employees,
rather than a multiple employer plan.
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\32\See, for example, Department of Labor Advisory Opinions 2012-
04A, 2003-17A, 2001-04A, and 1994-07A, and other authorities cited
therein.
\33\See, for example, Department of Labor Advisory Opinion 2017-
02AC.
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Form 5500 reporting
Under the Code, an employer maintaining a qualified
retirement plan generally is required to file an annual return
containing information required under regulations with respect
to the qualification, financial condition, and operation of the
plan.\34\ ERISA requires the plan administrator of certain
pension and welfare benefit plans to file annual reports
disclosing certain information to the Department of Labor
(``DOL'').\35\ These filing requirements are met by filing a
completed Form 5500, Annual Return/Report of Employee Benefit
Plan. Forms 5500 are filed with DOL, and information from Forms
5500 is shared with the IRS.\36\ In the case of a multiple
employer plan, the annual report must include a list of
participating employers and a good faith estimate of the
percentage of total contributions made by the participating
employers during the plan year. Certain small plans, that is,
plans covering fewer than 100 participants, are eligible for
simplified reporting requirements, which are met by filing Form
5500-SF, Short Form Annual Return/Report of Small Employee
Benefit Plan.\37\
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\34\Sec. 6058. In addition, under section 6059, the plan
administrator of a defined benefit plan subject to the minimum funding
requirements is required to file an annual actuarial report. Under Code
section 414(g) and ERISA section 3(16), plan administrator generally
means the person specifically so designated by the terms of the plan
document. In the absence of a designation, the plan administrator
generally is (1) in the case of a plan maintained by a single employer,
the employer, (2) in the case of a plan maintained by an employee
organization, the employee organization, or (3) in the case of a plan
maintained by two or more employers or jointly by one or more employers
and one or more employee organizations, the association, committee,
joint board of trustees, or other similar group of representatives of
the parties that maintain the plan. Under ERISA, the party described in
(1), (2), or (3) is referred to as the ``plan sponsor.''
\35\ERISA secs. 103 and 104. Under ERISA section 4065, the plan
administrator of certain defined benefit plans must provide information
to the PBGC.
\36\Information is shared also with the PBGC, as applicable. Form
5500 filings are also publicly released in accordance with section
6104(b) and Treas. Reg. sec. 301.6104(b)-1 and ERISA secs. 104(a)(1)
and 106(a).
\37\ERISA sec. 104(b).
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REASONS FOR CHANGE
The Committee believes that individuals are more likely to
save for retirement if they have access to an employer-
sponsored retirement plan. In order to facilitate the offering
of such plans, especially by small employers, the Committee
believes that the law should permit unrelated employers to
offer retirement plans to their employees through a multiple
employer plan in a cost-effective manner while preserving
compliance and employee protections. Allowing retirement plan
service providers to offer services through a pooled retirement
vehicle for unrelated employers in defined contribution plans
with individual accounts, such as 401(k) plans, will allow
employers (and their employees) participating in such plans to
benefit from economies of scale, which can result in improved
investment options for employees for their retirement savings.
Employers in such a plan should not be subject to risk that any
inadvertent or unintentional violation of tax code requirements
by a noncompliant employer in the plan could result in negative
consequences for the employers in the plan that are compliant
or for such employers' participants. Requiring the plan service
provider to take on fiduciary responsibilities will further the
protection of participants in such plans.
In the case of any multiple employer plan that, in
accordance with the Department of Labor's current
interpretations of the definition of employer in section 3(5)
of ERISA, is treated currently as a single plan under ERISA,
the Committee does not intend to modify the existing definition
and regulatory guidance thereunder, except insofar as
specifically provided herein with respect to relief from
disqualification (or other loss of tax-favored status) and
simplified annual reports.
EXPLANATION OF PROVISION
In general
The provision amends the Code rules relating to multiple
employer plans to provide relief from the ``one bad apple''
rule for certain plans (referred to herein as ``covered
multiple employer plans''). A covered multiple employer plan is
a multiple employer qualified defined contribution plan\38\ or
a plan that consists of IRAs (referred to herein as an ``IRA
plan''), including under an IRA trust,\39\ that either (1) is
maintained by employers which have a common interest other than
having adopted the plan, or (2) in the case of a plan not
described in (1), has a pooled plan provider (referred to
herein as a ``pooled provider plan''), and which meets certain
other requirements as described below.
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\38\To which section 413(c) applies.
\39\Under the provision, in applying the exclusive benefit
requirement under section 408(c) to an IRA plan with an IRA trust
covering employees of unrelated employers, all employees covered by the
plan are treated as employees of all employers participating in the
plan.
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The provision outlines various requirements that apply to a
pooled provider plan under the Code. It also outlines various
requirements that apply under ERISA to a qualified defined
contribution plan that is established or maintained for the
purpose of providing benefits to the employees of two or more
employers and that meets certain requirements to be a ``pooled
employer plan,'' and provides that a pooled employer plan is
treated for purposes of ERISA as a single plan that is a
multiple employer plan.\40\
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\40\With respect to plans described under proposed section
413(e)(1)(A), other than providing relief from the ``one bad apple''
rule if certain requirements are met and adding certain reporting
requirements, the provision generally does not change present law and
related guidance applicable to such multiple employer plans under the
Code or ERISA.
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Tax-favored status under the Code
In general
The provision provides relief from disqualification (or
other loss of tax-favored status) of the entire plan merely
because one or more participating employers fail to take
actions required with respect to the plan (that is, relief from
the ``one bad apple'' rule).
Such relief under the provision does not apply to a plan
unless the terms of the plan provide that, in the case of any
employer in the plan failing to take required actions (referred
to herein as a ``noncompliant employer)''--
plan assets attributable to employees of the
noncompliant employer (or beneficiaries of such
employees) will be transferred to a plan maintained
only by that employer (or its successor), to a tax-
favored retirement plan for each individual whose
account is transferred,\41\ or to any other arrangement
that the Secretary determines is appropriate, unless
the Secretary determines it is in the best interests of
the employees of the noncompliant employer (and
beneficiaries of such employees) to retain the assets
in the plan, and
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\41\For this purpose, a tax-favored retirement plan means an
eligible retirement plan as defined in section 402(c)(8)(B), that is,
an IRA, a qualified retirement plan, a tax-deferred annuity plan under
section 403(b), or an eligible deferred compensation plan of a State or
local governmental employer under section 457(b).
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the noncompliant employer (and not the plan
with respect to which the failure occurred or any other
employer in the plan) is, except to the extent provided
by the Secretary, liable for any plan liabilities
attributable to employees of the noncompliant employer
(or beneficiaries of such employees).
In addition, in the case of a pooled provider plan, if the
pooled plan provider does not perform substantially all the
administrative duties required of the provider (as described
below) for any plan year, the Secretary may provide that the
determination as to whether the plan meets the Code
requirements for tax-favored treatment will be made in the same
manner as would be made without regard to the relief under the
provision.
Pooled plan provider
Under the provision, ``pooled plan provider'' with respect
to a plan means a person that--
is designated by the terms of the plan as a
named fiduciary under ERISA,\42\ as the plan
administrator, and as the person responsible to perform
all administrative duties (including conducting proper
testing with respect to the plan and the employees of
each employer in the plan) that are reasonably
necessary to ensure that the plan meets the Code
requirements for tax-favored treatment and the
requirements of ERISA and to ensure that each employer
in the plan takes actions as the Secretary or the
pooled plan provider determines necessary for the plan
to meet Code and ERISA requirements, including
providing to the pooled plan provider any disclosures
or other information that the Secretary may require or
that the pooled plan provider otherwise determines are
necessary to administer the plan or to allow the plan
to meet Code and ERISA requirements,
---------------------------------------------------------------------------
\42\Within the meaning of ERISA section 402(a)(2).
---------------------------------------------------------------------------
registers with the Secretary as a pooled
plan provider and provides any other information that
the Secretary may require, before beginning operations
as a pooled plan provider,
acknowledges in writing its status as a
named fiduciary under ERISA and as the plan
administrator, and
is responsible for ensuring that all persons
who handle plan assets or are plan fiduciaries are
bonded in accordance with ERISA requirements.
The provision specifies that the Secretary may perform
audits, examinations, and investigations of pooled plan
providers as may be necessary to enforce and carry out the
purposes of the provision.
In addition, the provision provides that in determining
whether a person meets the requirements to be a pooled plan
provider with respect to any plan, all persons who perform
services for the plan and who are treated as a single
employer\43\ are treated as one person.
---------------------------------------------------------------------------
\43\Under subsection (b), (c), (m), or (o) of section 414.
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Plan sponsor
The provision also provides that, except with respect to
the administrative duties (as a named fiduciary, as the plan
administrator, and as the person responsible for the
performance of all administrative duties) for which the pooled
plan provider is responsible as described above, each employer
in a plan which has a pooled plan provider will be treated as
the plan sponsor with respect to the portion of the plan
attributable to that employer's employees (or beneficiaries of
such employees).
Guidance
The provision directs the Secretary to issue guidance that
the Secretary determines appropriate to carry out the
provision, including guidance (1) to identify the
administrative duties and other actions required to be
performed by a pooled plan provider, (2) that describes the
procedures to be taken to terminate a plan that fails to meet
the requirements to be a covered multiple employer plan,
including the proper treatment of, and actions needed to be
taken by, any employer in the plan and plan assets and
liabilities attributable to employees of that employer (or
beneficiaries of such employees), and (3) to identify
appropriate cases in which corrective action will apply with
respect to noncompliant employers. For purposes of (3), the
Secretary is to take into account whether the failure of an
employer or pooled plan provider to provide any disclosures or
other information, or to take any other action, necessary to
administer a plan or to allow a plan to meet the Code
requirements for tax-favored treatment, has continued over a
period of time that demonstrates a lack of commitment to
compliance.
The provision also directs the Secretary to publish model
plan language that meets the Code and ERISA requirements under
the provision and that may be adopted in order to be treated as
a pooled employer plan under ERISA.
Pooled employer plans under ERISA
In general
As described above, under the provision, a pooled employer
plan is treated for purposes of ERISA as a single plan that is
a multiple employer plan. A ``pooled employer plan'' is defined
as a plan (1) that is an individual account plan established or
maintained for the purpose of providing benefits to the
employees of two or more employers, (2) that is a qualified
retirement plan or an IRA plan, and (3) the terms of which meet
the requirements described below. A pooled employer plan does
not include a plan maintained by employers that have a common
interest other than having adopted the plan.
In order for a plan to be a pooled employer plan, the plan
terms must--
designate a pooled plan provider and provide
that the pooled plan provider is a named fiduciary of
the plan,
designate one or more trustees (other than
an employer in the plan)\44\ to be responsible for
collecting contributions to, and holding the assets of,
the plan, and require the trustees to implement written
contribution collection procedures that are reasonable,
diligent, and systematic,
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\44\Any trustee must meet the requirements under the Code to be an
IRA trustee.
---------------------------------------------------------------------------
provide that each employer in the plan
retains fiduciary responsibility for the selection and
monitoring, in accordance with ERISA fiduciary
requirements, of the person designated as the pooled
plan provider and any other person who is also
designated as a named fiduciary of the plan, and, to
the extent not otherwise delegated to another fiduciary
by the pooled plan provider (and subject to the ERISA
rules relating to self-directed investments), the
investment and management of the portion of the plan's
assets attributable to the employees of that employer
(or beneficiaries of such employees) in the plan,
provide that employers in the plan, and
participants and beneficiaries, are not subject to
unreasonable restrictions, fees, or penalties with
regard to ceasing participation, receipt of
distributions, or otherwise transferring assets of the
plan in accordance with applicable rules for plan
mergers and transfers,
require the pooled plan provider to provide
to employers in the plan any disclosures or other
information that the Secretary of Labor may require,
including any disclosures or other information to
facilitate the selection or any monitoring of the
pooled plan provider by employers in the plan, and
require each employer in the plan to take any actions
that the Secretary of Labor or pooled plan provider
determines are necessary to administer the plan or to
allow for the plan to meet the ERISA and Code
requirements applicable to the plan, including
providing any disclosures or other information that the
Secretary of Labor may require or that the pooled plan
provider otherwise determines are necessary to
administer the plan or to allow the plan to meet such
ERISA and Code requirements, and
provide that any disclosure or other
information required to be provided as described above
may be provided in electronic form and will be designed
to ensure only reasonable costs are imposed on pooled
plan providers and employers in the plan.
In the case of a fiduciary of a pooled employer plan or a
person handling assets of a pooled employer plan, the maximum
bond amount under ERISA is $1 million.
The term ``pooled employer plan'' does not include a
multiemployer plan. Such term also does not include a plan
established before the date of enactment of the Family Savings
Act of 2018 unless the plan administrator elects to have the
plan treated as a pooled employer plan and the plan meets the
ERISA requirements applicable to a pooled employer plan
established on or after such date.
Pooled plan provider
The definition of pooled plan provider for ERISA purposes
is generally similar to the definition under the Code portion
of the provision, described above.\45\ The ERISA definition
requires a person to register as a pooled plan provider with
the Secretary of Labor and provide any other information that
the Secretary of Labor may require before beginning operations
as a pooled plan provider.
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\45\In determining whether a person meets the requirements to be a
pooled plan provider with respect to a plan, all persons who perform
services for the plan and who are treated as a single employer under
subsection (b), (c), (m), or (o) of section 414 are treated as one
person.
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The provision specifies that the Secretary of Labor may
perform audits, examinations, and investigations of pooled plan
providers as may be necessary to enforce and carry out the
purposes of the provision.
Plan sponsor
The provision also provides that except with respect to the
administrative duties (as a named fiduciary, as the plan
administrator, and as the person responsible for the
performance of all administrative duties) for which the pooled
plan provider is responsible as described above, each employer
in a pooled employer plan will be treated as the plan sponsor
with respect to the portion of the plan attributable to that
employer's employees (or beneficiaries of such employees).
Guidance
The provision directs the Secretary of Labor to issue
guidance that such Secretary determines appropriate to carry
out the provision, including guidance (1) to identify the
administrative duties and other actions required to be
performed by a pooled plan provider, and (2) that requires, in
appropriate cases of a noncompliant employer, plan assets
attributable to employees of the noncompliant employer (or
beneficiaries of such employees) to be transferred to a plan
maintained only by that employer (or its successor), to a tax-
favored retirement plan for each individual whose account is
transferred, or to any other arrangement that the Secretary of
Labor determines in the guidance is appropriate,\46\ and the
noncompliant employer (and not the plan with respect to which
the failure occurred or any other employer in the plan) to be
liable for any plan liabilities attributable to employees of
the noncompliant employer (or beneficiaries of such employees),
except to the extent provided in the guidance. For purposes of
(2), the Secretary of Labor is to take into account whether the
failure of an employer or pooled plan provider to provide any
disclosures or other information, or to take any other action,
necessary to administer a plan or to allow a plan to meet the
requirements of ERISA and the Code requirements for tax-favored
treatment, has continued over a period of time that
demonstrates a lack of commitment to compliance.
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\46\The Secretary of Labor may waive the requirement to transfer
assets to another plan or arrangement in appropriate circumstances if
the Secretary of Labor determines it is in the best interests of the
employees of the noncompliant employer (and the beneficiaries of such
employees) to retain the assets in the pooled employer plan.
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Form 5500 reporting
Under the provision, the Form 5500 filing for a multiple
employer plan (including a pooled employer plan) must include a
list of the employers in the plan, a good faith estimate of the
percentage of total contributions made by such employers during
the plan year, and the aggregate account balances attributable
to each employer in the plan (determined as the sum of the
account balances of the employees of each employer (and the
beneficiaries of such employees)); and with respect to a pooled
employer plan, the identifying information for the person
designated under the terms of the plan as the pooled plan
provider. In addition, the provision adds, to the list of
pension plans to which simplified reporting may be prescribed
by the Secretary of Labor, a multiple employer plan that covers
fewer than 1,000 participants, but only if no single employer
in the plan has 100 or more participants covered by the plan.
EFFECTIVE DATE
The provision applies to plan years beginning after
December 31, 2019, including reporting for purposes of Forms
5500 for plan years beginning after December 31, 2019.
Nothing in the Code amendments made by the provision is to
be construed as limiting the authority of the Secretary (or the
Secretary's delegate) to provide for the proper treatment of a
failure to meet any Code requirement with respect to any
employer (and its employees) in a multiple employer plan.
B. Rules Relating to Election of Safe Harbor 401(k) Status (sec. 102 of
the Bill and sec. 401(k) of the Code)
PRESENT LAW
Section 401(k) plans
A qualified defined contribution plan may include a
qualified cash or deferred arrangement, under which employees
may elect to have contributions made to the plan (referred to
as ``elective deferrals'') rather than receive the same amount
as current compensation (referred to as a ``section 401(k)
plan'').\47\ The maximum annual amount of elective deferrals
that can be made by an employee for a year is $18,500 (for
2018) or, if less, the employee's compensation.\48\ For an
employee who attains age 50 by the end of the year, the dollar
limit on elective deferrals is increased by $6,000 (for 2018)
(called catch-up contributions).\49\ The dollar limits for
elective deferrals, including catch-up contributions, are
subject to indexing; after any increase, an amount that is not
a multiple of $500 is rounded to the next lowest multiple of
$500. An employee's elective deferrals must be fully vested
(nonforfeitable to the employee). A section 401(k) plan may
also provide for employer matching and nonelective
contributions, which may be subject to vesting conditions. A
matching contribution is conditioned on the employee making
elective deferrals,\50\ while a nonelective contribution is not
conditioned on whether an employee has elected to make
contributions to the plan.
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\47\Elective deferrals are generally made on a pretax basis and
distributions attributable to elective deferrals are includible in
income. However, a section 401(k) plan 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 after-tax Roth contributions. Certain
distributions from a designated Roth account are excluded from income
even though they include earnings not previously taxed.
\48\Sec. 402(g).
\49\Sec. 414(v).
\50\Matching contributions may also be conditioned on the employee
making Roth contributions or after-tax contributions.
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Automatic enrollment
A section 401(k) plan must provide each eligible employee
with an effective opportunity to make or change an election to
make elective deferrals at least once each plan year.\51\
Whether an employee has an effective opportunity is determined
based on all the relevant facts and circumstances, including
the adequacy of notice of the availability of the election, the
period of time during which an election may be made, and any
other conditions on elections.
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\51\Treas. Reg. sec. 1.401(k)-1(e)(2)(ii).
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Section 401(k) plans are generally designed so that an
employee will receive cash compensation unless the employee
affirmatively elects to make elective deferrals to the section
401(k) plan. Alternatively, a plan may provide that elective
deferrals are made at a specified rate when an employee becomes
eligible to participate unless the employee elects otherwise
(that is, affirmatively elects not to make contributions or to
make contributions at a different rate). This plan design is
referred to as automatic enrollment.
Nondiscrimination test
General rule and design-based safe harbors
An annual nondiscrimination test, called the actual
deferral percentage test (the ``ADP'' test) applies to elective
deferrals under a section 401(k) plan.\52\ The ADP test
generally compares the average rate of deferral for highly
compensated employees to the average rate of deferral for
nonhighly compensated employees and requires that the average
deferral rate for highly compensated employees not exceed the
average rate for nonhighly compensated employees by more than
certain specified amounts. If a plan fails to satisfy the ADP
test for a plan year based on the deferral elections of highly
compensated employees, the plan is permitted to distribute
deferrals to highly compensated employees (``excess
deferrals'') in a sufficient amount to correct the failure. The
distribution of the excess deferrals must be made by the close
of the following plan year.\53\
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\52\Sec. 401(k)(3).
\53\Sec. 401(k)(8).
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The ADP test is deemed to be satisfied if a section 401(k)
plan includes certain minimum matching or nonelective
contributions under either of two plan designs (``401(k) safe
harbor plan''), described below, as well as certain required
rights and features and satisfies a notice requirement.\54\
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\54\Secs. 401(k)(12) and (13). If certain additional requirements
are met, matching contributions under 401(k) safe harbor plan may also
satisfy a nondiscrimination test applicable under section 401(m).
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Safe harbor contributions
Under one type of 401(k) safe harbor plan (``basic 401(k)
safe harbor plan''), the plan either (1) satisfies a matching
contribution requirement (``matching contribution basic 401(k)
safe harbor plan'') or (2) provides for a nonelective
contribution to a defined contribution plan of at least three
percent of an employee's compensation on behalf of each
nonhighly compensated employee who is eligible to participate
in the plan (``nonelective basic 401(k) safe harbor plan'').
The matching contribution requirement under the matching
contribution basic 401(k) safe harbor requires a matching
contribution equal to at least 100 percent of elective
contributions of the employee for contributions not in excess
of three percent of compensation, and 50 percent of elective
contributions for contributions that exceed three percent of
compensation but do not exceed five percent, for a total
matching contribution of up to four percent of compensation.
The required matching contributions and the three percent
nonelective contribution under the basic 401(k) safe harbor
must be immediately nonforfeitable (that is, 100 percent
vested) when made.
Another safe harbor applies for a section 401(k) plan that
include automatic enrollment (``automatic enrollment 401(k)
safe harbor''). Under an automatic enrollment 401(k) safe
harbor, unless an employee elects otherwise, the employee is
treated as electing to make elective deferrals equal to a
percentage of compensation as stated in the plan, not in excess
of 10 percent and at least (1) three percent of compensation
for the first year the deemed election applies to the
participant, (2) four percent during the second year, (3) five
percent during the third year, and (4) six percent during the
fourth year and thereafter.\55\ Under the automatic enrollment
401(k) safe harbor, the matching contribution requirement is
100 percent of elective contributions of the employee for
contributions not in excess of one percent of compensation, and
50 percent of elective contributions for contributions that
exceed one percent of compensation but do not exceed six
percent, for a total matching contribution of up to 3.5 percent
of compensation (``matching contribution automatic enrollment
401(k) safe harbor''). The rate of nonelective contribution
under the automatic enrollment 401(k) safe harbor plan is three
percent, as under the basic 401(k) safe harbor (``nonelective
contribution automatic enrollment 401(k) safe harbor'').
However, under the automatic enrollment 401(k) safe harbors,
the matching and nonelective contributions are required to
become 100 percent vested only after two years of service
(rather than being required to be immediately vested when
made).
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\55\These automatic increases in default contribution rates are
required for plans using the safe harbor. Rev. Rul. 2009-30, 2009-39
I.R.B. 391, provides guidance for including automatic increases in
other plans using automatic enrollment, including under a plan that
includes an eligible automatic contribution arrangement.
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Safe harbor notice
The notice requirement for a 401(k) safe harbor plan is
satisfied if each employee eligible to participate is given,
within a reasonable period before any year, written notice of
the employee's rights and obligations under the arrangement and
the notice meets certain content and timing requirements
(``safe harbor notice''). To meet the content requirements, a
safe harbor notice must be sufficiently accurate and
comprehensive to inform an employee of the employee's rights
and obligations under the plan, and be written in a manner
calculated to be understood by the average employee eligible to
participate in the plan. A safe harbor notice must provide
certain information, including the plan's safe harbor
contributions, any other plan contributions, the type and
amount of compensation that may be deferred under the plan, how
to make cash or deferred elections, the plan's withdrawal and
vesting provisions, and specified contact information. In
addition, a safe harbor notice for an automatic enrollment
401(k) safe harbor must describe certain additional information
items, including the deemed deferral elections under the plan
if the employee does not make an affirmative election and how
contributions will be invested.
Delay in adopting nonelective 401(k) safe harbor
Generally the plan provisions for the requirements that
must be satisfied to be a 401(k) safe harbor plan must be
adopted before the first day of the plan year and remain in
effect for an entire 12-month plan year. However, in the case
of a nonelective 401(k) safe harbor plan (but not the matching
contribution 401(k) safe harbor), a plan may be amended after
the first day of the plan year but no later than 30 days before
the end of the plan year to adopt the safe harbor plan
provisions including providing the 3 percent of compensation
nonelective contribution. The plan must also provide a
contingent and follow-up notice. The contingent notice must be
provided before the beginning of the plan year and specify that
the plan may be amended to include the safe harbor nonelective
contribution and, if it is so amended, a follow-up notice will
be provided. If the plan is amended, the follow-up notice must
be provided no later than 30 days before the end of the plan
year stating that the safe harbor nonelective contribution will
be provided.
REASONS FOR CHANGE
The Committee believes that providing employers with a
longer time period to decide whether to offer a nonelective
basic 401(k) safe harbor plan to employees will provide more
flexibility to employers, thereby reducing the costs associated
with sponsoring a retirement plan. The Committee believes that
this will help encourage employers to offer retirement plans,
fostering greater retirement savings by employees.
EXPLANATION OF PROVISION
In general
The provision makes certain changes to the rules for the
nonelective contribution 401(k) safe harbor.
Elimination of notice requirement
The provision eliminates the safe harbor notice requirement
with respect to nonelective 401(k) safe harbor plans. However,
the general rule under present law requiring a section 401(k)
plan to provide each eligible employee with an effective
opportunity to make or change an election to make elective
deferrals at least once each plan year still applies. As
described above, relevant factors used in determining if this
requirement is satisfied include the adequacy of notice of the
availability of the election and the period of time during
which an election may be made.
Delay in adopting provisions for nonelective 401(k) safe harbor
Under the provision, unless a plan provided at any time
during the plan year that 401(k) safe harbor matching
contributions applied to the plan year, a plan can be amended
to become a nonelective 401(k) safe harbor plan for a plan year
(that is, amended to provide the required nonelective
contributions and thereby satisfy the safe harbor requirements)
at any time before the 30th day before the close of the plan
year.
Further, unless a plan provided at any time during the plan
year that 401(k) safe harbor matching contributions applied to
the plan year, the provision allows a plan to be amended after
the 30th day before the close of the plan year to become a
nonelective contribution 401(k) safe harbor plan for the plan
year if (1) the plan is amended to provide for a nonelective
contribution of at least four percent of compensation (rather
than at least three percent) for all eligible employees for
that plan year and (2) the plan is amended no later than the
last day for distributing excess contributions for the plan
year, that is, by the close of following plan year.
EFFECTIVE DATE
The provision applies to plan years beginning after
December 31, 2018.
C. Certain Taxable Non-Tuition Fellowship and Stipend Payments Treated
as Compensation for IRA Purposes (sec. 103 of the Bill and sec. 219 of
the Code)
PRESENT LAW
There are two general types of IRAs: traditional IRAs and
Roth IRAs.\56\ The total amount that an individual may
contribute to one or more IRAs for a year is generally limited
to the lesser of: (1) a dollar amount ($5,500 for 2018); and
(2) the amount of the individual's compensation that is
includible in gross income for the year.\57\ In the case of an
individual who has attained age 50 by the end of the year, the
dollar amount is increased by $1,000. For a married couple,
contributions can be made up to the dollar limit for each
spouse if the combined compensation of the spouses that is
includible in gross income is at least equal to the contributed
amount.
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\56\Secs. 408 and 408A.
\57\Sec. 219(b)(1)(A) and (5), as referenced in secs. 408(a)(1) and
(b)(2)(B) and 408A(c)(2). Under section 4973, IRA contributions in
excess of the applicable limit are generally subject to an excise tax
of six percent per year until withdrawn.
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An individual may make contributions to a traditional IRA
(up to the contribution limit) without regard to his or her
adjusted gross income. An individual may deduct his or her
contributions to a traditional IRA if neither the individual
nor the individual's spouse is an active participant in an
employer-sponsored retirement plan. If an individual or the
individual's spouse is an active participant in an employer-
sponsored retirement plan, the deduction is phased out for
taxpayers with adjusted gross income over certain levels.\58\
---------------------------------------------------------------------------
\58\Sec. 219(g).
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Individuals with adjusted gross income below certain levels
may make contributions to a Roth IRA (up to the contribution
limit).\59\ Contributions to a Roth IRA are not deductible. As
described above, an individual's IRA contributions cannot
exceed the amount of his or her compensation that is includible
in gross income. Subject to the rule for spouses, described
above, an individual who has no compensation income generally
is not eligible to make IRA contributions, even if the
individual has other income that is includible in gross
income.\60\
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\59\Sec. 408A(c)(3).
\60\Under a special rule in section 219(f)(1), alimony that is
includible in gross income under section 71 is treated as compensation
for IRA contribution purposes.
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REASONS FOR CHANGE
The Committee believes that graduate and postdoctoral
students who receive stipends and similar amounts that are
included in gross income should not be at a disadvantage with
respect to other individuals when it comes to saving for
retirement in an IRA. The Committee believes that treating such
amounts as compensation for IRA contribution purposes will make
it easier for graduate and postdoctoral students to begin
saving for retirement.
EXPLANATION OF PROVISION
Under the provision, an amount that is included in gross
income and paid to an individual to aid the individual in the
pursuit of graduate or postdoctoral study or research is
treated as compensation taken into account for IRA contribution
purposes.
EFFECTIVE DATE
This provision is effective for taxable years beginning
after December 31, 2018.
D. Repeal of Maximum Age for Traditional IRA Contributions (sec. 104 of
the Bill and sec. 219 of the Code)
PRESENT LAW
Under present law, an individual may make deductible
contributions to a traditional IRA up to the IRA contribution
limit if neither the individual nor the individual's spouse is
an active participant in an employer-sponsored retirement
plan.\61\ If an individual (or the individual's spouse) is an
active participant in an employer-sponsored retirement plan,
the deduction is phased out for taxpayers with adjusted gross
income (``AGI'') for the taxable year over certain indexed
levels.\62\ To the extent an individual cannot or does not make
deductible contributions to a traditional IRA, the individual
may make nondeductible contributions to a traditional IRA
(without regard to AGI limits). Alternatively, subject to AGI
limits, an individual may make nondeductible contributions to a
Roth IRA.\63\
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\61\Sec. 219.
\62\Sec. 219(g).
\63\Sec. 408(o). The annual contribution limit for IRAs is
coordinated so that the maximum amount that can be contributed to all
of an individual's IRAs (both traditional and Roth) for a taxable year
is the lesser of a certain dollar amount ($5,500 for 2018) or the
individual's compensation.
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An individual who has attained age 70\1/2\ by the close of
a year is not permitted to make contributions to a traditional
IRA.\64\ This restriction does not apply to contributions to a
Roth IRA.\65\ In addition, employees over age 70\1/2\ are not
precluded from contributing to employer-sponsored plans.
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\64\Sec. 219(d)(1).
\65\Sec. 408A(c)(4).
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REASONS FOR CHANGE
As Americans live longer, many individuals choose to
continue working later in life and should be permitted to
continue making contributions to a traditional IRA past age
70\1/2\. The Committee believes that the present law age limit
on making contributions to an IRA is an impediment to
retirement savings that should be eliminated.
EXPLANATION OF PROVISION
The provision repeals the prohibition on contributions to a
traditional IRA by an individual who has attained age 70\1/2\.
EFFECTIVE DATE
The provision applies to contributions made for taxable
years beginning after December 31, 2018.
E. Qualified Employer Plans Prohibited From Making Loans Through Credit
Cards and Other Similar Arrangements (Sec. 105 of the Bill and sec.
72(p) of the Code)
PRESENT LAW
Qualified employer-sponsored retirement plans may provide
loans to participants. Unless the loan satisfies certain
requirements in both form and operation, the amount of a
retirement plan loan is a deemed distribution from the
retirement plan.\66\ These requirements include the following:
the amount of the loan must not exceed the lesser of 50 percent
of the participant's account balance or $50,000 (generally
taking into account outstanding balances of previous loans);
the terms of the loan must provide for a repayment period of
not more than five years\67\ and provide for level amortization
of loan payments (with payments not less frequently than
quarterly); and the terms of the loan must be legally
enforceable. Subject to the limit on the amount of loans, which
precludes any additional loan that would cause the limit to be
exceeded, the rules relating to loans do not limit the number
of loans an employee may obtain from a plan. Some arrangements
have developed under which an employee can access plan loans
through the use of a credit card or similar mechanism.
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\66\Sec. 72(p). Public Law No. 115-97 extends the period during
which a qualified plan loan offset amount may be contributed to an
eligible retirement plan as a rollover contribution from 60 days after
the date of the offset to the due date (including extensions) for
filing the Federal income tax return for the taxable year in which the
plan loan offset occurs (that is, the taxable year in which the amount
is treated as distributed from the plan). A qualified plan loan offset
amount is a plan loan offset amount that is treated as distributed from
a qualified retirement plan, a section 403(b) plan, or a governmental
section 457(b) plan solely by reason of the termination of the plan or
the failure to meet the repayment terms of the loan because of the
employee's severance from employment. A loan offset amount is the
amount by which an employee's account balance under the plan is reduced
to repay a loan from the plan.
\67\Loans specifically for home purchases may be repaid over a
longer period.
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REASONS FOR CHANGE
The Committee believes that eliminating the ability to
obtain a plan loan with a credit card from an individual's
retirement account is consistent with the objective of
facilitating and encouraging retirement savings.
EXPLANATION OF PROVISION
Under the provision, a plan loan that is made through the
use of a credit card or similar arrangement does not meet the
requirements for loan treatment and is therefore a deemed
distribution.
EFFECTIVE DATE
The provision applies to loans made after the date of
enactment.
F. Portability of Lifetime Income Investments (sec. 106 of the Bill and
secs. 401(a), 401(k), 403(b), and 457(d) of the Code)
PRESENT LAW
Distribution restrictions for accounts under employer-sponsored plans
Types of plans and contributions
Tax-favored employer-sponsored retirement plans under which
individual accounts are maintained for employees include
qualified defined contribution plans, tax-deferred annuity
plans (referred to as ``section 403(b)'' plans), and eligible
deferred compensation plans of State and local government
employers (referred to as ``governmental section 457(b)''
plans).\68\
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\68\Secs. 401(a), 403(a), 403(b), 457(b) and (e)(1)(A).
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Contributions to a qualified defined contribution plan or
section 403(b) plan may include some or all of the following
types of contributions:
pretax elective deferrals (that is, pretax
contributions made at the election of an employee in
lieu of receiving cash compensation),
after-tax designated Roth contributions
(that is, elective deferrals made on an after-tax basis
to a Roth account under the plan),
after-tax employee contributions (other than
designated Roth contributions),
pretax employer matching contributions (that
is, employer contributions made as a result of an
employee's elective deferrals, designated Roth
contributions, or after-tax contributions), and
pretax employer nonelective contributions
(that is, employer contributions made without regard to
whether an employee makes elective deferrals,
designated Roth contributions, or after-tax
contributions).
Contributions to a governmental section 457(b) plan
generally consist of pretax elective deferrals and, if provided
for under the plan, designated Roth contributions.
Restrictions on in-service distributions
The terms of an employer-sponsored retirement plan
generally determine when distributions are permitted. However,
in some cases, statutory restrictions on distributions may
apply.
Elective deferrals under a qualified defined contribution
plan are subject to statutory restrictions on distribution
before severance from employment, referred to as ``in-service''
distributions.\69\ In-service distributions of elective
deferrals (and related earnings) generally are permitted only
after attainment of age 59\1/2\ or termination of the plan. In-
service distributions of elective deferrals (but not related
earnings) are also permitted in the case of hardship.\70\
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\69\Sec. 401(k)(2)(B). Similar restrictions apply to certain other
contributions, such as employer matching or nonelective contributions
required under the nondiscrimination safe harbors under section 401(k).
\70\The Bipartisan Budget Act of 2018, Pub. L. No. 115-123
(``BBA''), amends certain hardship distribution rules applicable to
401(k) plans, effective for plan years beginning after December 31,
2018. One such amendment under BBA section 41114 permits earnings on
elective deferrals under a section 401(k) plan, as well as qualified
nonelective contributions and qualified matching contributions (and
attributable earnings), to be distributed on account of hardship.
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Other distribution restrictions may apply to contributions
under certain types of qualified defined contribution plans. A
profit-sharing plan generally may allow an in-service
distribution of an amount contributed to the plan only after a
fixed number of years (not less than two).\71\ A money purchase
pension plan generally may not allow an in-service distribution
before attainment of age 62 (or attainment of normal retirement
age under the plan if earlier) or termination of the plan.\72\
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\71\Rev. Rul. 71-295, 1971-2 C.B. 184, and Treas. Reg. sec. 1.401-
1(b)(1)(ii). Similar rules apply to a stock bonus plan. Treas. Reg.
sec. 1.401-1(b)(1)(iii).
\72\Sec. 401(a)(36) and Treas. Reg. secs. 1.401-1(b)(1)(i) and
1.401(a)-1(b).
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Elective deferrals under a section 403(b) plan are subject
to in-service distribution restrictions similar to those
applicable to elective deferrals under a qualified defined
contribution plan, and, in some cases, other contributions to a
section 403(b) plan are subject to similar restrictions.\73\
Deferrals under a governmental section 457(b) plan are subject
to in-service distribution restrictions similar to those
applicable to elective deferrals under a qualified defined
contribution plan, except that in-service distributions under a
governmental section 457(b) plan apply until age 70\1/2\
(rather than age 59\1/2\).\74\
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\73\Secs. 403(b)(7)(A)(ii) and 403(b)(11).
\74\Sec. 457(d)(1)(A).
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Distributions and rollovers
A distribution from an employer-sponsored retirement plan
is generally includible in income except for any portion
attributable to after-tax contributions, which result in
basis.\75\ Unless an exception applies, in the case of a
distribution before age 59\1/2\ from a qualified retirement
plan or a section 403(b) plan, any amount included in income is
subject to an additional 10-percent tax, referred to as the
``early withdrawal'' tax.\76\
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\75\Secs. 402(a), 403(b)(1) and 457(a)(1). Under section 402A(d), a
qualified distribution from a designated Roth account under an
employer-sponsored plan is not includible in income.
\76\Sec. 72(t).
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A distribution from an employer-sponsored retirement plan
generally may be rolled over on a nontaxable basis to another
such plan or to an individual retirement arrangement (``IRA''),
either by a direct transfer to the recipient plan or IRA or by
contributing the distribution to the recipient plan or IRA
within 60 days of receiving the distribution.\77\ If the
distribution from an employer-sponsored retirement plan
consists of property, the rollover is accomplished by a
transfer or contribution of the property to the recipient plan
or IRA.
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\77\Secs. 402(c), 402A(c)(3), 403(b)(8) and 457(e)(16).
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Investment of accounts under employer-sponsored plans
Qualified defined contribution plans, section 403(b) plans,
and governmental section 457(b) plans commonly allow employees
to direct the manner in which their accounts are invested.
Employees may be given a choice among specified lifetime
investments, such as a choice of specified mutual funds, and,
in some cases, may be able to direct the investment of their
accounts in any product, instrument or investment offered in
the market.
The investment options under a particular employer-
sponsored retirement plan may change at times.\78\ Similarly, a
plan that allows employees to direct the investment of their
accounts in any product, instrument or investment offered in
the market may be amended to limit the investments that can be
held in the plan. In these cases, employees may be required to
change the investments held within their accounts.
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\78\In the case of a plan subject to ERISA, a participant's
exercise of control over the investment of the assets in his or her
account by choosing among the investment options offered under the plan
does not relieve a plan fiduciary from the duty to prudently select and
monitor the investment options offered to participants. 29 C.F.R. sec.
2550.404c-1(d)(2)(iv) (2010); Tibble v. Edison International, No. 13-
550, 135 S. Ct. 1823 (2015). The duty to monitor investment options may
result in a change in the options offered.
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The terms of some investments impose a charge or fee when
the investment is liquidated, particularly if the investment is
liquidated within a particular period after acquisition. For
example, a lifetime income product, such as an annuity
contract, may impose a surrender charge if the investment is
discontinued.
If an employee has to liquidate an investment held in an
employer-sponsored retirement plan because of a change in
investment options or a limit on investments held in the plan,
the employee may be subject to a charge or fee as described
above. In addition, restrictions on in-service distributions
may prevent the employee from preserving the investment through
a rollover.
REASONS FOR CHANGE
The Committee believes that employers should have the
opportunity to allow employees who invest their retirement
accounts in an annuity to maintain such investments if the plan
investment options are changed or limited. Allowing an annuity
investment to be maintained through a distribution and rollover
will prevent the employee from having to incur the penalties
that can arise when an annuity is required to be cashed out
prematurely.
EXPLANATION OF PROVISION
Under the provision, if a lifetime income investment is no
longer authorized to be held as an investment option under a
qualified defined contribution plan, section 403(b) plan, or
governmental section 457(b) plan, except as otherwise provided
in guidance, the plan does not fail to satisfy the Code
requirements applicable to the plan solely by reason of
allowing (1) qualified distributions of a lifetime income
investment, or (2) distributions of a lifetime income
investment in the form of a qualified plan distribution annuity
contract. Such a distribution must be made within the 90-day
period ending on the date when the lifetime income investment
is no longer authorized to be held as an investment option
under the plan.
For purposes of the provision, a qualified distribution is
a direct trustee-to-trustee transfer to another employer-
sponsored retirement plan or IRA.\79\ A lifetime income
investment is an investment option designed to provide an
employee with election rights (1) that are not uniformly
available with respect to other investment options under the
plan and (2) that are rights to a lifetime income feature
available through a contract or other arrangement offered under
the plan (or under another employer-sponsored retirement plan
or IRA through a direct trustee-to-trustee transfer). A
lifetime income feature is (1) a feature that guarantees a
minimum level of income annually (or more frequently) for at
least the remainder of the life of the employee or the joint
lives of the employee and the employee's designated
beneficiary, or (2) an annuity payable on behalf of the
employee under which payments are made in substantially equal
periodic payments (not less frequently than annually) over the
life of the employee or the joint lives of the employee and the
employee's designated beneficiary. Finally, a qualified plan
distribution annuity contract is an annuity contract purchased
for a participant and distributed to the participant by an
employer-sponsored retirement plan or an employer-sponsored
retirement plan contract.\80\
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\79\For this purpose, an employer-sponsored retirement plan or IRA
means such a plan or IRA that is an eligible retirement plan under
section 402(c)(8)(B).
\80\For this purpose, an employer-sponsored retirement plan
contract is an annuity contract distributed from an eligible retirement
plan described in section 402(c)(8)(B) other than an IRA or individual
retirement annuity.
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EFFECTIVE DATE
The provision applies to plan years beginning after
December 31, 2018.
G. Treatment of Custodial Accounts on Termination of Section 403(b)
Plans (sec. 107 of the Bill and sec. 403(b) of the Code)
PRESENT LAW
Tax-sheltered annuities (section 403(b) plans)
Section 403(b) plans are a form of tax-favored employer-
sponsored plan that provide tax benefits similar to qualified
retirement plans. Section 403(b) plans may be maintained only
by (1) charitable tax-exempt organizations, and (2) educational
institutions of State or local governments (that is, public
schools, including colleges and universities). Many of the
rules that apply to section 403(b) plans are similar to the
rules applicable to qualified retirement plans, including
section 401(k) plans. Employers may make nonelective or
matching contributions to such plans on behalf of their
employees, and the plan may provide for employees to make pre-
tax elective deferrals, designated Roth contributions (held in
designated Roth accounts)\81\ or other after-tax contributions.
Generally section 403(b) plans provide for contributions toward
the purchase of annuity contracts or provide for contributions
to be held in custodial accounts for each employee. In the case
of contributions to custodial accounts under a section 403(b)
plan, the amounts must be invested only in regulated investment
company stock.\82\ Contributions to a custodial account are not
permitted to be distributed before the employee dies, attains
age 59\1/2\, has a severance from employment, or, in the case
of elective deferrals, encounters financial hardship.
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\81\Sec. 402A.
\82\Sec. 403(b)(7).
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A section 403(b) plan is permitted to contain provision for
plan termination and that allow accumulated benefits to be
distributed on termination.\83\ In order for a plan termination
to be effectuated, however, all plan assets must be distributed
to participants.
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\83\Treas. Reg. sec. 1.403(b)-10(a).
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Rollovers
A distribution from a section 403(b) plan that is an
eligible rollover distribution may be rolled over to an
eligible retirement plan (which include another 403(b) plan, a
qualified retirement plan, and an IRA).\84\ The rollover
generally can be achieved by direct rollover (direct payment
from the distributing plan to the recipient plan) or by
contributing the distribution to the eligible retirement plan
within 60 days of receiving the distribution (``60-day
rollover'').\85\
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\84\Sec. 403(b)(8). Similar rules apply to distributions from
qualified retirement plans and governmental section 457(b) plans.
\85\Under section 402(c)(11), any distribution to a beneficiary
other than the participant's surviving spouse is only permitted to be
rolled over to an IRA using a direct rollover; 60-day rollovers are not
available to nonspouse beneficiaries.
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Amounts that are rolled over are usually not included in
gross income. Generally, a distribution of any portion of the
balance to the credit of a participant is an eligible rollover
distribution with exceptions, for example, certain periodic
payments, required minimum distributions, and hardship
distributions.\86\
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\86\Sec. 402(c)(4). Treas. Reg. sec. 1.402(c)-1 identifies certain
other payments that are not eligible for rollover, including, for
example, certain corrective distributions, loans that are treated as
deemed distributions under section 72(p), and dividends on employer
securities as described in section 404(k).
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Roth conversions
Distributions from section 403(b) plans may be rolled into
a Roth IRA.\87\ Distributions from these plans that are rolled
over into a Roth IRA and that are not distributions from a
designated Roth account must be included in gross income.
Further, a section 403(b) plan that allows employees to make
designated Roth contributions may also allow employees to elect
to transfer amounts held in accounts that are not designated
Roth accounts into designated Roth accounts, but the amount
transferred must be included in income as though it were
distributed.\88\
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\87\Sec. 408A(d)(3). Similar rules apply to qualified retirement
plans and governmental section 457(b) plans.
\88\Sec. 402A(d)(4). Similar rules apply to qualified retirement
plans and governmental section 457(b) plans.
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Approved nonbank trustees required for IRAs
An IRA can be a trust, a custodial account, or an annuity
contract. The Code requires that the trustee or custodian of an
IRA be a bank (which is generally subject to Federal or State
supervision) or an IRS approved nonbank trustee, that an
annuity contract be issued by an insurance company (which is
subject to State supervision), and that an IRA trust or
custodial account be created and organized in the United
States.
In order for a trustee or custodian that is not a bank to
be an IRA trustee or custodian, the entity must apply to the
IRS for approval. Treasury Regulations list a number of factors
that are taken into account in approving an applicant to be a
nonbank trustee.\89\ The applicant must demonstrate fiduciary
ability (ability to act within accepted rules of fiduciary
conduct including continuity and diversity of ownership),
capacity to account (experience and competence with other
activities normally associated with handling of retirement
funds), and ability to satisfy other rules of fiduciary conduct
which includes a net worth requirement. Because it is an
objective requirement that may be difficult for some applicants
to satisfy, the net worth requirement is the most significant
of the requirements for nonbank trustees.
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\89\Treas. Reg. sec. 1.408-2(e).
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To be approved, the entity must have a net worth of at
least $250,000 at the time of the application. There is a
maintenance rule that varies depending on whether the trustee
is an active trustee or a passive trustee and that includes
minimum dollar amounts and minimum amounts as a percentage of
assets held in fiduciary accounts. A special rule is provided
for nonbank trustees that are members of the Security Investor
Protection Corporation (``SIPC'').
REASONS FOR CHANGE
In general, assets of section 403(b) plans can be invested
only in annuity contracts or mutual funds. Unlike most
qualified defined contribution plans, under which assets are
held in a trust, assets associated with section 403(b) plans
historically have often consisted of annuity contracts issued
in the name of the particular participant or mutual funds held
in a custodial account in the participant's name. In many
cases, this prevents an employer from distributing these assets
in order to effectuate a plan termination. The Committee wishes
to provide a mechanism under which the plan termination may
proceed while keeping assets that cannot otherwise be
distributed in a tax-favored retirement savings vehicle.
EXPLANATION OF PROVISION
Under the provision, if an employer terminates a section
403(b) plan under which amounts are contributed to custodial
accounts, and the person holding the assets of the accounts is
an IRS approved nonbank trustee, then, as of the date of the
termination, the custodial accounts are deemed to be IRAs. Only
a custodial account under a section 403(b) plan that is a
designated Roth account is treated as a Roth IRA upon
termination of the section 403(b) plan.
EFFECTIVE DATE
The provision applies to plan terminations occurring after
December 31, 2018.
H. Clarification of Retirement Income Account Rules Relating to Church-
Controlled Organizations (sec. 108 of the Bill and sec. 403(b)(9) of
the Code)
PRESENT LAW
Assets of a tax-sheltered annuity plan (``section 403(b)''
plan), generally must be invested in annuity contracts or
mutual funds.\90\ However, the restrictions on investments do
not apply to a retirement income account, which is a defined
contribution program established or maintained by a church, or
a convention or association of churches, to provide benefits
under the plan to employees of a religious, charitable or
similar tax-exempt organization.\91\
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\90\ Sec. 403(b)(1)(A) and (7).
\91\Sec. 403(b)(9)(B), referring to organizations exempt from tax
under section 501(c)(3). For this purpose, a church or a convention or
association of churches includes an organization described in section
414(e)(3)(A), that is, an organization, the principal purpose or
function of which is the administration or funding of a plan or program
for the provision of retirement benefits or welfare benefits, or both,
for the employees of a church or a convention or association of
churches, provided that the organization is controlled by or associated
with a church or a convention or association of churches.
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Certain rules prohibiting discrimination in favor of highly
compensated employees, which apply to section 403(b) plans
generally, do not apply to a plan maintained by a church or
qualified church-controlled organization.\92\ For this purpose,
church means a church, a convention or association of churches,
or an elementary or secondary school that is controlled,
operated, or principally supported by a church or by a
convention or association of churches, and includes a qualified
church-controlled organization. A qualified church-controlled
organization is any church-controlled tax-exempt organization
other than an organization that (1) offers goods, services, or
facilities for sale, other than on an incidental basis, to the
general public, other than goods, services, or facilities that
are sold at a nominal charge substantially less than the cost
of providing the goods, services, or facilities, and (2)
normally receives more than 25 percent of its support from
either governmental sources, or receipts from admissions, sales
of merchandise, performance of services, or furnishing of
facilities, in activities that are not unrelated trades or
businesses, or from both. Church-controlled organizations that
are not qualified church-controlled organizations are generally
referred to as ``nonqualified church-controlled
organizations.''
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\92\Sec. 403(b)(1)(D) and (12).
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In recent years, a question has arisen as to whether
employees of nonqualified church-controlled organizations may
be covered under a section 403(b) plan that consists of a
retirement income account.
REASONS FOR CHANGE
The Committee believes clarification is needed with respect
to the employees who may be permitted to participate in a
retirement income account, which is a typical vehicle in church
retirement plans.
EXPLANATION OF PROVISION
The provision clarifies that a retirement income account
may cover a duly ordained, commissioned, or licensed minister
of a church in the exercise of his ministry, regardless of the
source of his compensation; an employee of an organization,
whether a civil law corporation or otherwise, that is exempt
from tax under section 501 and is controlled by or associated
with a church or a convention or association of churches; and
an employee who is included in a church plan under certain
circumstances after separation from the service of a church, a
convention or association of churches, or an organization
described above.\93\
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\93\These individuals are described in sections 414(e)(3)(B) and
(E).
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EFFECTIVE DATE
The provision applies to plan years beginning after
December 31, 2008.
I. Exemption From Required Minimum Distribution Rules for Individuals
With Certain Account Balances (sec. 109 of the bill and secs. 401(a)(9)
and 6047 of the Code)
PRESENT LAW
Required minimum distributions
Employer-provided qualified retirement plans, traditional
IRAs, and individual retirement annuities are subject to
required minimum distribution rules. A qualified retirement
plan for this purpose means a tax-qualified plan described in
section 401(a) (such as a defined benefit pension plan or a
section 401(k) plan), employee retirement annuities described
in section 403(a), tax-sheltered annuities described in section
403(b), and a plan described in section 457(b) that is
maintained by a governmental employer.\94\ An employer-provided
qualified retirement plan that is a defined contribution plan
is a plan which provides (1) an individual account for each
participant and (2) for benefits based on the amount
contributed to the participant's account, and any income,
expenses, gains, losses, and forfeitures of accounts of other
participants which may be allocated to such participant's
account.\95\
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\94\The required minimum distribution rules also apply to section
457(b) plans maintained by tax-exempt employers other than governmental
employers.
\95\Sec. 414(i).
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Required minimum distributions generally must begin by
April 1 of the calendar year following the calendar year in
which the individual (employee or IRA owner) reaches age 70\1/
4\. However, in the case of an employer-provided qualified
retirement plan, the required minimum distribution date for an
individual who is not a 5-percent owner of the employer
maintaining the plan may be delayed to April 1 of the year
following the year in which the individual retires if the plan
provides for this later distribution date. For all subsequent
years, including the year in which the individual was paid the
first required minimum distribution by April 1, the individual
must take the required minimum distribution by December 31 of
the year.
For IRAs and defined contributions plans, the required
minimum distribution for each year generally is determined by
dividing the account balance as of the end of the prior year by
a distribution period,\96\ generally a number in the uniform
lifetime table.\97\ This table is based on joint life
expectancies of the individual and a hypothetical beneficiary
10 years younger than the individual. For an individual with a
spouse as designated beneficiary who is more than 10 years
younger (and thus the number of years in the couple's joint
life expectancy is greater than the uniform life time table),
the joint life expectancy of the couple is used. There are
special rules in the case of annuity payments from an insurance
contract.
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\96\Treas. Reg. sec. 1.401(a)(9)-5.
\97\Treas. Reg. sec. 1.401(a)(9)-9.
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If an individual dies on or after the individual's required
beginning date, the required minimum distribution is also
determined by dividing the account balance as of the end of the
prior year by a distribution period. The distribution period is
equal to the remaining years of the beneficiary's life
expectancy or, if there is no designated beneficiary, a
distribution period equal to the remaining years of the
deceased individual's single life expectancy, using the age of
the deceased individual in the year of death.\98\
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\98\Tres. Reg. sec. 1.401(a)(9)-5, A-5(a).
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In the case of an individual who dies before the
individual's required beginning date, there are two methods for
satisfying the after death required minimum distribution rules,
the life expectancy rule or the five year rule. Under the life
expectancy rule, annual required minimum distributions must
begin no later than December 31 of the calendar year
immediately following the calendar year in which the individual
died. This rule is only available if the designated beneficiary
is an individual (e.g., not the individual's estate or a
charity). If the designated beneficiary is the individual's
spouse, commencement of distributions can be delayed until
December 31 of the calendar year in which the deceased
individual would have attained age 70. The required minimum
distribution for each year is also determined by dividing the
account balance as of the end of the prior year by a
distribution period, which is determined by reference to the
beneficiary's life expectancy.\99\ Under the five-year rule,
the individual's entire account must be distributed no later
than December 31 of the calendar year containing the fifth
anniversary of the individual's death.\100\
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\99\Tres. Reg. sec. 1.401(a)(9)-5, A-5(b).
\100\Tres. Reg. sec. 1.401(a)(9)-3, Q & As 1,2.
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A special after-death rule applies for an IRA if the
beneficiary of the IRA is the surviving spouse. The surviving
spouse is permitted to choose to calculate required minimum
distributions while the spouse is alive, and after the spouse's
death, as though the spouse is the IRA owner, rather than a
beneficiary.
Roth IRAs are not subject to the minimum distribution rules
during the IRA owner's lifetime. However, Roth IRAs are subject
to the post-death minimum distribution rules that apply to
traditional IRAs. For Roth IRAs, the IRA owner is treated as
having died before the individual's required beginning date.
Thus only the life expectancy rule and the five year rule
apply.
Failure to make a required minimum distribution triggers a
50-percent excise tax, payable by the individual or the
individual's beneficiary. The tax is imposed during the taxable
year that begins with or within the calendar year during which
the distribution was required.\101\ The tax may be waived if
the distribution did not occur because of reasonable error and
reasonable steps are taken to remedy the violation.\102\
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\101\Sec. 4974(a).
\102\Sec. 4974(d).
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Eligible rollover distributions
With certain exceptions, distributions from an employer-
provided qualified retirement plan are eligible to be rolled
over tax free into another employer-provided qualified
retirement plan or an IRA. This can be achieved by contributing
the amount of the distribution to the other plan or IRA within
60 days of the distribution, or by a direct payment by the plan
to the other plan or IRA (referred to as a ``direct
rollover''). Distributions that are not eligible for rollover
include (i) any distribution that is one of a series of
periodic payments generally for a period of 10 years or more
(or, if a shorter period, certain life expectancies) and (ii)
any distribution to the extent that the distribution is a
required minimum distribution.\103\
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\103\Sec. 402(c)(4).Distributions that are not eligible rollover
distributions also include distributions made upon hardship of the
employee and any qualified disaster relief distribution (within the
meaning of section 72(t)(2)(G)).
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For any distribution that is eligible for rollover, an
employer-provided tax-qualified retirement plan must offer the
distributee the right to have the distribution made in a direct
rollover\104\ and, before making the distribution, the plan
administrator must provide the distributee with a written
explanation of the direct rollover right and related tax
consequences.\105\ If a distributee does not choose to have the
distribution made in a direct rollover, the distribution is
generally subject to mandatory 20-percent income tax
withholding.\106\
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\104\Sec. 401(a)(31).
\105\Sec. 402(f).
\106\Sec. 3405(c). This mandatory withholding does not apply to a
distributee that is a beneficiary other than a surviving spouse of an
employee.
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REASONS FOR CHANGE
The Committee believes that individuals with relatively
modest retirement account balances should be exempt from the
compliance burdens associated with the required minimum
distribution rules. The Committee believes that these
individuals should be permitted to continue to accumulate
additional retirement savings without the disruption of a
required distribution.
EXPLANATION OF PROVISION
Under the provision, if on the last day of any calendar
year, the aggregate value of an individual's entire interest
under all applicable eligible retirement plans does not exceed
an applicable dollar limit in effect for that year, then the
required minimum distribution requirements with respect to a
distribution relating to such year shall not apply to that
individual. The applicable dollar limit is $50,000 and is
subject to indexing; if the dollar amount after any increase is
not a multiple of $5,000, it is rounded to the next lowest
multiple of $5,000. For this purpose, an applicable eligible
retirement plan means a tax-qualified plan described in section
401(a) (other than a defined benefit plan), IRAs and individual
retirement annuities under section 408, employee retirement
annuities described in section 403(a), tax-sheltered annuities
described in section 403(b), and a plan described in section
457(b) that is maintained by a governmental employer.
If the aggregate value of an individual's entire interest
under all applicable eligible retirement plans does exceed the
applicable dollar limit, the amount to be distributed as a
required minimum distribution for that individual will not
exceed an amount equal to the excess of the aggregate value of
that individual's entire interest under such plans on the last
day of the calendar year to which such distribution relates,
over the applicable dollar limit in effect for that calendar
year.
The provision provides that in the case of an employer plan
which is an applicable eligible retirement plan, the plan will
not be treated as failing to meet these requirements in the
case of any failure to make a required minimum distribution for
a calendar year if the aggregate value of an employee's
interest under all such plans of the employer on the last day
of the calendar year to which the distribution relates does not
exceed the applicable dollar limit in effect for that year, and
the employee certifies that the aggregate value of the
employee's interest under all applicable retirement plans on
the last day of such calendar year held by the employee did not
exceed the applicable dollar limit in effect for that year.
In addition, the provision provides that not later than
January 31 of each year, the plan administrator (or as
applicable, the trustee of an IRA or the issuer of an
individual retirement annuity) of each applicable eligible
retirement plan will report to the Secretary and to each
participant in each plan (or as applicable, each individual
owner of an account or annuity) who has attained age 69 as of
the end of the preceding calendar year (1) the name and plan
number of the plan, account or annuity; (2) the name and
address of the plan administrator, trustee, or issuer; (3) the
name, address and taxpayer identification number of the
participant or individual; and (4) the account balance of the
participant or individual as of the end of the preceding
calendar year.
EFFECTIVE DATE
The provision is effective for distributions required to be
made after the first calendar year beginning at least 120 days
after the date of enactment.
J. Clarification of Treatment of Certain Retirement Plan Contributions
Picked Up by Governmental Employers for New or Existing Employees (sec.
110 of the Bill and sec. 414(h)(2) of the Code)
PRESENT LAW
Taxation of contributions to qualified retirement plans
Contributions to qualified retirement plans generally fall
into three categories: employer contributions, employee
contributions, and elective deferrals. Generally, the type or
types of contributions made to a plan is determined by the
terms of the plan.
Employer contributions to a qualified retirement plan are
not includible in an employee's income at the time of
contribution and are not wages for purposes of tax under the
Federal Insurance Contributions Act (``FICA'').\107\
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\107\Secs. 3101-3128. FICA tax consists of two parts: (1) old age,
survivor, and disability insurance (``OASDI'') and (2) Medicare
hospital insurance (``HI''). The OASDI tax rate is 6.2 percent for each
the employee and employer (for a total rate of 12.4 percent). The OASDI
tax rate applies to employee wages up to the OASDI wage base ($128,400
for calendar year 2018). The HI tax rate is 1.45 percent on each the
employee and the employer (for a total rate of 2.9 percent) and applies
to all wages. The employee portion of the HI tax (not the employer
portion) is increased by an additional tax of 0.9 percent on wages
received in excess of a threshold amount. The threshold amount is
$250,000 in the case of a joint return, $125,000 in the case of a
married individual filing a separate return, and $200,000 in any other
case.
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An amount contributed to a qualified retirement plan at the
election of an employee is generally treated as an employee
after-tax contribution and thus is includible in income.
Employee contributions are also generally wages for FICA tax
purposes.
A qualified defined contribution plan may include a section
401(k) plan, under which employees may choose to make elective
deferrals rather than receive the same amount as current
compensation.\108\ Elective deferrals are subject to certain
rules. For example, elective deferrals must be fully vested and
may not exceed an annual limit ($18,500 for 2018).\109\
Elective deferrals are not includible in income at the time of
contribution; however, they are wages for FICA tax purposes.
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\108\Elective deferrals are generally made on a pretax basis and
distributions attributable to elective deferrals are includible in
income. However, a section 401(k) plan 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 after-tax Roth contributions. Certain
distributions from a designated Roth account are excluded from income,
even though they include earnings not previously taxed.
\109\A State or local governmental employer may not maintain a
401(k) plan unless it maintained a 401(k) plan before May 6, 1986.
However, other arrangements similar to 401(k) plans are available to
State and local governmental employers, such as eligible deferred
compensation plans (section 457).
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A distribution of benefits from a qualified retirement plan
generally is includible in gross income in the year it is paid
or distributed, except to the extent the amount distributed
represents a return of the employee's after-tax contributions
(i.e., basis).
Special rules for State and local governmental plans
Some defined benefit pension plans require employee
contributions. In many cases, governmental employees are
required to participate in and contribute to a defined benefit
pension plan as a condition of employment.\110\ In such cases,
the required employee contributions are generally withheld from
employees' salaries. In some cases, a governmental plan may
cover employees of different governmental entities. For
example, a plan established by a State may cover employees of
various State agencies or employees of the State and of local
governments within the State. In such cases, the plan may
provide employers with the option of paying required employee
contributions on behalf of their employees, rather than
withholding the required contributions from employees'
salaries.
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\110\A governmental plan may also allow an employee to purchase
additional service credit (such as credit for military service) by
making additional employee contributions.
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Under a special rule, in the case of a plan maintained by a
State or local government, if contributions are designated as
employee contributions, but the State or local governmental
employer ``picks up'' (i.e., pays) the contributions,
contributions so picked up (``pick-up contributions'') are
treated as employer contributions.\111\ As a result of being
treated as employer contributions, pick-up contributions are
not includible in employees' income at the time of
contribution.
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\111\Sec. 414(h)(2).
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Legislative history indicates that the pick-up rules were
intended to apply to situations in which amounts are designated
as employee contributions under a State or local governmental
plan, but the governmental employer pays all or a part of the
employee's contribution without withholding the amount from the
employee's salary. In this situation, the portion of the
contribution that is ``picked up'' by the government was viewed
as, in substance, an employer contribution for Federal tax
purposes, even though designated as an employee contribution
for purposes of State law.\112\
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\112\See H.R. Rep. No. 93-807, at 145 (1974).
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Although pick-up contributions are treated as employer
contributions for income tax purposes, pick-up contributions
made pursuant to a salary reduction agreement are wages for
FICA tax purposes.\113\ However, compensation of State and
local government employees who are covered by a qualified
retirement plan may be generally exempt from FICA tax.\114\
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\113\Sec. 3121(v)(1)(B). For this purpose, a salary reduction
agreement includes any arrangement in which there is a reduction in the
employee's salary in connection with the employer's contribution of a
corresponding amount to a pension plan on the employee's behalf,
regardless of whether the employee approves or chooses participation in
the plan or whether participation is mandatory. See H.R. Rep. No. 98-
861, at 1415 (1984), and State of New Mexico v. Shalala, 153 F.3d 1160
(10th Cir. 1998).
\114\Sec. 3121(b)(7)(F).
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IRS guidance has applied pick-up treatment in situations in
which employees' salaries are reduced by the amount of the
contribution as long as individual employees are not given the
option of choosing to receive amounts directly instead of
having them paid by the employer to the plan.\115\ The IRS has
issued numerous private letter rulings to taxpayers that deal
with the application of the pick-up rules to particular
arrangements. Many of these rulings apply pick-up treatment to
employee contributions to a State or local governmental pension
plan that are required as a condition of employment and
withheld from employees' salary. The IRS also has ruled
favorably on arrangements that allow individual employees to
make an irrevocable election to have contributions made to a
plan on their behalf by payroll deduction if a State statute or
similar provision provides that the contributions are being
paid by the employer in lieu of contributions by the
employee.\116\ The rulings conclude that, in these
circumstances, the employee does not have the option of
receiving the amounts directly and that pick-up treatment
applies.
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\115\See, e.g., Rev. Rul. 81-36, 1981-1 C.B. 255. (The employer
must also specify that the contributions are being paid by the employer
in lieu of contributions by the employee.) Compare Rev. Rul. 81-35,
1981-1 C.B. 255, which denies pick-up treatment to contributions made
pursuant to an individual employment agreement under which the employer
contributes a certain percentage of the employee's salary to the
State's pension plan on behalf of the employee. In Priv. Ltr. Rul.
201417025 (Jan. 28, 2014), the IRS ruled that where a state retirement
system had added a qualified defined contribution plan to its qualified
defined benefit plan and provided employees who participated in or were
eligible to participate in the defined benefit plan a one-time
opportunity to move to the defined contribution plan and continue to
have their employee contributions treated as ``picked up'' by the
employer, and also provided employees with an additional opportunity to
move to the defined contribution plan (1) the amounts transferred,
either time, were not distributions, and the transfers did not result
in currently taxable income to the participant and (2) neither election
to transfer between plans constituted a cash or deferred arrangement
under sec. 401(k).
\116\See, e.g., Priv. Ltr. Rul. 200423040 (March 9, 2004)
(employees may elect whether to participate in a defined benefit
pension plan that requires employee contributions) and Priv. Ltr. Rul.
200317034 (October 10, 2002) (employees may elect to have contributions
made to a defined benefit pension plan by payroll reduction to purchase
additional service credit). In addition, under Priv. Ltr. Rul.
200317024 (September 30, 2002), pick-up treatment applies to
contributions made to a defined contribution plan at the election of
employees. This ruling suggests that the pick-up rules may be used to
make pretax employee contributions to a defined contribution plan
without complying with the rules applicable to elective deferrals.
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Rev. Rul. 2006-43\117\ provides that a contribution to a
qualified plan established by a State government will not be
treated as picked up by the employing unit unless the employing
unit (1) specifies that contributions, although designated as
employee contributions, are being paid by the employer (which
is taken by formal action by a duly authorized person which
must only apply prospectively and be evidenced by a
contemporaneous written document); and (2) does not permit a
participating employee from and after the date of the ``pick-
up'' to have a cash or deferred election right with respect to
designated employee contributions.
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\117\2006-35 I.R.B. 329, August 28, 2006.
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REASONS FOR CHANGE
The Committee believes that State and local governments and
their employees should be allowed to treat employee
contributions as ``picked-up'' by the employer (and therefore
not subject to income taxation when contributed) without regard
to whether employees may choose between different benefit
formulas within the plan. The Committee believes that allowing
such options to employees with respect to their retirement
benefits should not trigger unfavorable Federal income tax
consequences.
EXPLANATION OF PROVISION
Under the provision, a contribution shall not fail to be
treated as picked up by an employing unit merely because the
employee may make an irrevocable election between the
applications of two alternative benefit formulas involving the
same or different levels of employee contributions. The
provision leads to a different result than the conclusion
reached in Rev. Rul. 2006-43 by permitting an employee
contribution to be treated as having been picked up by a State
or local governmental employer (and treated as an employer
contribution) where the employee makes an irrevocable election
between the application of two alternative benefit formulas
involving the same or different levels of employee
contributions.
EFFECTIVE DATE
The provision applies to plan years beginning after the
date of enactment.
K. Elective Deferrals by Members of the Ready Reserve of a Reserve
Component of the Armed Forces (sec. 111 of the Bill and sec. 402(g) of
the Code)
PRESENT LAW
Elective deferrals
Tax-favored employer-sponsored retirement plans may allow
an employee to make an election between cash and an employer
contribution to the plan pursuant to a qualified cash or
deferred arrangement or a salary reduction agreement.\118\
Amounts contributed pursuant to these qualified cash or
deferred arrangements and salary reduction agreements are
referred to as elective deferrals. The total elective deferrals
that may be made by an individual for a year are subject to a
dollar limit, generally $18,500 for 2018.\119\ An employee age
50 or over may make additional elective deferrals, referred to
as catch-up contributions, generally limited to $6,000 for
2018.\120\ These limits apply to the total amount of elective
deferrals that an individual may contribute for the year,
whether to a single plan or to multiple plans, for example,
plans of different employers for whom the individual works
during the year.
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\118\See, for example, sections 401(k) and 403(b).
\119\Sec. 402(g).
\120\Sec. 414(v). The total of an employee's elective deferrals for
a year, including catch-up contributions, cannot exceed the employee's
compensation for the year.
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Thrift Savings Plan and the Ready Reserve
The Thrift Savings Plan (``TSP'') is a tax-favored
retirement plan sponsored by the Federal government under which
Federal employees may contribute elective deferrals.\121\
Elective deferrals made to the TSP are subject to the same
limits as elective deferrals made to other employer-sponsored
retirement plans, including elective deferrals made to plans of
different employers for whom the individual works during the
year.
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\121\Sec. 7701(j). The provisions of TSP are governed also by 5
U.S.C. 8430 through 8440f.
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The Armed Forces of the United States include seven reserve
components: the Army National Guard, the Army Reserve, the Navy
Reserve, the Marine Corps Reserve, the Air National Guard, the
Air Force Reserve, and the Coast Guard Reserve. The Ready
Reserve consists of members of the reserve components who are
usually called to active duty before other members. A member of
the Ready Reserve who is in pay status may make elective
deferrals to the TSP. In the case of a member of the Ready
Reserve who is eligible to contribute elective deferrals to the
TSP in that capacity and to another plan in connection with
other employment, the general limit on elective deferrals
applies to the total elective deferrals made to the TSP and the
other plan. In the case of a member of the Ready Reserve who is
also a civilian Federal employee and eligible to make elective
deferrals to the TSP in that capacity, the general limit on
elective deferrals applies to the total elective deferrals made
to the TSP in both capacities.
REASONS FOR CHANGE
In recent years, members of the Armed Forces have become
eligible to receive matching contributions within their TSP
accounts. However, active-duty members of our military who
enter the civilian workforce and continue to serve in the Ready
Reserve may lose out on such matching contributions because
they may exceed the elective deferral contribution limit based
on their participation in a civilian defined contribution plan.
The Committee believes that considerations related to
retirement savings should not serve as a disincentive for an
individual to continue to serve in the Ready Reserve. Allowing
members of the Ready Reserve to fully contribute to their TSP
accounts while also contributing to a defined contribution plan
related to their civilian employment enhances the Nation's
readiness by helping to retain, on a part-time basis, our well-
trained and experienced members of the Armed Forces.
EXPLANATION OF PROVISION
Under the provision, if an individual who is a member of
the Ready Reserve makes elective deferrals to the TSP in that
capacity, a separate limit (including a separate catch-up
contribution limit) applies to all other elective deferrals
that may be made by that individual. This separate limit
applies only to one other plan or to the TSP in connection with
other employment (that is, employment other than that as a
member of the Ready Reserve) of that individual based on the
individual's compensation in that other employment.
Accordingly, if a member of the Ready Reserve makes elective
deferrals to the TSP both as a Reservist and also as a civilian
Federal employee, separate limits (including a separate catch-
up contribution limit) will apply to the elective deferrals
made to the TSP by the individual as a member of the Ready
Reserve and in the individual's capacity as a civilian Federal
employee. If a member of the Ready Reserve makes elective
deferrals to the TSP as a Reservist and also makes elective
deferrals to a private sector plan as a private sector
employee, separate limits (including a separate catch-up
contribution limit) will apply to the elective deferrals made
to the TSP by the individual as a member of the Ready Reserve
and to the elective deferrals made to the private sector plan
in the individual's capacity as a private sector employee.
EFFECTIVE DATE
The provision is effective for plan years beginning after
December 31, 2018.
TITLE II--ADMINISTRATIVE IMPROVEMENTS
A. Plan Adopted by Filing Due Date for Year May Be Treated as in Effect
as of Close of Year (sec. 201 of the Bill and sec. 401(b) of the Code)
PRESENT LAW
In order for a qualified retirement plan to be treated as
maintained for a taxable year, the plan must be adopted by the
last day of the taxable year.\122\ However, the trust under the
plan will not fail to be treated as in existence due to lack of
corpus merely because it holds no assets on the last day of the
taxable year.\123\ Contributions made by the due date (plus
extensions) of the tax return for the employer maintaining the
plan for a taxable year are treated as contributed on account
of that taxable year.\124\ Thus a plan can be established on
the last day of a taxable year even though the first
contribution is not made until the due date of the employer's
return of tax for the taxable year. Further, if the terms of a
plan adopted during an employer's taxable year fail to satisfy
the qualification requirements that apply to the plan for the
year, the plan may also be amended retroactively by the due
date (including extensions) of the employer's return, provided
that the amendment is made retroactively effective.\125\
However, this provision does not allow a plan to be adopted
after the end of a taxable year and made retroactively
effective, for qualification purposes, for the taxable year
prior to the taxable year in which the plan was adopted by the
employer.\126\
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\122\Rev. Rul. 76-28, 1976-1 C.B. 106.
\123\Rev. Rul. 81-114, 1981-1 C.B. 207.
\124\Sec. 404(a)(6).
\125\Sec. 401(b).
\126\Treas. Reg. sec. 1.401(b)-1(a).
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REASONS FOR CHANGE
The Committee believes that providing employers with more
time to establish a retirement plan for their employees will
facilitate more employers, especially small employers,
establishing such plans, thus leading to more retirement
savings by employees.
EXPLANATION OF PROVISION
Under the provision, if an employer adopts a qualified
retirement plan after the close of a taxable year but before
the time prescribed by law for filing the return of tax of the
employer for the taxable year (including extensions thereof),
the employer may elect to treat the plan as having been adopted
as of the last day of the taxable year.
The provision does not override rules requiring certain
plan provisions to be in effect during a plan year, such as the
provision for elective deferrals under a qualified cash or
deferral arrangement (``generally referred to as a 401(k)
plan'').\127\
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\127\Treas. Reg. sec. 1.401(k)-1(e)(2)(ii).
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EFFECTIVE DATE
The provision applies to plans adopted for taxable years
beginning after December 31, 2018.
B. Modification of Nondiscrimination Rules To Protect Older, Longer
Service Participants (sec. 202 of the Bill and secs. 401(a)(4) and
(a)(26) of the Code)
PRESENT LAW
In general
Qualified retirement plans are subject to nondiscrimination
requirements, under which the group of employees covered by a
plan (``plan coverage'') and the contributions or benefits
provided to employees, including benefits, rights, and features
under the plan, must not discriminate in favor of highly
compensated employees.\128\ The timing of plan amendments must
also not have the effect of discriminating significantly in
favor of highly compensated employees. In addition, in the case
of a defined benefit plan, the plan must benefit at least the
lesser of (1) 50 employees of the employer, or (2) the greater
of (a) 40 percent of all employees of the employer or (b) two
employees (or one employee if there is only one employee),
referred to as the ``minimum participation'' requirements.\129\
These requirements are designed to help ensure that qualified
retirement plans achieve the goal of retirement security for
both lower and higher paid employees.
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\128\Secs. 401(a)(3)-(5) and 410(b). Detailed rules are provided in
Treas. Reg. secs. 1.401(a)(4)-1 through -13 and secs. 1.410(b)-2
through -10. In applying the nondiscrimination requirements, certain
employees, such as those under age 21 or with less than a year of
service, generally may be disregarded. In addition, employees of
controlled groups and affiliated service groups under the aggregation
rules of section 414(b), (c), (m) and (o) are treated as employed by a
single employer.
\129\Sec. 401(a)(26).
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For nondiscrimination purposes, an employee generally is
treated as highly compensated if the employee (1) was a five-
percent owner of the employer at any time during the year or
the preceding year, or (2) had compensation for the preceding
year in excess of $120,000 (for 2018).\130\ Employees who are
not highly compensated are referred to as nonhighly compensated
employees.
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\130\Section 414(q). At the election of the employer, employees who
are highly compensated based on the amount of their compensation may be
limited to employees who were among the top 20 percent of employees
based on compensation.
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Nondiscriminatory plan coverage
Whether plan coverage of employees is nondiscriminatory is
determined by calculating a plan's ratio percentage, that is,
the ratio of the percentage of nonhighly compensated employees
covered under the plan to the percentage of highly compensated
employees covered. For this purpose, certain portions of a
defined contribution plan are treated as separate plans to
which the plan coverage requirements are applied separately,
referred to as mandatory disaggregation. Specifically, the
following, if provided under a plan, are treated as separate
plans: the portion of a plan consisting of employee elective
deferrals, the portion consisting of employer matching
contributions, the portion consisting of employer nonelective
contributions, and the portion consisting of an employee stock
ownership plan (``ESOP'').\131\ Subject to mandatory
disaggregation, different qualified retirement plans may
otherwise be aggregated and tested together as a single plan,
provided that they use the same plan year. The plan determined
under these rules for plan coverage purposes generally is also
treated as the plan for purposes of applying the other
nondiscrimination requirements.
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\131\Elective deferrals are contributions that an employee elects
to have made to a defined contribution plan that includes a qualified
cash or deferred arrangement (a section 401(k) plan) rather than
receive the same amount as current compensation. Employer matching
contributions are contributions made by an employer only if an employee
makes elective deferrals or after-tax employee contributions. Employer
nonelective contributions are contributions made by an employer
regardless of whether an employee makes elective deferrals or after-tax
employee contributions. Under section 4975(e)(7), an ESOP is a defined
contribution plan, or portion of a defined contribution plan, that is
designated as an ESOP and is designed to invest primarily in employer
stock.
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A plan's coverage is nondiscriminatory if the ratio
percentage, as determined above, is 70 percent or greater. If a
plan's ratio percentage is less than 70 percent, a multi-part
test applies, referred to as the average benefit test. First,
the plan must meet a ``nondiscriminatory classification
requirement,'' that is, it must cover a group of employees that
is reasonable and established under objective business criteria
and the plan's ratio percentage must be at or above a level
specified in the regulations, which varies depending on the
percentage of nonhighly compensated employees in the employer's
workforce. In addition, the average benefit percentage test
must be satisfied.
Under the average benefit percentage test, in general, the
average rate of employer-provided contributions or benefit
accruals for all nonhighly compensated employees under all
plans of the employer must be at least 70 percent of the
average contribution or accrual rate of all highly compensated
employees.\132\ In applying the average benefit percentage
test, elective deferrals made by employees, as well as employer
matching and nonelective contributions, are taken into account.
Generally, all plans maintained by the employer are taken into
account, including ESOPs, regardless of whether plans use the
same plan year.
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\132\Contribution and benefit rates are generally determined under
the rules for nondiscriminatory contributions or benefit accruals,
described below. These rules are generally based on benefit accruals
under a defined benefit plan, other than accruals attributable to
after-tax employee contributions, and contributions allocated to
participants' accounts under a defined contribution plan, other than
allocations attributable to after-tax employee contributions. (Under
these rules, contributions allocated to participants' accounts are
referred to as ``allocations,'' with the related rates referred to as
``allocation rates,'' but ``contribution rates'' is used herein for
convenience.) However, as discussed below, benefit accruals can be
converted to actuarially equivalent contributions, and contributions
can be converted to actuarially equivalent benefit accruals.
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Under a transition rule applicable in the case of the
acquisition or disposition of a business, or portion of a
business, or a similar transaction, a plan that satisfied the
plan coverage requirements before the transaction is deemed to
continue to satisfy them for a period after the
transaction,\133\ provided coverage under the plan is not
significantly changed during that period.\134\
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\133\It is for the period beginning on date of the transaction and
ending on the last day of the first plan year beginning after the date
of the transaction.
\134\Sec. 410(b)(6)(C).
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Nondiscriminatory contributions or benefit accruals
In general
There are three general approaches to testing the amount of
benefits under qualified retirement plans: (1) design-based
safe harbors under which the plan's contribution or benefit
accrual formula satisfies certain uniformity standards, (2) a
general test, described below, and (3) cross-testing of
equivalent contributions or benefit accruals. Employee elective
deferrals and employer matching contributions under defined
contribution plans are subject to special testing rules and
generally are not permitted to be taken into account in
determining whether other contributions or benefits are
nondiscriminatory.\135\
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\135\Secs. 401(k) and (m), the latter of which applies also to
after-tax employee contributions under a defined contribution plan.
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The nondiscrimination rules allow contributions and benefit
accruals to be provided to highly compensated and nonhighly
compensated employees at the same percentage of
compensation.\136\ Thus, the various testing approaches
described below are generally applied to the amount of
contributions or accruals provided as a percentage of
compensation, referred to as a contribution rate or accrual
rate. In addition, under the ``permitted disparity'' rules, in
calculating an employee's contribution or accrual rate, credit
may be given for the employer paid portion of Social Security
taxes or benefits.\137\ The permitted disparity rules do not
apply in testing whether elective deferrals, matching
contributions, or ESOP contributions are nondiscriminatory.
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\136\For this purpose, under section 401(a)(17), annual
compensation generally is limited to $275,000 per year (for 2018).
\137\See sections 401(a)(5)(C) and (D) and 401(l) and Treas. Reg.
section 1.401(a)(4)-7 and 1.401(l)-1 through -6 for rules for
determining the amount of contributions or benefits that can be
attributed to the employer-paid portion of Social Security taxes or
benefits.
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The general test is generally satisfied by measuring the
rate of contribution or benefit accrual for each highly
compensated employee to determine if the group of employees
with the same or higher rate (a ``rate'' group) is a
nondiscriminatory group, using the nondiscriminatory plan
coverage standards described above. For this purpose, if the
ratio percentage of a rate group is less than 70 percent, a
simplified standard applies, which includes disregarding the
reasonable classification requirement, but requires
satisfaction of the average benefit percentage test.
Cross-testing
Cross-testing involves the conversion of contributions
under a defined contribution plan or benefit accruals under a
defined benefit plan to actuarially equivalent accruals or
contributions, with the resulting equivalencies tested under
the general test. However, employee elective deferrals and
employer matching contributions under defined contribution
plans are not permitted to be taken into account for this
purpose, and cross-testing of contributions under a defined
contribution plan, or cross-testing of a defined contribution
plan aggregated with a defined benefit plan, is permitted only
if certain threshold requirements are satisfied.
In order for a defined contribution plan to be tested on an
equivalent benefit accrual basis, one of the following three
threshold conditions must be met:
The plan has broadly available allocation rates, that is,
each allocation rate under the plan is available to a
nondiscriminatory group of employees (disregarding certain
permitted additional contributions provided to employees as a
replacement for benefits under a frozen defined benefit plan,
as discussed below);
The plan provides allocations that meet prescribed designs
under which allocations gradually increase with age or service
or are expected to provide a target level of annuity benefit;
or
The plan satisfies a minimum allocation gateway, under
which each nonhighly compensated employee has an allocation
rate of (a) at least one-third of the highest rate for any
highly compensated employee, or (b) if less, at least five
percent.
In order for an aggregated defined contribution and defined
benefit plan to be tested on an aggregate equivalent benefit
accrual basis, one of the following three threshold conditions
must be met:
The plan must be primarily defined benefit in character,
that is, for more than fifty percent of the nonhighly
compensated employees under the plan, their accrual rate under
the defined benefit plan exceeds their equivalent accrual rate
under the defined contribution plan;
The plan consists of broadly available separate defined
benefit and defined contribution plans, that is, the defined
benefit plan and the defined contribution plan would separately
satisfy simplified versions of the minimum coverage and
nondiscriminatory amount requirements; or
The plan satisfies a minimum aggregate allocation gateway,
under which each nonhighly compensated employee has an
aggregate allocation rate (consisting of allocations under the
defined contribution plan and equivalent allocations under the
defined benefit plan) of (a) at least one-third of the highest
aggregate allocation rate for any nonhighly compensated
employee, or (b) if less, at least five percent in the case of
a highest nonhighly compensated employee's rate up to 25
percent, increased by one percentage point for each five-
percentage-point increment (or portion thereof) above 25
percent, subject to a maximum of 7.5 percent.
Benefits, rights, and features
Each benefit, right, or feature offered under the plan
generally must be available to a group of employees that has a
ratio percentage that satisfies the minimum coverage
requirements, including the reasonable classification
requirement if applicable, except that the average benefit
percentage test does not have to be met, even if the ratio
percentage is less than 70 percent.
Multiple employer and section 403(b) plans
A multiple employer plan generally is a single plan
maintained by two or more unrelated employers, that is,
employers that are not treated as a single employer under the
aggregation rules for related entities.\138\ The plan coverage
and other nondiscrimination requirements are applied separately
to the portions of a multiple employer plan covering employees
of different employers.\139\
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\138\Sec. 413(c). Multiple employer status does not apply if the
plan is a multiemployer plan, defined under sec. 414(f) as a plan
maintained pursuant to one or more collective bargaining agreements
with two or more unrelated employers and to which the employers are
required to contribute under the collective bargaining agreement(s).
Multiemployer plans are also known as Taft-Hartley plans.
\139\Treas. Reg. sec. 1.413-2(a)(3)(ii)-(iii).
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Certain tax-exempt charitable organizations may offer their
employees a tax-deferred annuity plan (``section 403(b)
plan'').\140\ The nondiscrimination requirements, other than
the requirements applicable to elective deferrals, generally
apply to section 403(b) plans of private tax-exempt
organizations. For purposes of applying the nondiscrimination
requirements to a section 403(b) plan, subject to mandatory
disaggregation, a qualified retirement plan may be combined
with the section 403(b) plan and treated as a single plan.\141\
However, a section 403(b) plan and qualified retirement plan
may not be treated as a single plan for purposes of applying
the nondiscrimination requirements to the qualified retirement
plan.
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\140\Sec. 403(b). These plans are available to employers that are
tax-exempt under section 501(c)(3), as well as to employers that are
educational institutions of State or local governments.
\141\Treas. Reg. sec. 1.410(b)-7(f).
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Closed and frozen defined benefit plans
A defined benefit plan may be amended to limit
participation in the plan to individuals who are employees as
of a certain date. That is, employees hired after that date are
not eligible to participate in the plan. Such a plan is
sometimes referred to as a ``closed'' defined benefit plan
(that is, closed to new entrants). In such a case, it is common
for the employer also to maintain a defined contribution plan
and to provide employer matching or nonelective contributions
only to employees not covered by the defined benefit plan or at
a higher rate to such employees.
Over time, the group of employees continuing to accrue
benefits under the defined benefit plan may come to consist
more heavily of highly compensated employees, for example,
because of greater turnover among nonhighly compensated
employees or because increasing compensation causes nonhighly
compensated employees to become highly compensated. In that
case, the defined benefit plan may have to be combined with the
defined contribution plan and tested on a benefit accrual
basis. However, under the regulations, if none of the threshold
conditions is met, testing on a benefits basis may not be
available. Notwithstanding the regulations, recent IRS guidance
provides relief for a limited period, allowing certain closed
defined benefit plans to be aggregated with a defined
contribution plan and tested on an aggregate equivalent
benefits basis without meeting any of the threshold
conditions.\142\ When the group of employees continuing to
accrue benefits under a closed defined benefit plan consists
more heavily of highly compensated employees, the benefits,
rights, and features provided under the plan may also fail the
tests under the existing nondiscrimination rules.
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\142\Notice 2014-5, 2014-2 I.R.B. 276, December 13, 2013 extended
by Notice 2015-28, 2015-14 I.R.B. 848, March 19, 2015, Notice 2016-57,
2016-40 I.R.B. 432, September 19, 2016, and most recently by Notice
2017-45, 2017-38 I.R.B. 232, August 31, 2017. Proposed regulations
revising the nondiscrimination requirements for closed plans were also
issued in 2016, subject to various conditions. 81 Fed. Reg. 4976
(January 29, 2016).
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In some cases, if a defined benefit plan is amended to
cease future accruals for all participants, referred to as a
``frozen'' defined benefit plan, additional contributions to a
defined contribution plan may be provided for participants, in
particular for older participants, in order to make up in part
for the loss of the benefits they expected to earn under the
defined benefit plan (``make-whole'' contributions). As a
practical matter, testing on a benefit accrual basis may be
required in that case, but may not be available because the
defined contribution plan does not meet any of the threshold
conditions.
REASONS FOR CHANGE
Some employers that sponsor defined benefit plans have
closed their plans to new employees and offer new employees
alternative retirement savings plans. Employees in such closed
defined benefit plans continue to earn benefits under the
defined benefit plan, consistent with their expectations as to
their retirement income. This is particularly important for
employees who are close to retirement. However, without greater
flexibility in the nondiscrimination rules, employers may be
forced to freeze these defined benefit plans, thus preventing
employees who remain in the plan from earning their expected
benefits. When a defined benefit plan is frozen, make-whole
contributions can offset some of the resulting benefit loss for
employees. In that case too, however, greater flexibility in
the nondiscrimination rules is needed. The Committee believes
it is appropriate to provide such flexibility in order to
protect employee benefits for older, longer-service employees.
EXPLANATION OF PROVISION
Closed or frozen defined benefit plans
In general
The provision provides nondiscrimination relief with
respect to benefits, rights, and features for a closed class of
participants (``closed class''),\143\ and with respect to
benefit accruals for a closed class, under a defined benefit
plan that meets the requirements described below (referred to
herein as an ``applicable'' defined benefit plan). In addition,
the provision treats a closed or frozen applicable defined
benefit plan as meeting the minimum participation requirements
if the plan met the requirements as of the effective date of
the plan amendment by which the plan was closed or frozen.
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\143\References under the provision to a closed class of
participants and similar references to a closed class include
arrangements under which one or more classes of participants are
closed, except that one or more classes of participants closed on
different dates are not aggregated for purposes of determining the date
any such class was closed.
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If a portion of an applicable defined benefit plan eligible
for relief under the provision is spun off to another employer,
and if the spun-off plan continues to satisfy any ongoing
requirements applicable for the relevant relief as described
below, the relevant relief for the spun-off plan will continue
with respect to the other employer.
Benefits, rights, or features for a closed class
Under the provision, an applicable defined benefit plan
that provides benefits, rights, or features to a closed class
does not fail the nondiscrimination requirements by reason of
the composition of the closed class, or the benefits, rights,
or features provided to the closed class, if (1) for the plan
year as of which the class closes and the two succeeding plan
years, the benefits, rights, and features satisfy the
nondiscrimination requirements without regard to the relief
under the provision, but taking into account the special
testing rules described below,\144\ and (2) after the date as
of which the class was closed, any plan amendment modifying the
closed class or the benefits, rights, and features provided to
the closed class does not discriminate significantly in favor
of highly compensated employees.
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\144\Other testing options available under present law are also
available for this purpose.
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For purposes of requirement (1) above, the following
special testing rules apply:
In applying the plan coverage transition
rule for business acquisitions, dispositions, and
similar transactions, the closing of the class of
participants is not treated as a significant change in
coverage;
Two or more plans do not fail to be eligible
to be a treated as a single plan solely by reason of
having different plan years;\145\ and
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\145\This rule applies also for purposes of applying the plan
coverage and other nondiscrimination requirements to an applicable
defined benefit plan and one or more defined contributions that, under
the provision, may be treated as a single plan as described below.
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Changes in employee population are
disregarded to the extent attributable to individuals
who become employees or cease to be employees, after
the date the class is closed, by reason of a merger,
acquisition, divestiture, or similar event.
Benefit accruals for a closed class
Under the provision, an applicable defined benefit plan
that provides benefits to a closed class may be aggregated,
that is, treated as a single plan, and tested on a benefit
accrual basis with one or more defined contribution plans
(without having to satisfy the threshold conditions under
present law) if (1) for the plan year as of which the class
closes and the two succeeding plan years, the plan satisfies
the plan coverage and nondiscrimination requirements without
regard to the relief under the provision, but taking into
account the special testing rules described above,\146\ and (2)
after the date as of which the class was closed, any plan
amendment modifying the closed class or the benefits provided
to the closed class does not discriminate significantly in
favor of highly compensated employees.
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\146\Other testing options available under present law are also
available for this purpose.
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Under the provision, defined contribution plans that may be
aggregated with an applicable defined benefit plan and treated
as a single plan include the portion of one or more defined
contribution plans consisting of matching contributions, an
ESOP, or matching or nonelective contributions under a section
403(b) plan. If an applicable defined benefit plan is
aggregated with the portion of a defined contribution plan
consisting of matching contributions, any portion of the
defined contribution plan consisting of elective deferrals must
also be aggregated. In addition, the matching contributions are
treated in the same manner as nonelective contributions,
including for purposes of permitted disparity.
Applicable defined benefit plan
An applicable defined benefit plan to which relief under
the provision applies is a defined benefit plan under which the
class was closed (or the plan frozen) before April 5, 2017, or
that meets the following alternative conditions: (1) taking
into account any predecessor plan, the plan has been in effect
for at least five years as of the date the class is closed (or
the plan is frozen) and (2) under the plan, during the five-
year period preceding that date, (a) for purposes of the relief
provided with respect to benefits, rights, and features for a
closed class, there has not been a substantial increase in the
coverage or value of the benefits, rights, or features, or (b)
for purposes of the relief provided with respect to benefit
accruals for a closed class or the minimum participation
requirements, there has not been a substantial increase in the
coverage or benefits under the plan.
For purposes of (2)(a) above, a plan is treated as having a
substantial increase in coverage or value of benefits, rights,
or features only if, during the applicable five-year period,
either the number of participants covered by the benefits,
rights, or features on the date the period ends is more than 50
percent greater than the number on the first day of the plan
year in which the period began, or the benefits, rights, and
features have been modified by one or more plan amendments in
such a way that, as of the date the class is closed, the value
of the benefits, rights, and features to the closed class as a
whole is substantially greater than the value as of the first
day of the five-year period, solely as a result of the
amendments.
For purposes of (2)(b) above, a plan is treated as having
had a substantial increase in coverage or benefits only if,
during the applicable five-year period, either the number of
participants benefiting under the plan on the date the period
ends is more than 50 percent greater than the number of
participants on the first day of the plan year in which the
period began, or the average benefit provided to participants
on the date the period ends is more than 50 percent greater
than the average benefit provided on the first day of the plan
year in which the period began. In applying this requirement,
the average benefit provided to participants under the plan is
treated as having remained the same between the two relevant
dates if the benefit formula applicable to the participants has
not changed between the dates and, if the benefit formula has
changed, the average benefit under the plan is considered to
have increased by more than 50 percent only if the target
normal cost for all participants benefiting under the plan for
the plan year in which the five-year period ends exceeds the
target normal cost for all such participants for that plan year
if determined using the benefit formula in effect for the
participants for the first plan year in the five-year period by
more than 50 percent.\147\ In applying these rules, a multiple
employer plan is treated as a single plan, rather than as
separate plans separately covering the employees of each
participating employer.
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\147\Under the funding requirements applicable to defined benefit
plans, target normal cost for a plan year (defined in section
430(b)(1)(A)(i)) is generally the sum of the present value of the
benefits expected to be earned under the plan during the plan year plus
the amount of plan-related expenses to be paid from plan assets during
the plan year. Under the provision, in applying this average benefit
rule to certain defined benefit plans maintained by cooperative
organizations and charities, referred to as CSEC plans (defined in
section 414(y)), which are subject to different funding requirements,
the CSEC plan's normal cost under section 433(j)(1)(B) is used instead
of target normal cost.
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In applying these standards, any increase in coverage or
value, or in coverage or benefits, whichever is applicable, is
generally disregarded if it is attributable to coverage and
value, or coverage and benefits, provided to employees who (1)
became participants as a result of a merger, acquisition, or
similar event that occurred during the 7-year period preceding
the date the class was closed, or (2) became participants by
reason of a merger of the plan with another plan that had been
in effect for at least five years as of the date of the merger
and, in the case of benefits, rights, or features for a closed
class, under the merger, the benefits, rights, or features
under one plan were conformed to the benefits, rights, or
features under the other plan prospectively.
Make-whole contributions under a defined contribution plan
Under the provision, a defined contribution plan is
permitted to be tested on an equivalent benefit accrual basis
(without having to satisfy the threshold conditions under
present law) if the following requirements are met:
The plan provides make-whole contributions
to a closed class of participants whose accruals under
a defined benefit plan have been reduced or ended
(``make-whole class'');
For the plan year of the defined
contribution plan as of which the make-whole class
closes and the two succeeding plan years, the make-
whole class satisfies the nondiscriminatory
classification requirement under the plan coverage
rules, taking into account the special testing rules
described above;
After the date as of which the class was
closed, any amendment to the defined contribution plan
modifying the make-whole class or the allocations,
benefits, rights, and features provided to the make-
whole class does not discriminate significantly in
favor of highly compensated employees; and
Either the class was closed before April 5,
2017, or the defined benefit plan is an applicable
defined benefit plan under the alternative conditions
applicable for purposes of the relief provided with
respect to benefit accruals for a closed class.
With respect to one or more defined contribution plans
meeting the requirements above, in applying the plan coverage
and nondiscrimination requirements, the portion of the plan
providing make-whole or other nonelective contributions may
also be aggregated and tested on an equivalent benefit accrual
basis with the portion of one or more other defined
contribution plans consisting of matching contributions, an
ESOP, or matching or nonelective contributions under a section
403(b) plan. If the plan is aggregated with the portion of a
defined contribution plan consisting of matching contributions,
any portion of the defined contribution plan consisting of
elective deferrals must also be aggregated. In addition, the
matching contributions are treated in the same manner as
nonelective contributions, including for purposes of permitted
disparity.
Under the provision, ``make-whole contributions'' generally
means nonelective contributions for each employee in the make-
whole class that are reasonably calculated, in a consistent
manner, to replace some or all of the retirement benefits that
the employee would have received under the defined benefit plan
and any other plan or qualified cash or deferred arrangement
under a section 401(k) plan if no change had been made to the
defined benefit plan and other plan or arrangement.\148\
However, under a special rule, in the case of a defined
contribution plan that provides benefits, rights, or features
to a closed class of participants whose accruals under a
defined benefit plan have been reduced or eliminated, the plan
will not fail to satisfy the nondiscrimination requirements
solely by reason of the composition of the closed class, or the
benefits, rights, or features provided to the closed class, if
the defined contribution plan and defined benefit plan
otherwise meet the requirements described above but for the
fact that the make-whole contributions under the defined
contribution plan are made in whole or in part through matching
contributions.
---------------------------------------------------------------------------
\148\For this purpose, consistency is not required with respect to
employees who were subject to different benefit formulas under the
defined benefit plan.
---------------------------------------------------------------------------
If a portion of a defined contribution plan eligible for
relief under the provision is spun off to another employer, and
if the spun-off plan continues to satisfy any ongoing
requirements applicable for the relevant relief as described
above, the relevant relief for the spun-off plan will continue
with respect to the other employer.
EFFECTIVE DATE
The provision is generally effective on the date of
enactment, without regard to whether any plan modifications
referred to in the provision are adopted or effective before,
on, or after the date of enactment.
However, at the election of a plan sponsor, the provision
will apply to plan years beginning after December 31, 2013. For
purposes of the provision, a closed class of participants under
a defined benefit plan is treated as being closed before April
5, 2017, if the plan sponsor's intention to create the closed
class is reflected in formal written documents and communicated
to participants before that date. In addition, a plan does not
fail to be eligible for the relief under the provision solely
because (1) in the case of benefits, rights, or features for a
closed class under a defined benefit plan, the plan was amended
before the date of enactment to eliminate one or more benefits,
rights, or features and is further amended after the date of
enactment to provide the previously eliminated benefits,
rights, or features to a closed class of participants, or (2)
in the case of benefit accruals for a closed class under a
defined benefit plan or application of the minimum benefit
requirements to a closed or frozen defined benefit plan, the
plan was amended before the date of the enactment to cease all
benefit accruals and is further amended after the date of
enactment to provide benefit accruals to a closed class of
participants. In either case, the relevant relief applies only
if the plan otherwise meets the requirements for the relief,
and, in applying the relevant relief, the date the class of
participants is closed is the effective date of the later
amendment.
C. Study of Appropriate PBGC Premiums (sec. 203 of the Bill)
PRESENT LAW
Minimum funding rules
The Code and ERISA apply minimum funding requirements to
defined benefit retirement plans maintained by private-sector
employers for their employees (referred to as ``single-
employer'' plans), for purposes of which employers that are
members of a controlled group are considered a single employer.
For purposes of minimum funding requirements, generally each
participating employer in a multiple employer plan is treated
as maintaining a separate single plan,\149\ and a CSEC
plan\150\ is treated as if all participants in the plan are
employed by a single employer.\151\
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\149\Sec. 413(c)(4)(A).
\150\As defined in section 414(y). See footnote 145, supra.
\151\Sec. 413(d)(1).
---------------------------------------------------------------------------
The amount of contributions required for a plan year under
the minimum funding rules is generally the amount needed to
fund benefits earned during that year plus that year's portion
of other liabilities that are amortized over a period of years,
such as benefits resulting from a grant of past service credit.
A minimum contribution is required for a plan year if the value
of the plan's assets is less than the plan's ``funding
target,'' that is, the present value, determined actuarially,
of all benefits earned as of the beginning of the year. If the
value of plan assets is less than the plan's funding target,
such that the plan has a funding shortfall, the shortfall is
generally required to be funded by contributions, with
interest, over seven years, taking into account the remaining
installments attributable to shortfalls from preceding years.
If participants earn additional benefits for the year, the
required contribution must include the amount of the plan's
``target normal cost,'' that is, the present value, determined
actuarially, of benefits expected to be earned for the year. In
the case of a plan funded below a certain level, referred to as
an ``at-risk'' plan, specified assumptions must be used in
determining the plan's funding target and target normal cost.
The PBGC
Even if a defined benefit plan is fully funded based on the
minimum funding requirements of the Code and ERISA, the assets
may not be sufficient to purchase annuities on a market basis.
Thus, it is possible that a plan may be terminated at a time
when plan assets are not sufficient to provide all benefits
accrued by employees under the plan. In order to protect plan
participants from losing retirement benefits in such
circumstances, the Pension Benefit Guaranty Corporation
(``PBGC''), a corporation within the Department of Labor, was
created in 1974 under ERISA to provide an insurance program for
benefits under most defined benefit plans maintained by private
employers.
PBGC premiums
In general
Under ERISA, the PBGC is funded solely by assets in
terminated plans, amounts recovered from employers who
terminate underfunded plans, premiums paid with respect to
covered plans, and investment earnings. All covered single
employer (including multiple employer) plans are required to
pay a flat per-participant premium; underfunded plans are
subject to an additional rate variable premium based on the
level of underfunding. The amount of both the flat rate premium
and the variable rate premium are set by statute.
Under ERISA and PBGC's regulations, a termination premium
must be paid to the PBGC annually for three years after plan
termination for certain distress and involuntary pension plan
terminations. The amount of the termination premium is $1,250
per participant except for certain airline-related plans.
Flat rate premiums
In 2018, the annual flat rate per participant premium is
$74 per participant. By statute, the 2019 flat rate premium
will go up by $6 to $80.\152\ In addition, with the exception
of the single employer flat rate premium for 2019, all rates
and caps are indexed to inflation based on the National Average
Wage Index.\153\
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\152\ERISA sec. 4006, 29 U.S.C. 1306.
\153\Sec. 209(k)(1) of the Social Security Act (42 U.S.C.
409(k)(1)).
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Variable rate premiums
In 2018, the variable rate premium is equal to $38 per
$1,000 of unfunded vested benefits, and is indexed to inflation
based on the National Average Wage Index. By statute, the 2019
variable rate premium will go up by $4 to $42 per $1,000 of
unfunded vested benefits.\154\ The term ``unfunded vested
benefits'' means the amount which would be the unfunded current
liability (as defined under the minimum funding rules) if only
vested (nonforfeitable) benefits were taken into account and if
benefits were valued at the variable premium interest rate. No
variable rate premium is imposed for a year if contributions to
the plan for the prior year were at least equal to the full
funding limit for that year.
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\154\ERISA sec. 4006, 29 U.S.C. 1306.
---------------------------------------------------------------------------
REASONS FOR CHANGE
Under present law, the PBGC is funded by assets in
terminated plans, amounts recovered from employers who
terminate underfunded plans, premiums paid with respect to
covered plans, and investment earnings. Different sets of
funding rules, most recently set in legislation in 2014 and
2015, apply for three types of pension plans: single-employer,
multiemployer, and CSEC plans. The Committee believes that CSEC
plans have special characteristics that should be recognized in
the PBGC premium rates for such plans. In this regard, the
Committee believes that this category of plans should not be
subject to premium levels higher than is appropriate for their
risk profile. The study is intended to provide information
relevant for setting the appropriate premium rates for CSEC
plans.
EXPLANATION OF PROVISION
Under the provision, the PBGC is required to contract with
an appropriate agency or organization (to be selected by the
PBGC's Board of Directors) to conduct an independent study of
the PBGC's Single-Employer Pension Insurance Modeling System
(PIMS).
The study, which is required to begin no later than six
months after the date of enactment, will:
examine the current structure and level of
PBGC premiums required to be paid by single employer
plans (including fixed, variable and termination
premiums) to evaluate whether such premiums are
sufficient to pay PBGC guaranteed benefits;
evaluate whether alternative structures and
levels of premiums would better account for the risks
posed by various categories of single employer plans,
including on the basis of (A) industry, ownership
structure, or size of the plan sponsor, (B) plan funded
status, risk or volatility of plan investments, or the
credit worthiness of the plan sponsor, or (C) a
combination of the factors described in (A) and (B);
evaluate whether other methods of estimating
the value of assets and liabilities should be used in
the PBGC's financial statements such as those described
by the CBO in its September 2005 report, ``The Risk
Exposure of the Pension Benefit Guaranty Corporation,''
and in its August 2016 report, ``Options to Improve the
Financial Condition of the Pension Benefit Guaranty
Corporation's Multiemployer Program;''
evaluate whether multiple employer plans
(including CSEC plans) have characteristics that
warrant a separate structure and level of PBGC
premiums; and
include an explanation of the assumptions
underlying each analysis involved in conducting such
study.
EFFECTIVE DATE
The provision is effective on the date of enactment.
TITLE III--OTHER SAVINGS PROVISIONS
A. Universal Savings Accounts (sec. 301 of the Bill and new sec. 530U
of the Code)
PRESENT LAW
Savings plans and accounts under the Code
Tax-favored retirement arrangements
The Code provides two general vehicles for tax-favored
retirement savings: employer-sponsored plans and IRAs. Code
provisions are generally within the jurisdiction of the
Secretary of the Treasury.\155\
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\155\Retirement plans of private employers, including qualified
retirement plans and tax-deferred annuity plans, are generally subject
to requirements under ERISA, and are generally within the jurisdiction
of the Secretary of Labor.
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The most common type of tax-favored employer-sponsored
retirement plan is a qualified retirement plan,\156\ which may
be a defined contribution plan or a defined benefit plan. Under
a defined contribution plan, separate individual accounts are
maintained for participants, to which accumulated
contributions, earnings and losses are allocated, and
participants' benefits are based on the value of their
accounts.\157\ Defined contribution plans commonly allow
participants to direct the investment of their accounts,
usually by choosing among investment options offered under the
plan. Under a defined benefit plan, benefits are determined
under a plan formula and paid from general plan assets, rather
than individual accounts.\158\ Besides qualified retirement
plans, certain tax-exempt employers and public schools may
maintain tax-deferred annuity plans.\159\
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\156\Sec. 401(a). A qualified annuity plan under section 403(a) is
similar to and subject to requirements similar to those applicable to
qualified retirement plans.
\157\Sec. 414(i). Defined contribution plans generally provide for
contributions by employers and may include a qualified cash or deferred
arrangement under a section 401(k) plan, under which employees may
elect to contribute to the plan.
\158\Sec. 414(j).
\159\Sec. 403(b). Private and governmental employers that are
exempt from tax under section 501(c)(3), including tax-exempt private
schools, may maintain tax-deferred annuity plans. State and local
governmental employers may maintain another type of tax-favored
retirement plan, an eligible deferred compensation plan under section
457(b).
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An IRA is generally established by the individual for whom
the IRA is maintained.\160\ However, in some cases, an employer
may establish IRAs on behalf of employees and provide
retirement contributions to the IRAs.\161\ An individual
retirement account (``IRA'') is a tax-exempt trust or account
established for the exclusive benefit of an individual and his
or her beneficiaries.\162\ There are two general types of IRAs:
traditional IRAs, to which both deductible and nondeductible
contributions may be made, and Roth IRAs, contributions to
which are not deductible. In general, amounts held in a
traditional IRA are includible in income when withdrawn (except
to the extent the withdrawal is a return of nondeductible
contributions). Amounts held in a Roth IRA that are withdrawn
as a qualified distribution are not includible in income;
distributions from a Roth IRA that are not qualified
distributions are includible in income to the extent
attributable to earnings. A qualified distribution is a
distribution that is made (1) after the five-taxable year
period beginning with the first taxable year for which the
individual made a contribution to a Roth IRA, and (2) after
attainment of age 59\1/2\, on account of death or disability,
or for first-time homebuyer expenses of up to $10,000.
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\160\Sections 219, 408 and 408A provide rules for IRAs. Under
section 408(a)(2) and (n), only certain entities are permitted to be
the trustee of an IRA. The trustee of an IRA generally must be a bank,
an insured credit union, or a corporation subject to supervision and
examination by the Commissioner of Banking or other officer in charge
of the administration of the banking laws of the State in which it is
incorporated. Alternatively, an IRA trustee may be another person who
demonstrates to the satisfaction of the Secretary that the manner in
which the person will administer the IRA will be consistent with the
IRA requirements.
\161\SEP plans under section 408(k) and SIMPLE IRA plans under
section 408(p) are employer-sponsored retirement plans funded using
IRAs for employees. In addition, IRA treatment may apply to accounts
maintained for employees under a trust created by an employer (or an
employee association) for the exclusive benefit of employees or their
beneficiaries, provided that the trust complies with the relevant IRA
requirements and separate accounting is maintained for the interest of
each employee or beneficiary. Sec. 408(c). In that case, the assets of
the trust may be held in a common fund for the account of all
individuals who have an interest in the trust.
\162\Secs. 408 and 408A.
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Other tax-favored savings arrangements
The Code provides for certain other tax-advantaged savings
arrangements, allowing taxpayers to save both for education and
for expenses associated with a disability.
A qualified tuition program (known as a ``529 plan'') is a
program established and maintained by a State or agency or
instrumentality thereof, under which a person may make
contributions to an account that is established for the purpose
of satisfying the qualified higher education expenses of the
designated beneficiary of the account.\163\ Similarly,
Coverdell education savings accounts are trusts or custodial
accounts established on behalf of a designated beneficiary for
the purpose of saving for the education expenses of the
designated beneficiary.\164\ For both of these accounts,
contributions are not tax deductible for Federal income tax
purposes, but qualified distributions (generally distributions
made for the purpose of meeting the designated beneficiary's
education expenses) are not subject to tax.
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\163\Sec. 529.
\164\Sec. 530.
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A qualified ABLE program is a program established and
maintained by a State or agency or instrumentality thereof,
under which individuals may open accounts (an ``ABLE account'')
for the purpose of meeting the account owner's qualified
disability expenses.\165\ Limitations apply on eligibility to
establish an ABLE account, the number of ABLE accounts any
individual may own, and to the maximum annual contributions an
ABLE account may receive in a given year. Amounts contributed
to an ABLE account are not deductible for Federal income tax
purposes, but qualified distributions (generally distributions
made for the purpose of meeting the designated beneficiary's
qualified disability expenses) are not subject to tax.
---------------------------------------------------------------------------
\165\Sec. 529A.
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REASONS FOR CHANGE
The Code currently provides for various savings vehicles
that can be used for a variety of specified purposes, such as
health care, education, and retirement. Specific rules apply
for each such savings vehicle with respect to when
distributions may be made in a tax-favored manner, as well as
the types of individuals who may contribute on a tax-favored
basis. Individuals may contribute to a savings vehicle for a
specific purpose, only to experience a change in circumstances
with the result that they need to access the savings for
another purpose. The Committee believes that it is important to
encourage individuals and families to save and invest for the
future by providing the flexibility to use a savings vehicle
for whatever need may arise in the future. The Committee
believes that it will be valuable to establish a fully-flexible
tax-favored savings vehicle that does not limit when, or for
what purposes, a saver can withdraw his or her money. The
Committee believes that Universal Savings Accounts will be
particularly powerful for low-income and young Americans who
are interested in saving for the future but might need to
access their savings for life events prior to retirement.
EXPLANATION OF PROVISION
The provision permits a universal savings account to be
established by an individual for whom the account is
maintained, through a trust arrangement subject to
substantially all of the same requirements that apply to trust
arrangements under IRAs. For each taxable year, an individual
may contribute cash in an amount up to $2,500, not to exceed
the individual's compensation\166\ includible in the
individual's gross income for the taxable year. The
individual's account balance is nonforfeitable. Contributions
are not permitted for dependents; thus, if an individual is a
dependent of another taxpayer, the dollar limit for
contributions for such individual is zero. The dollar limit is
subject to indexing; if the dollar amount after any increase is
applied is not a multiple of $100, it is rounded to the next
lower multiple of $100.
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\166\Within the meaning of section 219.
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In the case of taxpayers who file a joint income tax
return, if an individual's compensation includible in gross
income for the taxable year is less than such compensation of
the individual's spouse, the compensation on which the
contribution limit is based for that individual may include the
spouse's compensation includible in gross income for the
taxable year reduced (but not below zero) by the amount the
spouse contributed for the taxable year to universal savings
accounts of the spouse. For example, if the joint income tax
return for the individual and the spouse results in $4,000 of
compensation includible in gross income for the taxable year
(all of which was earned by the spouse), and the spouse
contributed $2,500 for the taxable year to the spouse's
universal savings accounts, then the individual may contribute
a maximum of $1,500 for the taxable year to the individual's
universal savings accounts.
Distributions from universal savings accounts are generally
not includible in gross income. Distributions may be made in
cash or in other property that has a readily ascertainable fair
market value as identified by the Secretary. Excess
contributions (along with any attributable net income) must be
corrected by the due date of the tax return for the taxable
year, in order to avoid being subject to the excess
contribution excise tax of 6 percent. Any related net income on
such excess contributions is includible in gross income for
such taxable year.
Rollovers are not permitted into or from a universal
savings account, other than qualified rollovers. For this
purpose, a qualified rollover is a contribution to a universal
savings account from another universal savings account of the
same individual, if such amount is contributed not later than
60 days after the distribution from the other universal savings
account. Qualified rollovers are not taken into account with
respect to the contribution limit applicable to universal
savings accounts.
If an individual acquires a spouse's universal savings
account by reason of the spouse's death, the individual is
treated as the account holder of the deceased spouse's
universal savings account. In any other case, when an account
holder of a universal savings account dies, the account ceases
to be treated as a universal savings account and all amounts in
the account are treated as distributed on the date of death of
the account holder.
Prohibited transaction rules apply to universal savings
accounts. In addition, the trustee of a universal savings
account is required to make a report with respect to the
account to the account holder not later than January 31 of the
calendar year following the calendar year to which the report
relates and to the IRS as specified by the Secretary, in a
manner similar to IRA reporting.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2018.
B. Expansion of 529 Plans (sec. 302 of the Bill and sec. 529 of the
Code)
PRESENT LAW
In general
A qualified tuition program (often referred to as a ``529
plan'') is a program established and maintained by a State or
agency or instrumentality thereof, or by one or more eligible
educational institutions, which satisfies certain requirements
and under which a person may purchase tuition credits or
certificates on behalf of a designated beneficiary that entitle
the beneficiary to the waiver or payment of qualified higher
education expenses of the beneficiary (a ``prepaid tuition
program''). Section 529 provides specified income tax and
transfer tax rules for the treatment of accounts and contracts
established under qualified tuition programs.\167\ In the case
of a program established and maintained by a State or agency or
instrumentality thereof, a qualified tuition program also
includes a program under which a person may make contributions
to an account that is established for the purpose of satisfying
the qualified higher education expenses of the designated
beneficiary of the account, provided it satisfies certain
specified requirements (a ``savings account program''). Under
both types of qualified tuition programs, a contributor
establishes an account for the benefit of a particular
designated beneficiary to provide for that beneficiary's higher
education expenses.
---------------------------------------------------------------------------
\167\For purposes of this description, the term ``account'' is used
interchangeably to refer to a prepaid tuition benefit contract or a
tuition savings account established pursuant to a qualified tuition
program.
---------------------------------------------------------------------------
In general, prepaid tuition contracts and tuition savings
accounts established under a qualified tuition program involve
prepayments or contributions made by one or more individuals
for the benefit of a designated beneficiary. Decisions with
respect to the contract or account are typically made by an
individual who is not the designated beneficiary. Qualified
tuition accounts or contracts generally require the designation
of a person (generally referred to as an ``account
owner'')\168\ whom the program administrator (oftentimes a
third-party administrator retained by the State or by the
educational institution that established the program) may look
to for decisions, recordkeeping, and reporting with respect to
the account established for a designated beneficiary. The
person or persons who make the contributions to the account
need not be the same person who is regarded as the account
owner for purposes of administering the account. Under many
qualified tuition programs, the account owner generally has
control over the account or contract, including the ability to
change designated beneficiaries and to withdraw funds at any
time and for any purpose. Thus, in practice, qualified tuition
accounts or contracts generally involve a contributor, a
designated beneficiary, an account owner (who oftentimes is not
the contributor or the designated beneficiary), and an
administrator of the account or contract.
---------------------------------------------------------------------------
\168\Section 529 refers to contributors and designated
beneficiaries, but does not define or otherwise refer to the term
``account owner,'' which is a commonly used term among qualified
tuition programs.
---------------------------------------------------------------------------
Qualified higher education expenses
Distributions for the purpose of meeting the designated
beneficiary's higher education expenses are generally not
subject to tax. For purposes of receiving a distribution from a
qualified tuition program that qualifies for this favorable tax
treatment, the term qualified higher education expenses means
tuition, fees, books, supplies, and equipment required for the
enrollment or attendance of a designated beneficiary at an
eligible educational institution, and expenses for special
needs services in the case of a special needs beneficiary that
are incurred in connection with such enrollment or attendance.
Qualified higher education expenses generally also include room
and board for students who are enrolled at least half-time.
Qualified higher education expenses include the purchase of any
computer technology or equipment, or Internet access or related
services, if such technology or services are to be used
primarily by the beneficiary during any of the years a
beneficiary is enrolled at an eligible institution.
For distributions made after December 31, 2017, a
designated beneficiary may, on an annual basis, receive up to
$10,000 in aggregate 529 distributions to be used in connection
with expenses for tuition in connection with enrollment or
attendance at an elementary or secondary public, private, or
religious school. To the extent such distributions do not
exceed $10,000, they are treated in the same manner as
distributions for qualified higher education expenses.
Contributions to qualified tuition programs
Contributions to a qualified tuition program must be made
in cash. Section 529 does not impose a specific dollar limit on
the amount of contributions, account balances, or prepaid
tuition benefits relating to a qualified tuition account;
however, the program is required to have adequate safeguards to
prevent contributions in excess of amounts necessary to provide
for the beneficiary's qualified higher education expenses.
Contributions generally are treated as a completed gift
eligible for the gift tax annual exclusion. Contributions are
not tax deductible for Federal income tax purposes, although
they may be deductible for State income tax purposes. Amounts
in the account accumulate on a tax-free basis (i.e., income on
accounts in the plan is not subject to current income tax).
A qualified tuition program may not permit any contributor
to, or designated beneficiary under, the program to direct
(directly or indirectly) the investment of any contributions
(or earnings thereon) more than two times in any calendar year,
and must provide separate accounting for each designated
beneficiary. A qualified tuition program may not allow any
interest in an account or contract (or any portion thereof) to
be used as security for a loan.
REASONS FOR CHANGE
The Committee believes that funds in 529 plans should be
available to help pay costs associated with homeschooling as
well as costs associated with traditional primary and secondary
education. Similarly, the Committee believes that funds in 529
plans should be available to help pay costs associated with
apprenticeship programs as well as costs associated with higher
education. Finally, the Committee believes that when a family
finds itself in a position of one child's 529 plan having more
funds than that child uses while attending school, it is
appropriate to allow some use of such funds to help with
payments on student-loan debt that may be carried by that child
and child's siblings.
EXPLANATION OF PROVISION
The provision makes four modifications to section 529
plans.
First, the provision allows tax-free treatment applicable
to distributions for higher education expenses to apply to
expenses for books, supplies, equipment and fees required for
the participation of a designated beneficiary in an
apprenticeship program. The apprenticeship program must be
registered and certified with the Secretary of Labor under
section 1 of the National Apprenticeship Act.\169\
---------------------------------------------------------------------------
\169\29 U.S.C. 50.
---------------------------------------------------------------------------
Second, the provision allows tax-free treatment to apply to
distributions made for expenses in connection with a
homeschool. Under the provision, distributions for certain
homeschool expenses are treated in the same manner as
distributions for qualified higher education expenses, and like
distributions for elementary and secondary school tuition, are
also subject to an annual limit of $10,000 in aggregate 529
distributions, per beneficiary.\170\ For these purposes,
qualifying homeschool expenses are those expenses, with respect
to a beneficiary, which are incurred in connection with a
homeschool and are for: (i) curriculum and curricular
materials; (ii) books or other instructional materials; (iii)
online educational materials; (iv) tuition for tutoring or
educational classes outside of the home; (v) dual enrollment in
an institution of higher education; and (vi) educational
therapies for students with disabilities.
---------------------------------------------------------------------------
\170\The $10,000 per beneficiary limit applies to the combined
distributions used for either (i) elementary and secondary school
tuition or (ii) homeschool expenses.
---------------------------------------------------------------------------
Third, the provision adds additional qualifying expenses
for distributions made on behalf of designated beneficiaries
attending elementary or secondary school. Under the provision,
in addition to tuition, a distribution may be made for expenses
for fees, academic tutoring, special needs services, books,
supplies, and other equipment, incurred in connection with
enrollment or attendance at such elementary or secondary
school.
Fourth, the provision treats as a qualified distribution
certain amounts used to make payments on principal or interest
of a qualified education loan. No individual may receive more
than $10,000 of such distributions, in aggregate, over the
course of the individual's lifetime.\171\ To the extent that an
individual receives in excess of $10,000 of such distributions,
they are subject to the usual tax treatment of 529
distributions (i.e., the earnings are included in income and
subject to a 10-percent penalty). The provision contains a
special rule allowing such amounts to be distributed to a
sibling of a designated beneficiary (i.e., a brother, sister,
stepbrother, or stepsister). This rule allows a 529 account
holder to make a student loan distribution to a sibling of the
designated beneficiary without changing the designated
beneficiary of the account. For purposes of the $10,000
lifetime limit on student loan distributions, a distribution to
a sibling of a designated beneficiary is applied towards the
sibling's lifetime limit, and not the designated beneficiary's
lifetime limit.
---------------------------------------------------------------------------
\171\This limitation applies to such distributions from all 529
accounts. Thus, an individual may not avoid the limitation by receiving
separate $10,000 distributions from multiple 529 accounts.
---------------------------------------------------------------------------
EFFECTIVE DATE
The provision applies to distributions made after December
31, 2018.
C. Penalty-Free Withdrawals Ffrom Retirement Plans for Individuals in
Case of Birth of Child or Adoption (sec. 303 of the Bill and secs.
72(t), 401-403, 408, 457, and 3405 of the Code)
PRESENT LAW
Distributions from tax-favored retirement plans
A distribution from a qualified retirement plan, a tax-
sheltered annuity plan (a ``section 403(b) plan''), an eligible
deferred compensation plan of a State or local government
employer (a ``governmental section 457(b) plan''), or an IRA
generally is included in income for the year distributed.\172\
These plans are referred to collectively as ``eligible
retirement plans.'' In addition, unless an exception applies, a
distribution from a qualified retirement plan, a section 403(b)
plan, or an IRA received before age 59\1/2\ is subject to a 10-
percent additional tax (referred to as the ``early withdrawal
tax'') on the amount includible in income.\173\
---------------------------------------------------------------------------
\172\Secs. 401(a), 403(a), 403(b), 457(b) and 408. Under section
3405, distributions from these plans are generally subject to income
tax withholding unless the recipient elects otherwise. In addition,
certain distributions from a qualified retirement plan, a section
403(b) plan, or a governmental section 457(b) plan are subject to
mandatory income tax withholding at a 20-percent rate unless the
distribution is rolled over.
\173\Sec. 72(t). Under present law, the 10-percent early withdrawal
tax does not apply to distributions from a governmental section 457(b)
plan.
---------------------------------------------------------------------------
In general, a distribution from an eligible retirement plan
may be rolled over to another eligible retirement plan within
60 days, in which case the amount rolled over generally is not
includible in income. The IRS has the authority to waive the
60-day requirement if failure to waive the requirement would be
against equity or good conscience, including cases of casualty,
disaster or other events beyond the reasonable control of the
individual.
The terms of a qualified retirement plan, section 403(b)
plan, or governmental section 457(b) plan generally determine
when distributions are permitted. However, in some cases,
restrictions may apply to distributions before an employee's
termination of employment, referred to as ``in-service''
distributions. Despite such restrictions, an in-service
distribution may be permitted in the case of financial hardship
or an unforeseeable emergency.
REASONS FOR CHANGE
Births and adoptions are important life events that can
come with significant financial costs for a family. The
Committee believes that, in these situations, individuals
should have access to some of their retirement savings to help
pay for these costs. The ability to access retirement savings
on a penalty-free basis at the time of the birth of a child or
adoption will provide such flexibility. As a result, the
Committees believes this will encourage younger workers to
begin to save earlier for their retirement, whether through
participation in an employer-sponsored plan or an IRA.
EXPLANATION OF PROVISION
In general
Under the provision, an exception to the 10-percent early
withdrawal tax applies in the case of a qualified birth or
adoption distribution from an applicable eligible retirement
plan (as defined). In addition, qualified birth or adoption
distributions may be recontributed to an individual's
applicable eligible retirement plans, subject to certain
requirements.
Distributions from applicable eligible retirement plans
A qualified birth or adoption distribution is a permissible
distribution from an applicable eligible retirement plan which,
for this purpose, encompasses eligible retirement plans other
than defined benefit plans, including qualified retirement
plans, section 403(b) plans, governmental section 457(b) plans,
and IRAs.\174\
---------------------------------------------------------------------------
\174\A qualified birth or adoption distribution is subject to
income tax withholding unless the recipient elects otherwise. Mandatory
20-percent withholding does not apply.
---------------------------------------------------------------------------
A qualified birth or adoption distribution is a
distribution from an applicable eligible retirement plan to an
individual if made during the one-year period beginning on the
date on which a child of the individual is born or on which the
legal adoption by the individual of an eligible child is
finalized. An eligible child means any individual (other than a
child of the taxpayer's spouse) who has not attained age 18 or
is physically or mentally incapable of self-support. The
provision requires the name, age, and taxpayer identification
number of the child or eligible child to which any qualified
birth or adoption distribution relates to be provided on the
tax return of the individual taxpayer for the taxable year.
The maximum aggregate amount which may be treated as
qualified birth or adoption distributions by any individual
with respect to a birth or adoption is $7,500. The maximum
aggregate amount applies on an individual basis. Therefore,
each spouse separately may receive a maximum aggregate amount
of $7,500 of qualified birth or adoption distributions (with
respect to a birth or adoption) from applicable eligible
retirement plans in which each spouse participates or holds
accounts.
An employer plan is not treated as violating any Code
requirement merely because it treats a distribution (that would
otherwise be a qualified birth or adoption distribution) to an
individual as a qualified birth or adoption distribution,
provided that the aggregate amount of such distributions to
that individual from plans maintained by the employer and
members of the employer's controlled group\175\ does not exceed
$7,500. Thus, under such circumstances an employer plan is not
treated as violating any Code requirement merely because an
individual might receive total distributions in excess of
$7,500 as a result of distributions from plans of other
employers or IRAs.
---------------------------------------------------------------------------
\175\The term ``controlled group'' means any group treated as a
single employer under subsection (b), (c), (m), or (o) of section 414.
---------------------------------------------------------------------------
Recontributions to applicable eligible retirement plans
Generally, any portion of a qualified birth or adoption
distribution may, at any time after the date on which the
distribution was received, be recontributed to an applicable
eligible retirement plan to which a rollover can be made. Such
a recontribution is treated as a rollover and thus is not
includible in income. If an employer adds the ability for plan
participants to receive qualified birth or adoption
distributions from a plan, the plan must permit an employee who
has received qualified birth or adoption distributions from
that plan to recontribute only up to the amount that was
distributed from that plan to that employee, provided the
employee otherwise is eligible to make contributions (other
than recontributions of qualified birth or adoption
distributions) to that plan. Any portion of a qualified birth
or adoption distribution from an individual's applicable
eligible retirement plans (whether employer plans or IRAs) may
be recontributed to an IRA held by such an individual which is
an applicable eligible retirement plan to which a rollover can
be made.
EFFECTIVE DATE
The provision applies to distributions made after December
31, 2018.
III. VOTES OF THE COMMITTEE
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 6757, ``Family Savings Act of 2018'' on
September 13, 2018.
The vote on the amendment offered by Mr. Kind to the
amendment in the nature of a substitute to H.R. 6757, which
would reduce PBGC premiums for Cooperative and Small Employer
Charity pension plans and require distributions from pension
plans, was not agreed to by a roll call vote of 14 yeas to 21
nays (with a quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ ....... X ......... Mr. Neal........... X ....... .........
Mr. Johnson...................... ....... X ......... Mr. Levin.......... X ....... .........
Mr. Nunes........................ ....... X ......... Mr. Lewis.......... X ....... .........
Mr. Reichert..................... ....... X ......... Mr. Doggett........ X ....... .........
Mr. Roskam....................... ....... X ......... Mr. Thompson....... X ....... .........
Mr. Buchanan..................... ....... X ......... Mr. Larson......... X ....... .........
Mr. Smith (NE)................... ....... X ......... Mr. Blumenauer..... X ....... .........
Ms. Jenkins...................... ....... X ......... Mr. Kind........... X ....... .........
Mr. Paulsen...................... ....... X ......... Mr. Pascrell....... X ....... .........
Mr. Marchant..................... ....... X ......... Mr. Crowley........ X ....... .........
Ms. Black........................ ....... X ......... Mr. Davis.......... X ....... .........
Mr. Reed......................... ....... X ......... Ms. Sanchez........ ....... ....... .........
Mr. Kelly........................ ....... X ......... Mr. Higgins........ X ....... .........
Mr. Renacci...................... ....... ....... ......... Ms. Sewell......... ....... ....... .........
Ms. Noem......................... ....... X ......... Ms. DelBene........ X ....... .........
Mr. Holding...................... ....... ....... ......... Ms. Chu............ X ....... .........
Mr. Smith (MO)................... ....... X .........
Mr. Rice......................... ....... ....... .........
Mr. Schweikert................... ....... X .........
Ms. Walorski..................... ....... X .........
Mr. Curbelo...................... ....... X .........
Mr. Bishop....................... ....... X .........
Mr. LaHood....................... ....... X .........
Mr. Wenstrup..................... ....... X .........
----------------------------------------------------------------------------------------------------------------
In compliance with the Rules of the House of
Representatives, the following statement is made concerning the
vote of the Committee on Ways and Means during the markup
consideration of H.R. 6757, ``Family Savings Act of 2018'' on
September 13, 2018.
H.R. 6757 was ordered favorably reported to the House of
Representatives as amended by an amendment in the nature of a
substitute offered by Chairman Brady by a roll call vote of 21
yeas to 14 nays (with a quorum being present). The vote was as
follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................ X ....... ......... Mr. Neal........... ....... X .........
Mr. Johnson...................... X ....... ......... Mr. Levin.......... ....... X .........
Mr. Nunes........................ X ....... ......... Mr. Lewis.......... ....... X .........
Mr. Reichert..................... X ....... ......... Mr. Doggett........ ....... X .........
Mr. Roskam....................... X ....... ......... Mr. Thompson....... ....... X .........
Mr. Buchanan..................... X ....... ......... Mr. Larson......... ....... X .........
Mr. Smith (NE)................... X ....... ......... Mr. Blumenauer..... ....... X .........
Ms. Jenkins...................... X ....... ......... Mr. Kind........... ....... X .........
Mr. Paulsen...................... X ....... ......... Mr. Pascrell....... ....... X .........
Mr. Marchant..................... X ....... ......... Mr. Crowley........ ....... X .........
Ms. Black........................ X ....... ......... Mr. Davis.......... ....... X .........
Mr. Reed......................... X ....... ......... Ms. Sanchez........ ....... ....... .........
Mr. Kelly........................ X ....... ......... Mr. Higgins........ ....... X .........
Mr. Renacci...................... ....... ....... ......... Ms. Sewell......... ....... X .........
Ms. Noem......................... X ....... ......... Ms. DelBene........ ....... ....... .........
Mr. Holding...................... ....... ....... ......... Ms. Chu............ ....... X .........
Mr. Smith (MO)................... X ....... .........
Mr. Rice......................... ....... ....... .........
Mr. Schweikert................... X ....... .........
Ms. Walorski..................... X ....... .........
Mr. Curbelo...................... X ....... .........
Mr. Bishop....................... X ....... .........
Mr. LaHood....................... X ....... .........
Mr. Wenstrup..................... X ....... .........
----------------------------------------------------------------------------------------------------------------
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 3(d) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of the bill, H.R. 6757, as
reported.
The bill, as reported, is estimated to have the following
effect on Federal fiscal year budget receipts for the period
2019-2028:
Pursuant to clause 8 of rule XIII of the Rules of the House
of Representatives, the following statement is made by the
Joint Committee on Taxation with respect to the provisions of
the bill amending the Internal Revenue Code of 1986: The gross
budgetary effect (before incorporating macroeconomic effects)
in any fiscal year is less than 0.25 percent of the current
projected gross domestic product of the United States for that
fiscal year; therefore, the bill is not ``major legislation''
for purposes of requiring that the estimate include the
budgetary effects of changes in economic output, employment,
capital stock and other macroeconomic variables.
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee further states that the revenue provisions involve
new tax expenditures.
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, September 21, 2018.
Hon. Kevin Brady,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 6757, the Family
Savings Act of 2018. It contains estimates of tax provisions
prepared by the staff of the Joint Committee on Taxation.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Kathleen
Burke.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 6757--Family Savings Act of 2018
Summary: H.R. 6757, the Family Savings Act of 2018, would
amend the tax code to modify requirements for tax-favored
savings accounts and employer-provided retirement plans. The
largest provisions include changes to the rules governing
multiple and pooled employer retirement plans, the creation of
new tax-preferred ``Universal Savings Accounts,'' to which an
individual would be able to contribute up to $2,500 each year,
and an exemption from required minimum distribution rules for
individuals with account balances below certain amounts.
The staff of the Joint Committee on Taxation (JCT)
estimates that enacting the bill would reduce revenues by $21.0
billion over the 2019-2028 period. The change in revenues
includes a reduction of about $0.3 billion over the 2019-2028
period that would result from changes in off-budget revenues
(from Social Security payroll taxes). CBO estimates that
enacting H.R. 6757 would increase direct spending by $2 million
over the 2019-2020 period for a study for the Pension Benefit
Guarantee Corporation (PBGC). Pay-as-you-go procedures apply
because enacting the legislation would affect revenues and
direct spending.
CBO and JCT estimate that enacting H.R. 6757 would increase
on-budget deficits by more than $5 billion in at least one of
the four 10-year periods beginning in 2029. CBO and JCT
estimate that enacting the bill would not increase net direct
spending in any of the four consecutive 10-year periods
beginning in 2029.
CBO and JCT have determined that H.R. 6757 contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act (UMRA).
Estimated cost to the Federal Government: The estimated
budgetary effect of H.R. 6757 is shown in the following table.
The costs of the legislation fall within budget function 600
(income security).
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-----------------------------------------------------------------------------------------------------------------------------------------
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019-2023 2019-2028
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
INCREASES OR DECREASES (-) IN REVENUES
Title I. Expanding and Preserving Retirement Savings.. 0 -28 -433 -590 -745 -962 -1,100 -1,238 -1,591 -1,675 -1,733 -2,758 -10,099
Title II. Administrative Improvements................. 0 * -9 -10 -10 -11 -12 -13 -14 -15 -16 -40 -111
Title III. Other Savings Provisions................... 0 13 -185 -605 -822 -1,073 -1,319 -1,583 -1,646 -1,723 -1,816 -2,673 -10,760
Total Estimated Changes in Revenues........... 0 -15 -627 -1,205 -1,577 -2,046 -2,431 -2,834 -3,251 -3,413 -3,565 -5,471 -20,970
On-Budget................................. 0 -13 -624 -1,195 -1,557 -2,015 -2,390 -2,782 -3,189 -3,351 -3,502 -5,405 -20,624
Off-Budgeta............................... 0 -2 -3 -10 -20 -31 -41 -52 -62 -62 -63 -66 -346
INCREASES IN DIRECT SPENDING
Estimated Budget Authority............................ 0 2 0 0 0 0 0 0 0 0 0 2 2
Estimated Outlays..................................... 0 1 1 0 0 0 0 0 0 0 0 2 2
NET INCREASE IN THE DEFICIT FROM CHANGES IN DIRECT SPENDING AND REVENUES
Effect on Deficit..................................... 0 16 628 1,205 1,577 2,046 2,431 2,834 3,251 3,413 3,565 5,473 20,972
On-Budget Deficit................................. 0 14 625 1,195 1,557 2,015 2,390 2,782 3,189 3,351 3,502 5,407 20,626
Off-Budget Deficit................................ 0 2 3 10 20 31 41 52 62 62 63 66 346
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation and CBO.
Components may not add to totals due to rounding; * = between -$500,000 and $500,000.
aOff-budget revenues result from changes in Social Security payroll tax receipts.
Basis of estimate: The Congressional Budget Act of 1974, as
amended, stipulates that revenue estimates provided by the
staff of the Joint Committee on Taxation will be the official
estimates for all tax legislation considered by the Congress.
As such, CBO incorporates those estimates into its cost
estimates of the effects of legislation. Nearly all of the
estimates for the provisions of H.R. 6757 were provided by
JCT.\1\ The date of enactment is generally assumed to be
October 1, 2018.
---------------------------------------------------------------------------
\1\For JCT's description of the bill and estimates of the
provisions, which include detail beyond the summary presented below,
see Joint Committee on Taxation, Description Of H.R. 6757,
the ``Family Savings Act Of 2018,'' JCX-73-18, https://www.jct.gov/
publications.
html?func=startdown&id=5138, and Estimated Revenue Effects of H.R.
6757, the ``Family
Savings Act Of 2018,'' JCX-75-18, https://www.jct.gov/
publications.html?func=startdown&id=
5141.
---------------------------------------------------------------------------
Revenues
Expanding and Preserving Retirement Savings. H.R. 6757
would make a number of changes to tax law relating to the
treatment of retirement plans. JCT estimates that those changes
would reduce revenues by $10.1 billion over the 2019 to 2028
period. One of the provisions in this section would affect off-
budget revenues, reducing them by $0.3 billion, JCT estimates.
The largest provisions in this section are the following, which
would take effect in 2019 unless otherwise noted:
Exempt Individuals with Certain Account
Balances from Required Minimum Distribution Rules.
After reaching 70 years and 6 months, individuals with
employer-provided qualified retirement plans,
traditional individual retirement accounts (IRAs), or
individual retirement annuities must begin withdrawing
a given amount each year--the required minimum
distribution. H.R. 6757 would exempt individuals with
less than $50,000 across all eligible retirement plans
(other than defined benefit plans) from required
minimum distribution rules. This would apply to
required distributions made during the calendar year
beginning at least 120 days after enactment. JCT
estimates that the changes in this provision would
reduce revenues by $6.2 billion from 2019 to 2028.
Modify Requirements for Multiple Employer
Plans and Pooled Employer Plans. Under current law,
employers may join together to maintain a qualified
retirement plan if they share a nexus (e.g. a common
industry) outside of the retirement benefit they
jointly provide. Additionally, if one participating
employer in a multiple employer plan violates a
requirement, the entire plan can be disqualified (the
``bad apple rule''). H.R. 6757 would allow multiple
employers without a nexus to jointly maintain a
qualified retirement plan, called a ``pooled provider
plan,'' and allow both multiple employer plans and
pooled provider plans to maintain their qualified
status as a whole if one employer in the group fails to
satisfy qualification requirements. This provision
would take effect in 2020, and JCT estimates that the
changes in this provision would reduce revenues by $3.7
billion from 2019 to 2028.
Repeal Maximum Age for Traditional IRA
Contributions. H.R. 6757 would repeal the maximum age
for contributions to a traditional IRA, which is
currently 70 years and 6 months. JCT estimates that
this change would reduce revenues by $0.1 billion from
2019 to 2028.
Allow a Separate Limit Elective Deferrals by
Members of the Ready Reserve of a Reserve Component of
the Armed Forces. Under current law, an employer-
provided retirement plan may allow an employee to
choose between receiving cash compensation or an
employer contribution to their retirement plan, called
an elective deferral. An individual is subject to an
overall limit on elective deferrals, across all of
their eligible employer retirement plans. H.R. 6757
would allow members of the Ready Reserve a separate
limit on deferrals to the Thrift Savings Plan
associated with their reserve service, rather than
apply the aggregate limit on deferrals to all their
qualified retirement plans. JCT estimates that this
provision would reduce revenues by $0.1 billion from
2019 to 2028.
Administrative Improvements. H.R. 6757 would make several
administrative changes, including permitting businesses that
adopt a retirement plan before the due date of their tax return
to treat the plan as adopted as of the last day of the tax
year. JCT estimates that this provision would reduce revenues
by $0.1 billion over the 2019 to 2028 period.
Other Savings Provisions. H.R. 6757 includes other savings
provisions, which JCT estimates would reduce revenues by $10.8
billion over the 2019 to 2028 period. One of the provisions in
this section would affect off-budget revenues, reducing them by
$0.1 billion, JCT estimates. The provisions in this section,
which would all take effect in 2019, are the following:
Create Universal Savings Accounts. H.R. 6757
would allow the creation of ``Universal Savings
Accounts,'' to which an individual could contribute
$2,500 after-tax each year, and withdraw from tax-free
for any purpose. JCT estimates that this provision
would reduce revenues by $8.6 billion from 2019 to
2028.
Expand Allowable Uses of Section 529 Plans.
Under current law, income earned on amounts in college
savings plans authorized under section 529 of the
Internal Revenue Code accumulates on a tax-free basis,
and the distribution of such income is not included in
the taxable income of the recipient if used to pay for
certain higher education expenses. H.R. 6757 would
allow tax-free distributions from 529 plans to also
cover expenses from apprenticeship programs,
homeschooling, elementary or secondary school tutoring
or supplies, or payments on a qualified education loan.
JCT estimates that the changes in this provision would
reduce revenues by $0.3 billion from 2019 to 2028.
Allow Penalty-Free Retirement Distributions
for New Births and Adoptions. Distributions from
qualified retirement plans before the age of 59 years
and 6 months generally face a 10-percent early
withdrawal tax. H.R. 6757 would exempt distributions of
up to $7,500 from the 10% penalty in the case of a
birth or adoption. JCT estimates that the changes in
this provision would reduce revenues by $1.9 billion
from 2019 to 2028.
Direct spending
The bill would require PBGC to contract with an appropriate
agency or organization to conduct an independent study related
to PBGC's single-employer pension program. Based on the cost of
similar studies, CBO estimates that implementing that provision
would increase direct spending by $2 million over the 2019-2028
period.
Pay-As-You-Go Considerations: The Statutory Pay-As-You-Go
Act of 2010 establishes budget-reporting and enforcement
procedures for legislation affecting direct spending or
revenues. The net changes in outlays and revenues that are
subject to those pay-as-you-go procedures are shown in the
following table. Only on-budget changes to outlays or revenues
are subject to pay-as-you-go procedures. Enacting the bill also
would reduce off-budget revenues by $346 million over the 2019-
2028 period.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 6757, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON SEPTEMBER 13, 2018
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
----------------------------------------------------------------------------------------------------------------------------------------
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019-2023 2019-2028
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN THE ON-BUDGET DEFICIT
Statutory Pay-As-You-Go Effects........................ 0 14 625 1,195 1,557 2,015 2,390 2,782 3,189 3,351 3,502 5,407 20,626
Memorandum:a
Changes in Outlays................................. 0 1 1 0 0 0 0 0 0 0 0 2 2
Change in On-Budget Revenues....................... 0 -13 -624 -1,195 -1,557 -2,015 -2,390 -2,782 -3,189 -3,351 -3,502 -5,405 -20,624
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation and CBO.
Components do not add to totals due to rounding
aA positive sign for outlays indicates an increase in outlays. A negative sign for revenues indicates a reduction in revenues.
Increase in long-term direct spending and deficits: CBO and
JCT estimate that enacting H.R. 6757 would increase on-budget
deficits by more than $5 billion in at least one of the four
10-year periods beginning in 2029. CBO and JCT estimate that
enacting the bill would not increase net direct spending in any
of the four consecutive 10-year periods beginning in 2029.
Mandates: CBO and JCT have determined that H.R. 6757
contains no private-sector or intergovernmental mandates as
defined by UMRA.
Estimate prepared by: Revenues: Staff of the Joint
Committee on Taxation and Kathleen Burke; Federal Costs: Noah
Meyerson; Mandates: Staff of the Joint Committee on Taxation
and Andrew Laughlin.
Estimate reviewed by: Joshua Shakin, Chief, Revenue
Estimating Unit; John McClelland, Assistant Director for Tax
Analysis; Sheila Dacey, Chief, Income Security and Education
Cost Estimates Unit; H. Samuel Papenfuss, Deputy Assistant
Director for Budget Analysis.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee advises that the
findings and recommendations of the Committee, based on
oversight activities under clause 2(b)(1) of rule X of the
Rules of the House of Representatives, are incorporated into
the description portions of this report.
B. Statement of General Performance Goals and Objectives
With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.
C. Information Relating to Unfunded Mandates
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
D. Applicability of House Rule XXI 5(b)
Rule XXI 5(b) of the Rules of the House of Representatives
provides, in part, that ``A bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase may not be considered as passed or agreed to
unless so determined by a vote of not less than three-fifths of
the Members voting, a quorum being present.'' The Committee has
carefully reviewed the bill and states that the bill does not
involve any Federal income tax rate increases within the
meaning of the rule.
E. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service
Restructuring and Reform Act of 1998 (``IRS Reform Act'')
requires the staff of the Joint Committee on Taxation (in
consultation with the Internal Revenue Service and the Treasury
Department) to provide a tax complexity analysis. The
complexity analysis is required for all legislation reported by
the Senate Committee on Finance, the House Committee on Ways
and Means, or any committee of conference if the legislation
includes a provision that directly or indirectly amends the
Internal Revenue Code of 1986 and has widespread applicability
to individuals or small businesses.
Pursuant to clause 3(h)(1) of rule XIII of the Rules of the
House of Representatives, for each such provision identified by
the staff of the Joint Committee on Taxation, a summary
description of the provision is provided below along with an
estimate of the number and type of affected taxpayers, and a
discussion regarding the relevant complexity and administrative
issues.
Following the analysis of the staff of the Joint Committee
on Taxation are the comments of the IRS and Treasury regarding
each provision included in the complexity analysis.
Universal Savings Accounts (sec. 301 of the bill)
Summary description of the provision
The provision permits a universal savings account to be
established by an individual for whom the account is
maintained, through a trust arrangement subject to
substantially all of the same requirements that apply to trust
arrangements under IRAs. For each taxable year, an individual
may contribute cash in an amount up to $2,500, indexed for
inflation, not to exceed the individual's compensation
includible in gross income for the taxable year. Contributions
by an individual are not permitted with respect to the
individual's dependents. In the case of joint filers,
contributions may be made to an individual's universal savings
accounts with respect to compensation includible in gross
income of the spouse (to the extent such individual's
compensation includible in gross income is less than the
spouse's), but the compensation on which the contribution limit
for such individual is based must be reduced (not below zero)
by the amount the spouse contributed for the taxable year to
universal savings accounts of the spouse.
Distributions from the accounts are not includible in gross
income. Distributions may be made in cash or in other property
that has a readily ascertainable value as identified by the
Secretary. Rollovers are not permitted into or from a universal
savings account from the types of retirement and savings
accounts typically eligible for rollovers (such as IRAs and
employer plans). Universal savings accounts cease to be treated
as such upon the death of the account holder unless an
individual acquires a spouse's universal savings account, in
which case the spouse is then treated as the account holder.
Excess contributions (along with any attributable net
income) must be corrected by the due date of the tax return for
the taxable year, in order to avoid being subject to an excess
contribution excise tax of 6 percent. Any related net income on
such excess contributions is includible in gross income for
such taxable year. Prohibited transaction rules apply to the
accounts. In addition, the trustee of a universal savings
account is required to make a report with respect to the
account to the account holder not later than January 31 of the
calendar year following the calendar year to which the report
relates and to the IRS as specified by the Secretary, in a
manner similar to IRA reporting.
Number of affected taxpayers
It is estimated that the provision will affect
approximately 34 percent of (individual) taxpayers annually,
beginning in 2019.
Discussion
The provision will require the IRS to create new forms and
publications regarding universal savings accounts.
Additionally, both taxpayers and the IRS will need to monitor
contributions to these accounts, so as to ensure that taxpayer
contributions do not exceed the $2,500 maximum contribution
amount. Disputes between taxpayers and the IRS may increase in
the case of discrepancies between these records.
The provision may contribute to tax complexity by adding an
additional tax-advantaged savings option for taxpayers.
Taxpayers may be unsure whether contributing to a universal
savings account, as opposed to a traditional or Roth IRA, a
qualified tuition program, a Coverdell ESA, or an ABLE account,
is the appropriate savings vehicle. Similarly, taxpayers who
have more than one such savings account may face uncertainty
over which account from which to withdraw funds, for any given
expense. This complexity may cause taxpayers to seek
professional tax advice, potentially raising the cost of tax
compliance to individual taxpayers.
Penalty-free withdrawals from retirement plans for individuals in case
of birth of child or adoption (sec. 303 of the bill)
Summary description of the provision
Distributions from applicable eligible retirement plans
A qualified birth or adoption distribution is a permissible
distribution from an applicable eligible retirement plan which,
for this purpose, encompasses eligible retirement plans other
than defined benefit plans, including qualified retirement
plans, section 403(b) plans, governmental section 457(b) plans,
and IRAs.
A qualified birth or adoption distribution is a
distribution from an applicable eligible retirement plan to an
individual if made during the one-year period beginning on the
date on which a child of the individual is born or on which the
legal adoption by the individual of an eligible child is
finalized. An eligible child means any individual (other than a
child of the taxpayer's spouse) who has not attained age 18 or
is physically or mentally incapable of self-support. The
proposal requires the name, age, and taxpayer identification
number of the child or eligible child to which any qualified
birth or adoption distribution relates to be provided on the
tax return of the individual taxpayer for the taxable year.
The maximum aggregate amount that may be treated as
qualified birth or adoption distributions by any individual
with respect to a birth or adoption is $7,500 (not indexed for
inflation). The maximum aggregate amount applies on an
individual basis. Therefore, each spouse separately may receive
a maximum aggregate amount of $7,500 of qualified birth or
adoption distributions (with respect to a birth or adoption)
from applicable eligible retirement plans in which each spouse
participates or holds accounts.
An employer plan is not treated as violating any Code
requirement merely because it treats a distribution (that would
otherwise be a qualified birth or adoption distribution) to an
individual as a qualified birth or adoption distribution,
provided the aggregate amount of such distributions to that
individual from plans maintained by the employer and members of
the employer's controlled group does not exceed $7,500.
Recontributions to applicable eligible retirement plans
Generally, any portion of a qualified birth or adoption
distribution may, at any time after the date on which the
distribution was received, be recontributed to an applicable
eligible retirement plan to which a rollover can be made. Such
a recontribution is treated as a rollover and thus is not
includible in income. If an employer adds the ability for plan
participants to receive qualified birth or adoption
distributions from a plan, the plan must permit an employee who
has received qualified birth or adoption distributions from
that plan to recontribute only up to the amount that was
distributed from that plan to that employee, provided the
employee otherwise is eligible to make contributions (other
than recontributions of qualified birth or adoption
distributions) to that plan. Any portion of a qualified birth
or adoption distribution from an individual's applicable
eligible retirement plans (whether employer plans or IRAs) may
be recontributed to an IRA held by such an individual that is
an applicable eligible retirement plan to which a rollover can
be made.
Number of affected taxpayers
It is estimated that the provision will affect over 10
percent of taxpayers during the budget window and will continue
to increase over time.
Discussion
The provision creates complexity for IRAs and employer
plans that choose to allow qualified birth or adoption
distributions. Specifically, plan administrators and IRA
trustees will be required to monitor eligibility for qualified
birth or adoption distributions, and employers will be required
to obtain certifications and track such distributions and
recontributions under the special rules that apply to employer
plans. The ability to recontribute with no time limit over the
lifetime of an individual, and not necessarily to the plan or
IRA from which the related distribution was made, will require
tracking of recontributions to ensure amounts so denominated do
not exceed the aggregate lifetime qualified birth or adoption
distributions from all plans of an individual. Tracking these
amounts will require that plan administrators and IRA trustees,
plan participants and IRA owners, and the IRS, keep accurate
and detailed records of distributions and recontributions for
an indefinite number of years.
The provision will require the IRS to create or update its
forms and publications to address qualified birth and adoption
distributions.
F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff
Benefits
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
G. Duplication of Federal Programs
In compliance with Sec. 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program, (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139, or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to section 6104 of
title 31, United States Code.
H. Disclosure of Directed Rule Makings
In compliance with Sec. 3(i) of H. Res. 5 (115th Congress),
the following statement is made concerning directed rule
makings: The Committee advises that Sec. 101 of the bill
directs the Secretary of the Treasury to provide guidance that
identifies the administrative duties and other actions required
to be performed by a pooled plan provider, describes the
procedures to be taken to terminate a plan, and identifies
appropriate cases to which certain rules of this section will
apply to employers in the plan failing to take certain actions.
Sec. 101 of the bill also directs the Secretary of the Treasury
to publish model plan language necessary for complying with
this section.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
A. Changes in Existing Law Proposed by the Bill as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law proposed
by the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle A--Income Taxes
* * * * * * *
CHAPTER 1--NORMAL TAXES AND SURTAXES
* * * * * * *
Subchapter B--Computation of Taxable Income
* * * * * * *
PART II--ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME
* * * * * * *
SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE
CONTRACTS.
(a) General rules for annuities.--
(1) Income inclusion.--Except as otherwise provided
in this chapter, gross income includes any amount
received as an annuity (whether for a period certain or
during one or more lives) under an annuity, endowment,
or life insurance contract.
(2) Partial annuitization.--If any amount is received
as an annuity for a period of 10 years or more or
during one or more lives under any portion of an
annuity, endowment, or life insurance contract--
(A) such portion shall be treated as a
separate contract for purposes of this section,
(B) for purposes of applying subsections (b),
(c), and (e), the investment in the contract
shall be allocated pro rata between each
portion of the contract from which amounts are
received as an annuity and the portion of the
contract from which amounts are not received as
an annuity, and
(C) a separate annuity starting date under
subsection (c)(4) shall be determined with
respect to each portion of the contract from
which amounts are received as an annuity.
(b) Exclusion ratio.--
(1) In general.--Gross income does not include that
part of any amount received as an annuity under an
annuity, endowment, or life insurance contract which
bears the same ratio to such amount as the investment
in the contract (as of the annuity starting date) bears
to the expected return under the contract (as of such
date).
(2) Exclusion limited to investment.--The portion of
any amount received as an annuity which is excluded
from gross income under paragraph (1) shall not exceed
the unrecovered investment in the contract immediately
before the receipt of such amount.
(3) Deduction where annuity payments cease before
entire investment recovered.--
(A) In general.--If--
(i) after the annuity starting date,
payments as an annuity under the
contract cease by reason of the death
of an annuitant, and
(ii) as of the date of such
cessation, there is unrecovered
investment in the contract,
the amount of such unrecovered investment (in
excess of any amount specified in subsection
(e)(5) which was not included in gross income)
shall be allowed as a deduction to the
annuitant for his last taxable year.
(B) Payments to other persons.--In the case
of any contract which provides for payments
meeting the requirements of subparagraphs (B)
and (C) of subsection (c)(2), the deduction
under subparagraph (A) shall be allowed to the
person entitled to such payments for the
taxable year in which such payments are
received.
(C) Net operating loss deductions provided.--
For purposes of section 172, a deduction
allowed under this paragraph shall be treated
as if it were attributable to a trade or
business of the taxpayer.
(4) Unrecovered investment.--For purposes of this
subsection, the unrecovered investment in the contract
as of any date is--
(A) the investment in the contract
(determined without regard to subsection
(c)(2)) as of the annuity starting date,
reduced by
(B) the aggregate amount received under the
contract on or after such annuity starting date
and before the date as of which the
determination is being made, to the extent such
amount was excludable from gross income under
this subtitle.
(c) Definitions.--
(1) Investment in the contract.--For purposes of
subsection (b), the investment in the contract as of
the annuity starting date is--
(A) the aggregate amount of premiums or other
consideration paid for the contract, minus
(B) the aggregate amount received under the
contract before such date, to the extent that
such amount was excludable from gross income
under this subtitle or prior income tax laws.
(2) Adjustment in investment where there is refund
feature.--If--
(A) the expected return under the contract
depends in whole or in part on the life
expectancy of one or more individuals;
(B) the contract provides for payments to be
made to a beneficiary (or to the estate of an
annuitant) on or after the death of the
annuitant or annuitants; and
(C) such payments are in the nature of a
refund of the consideration paid,
then the value (computed without discount for interest)
of such payments on the annuity starting date shall be
subtracted from the amount determined under paragraph
(1). Such value shall be computed in accordance with
actuarial tables prescribed by the Secretary. For
purposes of this paragraph and of subsection (e)(2)(A),
the term ``refund of the consideration paid'' includes
amounts payable after the death of an annuitant by
reason of a provision in the contract for a life
annuity with minimum period of payments certain, but
(if part of the consideration was contributed by an
employer) does not include that part of any payment to
a beneficiary (or to the estate of the annuitant) which
is not attributable to the consideration paid by the
employee for the contract as determined under paragraph
(1)(A).
(3) Expected return.--For purposes of subsection (b),
the expected return under the contract shall be
determined as follows:
(A) Life expectancy.--If the expected return
under the contract, for the period on and after
the annuity starting date, depends in whole or
in part on the life expectancy of one or more
individuals, the expected return shall be
computed with reference to actuarial tables
prescribed by the Secretary.
(B) Installment payments.--If subparagraph
(A) does not apply, the expected return is the
aggregate of the amounts receivable under the
contract as an annuity.
(4) Annuity starting date.--For purposes of this
section, the annuity starting date in the case of any
contract is the first day of the first period for which
an amount is received as an annuity under the contract.
(d) Special rules for qualified employer retirement plans.--
(1) Simplified method of taxing annuity payments.--
(A) In general.--In the case of any amount
received as an annuity under a qualified
employer retirement plan--
(i) subsection (b) shall not apply,
and
(ii) the investment in the contract
shall be recovered as provided in this
paragraph.
(B) Method of recovering investment in
contract.--
(i) In general.--Gross income shall
not include so much of any monthly
annuity payment under a qualified
employer retirement plan as does not
exceed the amount obtained by
dividing--
(I) the investment in the
contract (as of the annuity
starting date), by
(II) the number of
anticipated payments determined
under the table contained in
clause (iii) (or, in the case
of a contract to which
subsection (c)(3)(B) applies,
the number of monthly annuity
payments under such contract).
(ii) Certain rules made applicable.--
Rules similar to the rules of
paragraphs (2) and (3) of subsection
(b) shall apply for purposes of this
paragraph.
(iii) Number of anticipated
payments.--If the annuity is payable
over the life of a single individual,
the number of anticipated payments
shall be determined as follows:
------------------------------------------------------------------------
If the age of the annuitant on the The number of anticipated payments
annuity starting date is: is:
------------------------------------------------------------------------
Not more than 55............... 360
More than 55 but not more than 60 310
More than 60 but not more than 65 260
More than 65 but not more than 70 210
More than 70................... 160.
------------------------------------------------------------------------
(iv) Number of anticipated payments
where more than one life.--If the
annuity is payable over the lives of
more than 1 individual, the number of
anticipated payments shall be
determined as follows:
------------------------------------------------------------------------
If the combined ages of annuitants
are: The number is:
------------------------------------------------------------------------
Not more than 110 410
................................
More than 110 but not more than 120 360
..............
More than 120 but not more than 130 310
..............
More than 130 but not more than 140 260
..............
More than 140 210.
....................................
------------------------------------------------------------------------
(C) Adjustment for refund feature not
applicable.--For purposes of this paragraph,
investment in the contract shall be determined
under subsection (c)(1) without regard to
subsection (c)(2).
(D) Special rule where lump sum paid in
connection with commencement of annuity
payments.--If, in connection with the
commencement of annuity payments under any
qualified employer retirement plan, the
taxpayer receives a lump-sum payment--
(i) such payment shall be taxable
under subsection (e) as if received
before the annuity starting date, and
(ii) the investment in the contract
for purposes of this paragraph shall be
determined as if such payment had been
so received.
(E) Exception.--This paragraph shall not
apply in any case where the primary annuitant
has attained age 75 on the annuity starting
date unless there are fewer than 5 years of
guaranteed payments under the annuity.
(F) Adjustment where annuity payments not on
monthly basis.--In any case where the annuity
payments are not made on a monthly basis,
appropriate adjustments in the application of
this paragraph shall be made to take into
account the period on the basis of which such
payments are made.
(G) Qualified employer retirement plan.--For
purposes of this paragraph, the term
``qualified employer retirement plan'' means
any plan or contract described in paragraph
(1), (2), or (3) of section 4974(c).
(2) Treatment of employee contributions under defined
contribution plans.--For purposes of this section,
employee contributions (and any income allocable
thereto) under a defined contribution plan may be
treated as a separate contract.
(e) Amounts not received as annuities.--
(1) Application of subsection.--
(A) In general.--This subsection shall apply
to any amount which--
(i) is received under an annuity,
endowment, or life insurance contract,
and
(ii) is not received as an annuity,
if no provision of this subtitle (other
than this subsection) applies with
respect to such amount.
(B) Dividends.--For purposes of this section,
any amount received which is in the nature of a
dividend or similar distribution shall be
treated as an amount not received as an
annuity.
(2) General rule.--Any amount to which this
subsection applies--
(A) if received on or after the annuity
starting date, shall be included in gross
income, or
(B) if received before the annuity starting
date--
(i) shall be included in gross income
to the extent allocable to income on
the contract, and
(ii) shall not be included in gross
income to the extent allocable to the
investment in the contract.
(3) Allocation of amounts to income and investment.--
For purposes of paragraph (2)(B)--
(A) Allocation to income.--Any amount to
which this subsection applies shall be treated
as allocable to income on the contract to the
extent that such amount does not exceed the
excess (if any) of--
(i) the cash value of the contract
(determined without regard to any
surrender charge) immediately before
the amount is received, over
(ii) the investment in the contract
at such time.
(B) Allocation to investment.--Any amount to
which this subsection applies shall be treated
as allocable to investment in the contract to
the extent that such amount is not allocated to
income under subparagraph (A).
(4) Special rules for application of paragraph
(2)(B).--For purposes of paragraph (2)(B)--
(A) Loans treated as distributions.--If,
during any taxable year, an individual--
(i) receives (directly or indirectly)
any amount as a loan under any contract
to which this subsection applies, or
(ii) assigns or pledges (or agrees to
assign or pledge) any portion of the
value of any such contract,
such amount or portion shall be treated as
received under the contract as an amount not
received as an annuity. The preceding sentence
shall not apply for purposes of determining
investment in the contract, except that the
investment in the contract shall be increased
by any amount included in gross income by
reason of the amount treated as received under
the preceding sentence.
(B) Treatment of policyholder dividends.--Any
amount described in paragraph (1)(B) shall not
be included in gross income under paragraph
(2)(B)(i) to the extent such amount is retained
by the insurer as a premium or other
consideration paid for the contract.
(C) Treatment of transfers without adequate
consideration.--
(i) In general.--If an individual who
holds an annuity contract transfers it
without full and adequate
consideration, such individual shall be
treated as receiving an amount equal to
the excess of--
(I) the cash surrender value
of such contract at the time of
transfer, over
(II) the investment in such
contract at such time,
under the contract as an amount not
received as an annuity.
(ii) Exception for certain transfers
between spouses or former spouses.--
Clause (i) shall not apply to any
transfer to which section 1041(a)
(relating to transfers of property
between spouses or incident to divorce)
applies.
(iii) Adjustment to investment in
contract of transferee.--If under
clause (i) an amount is included in the
gross income of the transferor of an
annuity contract, the investment in the
contract of the transferee in such
contract shall be increased by the
amount so included.
(5) Retention of existing rules in certain cases.--
(A) In general.--In any case to which this
paragraph applies--
(i) paragraphs (2)(B) and (4)(A)
shall not apply, and
(ii) if paragraph (2)(A) does not
apply, the amount shall be included in
gross income, but only to the extent it
exceeds the investment in the contract.
(B) Existing contracts.--This paragraph shall
apply to contracts entered into before August
14, 1982. Any amount allocable to investment in
the contract after August 13, 1982, shall be
treated as from a contract entered into after
such date.
(C) Certain life insurance and endowment
contracts.--Except as provided in paragraph
(10) and except to the extent prescribed by the
Secretary by regulations, this paragraph shall
apply to any amount not received as an annuity
which is received under a life insurance or
endowment contract.
(D) Contracts under qualified plans.--Except
as provided in paragraph (8), this paragraph
shall apply to any amount received--
(i) from a trust described in section
401(a)which is exempt from tax under
section 501(a),
(ii) from a contract--
(I) purchased by a trust
described in clause (i),
(II) purchased as part of a
plan described in section
403(a),
(III) described in section
403(b), or
(IV) provided for employees
of a life insurance company
under a plan described in
section 818(a)(3), or
(iii) from an individual retirement
account or an individual retirement
annuity.
Any dividend described in section 404(k) which
is received by a participant or beneficiary
shall, for purposes of this subparagraph, be
treated as paid under a separate contract to
which clause (ii)(I) applies.
(E) Full refunds, surrenders, redemptions,
and maturities.--This paragraph shall apply
to--
(i) any amount received, whether in a
single sum or otherwise, under a
contract in full discharge of the
obligation under the contract which is
in the nature of a refund of the
consideration paid for the contract,
and
(ii) any amount received under a
contract on its complete surrender,
redemption, or maturity.
In the case of any amount to which the
preceding sentence applies, the rule of
paragraph (2)(A) shall not apply.
(6) Investment in the contract.--For purposes of this
subsection, the investment in the contract as of any
date is--
(A) the aggregate amount of premiums or other
consideration paid for the contract before such
date, minus
(B) the aggregate amount received under the
contract before such date, to the extent that
such amount was excludable from gross income
under this subtitle or prior income tax laws.
(8) Extension of paragraph (2)(b) to qualified plans
(A) In general.--Notwithstanding any other
provision of this subsection, in the case of
any amount received before the annuity starting
date from a trust or contract described in
paragraph (5)(D), paragraph (2)(B) shall apply
to such amounts.
(B) Allocation of amount received.--For
purposes of paragraph (2)(B), the amount
allocated to the investment in the contract
shall be the portion of the amount described in
subparagraph (A) which bears the same ratio to
such amount as the investment in the contract
bears to the account balance. The determination
under the preceding sentence shall be made as
of the time of the distribution or at such
other time as the Secretary may prescribe.
(C) Treatment of forfeitable rights.--If an
employee does not have a nonforfeitable right
to any amount under any trust or contract to
which subparagraph (A) applies, such amount
shall not be treated as part of the account
balance.
(D) Investment in the contract before 1987.--
In the case of a plan which on May 5, 1986,
permitted withdrawal of any employee
contributions before separation from service,
subparagraph (A) shall apply only to the extent
that amounts received before the annuity
starting date (when increased by amounts
previously received under the contract after
December 31, 1986) exceed the investment in the
contract as of December 31, 1986.
(9) Extension of paragraph (2)(b) to qualified
tuition programs and Coverdell education savings
accounts.--Notwithstanding any other provision of this
subsection, paragraph (2)(B) shall apply to amounts
received under a qualified tuition program (as defined
in section 529(b)) or under a Coverdell education
savings account (as defined in section 530(b)). The
rule of paragraph (8)(B) shall apply for purposes of
this paragraph.
(10) Treatment of modified endowment contracts.--
(A) In general.--Notwithstanding paragraph
(5)(C), in the case of any modified endowment
contract (as defined in section 7702A)--
(i) paragraphs (2)(B) and (4)(A)
shall apply, and
(ii) in applying paragraph (4)(A),
``any person'' shall be substituted for
``an individual''.
(B) Treatment of certain burial contracts.--
Notwithstanding subparagraph (A), paragraph
(4)(A) shall not apply to any assignment (or
pledge) of a modified endowment contract if
such assignment (or pledge) is solely to cover
the payment of expenses referred to in section
7702(e)(2)(C)(iii) and if the maximum death
benefit under such contract does not exceed
$25,000.
(11) Special rules for certain combination contracts
providing long-term care insurance.--Notwithstanding
paragraphs (2), (5)(C), and (10), in the case of any
charge against the cash value of an annuity contract or
the cash surrender value of a life insurance contract
made as payment for coverage under a qualified long-
term care insurance contract which is part of or a
rider on such annuity or life insurance contract--
(A) the investment in the contract shall be
reduced (but not below zero) by such charge,
and
(B) such charge shall not be includible in
gross income.
(12) Anti-abuse rules.--
(A) In general.--For purposes of determining
the amount includible in gross income under
this subsection--
(i) all modified endowment contracts
issued by the same company to the same
policyholder during any calendar year
shall be treated as 1 modified
endowment contract, and
(ii) all annuity contracts issued by
the same company to the same
policyholder during any calendar year
shall be treated as 1 annuity contract.
The preceding sentence shall not apply to any
contract described in paragraph (5)(D).
(B) Regulatory authority.--The Secretary may
by regulations prescribe such additional rules
as may be necessary or appropriate to prevent
avoidance of the purposes of this subsection
through serial purchases of contracts or
otherwise.
(f) Special rules for computing employees' contributions.--In
computing, for purposes of subsection (c)(1)(A), the aggregate
amount of premiums or other consideration paid for the
contract, and for purposes of subsection (e)(6), the aggregate
premiums or other consideration paid, amounts contributed by
the employer shall be included, but only to the extent that--
(1) such amounts were includible in the gross income
of the employee under this subtitle or prior income tax
laws; or
(2) if such amounts had been paid directly to the
employee at the time they were contributed, they would
not have been includible in the gross income of the
employee under the law applicable at the time of such
contribution.
Paragraph (2) shall not apply to amounts which were contributed
by the employer after December 31, 1962, and which would not
have been includible in the gross income of the employee by
reason of the application of section 911 if such amounts had
been paid directly to the employee at the time of contribution.
The preceding sentence shall not apply to amounts which were
contributed by the employer, as determined under regulations
prescribed by the Secretary, to provide pension or annuity
credits, to the extent such credits are attributable to
services performed before January 1, 1963, and are provided
pursuant to pension or annuity plan provisions in existence on
March 12, 1962, and on that date applicable to such services,
or to the extent such credits are attributable to services
performed as a foreign missionary (within the meaning of
section 403(b)(2)(D)(iii), as in effect before the enactment of
the Economic Growth and Tax Relief Reconciliation Act of 2001).
(g) Rules for transferee where transfer was for value.--Where
any contract (or any interest therein) is transferred (by
assignment or otherwise) for a valuable consideration, to the
extent that the contract (or interest therein) does not, in the
hands of the transferee, have a basis which is determined by
reference to the basis in the hands of the transferor, then--
(1) for purposes of this section, only the actual
value of such consideration, plus the amount of the
premiums and other consideration paid by the transferee
after the transfer, shall be taken into account in
computing the aggregate amount of the premiums or other
consideration paid for the contract;
(2) for purposes of subsection (c)(1)(B), there shall
be taken into account only the aggregate amount
received under the contract by the transferee before
the annuity starting date, to the extent that such
amount was excludable from gross income under this
subtitle or prior income tax laws; and
(3) the annuity starting date is the first day of the
first period for which the transferee received an
amount under the contract as an annuity.
For purposes of this subsection, the term ``transferee''
includes a beneficiary of, or the estate of, the transferee.
(h) Option to receive annuity in lieu of lump sum.--If--
(1) a contract provides for payment of a lump sum in
full discharge of an obligation under the contract,
subject to an option to receive an annuity in lieu of
such lump sum;
(2) the option is exercised within 60 days after the
day on which such lump sum first became payable; and
(3) part or all of such lump sum would (but for this
subsection) be includible in gross income by reason of
subsection (e)(1), then, for purposes of this subtitle,
no part of such lump sum shall be considered as
includible in gross income at the time such lump sum
first became payable.
(j) Interest.--Notwithstanding any other provision of this
section, if any amount is held under an agreement to pay
interest thereon, the interest payments shall be included in
gross income.
(l) Face-amount certificates.--For purposes of this section,
the term ``endowment contract'' includes a face-amount
certificate, as defined in section 2(a)(15) of the Investment
Company Act of 1940 (15 U.S.C., sec. 80a-2), issued after
December 31, 1954.
(m) Special rules applicable to employee annuities and
distributions under employee plans.--
(2) Computation of consideration paid by the
employee.--In computing--
(A) the aggregate amount of premiums or other
consideration paid for the contract for
purposes of subsection (c)(1)(A) (relating to
the investment in the contract), and
(B) the aggregate premiums or other
consideration paid for purposes of subsection
(e)(6) (relating to certain amounts not
received as an annuity),
any amount allowed as a deduction with respect to the
contract under section 404 which was paid while the
employee was an employee within the meaning of section
401(c)(1) shall be treated as consideration contributed
by the employer, and there shall not be taken into
account any portion of the premiums or other
consideration for the contract paid while the employee
was an owner-employee which is properly allocable (as
determined under regulations prescribed by the
Secretary) to the cost of life, accident, health, or
other insurance.
(3) Life insurance contracts.--
(A) This paragraph shall apply to any life
insurance contract--
(i) purchased as a part of a plan
described in section 403(a), or
(ii) purchased by a trust described
in section 401(a) which is exempt from
tax under section 501(a) if the
proceeds of such contract are payable
directly or indirectly to a participant
in such trust or to a beneficiary of
such participant.
(B) Any contribution to a plan described in
subparagraph (A)(i) or a trust described in
subparagraph (A)(ii) which is allowed as a
deduction under section 404, and any income of
a trust described in subparagraph (A)(ii),
which is determined in accordance with
regulations prescribed by the Secretary to have
been applied to purchase the life insurance
protection under a contract described in
subparagraph (A), is includible in the gross
income of the participant for the taxable year
when so applied.
(C) In the case of the death of an individual
insured under a contract described in
subparagraph (A), an amount equal to the cash
surrender value of the contract immediately
before the death of the insured shall be
treated as a payment under such plan or a
distribution by such trust, and the excess of
the amount payable by reason of the death of
the insured over such cash surrender value
shall not be includible in gross income under
this section and shall be treated as provided
in section 101.
(5) Penalties applicable to certain amounts received
by 5-percent owners (A) This paragraph applies to
amounts which are received from a qualified trust
described in section 401(a) or under a plan described
in section 403(a) at any time by an individual who is,
or has been, a 5-percent owner, or by a successor of
such an individual, but only to the extent such amounts
are determined, under regulations prescribed by the
Secretary, to exceed the benefits provided for such
individual under the plan formula.
(B) If a person receives an amount to which
this paragraph applies, his tax under this
chapter for the taxable year in which such
amount is received shall be increased by an
amount equal to 10 percent of the portion of
the amount so received which is includible in
his gross income for such taxable year.
(C) For purposes of this paragraph, the term
``5-percent owner'' means any individual who,
at any time during the 5 plan years preceding
the plan year ending in the taxable year in
which the amount is received, is a 5-percent
owner (as defined in section 416(i)(1)(B)).
(6) Owner-employee defined.--For purposes of this
subsection, the term ``owner-employee'' has the meaning
assigned to it by section 401(c)(3) and includes an
individual for whose benefit an individual retirement
account or annuity described in section 408(a) or (b)
is maintained. For purposes of the preceding sentence,
the term ``owner-employee'' shall include an employee
within the meaning of section 401(c)(1).
(7) Meaning of disabled.--For purposes of this
section, an individual shall be considered to be
disabled if he is unable to engage in any substantial
gainful activity by reason of any medically
determinable physical or mental impairment which can be
expected to result in death or to be of long-continued
and indefinite duration. An individual shall not be
considered to be disabled unless he furnishes proof of
the existence thereof in such form and manner as the
Secretary may require.
(10) Determination of investment in the contract in
the case of qualified domestic relations orders.--Under
regulations prescribed by the Secretary, in the case of
a distribution or payment made to an alternate payee
who is the spouse or former spouse of the participant
pursuant to a qualified domestic relations order (as
defined in section 414(p)), the investment in the
contract as of the date prescribed in such regulations
shall be allocated on a pro rata basis between the
present value of such distribution or payment and the
present value of all other benefits payable with
respect to the participant to which such order relates.
(n) Annuities under retired serviceman's family protection
plan or survivor benefit plan.--Subsection (b) shall not apply
in the case of amounts received after December 31, 1965, as an
annuity under chapter 73 of title 10 of the United States Code,
but all such amounts shall be excluded from gross income until
there has been so excluded (under section 122(b)(1) or this
section, including amounts excluded before January 1, 1966) an
amount equal to the consideration for the contract (as defined
by section 122(b)(2)), plus any amount treated pursuant to
section 101 (b)(2)(D) (as in effect on the day before the date
of the enactment of the Small Business Job Protection Act of
1996) as additional consideration paid by the employee.
Thereafter all amounts so received shall be included in gross
income.
(o) Special rules for distributions from qualified plans to
which employee made deductible contributions.--
(1) Treatment of contributions.--For purposes of this
section and sections 402 and 403, notwithstanding
section 414(h), any deductible employee contribution
made to a qualified employer plan or government plan
shall be treated as an amount contributed by the
employer which is not includible in the gross income of
the employee.
(3) Amounts constructively received.--
(A) In general.--For purposes of this
subsection, rules similar to the rules provided
by subsection (p) (other than the exception
contained in paragraph (2) thereof) shall
apply.
(B) Purchase of life insurance.--To the
extent any amount of accumulated deductible
employee contributions of an employee are
applied to the purchase of life insurance
contracts, such amount shall be treated as
distributed to the employee in the year so
applied.
(4) Special rule for treatment of rollover amounts.--
For purposes of sections 402(c), 403(a)(4), 403(b)(8),
408(d)(3), and 457(e)(16), the Secretary shall
prescribe regulations providing for such allocations of
amounts attributable to accumulated deductible employee
contributions, and for such other rules, as may be
necessary to insure that such accumulated deductible
employee contributions do not become eligible for
additional tax benefits (or freed from limitations)
through the use of rollovers.
(5) Definitions and special rules.--For purposes of
this subsection--
(A) Deductible employee contributions.--The
term ``deductible employee contributions''
means any qualified voluntary employee
contribution (as defined in section 219(e)(2))
made after December 31, 1981, in a taxable year
beginning after such date and made for a
taxable year beginning before January 1, 1987,
and allowable as a deduction under section
219(a) for such taxable year.
(B) Accumulated deductible employee
contributions.--The term ``accumulated
deductible employee contributions'' means the
deductible employee contributions--
(i) increased by the amount of income
and gain allocable to such
contributions, and
(ii) reduced by the sum of the amount
of loss and expense allocable to such
contributions and the amounts
distributed with respect to the
employee which are attributable to such
contributions (or income or gain
allocable to such contributions).
(C) Qualified employer plan.--The term
``qualified employer plan'' has the meaning
given to such term by subsection (p)(3)(A)(i).
(D) Government plan.--The term ``government
plan'' has the meaning given such term by
subsection (p)(3)(B).
(6) Ordering rules.--Unless the plan specifies
otherwise, any distribution from such plan shall not be
treated as being made from the accumulated deductible
employee contributions, until all other amounts to the
credit of the employee have been distributed.
(p) Loans treated as distributions.--For purposes of this
section--
(1) Treatment as distributions.--
(A) Loans.--If during any taxable year a
participant or beneficiary receives (directly
or indirectly) any amount as a loan from a
qualified employer plan, such amount shall be
treated as having been received by such
individual as a distribution under such plan.
(B) Assignments or pledges.--If during any
taxable year a participant or beneficiary
assigns (or agrees to assign) or pledges (or
agrees to pledge) any portion of his interest
in a qualified employer plan, such portion
shall be treated as having been received by
such individual as a loan from such plan.
(2) Exception for certain loans.--
(A) General rule.--Paragraph (1) shall not
apply to any loan to the extent that such loan
(when added to the outstanding balance of all
other loans from such plan whether made on,
before, or after August 13, 1982), does not
exceed the lesser of--
(i) $50,000, reduced by the excess
(if any) of--
(I) the highest outstanding
balance of loans from the plan
during the 1-year period ending
on the day before the date on
which such loan was made, over
(II) the outstanding balance
of loans from the plan on the
date on which such loan was
made, or
(ii) the greater of (I) one-half of
the present value of the nonforfeitable
accrued benefit of the employee under
the plan, or (II) $10,000.
For purposes of clause (ii), the present value
of the nonforfeitable accrued benefit shall be
determined without regard to any accumulated
deductible employee contributions (as defined
in subsection (o)(5)(B)).
(B) Requirement that loan be repayable within
5 years.--
(i) In general.--Subparagraph (A)
shall not apply to any loan unless such
loan, by its terms, is required to be
repaid within 5 years.
(ii) Exception for home loans.--
Clause (i) shall not apply to any loan
used to acquire any dwelling unit which
within a reasonable time is to be used
(determined at the time the loan is
made) as the principal residence of the
participant.
(C) Requirement of level amortization.--
Except as provided in regulations, this
paragraph shall not apply to any loan unless
substantially level amortization of such loan
(with payments not less frequently than
quarterly) is required over the term of the
loan.
(D) Prohibition of loans through credit cards
and other similar arrangements.--
Notwithstanding subparagraph (A), paragraph (1)
shall apply to any loan which is made through
the use of any credit card or any other similar
arrangement.
[(D)] (E) Related employers and related
plans.--For purposes of this paragraph--
(i) the rules of subsections (b),
(c), and (m) of section 414 shall
apply, and
(ii) all plans of an employer
(determined after the application of
such subsections) shall be treated as 1
plan.
(3) Denial of interest deductions in certain cases.--
(A) In general.--No deduction otherwise
allowable under this chapter shall be allowed
under this chapter for any interest paid or
accrued on any loan to which paragraph (1) does
not apply by reason of paragraph (2) during the
period described in subparagraph (B).
(B) Period to which subparagraph (A)
applies.--For purposes of subparagraph (A), the
period described in this subparagraph is the
period--
(i) on or after the 1st day on which
the individual to whom the loan is made
is a key employee (as defined in
section 416(i)), or
(ii) such loan is secured by amounts
attributable to elective deferrals
described in subparagraph (A) or (C) of
section 402(g)(3).
(4) Qualified employer plan, etc..--For purposes of
this subsection--
(A) Qualified employer plan.--
(i) In general.--The term ``qualified
employer plan'' means--
(I) a plan described in
section 401(a) which includes a
trust exempt from tax under
section 501(a),
(II) an annuity plan
described in section 403(a),
and
(III) a plan under which
amounts are contributed by an
individual's employer for an
annuity contract described in
section 403(b).
(ii) Special rule.--The term
``qualified employer plan'' shall
include any plan which was (or was
determined to be) a qualified employer
plan or a government plan.
(B) Government plan.--The term ``government
plan'' means any plan, whether or not
qualified, established and maintained for its
employees by the United States, by a State or
political subdivision thereof, or by an agency
or instrumentality of any of the foregoing.
(5) Special rules for loans, etc., from certain
contracts.--For purposes of this subsection, any amount
received as a loan under a contract purchased under a
qualified employer plan (and any assignment or pledge
with respect to such a contract) shall be treated as a
loan under such employer plan.
(q) 10-percent penalty for premature distributions from
annuity contracts.--
(1) Imposition of penalty.--If any taxpayer receives
any amount under an annuity contract, the taxpayer's
tax under this chapter for the taxable year in which
such amount is received shall be increased by an amount
equal to 10 percent of the portion of such amount which
is includible in gross income.
(2) Subsection not to apply to certain
distributions.--Paragraph 1 shall not apply to any
distribution--
(A) made on or after the date on which the
taxpayer attains age 59 1/2,
(B) made on or after the death of the holder
(or, where the holder is not an individual, the
death of the primary annuitant (as defined in
subsection (s)(6)(B))),
(C) attributable to the taxpayer's becoming
disabled within the meaning of subsection
(m)(7),
(D) which is a part of a series of
substantially equal periodic payments (not less
frequently than annually) made for the life (or
life expectancy) of the taxpayer or the joint
lives (or joint life expectancies) of such
taxpayer and his designated beneficiary,
(E) from a plan, contract, account, trust, or
annuity described in subsection (e)(5)(D),
(F) allocable to investment in the contract
before August 14, 1982, or
(G) under a qualified funding asset (within
the meaning of section 130(d), but without
regard to whether there is a qualified
assignment),
(H) to which subsection (t) applies (without
regard to paragraph (2) thereof),
(I) under an immediate annuity contract
(within the meaning of section 72(u)(4)), or
(J) which is purchased by an employer upon
the termination of a plan described in section
401(a) or 403(a) and which is held by the
employer until such time as the employee
separates from service.
(3) Change in substantially equal payments.--If--
(A) paragraph (1) does not apply to a
distribution by reason of paragraph (2)(D), and
(B) the series of payments under such
paragraph are subsequently modified (other than
by reason of death or disability)--
(i) before the close of the 5-year
period beginning on the date of the
first payment and after the taxpayer
attains age 59 1/2, or
(ii) before the taxpayer attains age
59 1/2, the taxpayer's tax for the 1st
taxable year in which such modification
occurs shall be increased by an amount,
determined under regulations, equal to
the tax which (but for paragraph
(2)(D)) would have been imposed, plus
interest for the deferral period
(within the meaning of subsection
(t)(4)(B)).
(r) Certain railroad retirement benefits treated as received
under employer plans.--
(1) In general.--Notwithstanding any other provision
of law, any benefit provided under the Railroad
Retirement Act of 1974 (other than a tier 1 railroad
retirement benefit) shall be treated for purposes of
this title as a benefit provided under an employer plan
which meets the requirements of section 401(a).
(2) Tier 2 taxes treated as contributions.--
(A) In general.--For purposes of paragraph
(1)--
(i) the tier 2 portion of the tax
imposed by section 3201 (relating to
tax on employees) shall be treated as
an employee contribution,
(ii) the tier 2 portion of the tax
imposed by section 3211 (relating to
tax on employee representatives) shall
be treated as an employee contribution,
and
(iii) the tier 2 portion of the tax
imposed by section 3221 (relating to
tax on employers) shall be treated as
an employer contribution.
(B) Tier 2 portion.--For purposes of
subparagraph (A)--
(i) After 1984.--With respect to
compensation paid after 1984, the tier
2 portion shall be the taxes imposed by
sections 3201(b), 3211(b), and 3221(b).
(ii) After September 30, 1981, and
before 1985.--With respect to
compensation paid before 1985 for
services rendered after September 30,
1981, the tier 2 portion shall be--
(I) so much of the tax
imposed by section 3201 as is
determined at the 2 percent
rate, and
(II) so much of the taxes
imposed by sections 3211 and
3221 as is determined at the
11.75 percent rate.
With respect to compensation paid for services
rendered after December 31, 1983, and before
1985, subclause (I) shall be applied by
substituting ``2.75 percent'' for ``2
percent'', and subclause (II) shall be applied
by substituting ``12.75 percent'' for ``11.75
percent''.
(iii) Before October 1, 1981.--With
respect to compensation paid for
services rendered during any period
before October 1, 1981, the tier 2
portion shall be the excess (if any)
of--
(I) the tax imposed for such
period by section 3201, 3211,
or 3221, as the case may be
(other than any tax imposed
with respect to man-hours),
over
(II) the tax which would have
been imposed by such section
for such period had the rates
of the comparable taxes imposed
by chapter 21 for such period
applied under such section.
(C) Contributions not allocable to
supplemental annuity or windfall benefits.--For
purposes of paragraph (1), no amount treated as
an employee contribution under this paragraph
shall be allocated to--
(i) any supplemental annuity paid
under section 2(b) of the Railroad
Retirement Act of 1974, or
(ii) any benefit paid under section
3(h), 4(e), or 4(h) of such Act.
(3) Tier 1 railroad retirement benefit.--For purposes
of paragraph (1), the term ``tier 1 railroad retirement
benefit'' has the meaning given such term by section
86(d)(4).
(s) Required distributions where holder dies before entire
interest is distributed.--
(1) In general.--A contract shall not be treated as
an annuity contract for purposes of this title unless
it provides that--
(A) if any holder of such contract dies on or
after the annuity starting date and before the
entire interest in such contract has been
distributed, the remaining portion of such
interest will be distributed at least as
rapidly as under the method of distributions
being used as of the date of his death, and
(B) if any holder of such contract dies
before the annuity starting date, the entire
interest in such contract will be distributed
within 5 years after the death of such holder.
(2) Exception for certain amounts payable over life
of beneficiary.--If--
(A) any portion of the holder's interest is
payable to (or for the benefit of) a designated
beneficiary,
(B) such portion will be distributed (in
accordance with regulations) over the life of
such designated beneficiary (or over a period
not extending beyond the life expectancy of
such beneficiary), and
(C) such distributions begin not later than 1
year after the date of the holder's death or
such later date as the Secretary may by
regulations prescribe,
then for purposes of paragraph (1), the portion
referred to in subparagraph (A) shall be treated as
distributed on the day on which such distributions
begin.
(3) Special rule where surviving spouse
beneficiary.--If the designated beneficiary referred to
in paragraph (2)(A) is the surviving spouse of the
holder of the contract, paragraphs (1) and (2) shall be
applied by treating such spouse as the holder of such
contract.
(4) Designated beneficiary.--For purposes of this
subsection, the term ``designated beneficiary'' means
any individual designated a beneficiary by the holder
of the contract.
(5) Exception for certain annuity contracts.--This
subsection shall not apply to any annuity contract--
(A) which is provided--
(i) under a plan described in section
401(a) which includes a trust exempt
from tax under section 501, or
(ii) under a plan described in
section 403(a),
(B) which is described in section 403(b),
(C) which is an individual retirement annuity
or provided under an individual retirement
account or annuity, or
(D) which is a qualified funding asset (as
defined in section 130(d), but without regard
to whether there is a qualified assignment).
(6) Special rule where holder is corporation or other
non-individual.--
(A) In general.--For purposes of this
subsection, if the holder of the contract is
not an individual, the primary annuitant shall
be treated as the holder of the contract.
(B) Primary annuitant.--For purposes of
subparagraph (A), the term ``primary
annuitant'' means the individual, the events in
the life of whom are of primary importance in
affecting the timing or amount of the payout
under the contract.
(7) Treatment of changes in primary annuitant where
holder of contract is not an individual.--For purposes
of this subsection, in the case of a holder of an
annuity contract which is not an individual, if there
is a change in a primary annuitant (as defined in
paragraph (6)(B)), such change shall be treated as the
death of the holder.
(t) 10-percent additional tax on early distributions from
qualified retirement plans.--
(1) Imposition of additional tax.--If any taxpayer
receives any amount from a qualified retirement plan
(as defined in section 4974(c)), the taxpayer's tax
under this chapter for the taxable year in which such
amount is received shall be increased by an amount
equal to 10 percent of the portion of such amount which
is includible in gross income.
(2) Subsection not to apply to certain
distributions.--Except as provided in paragraphs (3)
and (4), paragraph (1) shall not apply to any of the
following distributions:
(A) In general.--Distributions which are--
(i) made on or after the date on
which the employee attains age 59 1/2,
(ii) made to a beneficiary (or to the
estate of the employee) on or after the
death of the employee,
(iii) attributable to the employee's
being disabled within the meaning of
subsection (m)(7),
(iv) part of a series of
substantially equal periodic payments
(not less frequently than annually)
made for the life (or life expectancy)
of the employee or the joint lives (or
joint life expectancies) of such
employee and his designated
beneficiary,
(v) made to an employee after
separation from service after
attainment of age 55,
(vi) dividends paid with respect to
stock of a corporation which are
described in section 404(k),
(vii) made on account of a levy under
section 6331 on the qualified
retirement plan, or
(viii) payments under a phased
retirement annuity under section
8366a(a)(5) or 8412a(a)(5) of title 5,
United States Code, or a composite
retirement annuity under section
8366a(a)(1) or 8412a(a)(1) of such
title.
(B) Medical expenses.--Distributions made to
the employee (other than distributions
described in subparagraph (A), (C), or (D)) to
the extent such distributions do not exceed the
amount allowable as a deduction under section
213 to the employee for amounts paid during the
taxable year for medical care (determined
without regard to whether the employee itemizes
deductions for such taxable year).
(C) Payments to alternate payees pursuant to
qualified domestic relations orders.--Any
distribution to an alternate payee pursuant to
a qualified domestic relations order (within
the meaning of section 414(p)(1)).
(D) Distributions to unemployed individuals
for health insurance premiums.--
(i) In general.--Distributions from
an individual retirement plan to an
individual after separation from
employment--
(I) if such individual has
received unemployment
compensation for 12 consecutive
weeks under any Federal or
State unemployment compensation
law by reason of such
separation,
(II) if such distributions
are made during any taxable
year during which such
unemployment compensation is
paid or the succeeding taxable
year, and
(III) to the extent such
distributions do not exceed the
amount paid during the taxable
year for insurance described in
section 213(d)(1)(D) with
respect to the individual and
the individual's spouse and
dependents (as defined in
section 152, determined without
regard to subsections (b)(1),
(b)(2), and (d)(1)(B) thereof).
(ii) Distributions after
reemployment.--Clause (i) shall not
apply to any distribution made after
the individual has been employed for at
least 60 days after the separation from
employment to which clause (i) applies.
(iii) Self-employed individuals.--To
the extent provided in regulations, a
self-employed individual shall be
treated as meeting the requirements of
clause (i)(I) if, under Federal or
State law, the individual would have
received unemployment compensation but
for the fact the individual was self-
employed.
(E) Distributions from individual retirement
plans for higher education expenses.--
Distributions to an individual from an
individual retirement plan to the extent such
distributions do not exceed the qualified
higher education expenses (as defined in
paragraph (7)) of the taxpayer for the taxable
year. Distributions shall not be taken into
account under the preceding sentence if such
distributions are described in subparagraph
(A), (C), or (D) or to the extent paragraph (1)
does not apply to such distributions by reason
of subparagraph (B).
(F) Distributions from certain plans for
first home purchases.--Distributions to an
individual from an individual retirement plan
which are qualified first-time homebuyer
distributions (as defined in paragraph (8)).
Distributions shall not be taken into account
under the preceding sentence if such
distributions are described in subparagraph
(A), (C), (D), or (E) or to the extent
paragraph (1) does not apply to such
distributions by reason of subparagraph (B).
(G) Distributions from retirement plans to
individuals called to active duty.--
(i) In general.--Any qualified
reservist distribution.
(ii) Amount distributed may be
repaid.--Any individual who receives a
qualified reservist distribution may,
at any time during the 2-year period
beginning on the day after the end of
the active duty period, make one or
more contributions to an individual
retirement plan of such individual in
an aggregate amount not to exceed the
amount of such distribution. The dollar
limitations otherwise applicable to
contributions to individual retirement
plans shall not apply to any
contribution made pursuant to the
preceding sentence. No deduction shall
be allowed for any contribution
pursuant to this clause.
(iii) Qualified reservist
distribution.--For purposes of this
subparagraph, the term ``qualified
reservist distribution'' means any
distribution to an individual if--
(I) such distribution is from
an individual retirement plan,
or from amounts attributable to
employer contributions made
pursuant to elective deferrals
described in subparagraph (A)
or (C) of section 402(g)(3) or
section 501(c)(18)(D)(iii),
(II) such individual was (by
reason of being a member of a
reserve component (as defined
in section 101 of title 37,
United States Code)) ordered or
called to active duty for a
period in excess of 179 days or
for an indefinite period, and
(III) such distribution is
made during the period
beginning on the date of such
order or call and ending at the
close of the active duty
period.
(iv) Application of subparagraph.--
This subparagraph applies to
individuals ordered or called to active
duty after September 11, 2001. In no
event shall the 2-year period referred
to in clause (ii) end before the date
which is 2 years after the date of the
enactment of this subparagraph.
(H) Distributions from retirement plans in
case of birth of child or adoption.--
(i) In general.--Any qualified birth
or adoption distribution.
(ii) Limitation.--The aggregate
amount which may be treated as
qualified birth or adoption
distributions by any individual with
respect to any birth or adoption shall
not exceed $7,500.
(iii) Qualified birth or adoption
distribution.--For purposes of this
subparagraph--
(I) In general.--The term
``qualified birth or adoption
distribution'' means any
distribution from an applicable
eligible retirement plan to an
individual if made during the
1-year period beginning on the
date on which a child of the
individual is born or on which
the legal adoption by the
individual of an eligible child
is finalized.
(II) Eligible child.--The
term ``eligible child'' means
any individual (other than a
child of the taxpayer's spouse)
who has not attained age 18 or
is physically or mentally
incapable of self-support.
(iv) Treatment of plan
distributions.--
(I) In general.--If a
distribution to an individual
would (without regard to clause
(ii)) be a qualified birth or
adoption distribution, a plan
shall not be treated as failing
to meet any requirement of this
title merely because the plan
treats the distribution as a
qualified birth or adoption
distribution, unless the
aggregate amount of such
distributions from all plans
maintained by the employer (and
any member of any controlled
group which includes the
employer) to such individual
exceeds $7,500.
(II) Controlled group.--For
purposes of subclause (I), the
term ``controlled group'' means
any group treated as a single
employer under subsection (b),
(c), (m), or (o) of section
414.
(v) Amount distributed may be
repaid.--
(I) In general.--Any
individual who receives a
qualified birth or adoption
distribution may make one or
more contributions in an
aggregate amount not to exceed
the amount of such distribution
to an applicable eligible
retirement plan of which such
individual is a beneficiary and
to which a rollover
contribution of such
distribution could be made
under section 402(c),
403(a)(4), 403(b)(8),
408(d)(3), or 457(e)(16), as
the case may be.
(II) Limitation on
contributions to applicable
eligible retirement plans other
than IRAs.--The aggregate
amount of contributions made by
an individual under subclause
(I) to any applicable eligible
retirement plan which is not an
individual retirement plan
shall not exceed the aggregate
amount of qualified birth or
adoption distributions which
are made from such plan to such
individual. Subclause (I) shall
not apply to contributions to
any applicable eligible
retirement plan which is not an
individual retirement plan
unless the individual is
eligible to make contributions
(other than those described in
subclause (I)) to such
applicable eligible retirement
plan.
(III) Treatment of repayments
of distributions from
applicable eligible retirement
plans other than IRAs.--If a
contribution is made under
subclause (I) with respect to a
qualified birth or adoption
distribution from an applicable
eligible retirement plan other
than an individual retirement
plan, then the taxpayer shall,
to the extent of the amount of
the contribution, be treated as
having received such
distribution in an eligible
rollover distribution (as
defined in section 402(c)(4))
and as having transferred the
amount to the applicable
eligible retirement plan in a
direct trustee to trustee
transfer within 60 days of the
distribution.
(IV) Treatment of repayments
for distributions from iras.--
If a contribution is made under
subclause (I) with respect to a
qualified birth or adoption
distribution from an individual
retirement plan, then, to the
extent of the amount of the
contribution, such distribution
shall be treated as a
distribution described in
section 408(d)(3) and as having
been transferred to the
applicable eligible retirement
plan in a direct trustee to
trustee transfer within 60 days
of the distribution.
(vi) Definition and special rules.--
For purposes of this subparagraph--
(I) Applicable eligible
retirement plan.--The term
``applicable eligible
retirement plan'' means an
eligible retirement plan (as
defined in section
402(c)(8)(B)) other than a
defined benefit plan.
(II) Exemption of
distributions from trustee to
trustee transfer and
withholding rules.--For
purposes of sections
401(a)(31), 402(f), and 3405, a
qualified birth or adoption
distribution shall not be
treated as an eligible rollover
distribution.
(III) Taxpayer must include
tin.--A distribution shall not
be treated as a qualified birth
or adoption distribution with
respect to any child or
eligible child unless the
taxpayer includes the name,
age, and TIN of such child or
eligible child on the
taxpayer's return of tax for
the taxable year.
(IV) Distributions treated as
meeting plan distribution
requirements.--Any qualified
birth or adoption distribution
shall be treated as meeting the
requirements of sections
401(k)(2)(B)(i),
403(b)(7)(A)(ii), 403(b)(11),
and 457(d)(1)(A).
(3) Limitations.--
(A) Certain exceptions not to apply to
individual retirement plans.--Subparagraphs
(A)(v) and (C) of paragraph (2) shall not apply
to distributions from an individual retirement
plan.
(B) Periodic payments under qualified plans
must begin after separation.--Paragraph
(2)(A)(iv) shall not apply to any amount paid
from a trust described in section 401(a) which
is exempt from tax under section 501(a) or from
a contract described in section 72(e)(5)(D)(ii)
unless the series of payments begins after the
employee separates from service.
(4) Change in substantially equal payments.--
(A) In general.--If--
(i) paragraph (1) does not apply to a
distribution by reason of paragraph
(2)(A)(iv), and
(ii) the series of payments under
such paragraph are subsequently
modified (other than by reason of death
or disability or a distribution to
which paragraph (10) applies)--
(I) before the close of the
5-year period beginning with
the date of the first payment
and after the employee attains
age 59 1/2, or
(II) before the employee
attains age 59 1/2, the
taxpayer's tax for the 1st
taxable year in which such
modification occurs shall be
increased by an amount,
determined under regulations,
equal to the tax which (but for
paragraph (2)(A)(iv)) would
have been imposed, plus
interest for the deferral
period.
(B) Deferral period.--For purposes of this
paragraph, the term ``deferral period'' means
the period beginning with the taxable year in
which (without regard to paragraph (2)(A)(iv))
the distribution would have been includible in
gross income and ending with the taxable year
in which the modification described in
subparagraph (A) occurs.
(5) Employee.--For purposes of this subsection, the
term ``employee'' includes any participant, and in the
case of an individual retirement plan, the individual
for whose benefit such plan was established.
(6) Special rules for simple retirement accounts.--In
the case of any amount received from a simple
retirement account (within the meaning of section
408(p)) during the 2-year period beginning on the date
such individual first participated in any qualified
salary reduction arrangement maintained by the
individual's employer under section 408(p)(2),
paragraph (1) shall be applied by substituting ``25
percent'' for ``10 percent''.
(7) Qualified higher education expenses.--For
purposes of paragraph (2)(E)--
(A) In general.--The term ``qualified higher
education expenses'' means qualified higher
education expenses (as defined in section
529(e)(3)) for education furnished to--
(i) the taxpayer,
(ii) the taxpayer's spouse, or
(iii) any child (as defined in
section 152(f)(1)) or grandchild of the
taxpayer or the taxpayer's spouse,
at an eligible educational institution (as
defined in section 529(e)(5)).
(B) Coordination with other benefits.--The
amount of qualified higher education expenses
for any taxable year shall be reduced as
provided in section 25A(g)(2).
(8) Qualified first-time homebuyer distributions.--
For purposes of paragraph (2)(F)--
(A) In general.--The term ``qualified first-
time homebuyer distribution'' means any payment
or distribution received by an individual to
the extent such payment or distribution is used
by the individual before the close of the 120th
day after the day on which such payment or
distribution is received to pay qualified
acquisition costs with respect to a principal
residence of a first-time homebuyer who is such
individual, the spouse of such individual, or
any child, grandchild, or ancestor of such
individual or the individual's spouse.
(B) Lifetime dollar limitation.--The
aggregate amount of payments or distributions
received by an individual which may be treated
as qualified first-time homebuyer distributions
for any taxable year shall not exceed the
excess (if any) of--
(i) $10,000, over
(ii) the aggregate amounts treated as
qualified first-time homebuyer
distributions with respect to such
individual for all prior taxable years.
(C) Qualified acquisition costs.--For
purposes of this paragraph, the term
``qualified acquisition costs'' means the costs
of acquiring, constructing, or reconstructing a
residence. Such term includes any usual or
reasonable settlement, financing, or other
closing costs.
(D) First-time homebuyer; other
definitions.--For purposes of this paragraph--
(i) First-time homebuyer.--The term
``first-time homebuyer'' means any
individual if--
(I) such individual (and if
married, such individual's
spouse) had no present
ownership interest in a
principal residence during the
2-year period ending on the
date of acquisition of the
principal residence to which
this paragraph applies, and
(II) subsection (h) or (k) of
section 1034 (as in effect on
the day before the date of the
enactment of this paragraph)
did not suspend the running of
any period of time specified in
section 1034 (as so in effect)
with respect to such individual
on the day before the date the
distribution is applied
pursuant to subparagraph (A).
(ii) Principal residence.--The term
``principal residence'' has the same
meaning as when used in section 121.
(iii) Date of acquisition.--The term
``date of acquisition'' means the
date--
(I) on which a binding
contract to acquire the
principal residence to which
subparagraph (A) applies is
entered into, or
(II) on which construction or
reconstruction of such a
principal residence is
commenced.
(E) Special rule where delay in
acquisition.--If any distribution from any
individual retirement plan fails to meet the
requirements of subparagraph (A) solely by
reason of a delay or cancellation of the
purchase or construction of the residence, the
amount of the distribution may be contributed
to an individual retirement plan as provided in
section 408(d)(3)(A)(i) (determined by
substituting ``120th day'' for ``60th day'' in
such section), except that--
(i) section 408(d)(3)(B) shall not be
applied to such contribution, and
(ii) such amount shall not be taken
into account in determining whether
section 408(d)(3)(B) applies to any
other amount.
(9) Special rule for rollovers to section 457
plans.--For purposes of this subsection, a distribution
from an eligible deferred compensation plan (as defined
in section 457(b)) of an eligible employer described in
section 457(e)(1)(A) shall be treated as a distribution
from a qualified retirement plan described in
4974(c)(1) to the extent that such distribution is
attributable to an amount transferred to an eligible
deferred compensation plan from a qualified retirement
plan (as defined in section 4974(c)).
(10) Distributions to qualified public safety
employees in governmental plans.--
(A) In general.--In the case of a
distribution to a qualified public safety
employee from a governmental plan (within the
meaning of section 414(d)), paragraph (2)(A)(v)
shall be applied by substituting ``age 50'' for
``age 55''.
(B) Qualified public safety employee.--For
purposes of this paragraph, the term
``qualified public safety employee'' means--
(i) any employee of a State or
political subdivision of a State who
provides police protection,
firefighting services, or emergency
medical services for any area within
the jurisdiction of such State or
political subdivision, or
(ii) any Federal law enforcement
officer described in section 8331(20)
or 8401(17) of title 5, United States
Code, any Federal customs and border
protection officer described in section
8331(31) or 8401(36) of such title, any
Federal firefighter described in
section 8331(21) or 8401(14) of such
title, any air traffic controller
described in 8331(30) or 8401(35) of
such title, any nuclear materials
courier described in section 8331(27)
or 8401(33) of such title, any member
of the United States Capitol Police,
any member of the Supreme Court Police,
or any diplomatic security special
agent of the Department of State.
(u) Treatment of annuity contracts not held by natural
persons.--
(1) In general.--If any annuity contract is held by a
person who is not a natural person--
(A) such contract shall not be treated as an
annuity contract for purposes of this subtitle
(other than subchapter L), and
(B) the income on the contract for any
taxable year of the policyholder shall be
treated as ordinary income received or accrued
by the owner during such taxable year.
For purposes of this paragraph, holding by a trust or
other entity as an agent for a natural person shall not
be taken into account.
(2) Income on the contract.--
(A) In general.--For purposes of paragraph
(1), the term ``income on the contract'' means,
with respect to any taxable year of the
policyholder, the excess of--
(i) the sum of the net surrender
value of the contract as of the close
of the taxable year plus all
distributions under the contract
received during the taxable year or any
prior taxable year, reduced by
(ii) the sum of the amount of net
premiums under the contract for the
taxable year and prior taxable years
and amounts includible in gross income
for prior taxable years with respect to
such contract under this subsection.
Where necessary to prevent the avoidance of
this subsection, the Secretary may substitute
``fair market value of the contract'' for ``net
surrender value of the contract'' each place it
appears in the preceding sentence.
(B) Net premiums.--For purposes of this
paragraph, the term ``net premiums'' means the
amount of premiums paid under the contract
reduced by any policyholder dividends.
(3) Exceptions.--This subsection shall not apply to
any annuity contract which--
(A) is acquired by the estate of a decedent
by reason of the death of the decedent,
(B) is held under a plan described in section
401(a) or 403(a), under a program described in
section 403(b), or under an individual
retirement plan,
(C) is a qualified funding asset (as defined
in section 130(d), but without regard to
whether there is a qualified assignment),
(D) is purchased by an employer upon the
termination of a plan described in section
401(a) or 403(a) and is held by the employer
until all amounts under such contract are
distributed to the employee for whom such
contract was purchased or the employee's
beneficiary, or
(E) is an immediate annuity.
(4) Immediate annuity.--For purposes of this
subsection, the term ``immediate annuity'' means an
annuity--
(A) which is purchased with a single premium
or annuity consideration,
(B) the annuity starting date (as defined in
subsection (c)(4)) of which commences no later
than 1 year from the date of the purchase of
the annuity, and
(C) which provides for a series of
substantially equal periodic payments (to be
made not less frequently than annually) during
the annuity period.
(v) 10-percent additional tax for taxable distributions from
modified endowment contracts.--
(1) Imposition of additional tax.--If any taxpayer
receives any amount under a modified endowment contract
(as defined in section 7702A), the taxpayer's tax under
this chapter for the taxable year in which such amount
is received shall be increased by an amount equal to 10
percent of the portion of such amount which is
includible in gross income.
(2) Subsection not to apply to certain
distributions.--Paragraph (1) shall not apply to any
distribution--
(A) made on or after the date on which the
taxpayer attains age 59 1/2,
(B) which is attributable to the taxpayer's
becoming disabled (within the meaning of
subsection (m)(7)), or
(C) which is part of a series of
substantially equal periodic payments (not less
frequently than annually) made for the life (or
life expectancy) of the taxpayer or the joint
lives (or joint life expectancies) of such
taxpayer and his beneficiary.
(w) Application of basis rules to nonresident aliens.--
(1) In general.--Notwithstanding any other provision
of this section, for purposes of determining the
portion of any distribution which is includible in
gross income of a distributee who is a citizen or
resident of the United States, the investment in the
contract shall not include any applicable nontaxable
contributions or applicable nontaxable earnings.
(2) Applicable nontaxable contribution.--For purposes
of this subsection, the term ``applicable nontaxable
contribution'' means any employer or employee
contribution--
(A) which was made with respect to
compensation--
(i) for labor or personal services
performed by an employee who, at the
time the labor or services were
performed, was a nonresident alien for
purposes of the laws of the United
States in effect at such time, and
(ii) which is treated as from sources
without the United States, and
(B) which was not subject to income tax (and
would have been subject to income tax if paid
as cash compensation when the services were
rendered) under the laws of the United States
or any foreign country.
(3) Applicable nontaxable earnings.--For purposes of
this subsection, the term ``applicable nontaxable
earnings'' means earnings--
(A) which are paid or accrued with respect to
any employer or employee contribution which was
made with respect to compensation for labor or
personal services performed by an employee,
(B) with respect to which the employee was at
the time the earnings were paid or accrued a
nonresident alien for purposes of the laws of
the United States, and
(C) which were not subject to income tax
under the laws of the United States or any
foreign country.
(4) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the
provisions of this subsection, including regulations
treating contributions and earnings as not subject to
tax under the laws of any foreign country where
appropriate to carry out the purposes of this
subsection.
(x) Cross reference.--For limitation on adjustments to basis
of annuity contracts sold, see section 1021.
* * * * * * *
PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS
* * * * * * *
SEC. 219. RETIREMENT SAVINGS.
(a) Allowance of deduction.--In the case of an individual,
there shall be allowed as a deduction an amount equal to the
qualified retirement contributions of the individual for the
taxable year.
(b) Maximum amount of deduction.--
(1) In general.--The amount allowable as a deduction
under subsection (a) to any individual for any taxable
year shall not exceed the lesser of--
(A) the deductible amount, or
(B) an amount equal to the compensation
includible in the individual's gross income for
such taxable year.
(2) Special rule for employer contributions under
simplified employee pensions.--This section shall not
apply with respect to an employer contribution to a
simplified employee pension.
(3) Plans under section 501(c)(18).--Notwithstanding
paragraph (1), the amount allowable as a deduction
under subsection (a) with respect to any contributions
on behalf of an employee to a plan described in section
501(c)(18) shall not exceed the lesser of--
(A) $7,000, or
(B) an amount equal to 25 percent of the
compensation (as defined in section 415(c)(3))
includible in the individual's gross income for
such taxable year.
(4) Special rule for simple retirement accounts.--
This section shall not apply with respect to any amount
contributed to a simple retirement account established
under section 408(p).
(5) Deductible amount.--For purposes of paragraph
(1)(A)--
(A) In general.--The deductible amount is
$5,000.
(B) Catch-up contributions for individuals 50
or older.--
(i) In general.--In the case of an
individual who has attained the age of
50 before the close of the taxable
year, the deductible amount for such
taxable year shall be increased by the
applicable amount.
(ii) Applicable amount.--For purposes
of clause (i), the applicable amount is
$1,000.
(C) Cost-of-living adjustment.--
(i) In general.--In the case of any
taxable year beginning in a calendar
year after 2008, the $5,000 amount
under subparagraph (A) shall be
increased by an amount equal to--
(I) such dollar amount,
multiplied by
(II) the cost-of-living
adjustment determined under
section 1(f)(3) for the
calendar year in which the
taxable year begins, determined
by substituting ``calendar year
2007'' for ``calendar year
2016'' in subparagraph (A)(ii)
thereof.
(ii) Rounding rules.--If any amount
after adjustment under clause (i) is
not a multiple of $500, such amount
shall be rounded to the next lower
multiple of $500.
(c) Kay Bailey Hutchison Spousal IRA.--
(1) In general.--In the case of an individual to whom
this paragraph applies for the taxable year, the
limitation of paragraph (1) of subsection (b) shall be
equal to the lesser of--
(A) the dollar amount in effect under
subsection (b)(1)(A) for the taxable year, or
(B) the sum of--
(i) the compensation includible in
such individual's gross income for the
taxable year, plus
(ii) the compensation includible in
the gross income of such individual's
spouse for the taxable year reduced
by--
(I) the amount allowed as a
deduction under subsection (a)
to such spouse for such taxable
year,
(II) the amount of any
designated nondeductible
contribution (as defined in
section 408(o)) on behalf of
such spouse for such taxable
year, and
(III) the amount of any
contribution on behalf of such
spouse to a Roth IRA under
section 408A for such taxable
year.
(2) Individuals to whom paragraph (1) applies.--
Paragraph (1) shall apply to any individual if--
(A) such individual files a joint return for
the taxable year, and
(B) the amount of compensation (if any)
includible in such individual's gross income
for the taxable year is less than the
compensation includible in the gross income of
such individual's spouse for the taxable year.
(d) Other limitations and restrictions.--
[(1) Beneficiary must be under age 70 1/2.--No
deduction shall be allowed under this section with
respect to any qualified retirement contribution for
the benefit of an individual if such individual has
attained age 70 1/2 before the close of such
individual's taxable year for which the contribution
was made.]
(2) Recontributed amounts.--No deduction shall be
allowed under this section with respect to a rollover
contribution described in section 402(c), 403(a)(4),
403(b)(8), 408(d)(3), or 457(e)(16).
(3) Amounts contributed under endowment contract.--In
the case of an endowment contract described in section
408(b), no deduction shall be allowed under this
section for that portion of the amounts paid under the
contract for the taxable year which is properly
allocable, under regulations prescribed by the
Secretary, to the cost of life insurance.
(4) Denial of deduction for amount contributed to
inherited annuities or accounts.--No deduction shall be
allowed under this section with respect to any amount
paid to an inherited individual retirement account or
individual retirement annuity (within the meaning of
section 408(d)(3)(C)(ii)).
(e) Qualified retirement contribution.--For purposes of this
section, the term ``qualified retirement contribution'' means--
(1) any amount paid in cash for the taxable year by
or on behalf of an individual to an individual
retirement plan for such individual's benefit, and
(2) any amount contributed on behalf of any
individual to a plan described in section 501(c)(18).
(f) Other definitions and special rules.--
(1) Compensation.--For purposes of this section, the
term ``compensation'' includes earned income (as
defined in section 401(c)(2)). The term
``compensation'' does not include any amount received
as a pension or annuity and does not include any amount
received as deferred compensation. For purposes of this
paragraph, section 401(c)(2) shall be applied as if the
term trade or business for purposes of section 1402
included service described in subsection (c)(6). The
term ``compensation'' includes any differential wage
payment (as defined in section 3401(h)(2)). The term
``compensation'' shall include any amount included in
gross income and paid to an individual to aid the
individual in the pursuit of graduate or postdoctoral
study.
(2) Married individuals.--The maximum deduction under
subsection (b) shall be computed separately for each
individual, and this section shall be applied without
regard to any community property laws.
(3) Time when contributions deemed made.--For
purposes of this section, a taxpayer shall be deemed to
have made a contribution to an individual retirement
plan on the last day of the preceding taxable year if
the contribution is made on account of such taxable
year and is made not later than the time prescribed by
law for filing the return for such taxable year (not
including extensions thereof).
(5) Employer payments.--For purposes of this title,
any amount paid by an employer to an individual
retirement plan shall be treated as payment of
compensation to the employee (other than a self-
employed individual who is an employee within the
meaning of section 401(c)(1)) includible in his gross
income in the taxable year for which the amount was
contributed, whether or not a deduction for such
payment is allowable under this section to the
employee.
(6) Excess contributions treated as contribution made
during subsequent year for which there is an unused
limitation.--
(A) In general.--If for the taxable year the
maximum amount allowable as a deduction under
this section for contributions to an individual
retirement plan exceeds the amount contributed,
then the taxpayer shall be treated as having
made an additional contribution for the taxable
year in an amount equal to the lesser of--
(i) the amount of such excess, or
(ii) the amount of the excess
contributions for such taxable year
(determined under section 4973(b)(2)
without regard to subparagraph (C)
thereof).
(B) Amount contributed.--For purposes of this
paragraph, the amount contributed--
(i) shall be determined without
regard to this paragraph, and
(ii) shall not include any rollover
contribution.
(C) Special rule where excess deduction was
allowed for closed year.--Proper reduction
shall be made in the amount allowable as a
deduction by reason of this paragraph for any
amount allowed as a deduction under this
section for a prior taxable year for which the
period for assessing deficiency has expired if
the amount so allowed exceeds the amount which
should have been allowed for such prior taxable
year.
(7) Special rule for compensation earned by members
of the armed forces for service in a combat zone.--For
purposes of subsections (b)(1)(B) and (c), the amount
of compensation includible in an individual's gross
income shall be determined without regard to section
112.
(8) Election not to deduct contributions.--For
election not to deduct contributions to individual
retirement plans, see section 408(o)(2)(B)(ii).
(g) Limitation on deduction for active participants in
certain pension plans.--
(1) In general.--If (for any part of any plan year
ending with or within a taxable year) an individual or
the individual's spouse is an active participant, each
of the dollar limitations contained in subsections
(b)(1)(A) and (c)(1)(A) for such taxable year shall be
reduced (but not below zero) by the amount determined
under paragraph (2).
(2) Amount of reduction.--
(A) In general.--The amount determined under
this paragraph with respect to any dollar
limitation shall be the amount which bears the
same ratio to such limitation as--
(i) the excess of--
(I) the taxpayer's adjusted
gross income for such taxable
year, over
(II) the applicable dollar
amount, bears to (ii) $10,000
($20,000 in the case of a joint
return).
(B) No reduction below $200 until complete
phase-out.--No dollar limitation shall be
reduced below $200 under paragraph (1) unless
(without regard to this subparagraph) such
limitation is reduced to zero.
(C) Rounding.--Any amount determined under
this paragraph which is not a multiple of $10
shall be rounded to the next lowest $10.
(3) Adjusted gross income; applicable dollar
amount.--For purposes of this subsection--
(A) Adjusted gross income.--Adjusted gross
income of any taxpayer shall be determined--
(i) after application of sections 86
and 469, and
(ii) without regard to sections 135,
137, 221, 222, and 911 or the deduction
allowable under this section.
(B) Applicable dollar amount.--The term
``applicable dollar amount'' means the
following:
(i) In the case of a taxpayer filing
a joint return, $80,000.
(ii) In the case of any other
taxpayer (other than a married
individual filing a separate return),
$50,000.
(iii) In the case of a married
individual filing a separate return,
zero.
(4) Special rule for married individuals filing
separately and living apart.--A husband and wife who--
(A) file separate returns for any taxable
year, and
(B) live apart at all times during such
taxable year, shall not be treated as married
individuals for purposes of this subsection.
(5) Active participant.--For purposes of this
subsection, the term ``active participant'' means, with
respect to any plan year, an individual--
(A) who is an active participant in--
(i) a plan described in section
401(a) which includes a trust exempt
from tax under section 501(a),
(ii) an annuity plan described in
section 403(a),
(iii) a plan established for its
employees by the United States, by a
State or political subdivision thereof,
or by an agency or instrumentality of
any of the foregoing,
(iv) an annuity contract described in
section 403(b),
(v) a simplified employee pension
(within the meaning of section 408(k)),
or
(vi) any simple retirement account
(within the meaning of section 408(p)),
or
(B) who makes deductible contributions to a
trust described in section 501(c)(18).
The determination of whether an individual is an active
participant shall be made without regard to whether or
not such individual's rights under a plan, trust, or
contract are nonforfeitable. An eligible deferred
compensation plan (within the meaning of section
457(b)) shall not be treated as a plan described in
subparagraph (A)(iii).
(6) Certain individuals not treated as active
participants.--For purposes of this subsection, any
individual described in any of the following
subparagraphs shall not be treated as an active
participant for any taxable year solely because of any
participation so described:
(A) Members of reserve components.--
Participation in a plan described in
subparagraph (A)(iii) of paragraph (5) by
reason of service as a member of a reserve
component of the Armed Forces (as defined in
section 10101 of title 10), unless such
individual has served in excess of 90 days on
active duty (other than active duty for
training) during the year.
(B) Volunteer firefighters.--A volunteer
firefighter--
(i) who is a participant in a plan
described in subparagraph (A)(iii) of
paragraph (5) based on his activity as
a volunteer firefighter, and
(ii) whose accrued benefit as of the
beginning of the taxable year is not
more than an annual benefit of $1,800
(when expressed as a single life
annuity commencing at age 65).
(7) Special rule for spouses who are not active
participants.--If this subsection applies to an
individual for any taxable year solely because their
spouse is an active participant, then, in applying this
subsection to the individual (but not their spouse)--
(A) the applicable dollar amount under
paragraph (3)(B)(i) shall be $150,000; and
(B) the amount applicable under paragraph
(2)(A)(ii) shall be $10,000.
(8) Inflation adjustment.--In the case of any taxable
year beginning in a calendar year after 2006, the
dollar amount in the last row of the table contained in
paragraph (3)(B)(i), each of the dollar amounts in
paragraphs (3)(B)(i), (3)(B)(ii), and (7)(A) shall be
increased by an amount equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, determined by
substituting ``calendar year 2005'' for
``calendar year 2016'' in subparagraph (A)(ii)
thereof.
Any increase determined under the preceding sentence
shall be rounded to the nearest multiple of $1,000.
* * * * * * *
SEC. 221. INTEREST ON EDUCATION LOANS.
(a) Allowance of deduction.--In the case of an individual,
there shall be allowed as a deduction for the taxable year an
amount equal to the interest paid by the taxpayer during the
taxable year on any qualified education loan.
(b) Maximum deduction.--
(1) In general.--Except as provided in paragraph (2),
the deduction allowed by subsection (a) for the taxable
year shall not exceed $2,500.
(2) Limitation based on modified adjusted gross
income.--
(A) In general.--The amount which would (but
for this paragraph) be allowable as a deduction
under this section shall be reduced (but not
below zero) by the amount determined under
subparagraph (B).
(B) Amount of reduction.--The amount
determined under this subparagraph is the
amount which bears the same ratio to the amount
which would be so taken into account as--
(i) the excess of--
(I) the taxpayer's modified
adjusted gross income for such
taxable year, over
(II) $50,000 ($100,000 in the
case of a joint return), bears
to (ii) $15,000 ($30,000 in the
case of a joint return).
(C) Modified adjusted gross income.--The term
``modified adjusted gross income'' means
adjusted gross income determined--
(i) without regard to this section
and sections 222, 911, 931, and 933,
and
(ii) after application of sections
86, 135, 137, 219, and 469 (c)
Dependents not eligible for
deduction.--No deduction shall be
allowed by this section to an
individual for the taxable year if a
deduction under section 151 with
respect to such individual is allowed
to another taxpayer for the taxable
year beginning in the calendar year in
which such individual's taxable year
begins.
(d) Definitions.--For purposes of this section--
(1) Qualified education loan.--The term ``qualified
education loan'' means any indebtedness incurred by the
taxpayer solely to pay qualified higher education
expenses--
(A) which are incurred on behalf of the
taxpayer, the taxpayer's spouse, or any
dependent of the taxpayer as of the time the
indebtedness was incurred,
(B) which are paid or incurred within a
reasonable period of time before or after the
indebtedness is incurred, and
(C) which are attributable to education
furnished during a period during which the
recipient was an eligible student.
Such term includes indebtedness used to refinance
indebtedness which qualifies as a qualified education
loan. The term ``qualified education loan'' shall not
include any indebtedness owed to a person who is
related (within the meaning of section 267(b) or
707(b)(1)) to the taxpayer or to any person by reason
of a loan under any qualified employer plan (as defined
in section 72(p)(4)) or under any contract referred to
in section 72(p)(5).
(2) Qualified higher education expenses.--The term
``qualified higher education expenses'' means the cost
of attendance (as defined in section 472 of the Higher
Education Act of 1965, 20 U.S.C. 1087ll, as in effect
on the day before the date of the enactment of the
Taxpayer Relief Act of 1997) at an eligible educational
institution, reduced by the sum of--
(A) the amount excluded from gross income
under section 127, 135, 529, or 530 by reason
of such expenses, and
(B) the amount of any scholarship, allowance,
or payment described in section 25A(g)(2).
For purposes of the preceding sentence, the term
``eligible educational institution'' has the same
meaning given such term by section 25A(f)(2), except
that such term shall also include an institution
conducting an internship or residency program leading
to a degree or certificate awarded by an institution of
higher education, a hospital, or a health care facility
which offers postgraduate training.
(3) Eligible student.--The term ``eligible student''
has the meaning given such term by section 25A(b)(3).
(4) Dependent.--The term ``dependent'' has the
meaning given such term by section 152 (determined
without regard to subsections (b)(1), (b)(2), and
(d)(1)(B) thereof).
(e) Special rules.--
(1) Denial of double benefit.--No deduction shall be
allowed under this section for any amount for which a
deduction is allowable under any other provision of
this chapter. The deduction otherwise allowable under
subsection (a) (prior to the application of subsection
(b)) to the taxpayer for any taxable year shall be
reduced (but not below zero) by so much of the
distributions treated as a qualified higher education
expense under section 529(c)(9) with respect to loans
of the taxpayer as would be includible in gross income
under section 529(c)(3)(A) for such taxable year but
for such treatment.
(2) Married couples must file joint return.--If the
taxpayer is married at the close of the taxable year,
the deduction shall be allowed under subsection (a)
only if the taxpayer and the taxpayer's spouse file a
joint return for the taxable year.
(3) Marital status.--Marital status shall be
determined in accordance with section 7703.
(f) Inflation adjustments.--
(1) In general.--In the case of a taxable year
beginning after 2002, the $50,000 and $100,000 amounts
in subsection (b)(2) shall each be increased by an
amount equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, determined by
substituting ``calendar year 2001'' for
``calendar year 2016'' in subparagraph (A)(ii)
thereof.
(2) Rounding.--If any amount as adjusted under
paragraph (1) is not a multiple of $5,000, such amount
shall be rounded to the next lowest multiple of $5,000.
* * * * * * *
Subchapter D--Deferred Compensation, Etc
* * * * * * *
PART I--PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC
* * * * * * *
Subpart A--General Rule
* * * * * * *
SEC. 401. QUALIFIED PENSION, PROFIT-SHARING, AND STOCK BONUS PLANS.
(a) Requirements for qualification.--A trust created or
organized in the United States and forming part of a stock
bonus, pension, or profit-sharing plan of an employer for the
exclusive benefit of his employees or their beneficiaries shall
constitute a qualified trust under this section--
(1) if contributions are made to the trust by such
employer, or employees, or both, or by another employer
who is entitled to deduct his contributions under
section 404(a)(3)(B) (relating to deduction for
contributions to profit-sharing and stock bonus plans),
or by a charitable remainder trust pursuant to a
qualified gratuitous transfer (as defined in section
664(g)(1)), for the purpose of distributing to such
employees or their beneficiaries the corpus and income
of the fund accumulated by the trust in accordance with
such plan;
(2) if under the trust instrument it is impossible,
at any time prior to the satisfaction of all
liabilities with respect to employees and their
beneficiaries under the trust, for any part of the
corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other
than for the exclusive benefit of his employees or
their beneficiaries (but this paragraph shall not be
construed, in the case of a multiemployer plan, to
prohibit the return of a contribution within 6 months
after the plan administrator determines that the
contribution was made by a mistake of fact or law
(other than a mistake relating to whether the plan is
described in section 401(a) or the trust which is part
of such plan is exempt from taxation under section
501(a), or the return of any withdrawal liability
payment determined to be an overpayment within 6 months
of such determination));
(3) if the plan of which such trust is a part
satisfies the requirements of section 410 (relating to
minimum participation standards); and
(4) if the contributions or benefits provided under
the plan do not discriminate in favor of highly
compensated employees (within the meaning of section
414(q)). For purposes of this paragraph, there shall be
excluded from consideration employees described in
section 410(b)(3)(A) and (C).
(5) Special rules relating to nondiscrimination
requirements.--
(A) Salaried or clerical employees.--A
classification shall not be considered
discriminatory within the meaning of paragraph
(4) or section 410(b)(2)(A)(i) merely because
it is limited to salaried or clerical
employees.
(B) Contributions and benefits may bear
uniform relationship to compensation.--A plan
shall not be considered discriminatory within
the meaning of paragraph (4) merely because the
contributions or benefits of, or on behalf of,
the employees under the plan bear a uniform
relationship to the compensation (within the
meaning of section 414(s)) of such employees.
(C) Certain disparity permitted.--A plan
shall not be considered discriminatory within
the meaning of paragraph (4) merely because the
contributions or benefits of, or on behalf of,
the employees under the plan favor highly
compensated employees (as defined in section
414(q)) in the manner permitted under
subsection (l).
(D) Integrated defined benefit plan.--
(i) In general.--A defined benefit
plan shall not be considered
discriminatory within the meaning of
paragraph (4) merely because the plan
provides that the employer-derived
accrued retirement benefit for any
participant under the plan may not
exceed the excess (if any) of--
(I) the participant's final
pay with the employer, over
(II) the employer-derived
retirement benefit created
under Federal law attributable
to service by the participant
with the employer.
For purposes of this clause, the
employer-derived retirement benefit
created under Federal law shall be
treated as accruing ratably over 35
years.
(ii) Final pay.--For purposes of this
subparagraph, the participant's final
pay is the compensation (as defined in
section 414(q)(4)) paid to the
participant by the employer for any
year--
(I) which ends during the 5-
year period ending with the
year in which the participant
separated from service for the
employer, and
(II) for which the
participant's total
compensation from the employer
was highest.
(E) 2 or more plans treated as single plan.--
For purposes of determining whether 2 or more
plans of an employer satisfy the requirements
of paragraph (4) when considered as a single
plan--
(i) Contributions.--If the amount of
contributions on behalf of the
employees allowed as a deduction under
section 404 for the taxable year with
respect to such plans, taken together,
bears a uniform relationship to the
compensation (within the meaning of
section 414(s)) of such employees, the
plans shall not be considered
discriminatory merely because the
rights of employees to, or derived
from, the employer contributions under
the separate plans do not become
nonforfeitable at the same rate.
(ii) Benefits.--If the employees'
rights to benefits under the separate
plans do not become nonforfeitable at
the same rate, but the levels of
benefits provided by the separate plans
satisfy the requirements of regulations
prescribed by the Secretary to take
account of the differences in such
rates, the plans shall not be
considered discriminatory merely
because of the difference in such
rates.
(F) Social security retirement age.--For
purposes of testing for discrimination under
paragraph (4)--
(i) the social security retirement
age (as defined in section 415(b)(8))
shall be treated as a uniform
retirement age, and
(ii) subsidized early retirement
benefits and joint and survivor
annuities shall not be treated as being
unavailable to employees on the same
terms merely because such benefits or
annuities are based in whole or in part
on an employee's social security
retirement age (as so defined).
(G) Governmental plans.--Paragraphs (3) and
(4) shall not apply to a governmental plan
(within the meaning of section 414(d)).
(6) A plan shall be considered as meeting the
requirements of paragraph (3) during the whole of any
taxable year of the plan if on one day in each quarter
it satisfied such requirements.
(7) A trust shall not constitute a qualified trust
under this section unless the plan of which such trust
is a part satisfies the requirements of section 411
(relating to minimum vesting standards).
(8) A trust forming part of a defined benefit plan
shall not constitute a qualified trust under this
section unless the plan provides that forfeitures must
not be applied to increase the benefits any employee
would otherwise receive under the plan.
(9) Required distributions.--
(A) In general.--A trust shall not constitute
a qualified trust under this subsection unless
the plan provides that the entire interest of
each employee--
(i) will be distributed to such
employee not later than the required
beginning date, or
(ii) will be distributed, beginning
not later than the required beginning
date, in accordance with regulations,
over the life of such employee or over
the lives of such employee and a
designated beneficiary (or over a
period not extending beyond the life
expectancy of such employee or the life
expectancy of such employee and a
designated beneficiary).
(B) Required distribution where employee dies
before entire interest is distributed.--
(i) Where distributions have begun
under subparagraph (A)(ii).--A trust
shall not constitute a qualified trust
under this section unless the plan
provides that if--
(I) the distribution of the
employee's interest has begun
in accordance with subparagraph
(A)(ii), and
(II) the employee dies before
his entire interest has been
distributed to him,
the remaining portion of such interest
will be distributed at least as rapidly
as under the method of distributions
being used under subparagraph (A)(ii)
as of the date of his death.
(ii) 5-year rule for other cases.--A
trust shall not constitute a qualified
trust under this section unless the
plan provides that, if an employee dies
before the distribution of the
employee's interest has begun in
accordance with subparagraph (A)(ii),
the entire interest of the employee
will be distributed within 5 years
after the death of such employee.
(iii) Exception to 5-year rule for
certain amounts payable over life of
beneficiary.--If--
(I) any portion of the
employee's interest is payable
to (or for the benefit of) a
designated beneficiary,
(II) such portion will be
distributed (in accordance with
regulations) over the life of
such designated beneficiary (or
over a period not extending
beyond the life expectancy of
such beneficiary), and
(III) such distributions
begin not later than 1 year
after the date of the
employee's death or such later
date as the Secretary may by
regulations prescribe,
for purposes of clause (ii), the
portion referred to in subclause (I)
shall be treated as distributed on the
date on which such distributions begin.
(iv) Special rule for surviving
spouse of employee.--If the designated
beneficiary referred to in clause
(iii)(I) is the surviving spouse of the
employee--
(I) the date on which the
distributions are required to
begin under clause (iii)(III)
shall not be earlier than the
date on which the employee
would have attained age 70 1/2,
and
(II) if the surviving spouse
dies before the distributions
to such spouse begin, this
subparagraph shall be applied
as if the surviving spouse were
the employee.
(C) Required beginning date.--For purposes of
this paragraph--
(i) In general.--The term ``required
beginning date'' means April 1 of the
calendar year following the later of--
(I) the calendar year in
which the employee attains age
70 1/2, or
(II) the calendar year in
which the employee retires.
(ii) Exception.--Subclause (II) of
clause (i) shall not apply--
(I) except as provided in
section 409(d), in the case of
an employee who is a 5-percent
owner (as defined in section
416) with respect to the plan
year ending in the calendar
year in which the employee
attains age 70 1/2, or
(II) for purposes of section
408(a)(6) or (b)(3).
(iii) Actuarial adjustment.--In the
case of an employee to whom clause
(i)(II) applies who retires in a
calendar year after the calendar year
in which the employee attains age 70 1/
2, the employee's accrued benefit shall
be actuarially increased to take into
account the period after age 70 1/2 in
which the employee was not receiving
any benefits under the plan.
(iv) Exception for governmental and
church plans.--Clauses (ii) and (iii)
shall not apply in the case of a
governmental plan or church plan. For
purposes of this clause, the term
``church plan'' means a plan maintained
by a church for church employees, and
the term ``church'' means any church
(as defined in section 3121(w)(3)(A))
or qualified church-controlled
organization (as defined in section
3121(w)(3)(B)).
(D) Life expectancy.--For purposes of this
paragraph, the life expectancy of an employee
and the employee's spouse (other than in the
case of a life annuity) may be redetermined but
not more frequently than annually.
(E) Designated beneficiary.--For purposes of
this paragraph, the term ``designated
beneficiary'' means any individual designated
as a beneficiary by the employee.
(F) Treatment of payments to children.--Under
regulations prescribed by the Secretary, for
purposes of this paragraph, any amount paid to
a child shall be treated as if it had been paid
to the surviving spouse if such amount will
become payable to the surviving spouse upon
such child reaching majority (or other
designated event permitted under regulations).
(G) Treatment of incidental death benefit
distributions.--For purposes of this title, any
distribution required under the incidental
death benefit requirements of this subsection
shall be treated as a distribution required
under this paragraph.
(H) Exception from required minimum
distributions during life of employee where
assets do not exceed $50,000.--
(i) In general.--If on the last day
of any calendar year the aggregate
value of an employee's entire interest
under all applicable eligible
retirement plans does not exceed
$50,000, then the requirements of
subparagraph (A) with respect to any
distribution relating to such year
shall not apply with respect to such
employee.
(ii) Applicable eligible retirement
plan.--For purposes of this
subparagraph, the term ``applicable
eligible retirement plan'' means an
eligible retirement plan (as defined in
section 402(c)(8)(B)) other than a
defined benefit plan.
(iii) Limit on required minimum
distribution.--The required minimum
distribution determined under
subparagraph (A) for an employee under
all applicable eligible retirement
plans shall not exceed an amount equal
to the excess of--
(I) the aggregate value of an
employee's entire interest
under such plans on the last
day of the calendar year to
which such distribution
relates, over
(II) the dollar amount in
effect under clause (i) for
such calendar year.
The Secretary in regulations or other
guidance may provide how such amount
shall be distributed in the case of an
individual with more than one
applicable eligible retirement plan.
(iv) Inflation adjustment.--In the
case of any calendar year beginning
after 2019, the $50,000 amount in
clause (i) shall be increased by an
amount equal to--
(I) such dollar amount,
multiplied by
(II) the cost of living
adjustment determined under
section 1(f)(3) for the
calendar year, determined by
substituting ``calendar year
2018'' for ``calendar year
2016'' in subparagraph (A)(ii)
thereof.
Any increase determined under this
clause shall be rounded to the next
lowest multiple of $5,000.
(v) Plan administrator reliance on
employee certification.--An applicable
eligible retirement plan described in
clause (iii), (iv), (v), or (vi) of
section 402(c)(8)(B) shall not be
treated as failing to meet the
requirements of this paragraph in the
case of any failure to make a required
minimum distribution for a calendar
year if--
(I) the aggregate value of an
employee's entire interest
under all applicable eligible
retirement plans of the
employer on the last day of the
calendar year to which such
distribution relates does not
exceed the dollar amount in
effect for such year under
clause (i), and
(II) the employee certifies
that the aggregate value of the
employee's entire interest
under all applicable eligible
retirement plans on the last
day of the calendar year to
which such distribution relates
did not exceed the dollar
amount in effect for such year
under clause (i).
(vi) Aggregation rule.--All employers
treated as a single employer under
subsection (b), (c), (m), or (o) of
section 414 shall be treated as a
single employer for purposes of clause
(v).
(10) Other requirements.--
(A) Plans benefiting owner-employees.--In the
case of any plan which provides contributions
or benefits for employees some or all of whom
are owner-employees (as defined in subsection
(c)(3)), a trust forming part of such plan
shall constitute a qualified trust under this
section only if the requirements of subsection
(d) are also met.
(B) Top-heavy plans.--
(i) In general.--In the case of any
top-heavy plan, a trust forming part of
such plan shall constitute a qualified
trust under this section only if the
requirements of section 416 are met.
(ii) Plans which may become top-
heavy.--Except to the extent provided
in regulations, a trust forming part of
a plan (whether or not a top-heavy
plan) shall constitute a qualified
trust under this section only if such
plan contains provisions--
(I) which will take effect if
such plan becomes a top-heavy
plan, and
(II) which meet the
requirements of section 416.
(iii) Exemption for governmental
plans.--This subparagraph shall not
apply to any governmental plan.
(11) Requirement of joint and survivor annuity and
preretirement survivor annuity.--
(A) In general.--In the case of any plan to
which this paragraph applies, except as
provided in section 417, a trust forming part
of such plan shall not constitute a qualified
trust under this section unless--
(i) in the case of a vested
participant who does not die before the
annuity starting date, the accrued
benefit payable to such participant is
provided in the form of a qualified
joint and survivor annuity, and
(ii) in the case of a vested
participant who dies before the annuity
starting date and who has a surviving
spouse, a qualified preretirement
survivor annuity is provided to the
surviving spouse of such participant.
(B) Plans to which paragraph applies.--This
paragraph shall apply to--
(i) any defined benefit plan,
(ii) any defined contribution plan
which is subject to the funding
standards of section 412, and
(iii) any participant under any other
defined contribution plan unless--
(I) such plan provides that
the participant's
nonforfeitable accrued benefit
(reduced by any security
interest held by the plan by
reason of a loan outstanding to
such participant) is payable in
full, on the death of the
participant, to the
participant's surviving spouse
(or, if there is no surviving
spouse or the surviving spouse
consents in the manner required
under section 417(a)(2), to a
designated beneficiary),
(II) such participant does
not elect a payment of benefits
in the form of a life annuity,
and
(III) with respect to such
participant, such plan is not a
direct or indirect transferee
(in a transfer after December
31, 1984) of a plan which is
described in clause (i) or (ii)
or to which this clause applied
with respect to the
participant.
Clause (iii)(III) shall apply only with respect
to the transferred assets (and income
therefrom) if the plan separately accounts for
such assets and any income therefrom.
(C) Exception for certain ESOP benefits.--
(i) In general.--In the case of--
(I) a tax credit employee
stock ownership plan (as
defined in section 409(a)), or
(II) an employee stock
ownership plan (as defined in
section 4975(e)(7)),
subparagraph (A) shall not apply to
that portion of the employee's accrued
benefit to which the requirements of
section 409(h) apply.
(ii) Nonforfeitable benefit must be
paid in full, etc.--In the case of any
participant, clause (i) shall apply
only if the requirements of subclauses
(I), (II), and (III) of subparagraph
(B)(iii) are met with respect to such
participant.
(D) Special rule where participant and spouse
married less than 1 year.--A plan shall not be
treated as failing to meet the requirements of
subparagraphs (B)(iii) or (C) merely because
the plan provides that benefits will not be
payable to the surviving spouse of the
participant unless the participant and such
spouse had been married throughout the 1-year
period ending on the earlier of the
participant's annuity starting date or the date
of the participant's death.
(E) Exception for plans described in section
404(c).--This paragraph shall not apply to a
plan which the Secretary has determined is a
plan described in section 404(c) (or a
continuation thereof) in which participation is
substantially limited to individuals who,
before January 1, 1976, ceased employment
covered by the plan.
(F) Cross reference.--For--
(i) provisions under which
participants may elect to waive the
requirements of this paragraph, and
(ii) other definitions and special
rules for purposes of this paragraph,
see section 417.
(12) A trust shall not constitute a qualified trust
under this section unless the plan of which such trust
is a part provides that in the case of any merger or
consolidation with, or transfer of assets or
liabilities to, any other plan after September 2, 1974,
each participant in the plan would (if the plan then
terminated) receive a benefit immediately after the
merger, consolidation, or transfer which is equal to or
greater than the benefit he would have been entitled to
receive immediately before the merger, consolidation,
or transfer (if the plan had then terminated). The
preceding sentence does not apply to any multiemployer
plan with respect to any transaction to the extent that
participants either before or after the transaction are
covered under a multiemployer plan to which title IV of
the Employee Retirement Income Security Act of 1974
applies.
(13) Assignment and alienation.--
(A) In general.--A trust shall not constitute
a qualified trust under this section unless the
plan of which such trust is a part provides
that benefits provided under the plan may not
be assigned or alienated. For purposes of the
preceding sentence, there shall not be taken
into account any voluntary and revocable
assignment of not to exceed 10 percent of any
benefit payment made by any participant who is
receiving benefits under the plan unless the
assignment or alienation is made for purposes
of defraying plan administration costs. For
purposes of this paragraph a loan made to a
participant or beneficiary shall not be treated
as an assignment or alienation if such loan is
secured by the participant's accrued
nonforfeitable benefit and is exempt from the
tax imposed by section 4975 (relating to tax on
prohibited transactions) by reason of section
4975(d)(1). This paragraph shall take effect on
January 1, 1976 and shall not apply to
assignments which were irrevocable on September
2, 1974.
(B) Special rules for domestic relations
orders.--Subparagraph (A) shall apply to the
creation, assignment, or recognition of a right
to any benefit payable with respect to a
participant pursuant to a domestic relations
order, except that subparagraph (A) shall not
apply if the order is determined to be a
qualified domestic relations order.
(C) Special rule for certain judgments and
settlements.--Subparagraph (A) shall not apply
to any offset of a participant's benefits
provided under a plan against an amount that
the participant is ordered or required to pay
to the plan if--
(i) the order or requirement to pay
arises--
(I) under a judgment of
conviction for a crime
involving such plan,
(II) under a civil judgment
(including a consent order or
decree) entered by a court in
an action brought in connection
with a violation (or alleged
violation) of part 4 of
subtitle B of title I of the
Employee Retirement Income
Security Act of 1974, or
(III) pursuant to a
settlement agreement between
the Secretary of Labor and the
participant, or a settlement
agreement between the Pension
Benefit Guaranty Corporation
and the participant, in
connection with a violation (or
alleged violation) of part 4 of
such subtitle by a fiduciary or
any other person,
(ii) the judgment, order, decree, or
settlement agreement expressly provides
for the offset of all or part of the
amount ordered or required to be paid
to the plan against the participant's
benefits provided under the plan, and
(iii) in a case in which the survivor
annuity requirements of section
401(a)(11) apply with respect to
distributions from the plan to the
participant, if the participant has a
spouse at the time at which the offset
is to be made--
(I) either such spouse has
consented in writing to such
offset and such consent is
witnessed by a notary public or
representative of the plan (or
it is established to the
satisfaction of a plan
representative that such
consent may not be obtained by
reason of circumstances
described in section
417(a)(2)(B)), or an election
to waive the right of the
spouse to either a qualified
joint and survivor annuity or a
qualified preretirement
survivor annuity is in effect
in accordance with the
requirements of section 417(a),
(II) such spouse is ordered
or required in such judgment,
order, decree, or settlement to
pay an amount to the plan in
connection with a violation of
part 4 of such subtitle, or
(III) in such judgment,
order, decree, or settlement,
such spouse retains the right
to receive the survivor annuity
under a qualified joint and
survivor annuity provided
pursuant to section
401(a)(11)(A)(i) and under a
qualified preretirement
survivor annuity provided
pursuant to section
401(a)(11)(A)(ii), determined
in accordance with subparagraph
(D).
A plan shall not be treated as failing
to meet the requirements of this
subsection, subsection (k), section
403(b), or section 409(d) solely by
reason of an offset described in this
subparagraph.
(D) Survivor annuity.--
(i) In general.--The survivor annuity
described in subparagraph (C)(iii)(III)
shall be determined as if--
(I) the participant
terminated employment on the
date of the offset,
(II) there was no offset,
(III) the plan permitted
commencement of benefits only
on or after normal retirement
age,
(IV) the plan provided only
the minimum-required qualified
joint and survivor annuity, and
(V) the amount of the
qualified preretirement
survivor annuity under the plan
is equal to the amount of the
survivor annuity payable under
the minimum-required qualified
joint and survivor annuity.
(ii) Definition.--For purposes of
this subparagraph, the term ``minimum-
required qualified joint and survivor
annuity'' means the qualified joint and
survivor annuity which is the actuarial
equivalent of the participant's accrued
benefit (within the meaning of section
411(a)(7)) and under which the survivor
annuity is 50 percent of the amount of
the annuity which is payable during the
joint lives of the participant and the
spouse.
(14) A trust shall not constitute a qualified trust
under this section unless the plan of which such trust
is a part provides that, unless the participant
otherwise elects, the payment of benefits under the
plan to the participant will begin not later than the
60th day after the latest of the close of the plan year
in which--
(A) the date on which the participant attains
the earlier of age 65 or the normal retirement
age specified under the plan,
(B) occurs the 10th anniversary of the year
in which the participant commenced
participation in the plan, or
(C) the participant terminates his service
with the employer.
In the case of a plan which provides for the payment of
an early retirement benefit, a trust forming a part of
such plan shall not constitute a qualified trust under
this section unless a participant who satisfied the
service requirements for such early retirement benefit,
but separated from the service (with any nonforfeitable
right to an accrued benefit) before satisfying the age
requirement for such early retirement benefit, is
entitled upon satisfaction of such age requirement to
receive a benefit not less than the benefit to which he
would be entitled at the normal retirement age,
actuarially, reduced under regulations prescribed by
the Secretary.
(15) A trust shall not constitute a qualified trust
under this section unless under the plan of which such
trust is a part--
(A) in the case of a participant or
beneficiary who is receiving benefits under
such plan, or
(B) in the case of a participant who is
separated from the service and who has
nonforfeitable rights to benefits,
such benefits are not decreased by reason of any
increase in the benefit levels payable under title II
of the Social Security Act or any increase in the wage
base under such title II, if such increase takes place
after September 2, 1974, or (if later) the earlier of
the date of first receipt of such benefits or the date
of such separation, as the case may be.
(16) A trust shall not constitute a qualified trust
under this section if the plan of which such trust is a
part provides for benefits or contributions which
exceed the limitations of section 415.
(17) Compensation limit.--
(A) In general.--A trust shall not constitute
a qualified trust under this section unless,
under the plan of which such trust is a part,
the annual compensation of each employee taken
into account under the plan for any year does
not exceed $200,000.
(B) Cost-of-living adjustment.--The Secretary
shall adjust annually the $200,000 amount in
subparagraph (A) for increases in the cost-of-
living at the same time and in the same manner
as adjustments under section 415(d); except
that the base period shall be the calendar
quarter beginning July 1, 2001, and any
increase which is not a multiple of $5,000
shall be rounded to the next lowest multiple of
$5,000.
(19) A trust shall not constitute a qualified trust
under this section if under the plan of which such
trust is a part any part of a participant's accrued
benefit derived from employer contributions (whether or
not otherwise nonforfeitable), is forfeitable solely
because of withdrawal by such participant of any amount
attributable to the benefit derived from contributions
made by such participant. The preceding sentence shall
not apply to the accrued benefit of any participant
unless, at the time of such withdrawal, such
participant has a nonforfeitable right to at least 50
percent of such accrued benefit (as determined under
section 411). The first sentence of this paragraph
shall not apply to the extent that an accrued benefit
is permitted to be forfeited in accordance with section
411(a)(3)(D)(iii) (relating to proportional forfeitures
of benefits accrued before September 2, 1974, in the
event of withdrawal of certain mandatory
contributions).
(20) A trust forming part of a pension plan shall not
be treated as failing to constitute a qualified trust
under this section merely because the pension plan of
which such trust is a part makes 1 or more
distributions within 1 taxable year to a distributee on
account of a termination of the plan of which the trust
is a part, or in the case of a profit-sharing or stock
bonus plan, a complete discontinuance of contributions
under such plan. This paragraph shall not apply to a
defined benefit plan unless the employer maintaining
such plan files a notice with the Pension Benefit
Guaranty Corporation (at the time and in the manner
prescribed by the Pension Benefit Guaranty Corporation)
notifying the Corporation of such payment or
distribution and the Corporation has approved such
payment or distribution or, within 90 days after the
date on which such notice was filed, has failed to
disapprove such payment or distribution. For purposes
of this paragraph, rules similar to the rules of
section 402(a)(6)(B) (as in effect before its repeal by
section 521 of the Unemployment Compensation Amendments
of 1992) shall apply.
(22) If a defined contribution plan (other than a
profit-sharing plan)--
(A) is established by an employer whose stock
is not readily tradable on an established
market, and
(B) after acquiring securities of the
employer, more than 10 percent of the total
assets of the plan are securities of the
employer,
any trust forming part of such plan shall not
constitute a qualified trust under this section unless
the plan meets the requirements of subsection (e) of
section 409. The requirements of subsection (e) of
section 409 shall not apply to any employees of an
employer who are participants in any defined
contribution plan established and maintained by such
employer if the stock of such employer is not readily
tradable on an established market and the trade or
business of such employer consists of publishing on a
regular basis a newspaper for general circulation. For
purposes of the preceding sentence, subsections (b),
(c), (m), and (o) of section 414 shall not apply except
for determining whether stock of the employer is not
readily tradable on an established market.
(23) A stock bonus plan shall not be treated as
meeting the requirements of this section unless such
plan meets the requirements of subsections (h) and (o)
of section 409, except that in applying section 409(h)
for purposes of this paragraph, the term ``employer
securities'' shall include any securities of the
employer held by the plan.
(24) Any group trust which otherwise meets the
requirements of this section shall not be treated as
not meeting such requirements on account of the
participation or inclusion in such trust of the moneys
of any plan or governmental unit described in section
818(a)(6).
(25) Requirement that actuarial assumptions be
specified.--A defined benefit plan shall not be treated
as providing definitely determinable benefits unless,
whenever the amount of any benefit is to be determined
on the basis of actuarial assumptions, such assumptions
are specified in the plan in a way which precludes
employer discretion.
(26) Additional participation requirements.--
(A) In general.--In the case of a trust which
is a part of a defined benefit plan, such trust
shall not constitute a qualified trust under
this subsection unless on each day of the plan
year such trust benefits at least the lesser
of--
(i) 50 employees of the employer, or
(ii) the greater of--
(I) 40 percent of all
employees of the employer, or
(II) 2 employees (or if there
is only 1 employee, such
employee).
(B) Treatment of excludable employees.--
(i) In general.--A plan may exclude
from consideration under this paragraph
employees described in paragraphs (3)
and (4)(A) of section 410(b).
(ii) Separate application for certain
excludable employees.--If employees
described in section 410(b)(4)(B) are
covered under a plan which meets the
requirements of subparagraph (A)
separately with respect to such
employees, such employees may be
excluded from consideration in
determining whether any plan of the
employer meets such requirements if--
(I) the benefits for such
employees are provided under
the same plan as benefits for
other employees,
(II) the benefits provided to
such employees are not greater
than comparable benefits
provided to other employees
under the plan, and
(III) no highly compensated
employee (within the meaning of
section 414(q)) is included in
the group of such employees for
more than 1 year.
(C) Special rule for collective bargaining
units.--Except to the extent provided in
regulations, a plan covering only employees
described in section 410(b)(3)(A) may exclude
from consideration any employees who are not
included in the unit or units in which the
covered employees are included.
(D) Paragraph not to apply to multiemployer
plans.--Except to the extent provided in
regulations, this paragraph shall not apply to
employees in a multiemployer plan (within the
meaning of section 414(f)) who are covered by
collective bargaining agreements.
(E) Special rule for certain dispositions or
acquisitions.--Rules similar to the rules of
section 410(b)(6)(C) shall apply for purposes
of this paragraph.
(F) Separate lines of business.--At the
election of the employer and with the consent
of the Secretary, this paragraph may be applied
separately with respect to each separate line
of business of the employer. For purposes of
this paragraph, the term ``separate line of
business'' has the meaning given such term by
section 414(r) (without regard to paragraph
(2)(A) or (7) thereof).
(G) Exception for governmental plans.--This
paragraph shall not apply to a governmental
plan (within the meaning of section 414(d)).
(H) Regulations.--The Secretary may by
regulation provide that any separate benefit
structure, any separate trust, or any other
separate arrangement is to be treated as a
separate plan for purposes of applying this
paragraph.
(I) Protected participants.--
(i) In general.--A plan shall be
deemed to satisfy the requirements of
subparagraph (A) if--
(I) the plan is amended--
(aa) to cease all
benefit accruals, or
(bb) to provide
future benefit accruals
only to a closed class
of participants,
(II) the plan satisfies
subparagraph (A) (without
regard to this subparagraph) as
of the effective date of the
amendment, and
(III) the amendment was
adopted before April 5, 2017,
or the plan is described in
clause (ii).
(ii) Plans described.--A plan is
described in this clause if the plan
would be described in subsection
(o)(1)(C), as applied for purposes of
subsection (o)(1)(B)(iii)(IV) and by
treating the effective date of the
amendment as the date the class was
closed for purposes of subsection
(o)(1)(C).
(iii) Special rules.--For purposes of
clause (i)(II), in applying section
410(b)(6)(C), the amendments described
in clause (i) shall not be treated as a
significant change in coverage under
section 410(b)(6)(C)(i)(II).
(iv) Spun-off plans.--For purposes of
this subparagraph, if a portion of a
plan described in clause (i) is spun
off to another employer, the treatment
under clause (i) of the spun-off plan
shall continue with respect to the
other employer.
(27) Determinations as to profit-sharing plans.--
(A) Contributions need not be based on
profits.--The determination of whether the plan
under which any contributions are made is a
profit-sharing plan shall be made without
regard to current or accumulated profits of the
employer and without regard to whether the
employer is a tax- exempt organization.
(B) Plan must designate type.--In the case of
a plan which is intended to be a money purchase
pension plan or a profit-sharing plan, a trust
forming part of such plan shall not constitute
a qualified trust under this subsection unless
the plan designates such intent at such time
and in such manner as the Secretary may
prescribe.
(28) Additional requirements relating to employee
stock ownership plans.--
(A) In general.--In the case of a trust which
is part of an employee stock ownership plan
(within the meaning of section 4975(e)(7)) or a
plan which meets the requirements of section
409(a), such trust shall not constitute a
qualified trust under this section unless such
plan meets the requirements of subparagraphs
(B) and (C).
(B) Diversification of investments.--
(i) In general.--A plan meets the
requirements of this subparagraph if
each qualified participant in the plan
may elect within 90 days after the
close of each plan year in the
qualified election period to direct the
plan as to the investment of at least
25 percent of the participant's account
in the plan (to the extent such portion
exceeds the amount to which a prior
election under this subparagraph
applies). In the case of the election
year in which the participant can make
his last election, the preceding
sentence shall be applied by
substituting ``50 percent'' for ``25
percent''.
(ii) Method of meeting
requirements.--A plan shall be treated
as meeting the requirements of clause
(i) if--
(I) the portion of the
participant's account covered
by the election under clause
(i) is distributed within 90
days after the period during
which the election may be made,
or
(II) the plan offers at least
3 investment options (not
inconsistent with regulations
prescribed by the Secretary) to
each participant making an
election under clause (i) and
within 90 days after the period
during which the election may
be made, the plan invests the
portion of the participant's
account covered by the election
in accordance with such
election.
(iii) Qualified participant.--For
purposes of this subparagraph, the term
``qualified participant'' means any
employee who has completed at least 10
years of participation under the plan
and has attained age 55.
(iv) Qualified election period.--For
purposes of this subparagraph, the term
``qualified election period'' means the
6-plan-year period beginning with the
later of--
(I) the 1st plan year in
which the individual first
became a qualified participant,
or
(II) the 1st plan year
beginning after December 31,
1986.
For purposes of the preceding sentence,
an employer may elect to treat an
individual first becoming a qualified
participant in the 1st plan year
beginning in 1987 as having become a
participant in the 1st plan year
beginning in 1988.
(v) Exception.--This subparagraph
shall not apply to an applicable
defined contribution plan (as defined
in paragraph (35)(E)).
(C) Use of independent appraiser.--A plan
meets the requirements of this subparagraph if
all valuations of employer securities which are
not readily tradable on an established
securities market with respect to activities
carried on by the plan are by an independent
appraiser. For purposes of the preceding
sentence, the term ``independent appraiser''
means any appraiser meeting requirements
similar to the requirements of the regulations
prescribed under section 170(a)(1).
(29) Benefit limitations.--In the case of a defined
benefit plan (other than a multiemployer plan or a CSEC
plan) to which the requirements of section 412 apply,
the trust of which the plan is a part shall not
constitute a qualified trust under this subsection
unless the plan meets the requirements of section 436.
(30) Limitations on elective deferrals.--In the case
of a trust which is part of a plan under which elective
deferrals (within the meaning of section 402(g)(3)) may
be made with respect to any individual during a
calendar year, such trust shall not constitute a
qualified trust under this subsection unless the plan
provides that the amount of such deferrals under such
plan and all other plans, contracts, or arrangements of
an employer maintaining such plan may not exceed the
amount of the limitation in effect under section
402(g)(1)(A) for taxable years beginning in such
calendar year.
(31) Direct transfer of eligible rollover
distributions.--
(A) In general.--A trust shall not constitute
a qualified trust under this section unless the
plan of which such trust is a part provides
that if the distributee of any eligible
rollover distribution--
(i) elects to have such distribution
paid directly to an eligible retirement
plan, and
(ii) specifies the eligible
retirement plan to which such
distribution is to be paid (in such
form and at such time as the plan
administrator may prescribe),
such distribution shall be made in the form of
a direct trustee-to-trustee transfer to the
eligible retirement plan so specified.
(B) Certain mandatory distributions.--
(i) In general.--In case of a trust
which is part of an eligible plan, such
trust shall not constitute a qualified
trust under this section unless the
plan of which such trust is a part
provides that if--
(I) a distribution described
in clause (ii) in excess of
$1,000 is made, and
(II) the distributee does not
make an election under
subparagraph (A) and does not
elect to receive the
distribution directly,
the plan administrator shall make such
transfer to an individual retirement
plan of a designated trustee or issuer
and shall notify the distributee in
writing (either separately or as part
of the notice under section 402(f))
that the distribution may be
transferred to another individual
retirement plan.
(ii) Eligible plan.--For purposes of
clause (i), the term ``eligible plan''
means a plan which provides that any
nonforfeitable accrued benefit for
which the present value (as determined
under section 411(a)(11)) does not
exceed $5,000 shall be immediately
distributed to the participant.
(C) Limitation.--Subparagraphs (A) and (B)
shall apply only to the extent that the
eligible rollover distribution would be
includible in gross income if not transferred
as provided in subparagraph (A) (determined
without regard to sections 402(c), 403(a)(4),
403(b)(8), and 457(e)(16)). The preceding
sentence shall not apply to such distribution
if the plan to which such distribution is
transferred--
(i) is a qualified trust which is
part of a plan which is a defined
contribution plan and agrees to
separately account for amounts so
transferred, including separately
accounting for the portion of such
distribution which is includible in
gross income and the portion of such
distribution which is not so
includible, or
(ii) is an eligible retirement plan
described in clause (i) or (ii) of
section 402(c)(8)(B).
(D) Eligible rollover distribution.--For
purposes of this paragraph, the term ``eligible
rollover distribution'' has the meaning given
such term by section 402(f)(2)(A).
(E) Eligible retirement plan.--For purposes
of this paragraph, the term ``eligible
retirement plan'' has the meaning given such
term by section 402(c)(8)(B), except that a
qualified trust shall be considered an eligible
retirement plan only if it is a defined
contribution plan, the terms of which permit
the acceptance of rollover distributions.
(32) Treatment of failure to make certain payments if
plan has liquidity shortfall.--
(A) In general.--A trust forming part of a
pension plan to which section 430(j)(4) or
433(f)(5) applies shall not be treated as
failing to constitute a qualified trust under
this section merely because such plan ceases to
make any payment described in subparagraph (B)
during any period that such plan has a
liquidity shortfall (as defined in section
430(j)(4) or 433(f)(5)).
(B) Payments described.--A payment is
described in this subparagraph if such payment
is--
(i) any payment, in excess of the
monthly amount paid under a single life
annuity (plus any social security
supplements described in the last
sentence of section 411(a)(9)), to a
participant or beneficiary whose
annuity starting date (as defined in
section 417(f)(2)) occurs during the
period referred to in subparagraph (A),
(ii) any payment for the purchase of
an irrevocable commitment from an
insurer to pay benefits, and
(iii) any other payment specified by
the Secretary by regulations.
(C) Period of shortfall.--For purposes of
this paragraph, a plan has a liquidity
shortfall during the period that there is an
underpayment of an installment under section
430(j)(3) or 433(f) by reason of section
430(j)(4)(A) or 433(f)(5), respectively.
(33) Prohibition on benefit increases while sponsor
is in bankruptcy.--
(A) In general.--A trust which is part of a
plan to which this paragraph applies shall not
constitute a qualified trust under this section
if an amendment to such plan is adopted while
the employer is a debtor in a case under title
11, United States Code, or similar Federal or
State law, if such amendment increases
liabilities of the plan by reason of
(i) any increase in benefits,
(ii) any change in the accrual of
benefits, or
(iii) any change in the rate at which
benefits become nonforfeitable under
the plan,
with respect to employees of the debtor, and
such amendment is effective prior to the
effective date of such employer's plan of
reorganization.
(B) Exceptions.--This paragraph shall not
apply to any plan amendment if--
(i) the plan, were such amendment to
take effect, would have a funding
target attainment percentage (as
defined in section 430(d)(2)) of 100
percent or more,
(ii) the Secretary determines that
such amendment is reasonable and
provides for only de minimis increases
in the liabilities of the plan with
respect to employees of the debtor,
(iii) such amendment only repeals an
amendment described in section
412(d)(2), or
(iv) such amendment is required as a
condition of qualification under this
part.
(C) Plans to which this paragraph applies.--
This paragraph shall apply only to plans (other
than multiemployer plans or CSEC plans) covered
under section 4021 of the Employee Retirement
Income Security Act of 1974.
(D) Employer.--For purposes of this
paragraph, the term ``employer'' means the
employer referred to in section 412(b)(1),
without regard to section 412(b)(2).
(34) Benefits of missing participants on plan
termination.--In the case of a plan covered by title IV
of the Employee Retirement Income Security Act of 1974,
a trust forming part of such plan shall not be treated
as failing to constitute a qualified trust under this
section merely because the pension plan of which such
trust is a part, upon its termination, transfers
benefits of missing participants to the Pension Benefit
Guaranty Corporation in accordance with section 4050 of
such Act.
(35) Diversification requirements for certain defined
contribution plans.--
(A) In general.--A trust which is part of an
applicable defined contribution plan shall not
be treated as a qualified trust unless the plan
meets the diversification requirements of
subparagraphs (B), (C), and (D).
(B) Employee contributions and elective
deferrals invested in employer securities.--In
the case of the portion of an applicable
individual's account attributable to employee
contributions and elective deferrals which is
invested in employer securities, a plan meets
the requirements of this subparagraph if the
applicable individual may elect to direct the
plan to divest any such securities and to
reinvest an equivalent amount in other
investment options meeting the requirements of
subparagraph (D).
(C) Employer contributions invested in
employer securities.--In the case of the
portion of the account attributable to employer
contributions other than elective deferrals
which is invested in employer securities, a
plan meets the requirements of this
subparagraph if each applicable individual
who--
(i) is a participant who has
completed at least 3 years of service,
or
(ii) is a beneficiary of a
participant described in clause (i) or
of a deceased participant,
may elect to direct the plan to divest any such
securities and to reinvest an equivalent amount
in other investment options meeting the
requirements of subparagraph (D).
(D) Investment options.--
(i) In general.--The requirements of
this subparagraph are met if the plan
offers not less than 3 investment
options, other than employer
securities, to which an applicable
individual may direct the proceeds from
the divestment of employer securities
pursuant to this paragraph, each of
which is diversified and has materially
different risk and return
characteristics.
(ii) Treatment of certain
restrictions and conditions.--
(I) Time for making
investment choices.--A plan
shall not be treated as failing
to meet the requirements of
this subparagraph merely
because the plan limits the
time for divestment and
reinvestment to periodic,
reasonable opportunities
occurring no less frequently
than quarterly.
(II) Certain restrictions and
conditions not allowed.--Except
as provided in regulations, a
plan shall not meet the
requirements of this
subparagraph if the plan
imposes restrictions or
conditions with respect to the
investment of employer
securities which are not
imposed on the investment of
other assets of the plan. This
subclause shall not apply to
any restrictions or conditions
imposed by reason of the
application of securities laws.
(E) Applicable defined contribution plan.--
For purposes of this paragraph--
(i) In general.--The term
``applicable defined contribution
plan'' means any defined contribution
plan which holds any publicly traded
employer securities.
(ii) Exception for certain ESOPS.--
Such term does not include an employee
stock ownership plan if--
(I) there are no
contributions to such plan (or
earnings thereunder) which are
held within such plan and are
subject to subsection (k) or
(m), and
(II) such plan is a separate
plan for purposes of section
414(l) with respect to any
other defined benefit plan or
defined contribution plan
maintained by the same employer
or employers.
(iii) Exception for one participant
plans.--Such term does not include a
one-participant retirement plan.
(iv) One-participant retirement
plan.--For purposes of clause (iii),
the term ``one-participant retirement
plan'' means a retirement plan that on
the first day of the plan year--
(I) covered only one
individual (or the individual
and the individual's spouse)
and the individual (or the
individual and the individual's
spouse) owned 100 percent of
the plan sponsor (whether or
not incorporated), or
(II) covered only one or more
partners (or partners and their
spouses) in the plan sponsor.
(F) Certain plans treated as holding publicly
traded employer securities.--
(i) In general.--Except as provided
in regulations or in clause (ii), a
plan holding employer securities which
are not publicly traded employer
securities shall be treated as holding
publicly traded employer securities if
any employer corporation, or any member
of a controlled group of corporations
which includes such employer
corporation, has issued a class of
stock which is a publicly traded
employer security.
(ii) Exception for certain controlled
groups with publicly traded
securities.--Clause (i) shall not apply
to a plan if--
(I) no employer corporation,
or parent corporation of an
employer corporation, has
issued any publicly traded
employer security, and
(II) no employer corporation,
or parent corporation of an
employer corporation, has
issued any special class of
stock which grants particular
rights to, or bears particular
risks for, the holder or issuer
with respect to any corporation
described in clause (i) which
has issued any publicly traded
employer security.
(iii) Definitions.--For purposes of
this subparagraph, the term--
(I) ``controlled group of
corporations'' has the meaning
given such term by section
1563(a), except that ``50
percent'' shall be substituted
for ``80 percent'' each place
it appears,
(II) ``employer corporation''
means a corporation which is an
employer maintaining the plan,
and
(III) ``parent corporation''
has the meaning given such term
by section 424(e).
(G) Other definitions.--For purposes of this
paragraph--
(i) Applicable individual.--The term
``applicable individual'' means--
(I) any participant in the
plan, and
(II) any beneficiary who has
an account under the plan with
respect to which the
beneficiary is entitled to
exercise the rights of a
participant.
(ii) Elective deferral.--The term
``elective deferral'' means an employer
contribution described in section
402(g)(3)(A).
(iii) Employer security.--The term
``employer security'' has the meaning
given such term by section 407(d)(1) of
the Employee Retirement Income Security
Act of 1974.
(iv) Employee stock ownership plan.--
The term ``employee stock ownership
plan'' has the meaning given such term
by section 4975(e)(7).
(v) Publicly traded employer
securities.--The term ``publicly traded
employer securities'' means employer
securities which are readily tradable
on an established securities market.
(vi) Year of service.--The term
``year of service'' has the meaning
given such term by section 411(a)(5).
(H) Transition rule for securities
attributable to employer contributions.--
(i) Rules phased in over 3 years.--
(I) In general.--In the case
of the portion of an account to
which subparagraph (C) applies
and which consists of employer
securities acquired in a plan
year beginning before January
1, 2007, subparagraph (C) shall
only apply to the applicable
percentage of such securities.
This subparagraph shall be
applied separately with respect
to each class of securities.
(II) Exception for certain
participants aged 55 or over.--
Subclause (I) shall not apply
to an applicable individual who
is a participant who has
attained age 55 and completed
at least 3 years of service
before the first plan year
beginning after December 31,
2005.
(ii) Applicable percentage.--For
purposes of clause (i), the applicable
percentage shall be determined as
follows:
------------------------------------------------------------------------
Plan year to which subparagraph (C)
applies: The applicable percentage is:
------------------------------------------------------------------------
1st.................... 33
2d..................... 66
3d and following....... 100.
------------------------------------------------------------------------
(36) Distributions during working retirement.--A
trust forming part of a pension plan shall not be
treated as failing to constitute a qualified trust
under this section solely because the plan provides
that a distribution may be made from such trust to an
employee who has attained age 62 and who is not
separated from employment at the time of such
distribution.
(37) Death benefits under USERRA-qualified active
military service.--A trust shall not constitute a
qualified trust unless the plan provides that, in the
case of a participant who dies while performing
qualified military service (as defined in section
414(u)), the survivors of the participant are entitled
to any additional benefits (other than benefit accruals
relating to the period of qualified military service)
provided under the plan had the participant resumed and
then terminated employment on account of death.
(38) Portability of lifetime income investments.--
(A) In general.--Except as may be otherwise
provided by regulations, a trust forming part
of a defined contribution plan shall not be
treated as failing to constitute a qualified
trust under this section solely by reason of
allowing--
(i) qualified distributions of a
lifetime income investment, or
(ii) distributions of a lifetime
income investment in the form of a
qualified plan distribution annuity
contract,
on or after the date that is 90 days prior to
the date on which such lifetime income
investment is no longer authorized to be held
as an investment option under the plan.
(B) Definitions.--For purposes of this
subsection--
(i) the term ``qualified
distribution'' means a direct trustee-
to-trustee transfer described in
paragraph (31)(A) to an eligible
retirement plan (as defined in section
402(c)(8)(B)),
(ii) the term ``lifetime income
investment'' means an investment option
which is designed to provide an
employee with election rights--
(I) which are not uniformly
available with respect to other
investment options under the
plan, and
(II) which are to a lifetime
income feature available
through a contract or other
arrangement offered under the
plan (or under another eligible
retirement plan (as so
defined), if paid by means of a
direct trustee-to-trustee
transfer described in paragraph
(31)(A) to such other eligible
retirement plan),
(iii) the term ``lifetime income
feature'' means--
(I) a feature which
guarantees a minimum level of
income annually (or more
frequently) for at least the
remainder of the life of the
employee or the joint lives of
the employee and the employee's
designated beneficiary, or
(II) an annuity payable on
behalf of the employee under
which payments are made in
substantially equal periodic
payments (not less frequently
than annually) over the life of
the employee or the joint lives
of the employee and the
employee's designated
beneficiary, and
(iv) the term ``qualified plan
distribution annuity contract'' means
an annuity contract purchased for a
participant and distributed to the
participant by a plan or contract
described in subparagraph (B) of
section 402(c)(8) (without regard to
clauses (i) and (ii) thereof).
Paragraphs (11), (12), (13), (14), (15), (19), and (20) shall
apply only in the case of a plan to which section 411 (relating
to minimum vesting standards) applies without regard to
subsection (e)(2) of such section.
(b) Certain [Retroactive Changes in Plan] Plan Amendments.--
(1) Certain retroactive changes in plan.--A stock
bonus, pension, profit-sharing, or annuity plan shall
be considered as satisfying the requirements of
subsection (a) for the period beginning with the date
on which it was put into effect, or for the period
beginning with the earlier of the date on which there
was adopted or put into effect any amendment which
caused the plan to fail to satisfy such requirements,
and ending with the time prescribed by law for filing
the return of the employer for his taxable year in
which such plan or amendment was adopted (including
extensions thereof) or such later time as the Secretary
may designate, if all provisions of the plan which are
necessary to satisfy such requirements are in effect by
the end of such period and have been made effective for
all purposes for the whole of such period.
(2) Adoption of plan.--If an employer adopts a stock
bonus, pension, profit-sharing, or annuity plan after
the close of a taxable year but before the time
prescribed by law for filing the employer's return of
tax for the taxable year (including extensions
thereof), the employer may elect to treat the plan as
having been adopted as of the last day of the taxable
year.
(c) Definitions and rules relating to self-employed
individuals and owner-employees.--For purposes of this
section--
(1) Self-employed individual treated as employee.--
(A) In general.--The term ``employee''
includes, for any taxable year, an individual
who is a self-employed individual for such
taxable year.
(B) Self-employed individual.--The term
``self-employed individual'' means, with
respect to any taxable year, an individual who
has earned income (as defined in paragraph (2))
for such taxable year. To the extent provided
in regulations prescribed by the Secretary,
such term also includes, for any taxable year--
(i) an individual who would be a
self-employed individual within the
meaning of the preceding sentence but
for the fact that the trade or business
carried on by such individual did not
have net profits for the taxable year,
and
(ii) an individual who has been a
self-employed individual within the
meaning of the preceding sentence for
any prior taxable year.
(2) Earned income.--
(A) In general.--The term ``earned income''
means the net earnings from self-employment (as
defined in section 1402(a)), but such net
earnings shall be determined--
(i) only with respect to a trade or
business in which personal services of
the taxpayer are a material income-
producing factor,
(ii) without regard to paragraphs (4)
and (5) of section 1402(c),
(iii) in the case of any individual
who is treated as an employee under
subparagraph (A), (C), or (D) of
section 3121(d)(3), without regard to
section 1402(c)(2)
(iv) without regard to items which
are not included in gross income for
purposes of this chapter, and the
deductions properly allocable to or
chargeable against such items,
(v) with regard to the deductions
allowed by section 404 to the taxpayer,
and
(vi) with regard to the deduction
allowed to the taxpayer by section
164(f).
For purposes of this subparagraph, section
1402, as in effect for a taxable year ending on
December 31, 1962, shall be treated as having
been in effect for all taxable years ending
before such date. For purposes of this part
only (other than sections 419 and 419A), this
subparagraph shall be applied as if the term
``trade or business'' for purposes of section
1402 included service described in section
1402(c)(6).
(C) Income from disposition of certain
property.--For purposes of this section, the
term ``earned income'' includes gains (other
than any gain which is treated under any
provision of this chapter as gain from the sale
or exchange of a capital asset) and net
earnings derived from the sale or other
disposition of, the transfer of any interest
in, or the licensing of the use of property
(other than good will) by an individual whose
personal efforts created such property.
(3) Owner-employee.--The term ``owner-employee''
means an employee who--
(A) owns the entire interest in an
unincorporated trade or business, or
(B) in the case of a partnership, is a
partner who owns more than 10 percent of either
the capital interest or the profits interest in
such partnership.
To the extent provided in regulations prescribed by the
Secretary, such term also means an individual who has
been an owner-employee within the meaning of the
preceding sentence.
(4) Employer.--An individual who owns the entire
interest in an unincorporated trade or business shall
be treated as his own employer. A partnership shall be
treated as the employer of each partner who is an
employee within the meaning of paragraph (1).
(5) Contributions on behalf of owner-employees.--The
term ``contribution on behalf of an owner-employee''
includes, except as the context otherwise requires, a
contribution under a plan--
(A) by the employer for an owner-employee,
and
(B) by an owner-employee as an employee.
(6) Special rule for certain fishermen.--For purposes
of this subsection, the term ``self-employed
individual'' includes an individual described in
section 3121(b)(20) (relating to certain fishermen).
(d) Contribution limit on owner-employees.--A trust forming
part of a pension or profit-sharing plan which provides
contributions or benefits for employees some or all of whom are
owner-employees shall constitute a qualified trust under this
section only if, in addition to meeting the requirements of
subsection (a), the plan provides that contributions on behalf
of any owner-employee may be made only with respect to the
earned income of such owner-employee which is derived from the
trade or business with respect to which such plan is
established.
(f) Certain custodial accounts and contracts.--For purposes
of this title, a custodial account, an annuity contract, or a
contract (other than a life, health or accident, property,
casualty, or liability insurance contract) issued by an
insurance company qualified to do business in a State shall be
treated as a qualified trust under this section if--
(1) the custodial account or contract would, except
for the fact that it is not a trust, constitute a
qualified trust under this section, and
(2) in the case of a custodial account the assets
thereof are held by a bank (as defined in section
408(n)) or another person who demonstrates, to the
satisfaction of the Secretary, that the manner in which
he will hold the assets will be consistent with the
requirements of this section.
For purposes of this title, in the case of a custodial account
or contract treated as a qualified trust under this section by
reason of this subsection, the person holding the assets of
such account or holding such contract shall be treated as the
trustee thereof.
(g) Annuity defined.--For purposes of this section and
sections 402, 403, and 404, the term ``annuity'' includes a
face-amount certificate, as defined in section 2(a)(15) of the
Investment Company Act of 1940 (15 U.S.C., sec. 80a-2); but
does not include any contract or certificate issued after
December 31, 1962, which is transferable, if any person other
than the trustee of a trust described in section 401(a) which
is exempt from tax under section 501(a) is the owner of such
contract or certificate.
(h) Medical, etc., benefits for retired employees and their
spouses and dependents.--Under regulations prescribed by the
Secretary, and subject to the provisions of section 420, a
pension or annuity plan may provide for the payment of benefits
for sickness, accident, hospitalization, and medical expenses
of retired employees, their spouses and their dependents, but
only if--
(1) such benefits are subordinate to the retirement
benefits provided by the plan,
(2) a separate account is established and maintained
for such benefits,
(3) the employer's contributions to such separate
account are reasonable and ascertainable,
(4) it is impossible, at any time prior to the
satisfaction of all liabilities under the plan to
provide such benefits, for any part of the corpus or
income of such separate account to be (within the
taxable year or thereafter) used for, or diverted to,
any purpose other than the providing of such benefits,
(5) notwithstanding the provisions of subsection
(a)(2), upon the satisfaction of all liabilities under
the plan to provide such benefits, any amount remaining
in such separate account must, under the terms of the
plan, be returned to the employer, and
(6) in the case of an employee who is a key employee,
a separate account is established and maintained for
such benefits payable to such employee (and his spouse
and dependents) and such benefits (to the extent
attributable to plan years beginning after March 31,
1984, for which the employee is a key employee) are
only payable to such employee (and his spouse and
dependents) from such separate account.
For purposes of paragraph (6), the term ``key employee'' means
any employee, who at any time during the plan year or any
preceding plan year during which contributions were made on
behalf of such employee, is or was a key employee as defined in
section 416(i). In no event shall the requirements of paragraph
(1) be treated as met if the aggregate actual contributions for
medical benefits, when added to actual contributions for life
insurance protection under the plan, exceed 25 percent of the
total actual contributions to the plan (other than
contributions to fund past service credits) after the date on
which the account is established. For purposes of this
subsection, the term ``dependent'' shall include any individual
who is a child (as defined in section 152(f)(1)) of a retired
employee who as of the end of the calendar year has not
attained age 27.
(i) Certain union-negotiated pension plans.--In the case of a
trust forming part of a pension plan which has been determined
by the Secretary to constitute a qualified trust under
subsection (a) and to be exempt from taxation under section
501(a) for a period beginning after contributions were first
made to or for such trust, if it is shown to the satisfaction
of the Secretary that--
(1) such trust was created pursuant to a collective
bargaining agreement between employee representatives
and one or more employers,
(2) any disbursements of contributions, made to or
for such trust before the time as of which the
Secretary or his delegate determined that the trust
constituted a qualified trust, substantially complied
with the terms of the trust, and the plan of which the
trust is a part, as subsequently qualified, and
(3) before the time as of which the Secretary
determined that the trust constitutes a qualified
trust, the contributions to or for such trust were not
used in a manner which would jeopardize the interests
of its beneficiaries,
then such trust shall be considered as having constituted a
qualified trust under subsection (a) and as having been exempt
from taxation under section 501(a) for the period beginning on
the date on which contributions were first made to or for such
trust and ending on the date such trust first constituted
(without regard to this subsection) a qualified trust under
subsection (a).
(k) Cash or deferred arrangements.--
(1) General rule.--A profit-sharing or stock bonus
plan, a pre-ERISA money purchase plan, or a rural
cooperative plan shall not be considered as not
satisfying the requirements of subsection (a) merely
because the plan includes a qualified cash or deferred
arrangement.
(2) Qualified cash or deferred arrangement.--A
qualified cash or deferred arrangement is any
arrangement which is part of a profit-sharing or stock
bonus plan, a pre-ERISA money purchase plan, or a rural
cooperative plan which meets the requirements of
subsection (a)--
(A) under which a covered employee may elect
to have the employer make payments as
contributions to a trust under the plan on
behalf of the employee, or to the employee
directly in cash;
(B) under which amounts held by the trust
which are attributable to employer
contributions made pursuant to the employee's
election--
(i) may not be distributable to
participants or other beneficiaries
earlier than--
(I) severance from
employment, death, or
disability,
(II) an event described in
paragraph (10),
(III) in the case of a
profit-sharing or stock bonus
plan, the attainment of age 59
1/2,
(IV) subject to the
provisions of paragraph (14),
upon hardship of the employee,
[or]
(V) in the case of a
qualified reservist
distribution (as defined in
section 72(t)(2)(G)(iii)), the
date on which a period referred
to in subclause (III) of such
section begins, [and] or
(VI) except as may be
otherwise provided by
regulations, with respect to
amounts invested in a lifetime
income investment (as defined
in subsection (a)(38)(B)(ii)),
the date that is 90 days prior
to the date that such lifetime
income investment may no longer
be held as an investment option
under the arrangement,
(ii) will not be distributable merely
by reason of the completion of a stated
period of participation or the lapse of
a fixed number of years[;], and
(iii) except as may be otherwise
provided by regulations, in the case of
amounts described in clause (i)(VI),
will be distributed only in the form of
a qualified distribution (as defined in
subsection (a)(38)(B)(i)) or a
qualified plan distribution annuity
contract (as defined in subsection
(a)(38)(B)(iv)),
(C) which provides that an employee's right
to his accrued benefit derived from employer
contributions made to the trust pursuant to his
election is nonforfeitable, and
(D) which does not require, as a condition of
participation in the arrangement, that an
employee complete a period of service with the
employer (or employers) maintaining the plan
extending beyond the period permitted under
section 410(a)(1) (determined without regard to
subparagraph (B)(i) thereof).
(3) Application of participation and discrimination
standards.--
(A) A cash or deferred arrangement shall not
be treated as a qualified cash or deferred
arrangement unless--
(i) those employees eligible to
benefit under the arrangement satisfy
the provisions of section 410(b)(1),
and
(ii) the actual deferral percentage
for eligible highly compensated
employees (as defined in paragraph (5))
for the plan year bears a relationship
to the actual deferral percentage for
all other eligible employees for the
preceding plan year which meets either
of the following tests:
(I) The actual deferral
percentage for the group of
eligible highly compensated
employees is not more than the
actual deferral percentage of
all other eligible employees
multiplied by 1.25.
(II) The excess of the actual
deferral percentage for the
group of eligible highly
compensated employees over that
of all other eligible employees
is not more than 2 percentage
points, and the actual deferral
percentage for the group of
eligible highly compensated
employees is not more than the
actual deferral percentage of
all other eligible employees
multiplied by 2.
If 2 or more plans which include cash
or deferred arrangements are considered
as 1 plan for purposes of section
401(a)(4) or 410(b), the cash or
deferred arrangements included in such
plans shall be treated as 1 arrangement
for purposes of this subparagraph.
If any highly compensated employee is a
participant under 2 or more cash or deferred
arrangements of the employer, for purposes of
determining the deferral percentage with
respect to such employee, all such cash or
deferred arrangements shall be treated as 1
cash or deferred arrangement. An arrangement
may apply clause (ii) by using the plan year
rather than the preceding plan year if the
employer so elects, except that if such an
election is made, it may not be changed except
as provided by the Secretary.
(B) For purposes of subparagraph (A), the
actual deferral percentage for a specified
group of employees for a plan year shall be the
average of the ratios (calculated separately
for each employee in such group) of--
(i) the amount of employer
contributions actually paid over to the
trust on behalf of each such employee
for such plan year, to
(ii) the employee's compensation for
such plan year.
(C) A cash or deferred arrangement shall be
treated as meeting the requirements of
subsection (a)(4) with respect to contributions
if the requirements of subparagraph (A)(ii) are
met.
(D) For purposes of subparagraph (B), the
employer contributions on behalf of any
employee--
(i) shall include any employer
contributions made pursuant to the
employee's election under paragraph
(2), and
(ii) under such rules as the
Secretary may prescribe, may, at the
election of the employer, include--
(I) matching contributions
(as defined in 401(m)(4)(A))
which meet the requirements of
paragraph (2)(B) and (C), and
(II) qualified nonelective
contributions (within the
meaning of section
401(m)(4)(C)).
(E) For purposes of this paragraph, in the
case of the first plan year of any plan (other
than a successor plan), the amount taken into
account as the actual deferral percentage of
nonhighly compensated employees for the
preceding plan year shall be--
(i) 3 percent, or
(ii) if the employer makes an
election under this subclause, the
actual deferral percentage of nonhighly
compensated employees determined for
such first plan year.
(F) Special rule for early participation.--If
an employer elects to apply section
410(b)(4)(B) in determining whether a cash or
deferred arrangement meets the requirements of
subparagraph (A)(i), the employer may, in
determining whether the arrangement meets the
requirements of subparagraph (A)(ii), exclude
from consideration all eligible employees
(other than highly compensated employees) who
have not met the minimum age and service
requirements of section 410(a)(1)(A).
(G) Governmental plan.--A governmental plan
(within the meaning of section 414(d)) shall be
treated as meeting the requirements of this
paragraph.
(4) Other requirements.--
(A) Benefits (other than matching
contributions) must not be contingent on
election to defer.--A cash or deferred
arrangement of any employer shall not be
treated as a qualified cash or deferred
arrangement if any other benefit is conditioned
(directly or indirectly) on the employee
electing to have the employer make or not make
contributions under the arrangement in lieu of
receiving cash. The preceding sentence shall
not apply to any matching contribution (as
defined in section 401(m)) made by reason of
such an election.
(B) Eligibility of state and local
governments and tax-exempt organizations.--
(i) Tax-exempts eligible.--Except as
provided in clause (ii), any
organization exempt from tax under this
subtitle may include a qualified cash
or deferred arrangement as part of a
plan maintained by it.
(ii) Governments ineligible.--A cash
or deferred arrangement shall not be
treated as a qualified cash or deferred
arrangement if it is part of a plan
maintained by a State or local
government or political subdivision
thereof, or any agency or
instrumentality thereof. This clause
shall not apply to a rural cooperative
plan or to a plan of an employer
described in clause (iii).
(iii) Treatment of Indian tribal
governments.--An employer which is an
Indian tribal government (as defined in
section 7701(a)(40)), a subdivision of
an Indian tribal government (determined
in accordance with section 7871(d)), an
agency or instrumentality of an Indian
tribal government or subdivision
thereof, or a corporation chartered
under Federal, State, or tribal law
which is owned in whole or in part by
any of the foregoing may include a
qualified cash or deferred arrangement
as part of a plan maintained by the
employer.
(C) Coordination with other plans.--Except as
provided in section 401(m), any employer
contribution made pursuant to an employee's
election under a qualified cash or deferred
arrangement shall not be taken into account for
purposes of determining whether any other plan
meets the requirements of section 401(a) or
410(b). This subparagraph shall not apply for
purposes of determining whether a plan meets
the average benefit requirement of section
410(b)(2)(A)(ii).
(5) Highly compensated employee.--For purposes of
this subsection, the term ``highly compensated
employee'' has the meaning given such term by section
414(q).
(6) Pre-ERISA money purchase plan.--For purposes of
this subsection, the term ``pre-ERISA money purchase
plan'' means a pension plan--
(A) which is a defined contribution plan (as
defined in section 414(i)),
(B) which was in existence on June 27, 1974,
and which, on such date, included a salary
reduction arrangement, and
(C) under which neither the employee
contributions nor the employer contributions
may exceed the levels provided for by the
contribution formula in effect under the plan
on such date.
(7) Rural cooperative plan.--For purposes of this
subsection--
(A) In general.--The term ``rural cooperative
plan'' means any pension plan--
(i) which is a defined contribution
plan (as defined in section 414(i)),
and
(ii) which is established and
maintained by a rural cooperative.
(B) Rural cooperative defined.--For purposes
of subparagraph (A), the term ``rural
cooperative'' means--
(i) any organization which--
(I) is engaged primarily in
providing electric service on a
mutual or cooperative basis, or
(II) is engaged primarily in
providing electric service to
the public in its area of
service and which is exempt
from tax under this subtitle or
which is a State or local
government (or an agency or
instrumentality thereof), other
than a municipality (or an
agency or instrumentality
thereof),
(ii) any organization described in
paragraph (4) or (6) of section 501(c)
and at least 80 percent of the members
of which are organizations described in
clause (i),
(iii) a cooperative telephone company
described in section 501(c)(12),
(iv) any organization which--
(I) is a mutual irrigation or
ditch company described in
section 501(c)(12) (without
regard to the 85 percent
requirement thereof), or
(II) is a district organized
under the laws of a State as a
municipal corporation for the
purpose of irrigation, water
conservation, or drainage, and
(v) an organization which is a
national association of organizations
described in clause (i), (ii),, (iii),
or (iv).
(C) Special rule for certain distributions.--
A rural cooperative plan which includes a
qualified cash or deferred arrangement shall
not be treated as violating the requirements of
section 401(a) or of paragraph (2) merely by
reason of a hardship distribution or a
distribution to a participant after attainment
of age 59 1/2. For purposes of this section,
the term ``hardship distribution'' means a
distribution described in paragraph
(2)(B)(i)(IV) (without regard to the limitation
of its application to profit-sharing or stock
bonus plans).
(8) Arrangement not disqualified if excess
contributions distributed.--
(A) In general.--A cash or deferred
arrangement shall not be treated as failing to
meet the requirements of clause (ii) of
paragraph (3)(A) for any plan year if, before
the close of the following plan year--
(i) the amount of the excess
contributions for such plan year (and
any income allocable to such
contributions through the end of such
year) is distributed, or
(ii) to the extent provided in
regulations, the employee elects to
treat the amount of the excess
contributions as an amount distributed
to the employee and then contributed by
the employee to the plan.
Any distribution of excess contributions (and
income) may be made without regard to any other
provision of law.
(B) Excess contributions.--For purposes of
subparagraph (A), the term ``excess
contributions'' means, with respect to any plan
year, the excess of--
(i) the aggregate amount of employer
contributions actually paid over to the
trust on behalf of highly compensated
employees for such plan year, over
(ii) the maximum amount of such
contributions permitted under the
limitations of clause (ii) of paragraph
(3)(A) (determined by reducing
contributions made on behalf of highly
compensated employees in order of the
actual deferral percentages beginning
with the highest of such percentages).
(C) Method of distributing excess
contributions.--Any distribution of the excess
contributions for any plan year shall be made
to highly compensated employees on the basis of
the amount of contributions by, or on behalf
of, each of such employees.
(D) Additional tax under section 72(t) not to
apply.--No tax shall be imposed under section
72(t) on any amount required to be distributed
under this paragraph.
(E) Treatment of matching contributions
forfeited by reason of excess deferral or
contribution or permissible withdrawal.--For
purposes of paragraph (2)(C), a matching
contribution (within the meaning of subsection
(m)) shall not be treated as forfeitable merely
because such contribution is forfeitable if the
contribution to which the matching contribution
relates is treated as an excess contribution
under subparagraph (B), an excess deferral
under section 402(g)(2)(A), a permissible
withdrawal under section 414(w), or an excess
aggregate contribution under section
401(m)(6)(B).
(F) Cross reference.--For excise tax on
certain excess contributions, see section 4979.
(9) Compensation.--For purposes of this subsection,
the term ``compensation'' has the meaning given such
term by section 414(s).
(10) Distributions upon termination of plan.--
(A) In general.--An event described in this
subparagraph is the termination of the plan
without establishment or maintenance of another
defined contribution plan (other than an
employee stock ownership plan as defined in
section 4975(e)(7)).
(B) Distributions must be lump sum
distributions.--
(i) In general.--A termination shall
not be treated as described in
subparagraph (A) with respect to any
employee unless the employee receives a
lump sum distribution by reason of the
termination.
(ii) Lump-sum distribution.--For
purposes of this subparagraph, the term
``lump-sum distribution'' has the
meaning given such term by section
402(e)(4)(D) (without regard to
subclauses (I), (II), (III), and (IV)
of clause (i) thereof). Such term
includes a distribution of an annuity
contract from--
(I) a trust which forms a
part of a plan described in
section 401(a) and which is
exempt from tax under section
501(a), or
(II) an annuity plan
described in section 403(a).
(11) Adoption of simple plan to meet
nondiscrimination tests.--
(A) In general.--A cash or deferred
arrangement maintained by an eligible employer
shall be treated as meeting the requirements of
paragraph (3)(A)(ii) if such arrangement
meets--
(i) the contribution requirements of
subparagraph (B),
(ii) the exclusive plan requirements
of subparagraph (C), and
(iii) the vesting requirements of
section 408(p)(3).
(B) Contribution requirements.--
(i) In general.--The requirements of
this subparagraph are met if, under the
arrangement--
(I) an employee may elect to
have the employer make elective
contributions for the year on
behalf of the employee to a
trust under the plan in an
amount which is expressed as a
percentage of compensation of
the employee but which in no
event exceeds the amount in
effect under section
408(p)(2)(A)(ii),
(II) the employer is required
to make a matching contribution
to the trust for the year in an
amount equal to so much of the
amount the employee elects
under subclause (I) as does not
exceed 3 percent of
compensation for the year, and
(III) no other contributions
may be made other than
contributions described in
subclause (I) or (II).
(ii) Employer may elect 2-percent
nonelective contribution.--An employer
shall be treated as meeting the
requirements of clause (i)(II) for any
year if, in lieu of the contributions
described in such clause, the employer
elects (pursuant to the terms of the
arrangement) to make nonelective
contributions of 2 percent of
compensation for each employee who is
eligible to participate in the
arrangement and who has at least $5,000
of compensation from the employer for
the year. If an employer makes an
election under this subparagraph for
any year, the employer shall notify
employees of such election within a
reasonable period of time before the
60th day before the beginning of such
year.
(iii) Administrative requirements.--
(I) In general.--Rules
similar to the rules of
subparagraphs (B) and (C) of
section 408(p)(5) shall apply
for purposes of this
subparagraph.
(II) Notice of election
period.--The requirements of
this subparagraph shall not be
treated as met with respect to
any year unless the employer
notifies each employee eligible
to participate, within a
reasonable period of time
before the 60th day before the
beginning of such year (and,
for the first year the employee
is so eligible, the 60th day
before the first day such
employee is so eligible), of
the rules similar to the rules
of section 408(p)(5)(C) which
apply by reason of subclause
(I).
(C) Exclusive plan requirement.--The
requirements of this subparagraph are met for
any year to which this paragraph applies if no
contributions were made, or benefits were
accrued, for services during such year under
any qualified plan of the employer on behalf of
any employee eligible to participate in the
cash or deferred arrangement, other than
contributions described in subparagraph (B).
(D) Definitions and special rule.--
(i) Definitions.--For purposes of
this paragraph, any term used in this
paragraph which is also used in section
408(p) shall have the meaning given
such term by such section.
(ii) Coordination with top-heavy
rules.--A plan meeting the requirements
of this paragraph for any year shall
not be treated as a top-heavy plan
under section 416 for such year if such
plan allows only contributions required
under this paragraph.
(12) Alternative methods of meeting nondiscrimination
requirements.--
(A) In general.--A cash or deferred
arrangement shall be treated as meeting the
requirements of paragraph (3)(A)(ii) [if such
arrangement--
[(i) meets the contribution
requirements of subparagraph (B) or
(C), and
[(ii) meets the notice requirements
of subparagraph (D).] if such
arrangement--
(i) meets the contribution
requirements of subparagraph (B) and
the notice requirements of subparagraph
(D), or
(ii) meets the contribution
requirements of subparagraph (C).
(B) Matching contributions.--
(i) In general.--The requirements of
this subparagraph are met if, under the
arrangement, the employer makes
matching contributions on behalf of
each employee who is not a highly
compensated employee in an amount equal
to--
(I) 100 percent of the
elective contributions of the
employee to the extent such
elective contributions do not
exceed 3 percent of the
employee's compensation, and
(II) 50 percent of the
elective contributions of the
employee to the extent that
such elective contributions
exceed 3 percent but do not
exceed 5 percent of the
employee's compensation.
(ii) Rate for highly compensated
employees.--The requirements of this
subparagraph are not met if, under the
arrangement, the rate of matching
contribution with respect to any
elective contribution of a highly
compensated employee at any rate of
elective contribution is greater than
that with respect to an employee who is
not a highly compensated employee.
(iii) Alternative plan designs.--If
the rate of any matching contribution
with respect to any rate of elective
contribution is not equal to the
percentage required under clause (i),
an arrangement shall not be treated as
failing to meet the requirements of
clause (i) if--
(I) the rate of an employer's
matching contribution does not
increase as an employee's rate
of elective contributions
increase, and
(II) the aggregate amount of
matching contributions at such
rate of elective contribution
is at least equal to the
aggregate amount of matching
contributions which would be
made if matching contributions
were made on the basis of the
percentages described in clause
(i).
(C) Nonelective contributions.--The
requirements of this subparagraph are met if,
under the arrangement, the employer is
required, without regard to whether the
employee makes an elective contribution or
employee contribution, to make a contribution
to a defined contribution plan on behalf of
each employee who is not a highly compensated
employee and who is eligible to participate in
the arrangement in an amount equal to at least
3 percent of the employee's compensation.
(D) Notice requirement.--An arrangement meets
the requirements of this paragraph if, under
the arrangement, each employee eligible to
participate is, within a reasonable period
before any year, given written notice of the
employee's rights and obligations under the
arrangement which--
(i) is sufficiently accurate and
comprehensive to apprise the employee
of such rights and obligations, and
(ii) is written in a manner
calculated to be understood by the
average employee eligible to
participate.
(E) Other requirements.--
(i) Withdrawal and vesting
restrictions.--An arrangement shall not
be treated as meeting the requirements
of subparagraph (B) or (C) of this
paragraph unless the requirements of
subparagraphs (B) and (C) of paragraph
(2) are met with respect to all
employer contributions (including
matching contributions) taken into
account in determining whether the
requirements of subparagraphs (B) and
(C) of this paragraph are met.
(ii) Social security and similar
contributions not taken into account.--
An arrangement shall not be treated as
meeting the requirements of
subparagraph (B) or (C) unless such
requirements are met without regard to
subsection (l), and, for purposes of
subsection (l), employer contributions
under subparagraph (B) or (C) shall not
be taken into account.
(F) Timing of plan amendment for employer
making nonelective contributions.--
(i) In general.--Except as provided
in clause (ii), a plan may be amended
after the beginning of a plan year to
provide that the requirements of
subparagraph (C) shall apply to the
arrangement for the plan year, but only
if the amendment is adopted--
(I) at any time before the
30th day before the close of
the plan year, or
(II) at any time before the
last day under paragraph (8)(A)
for distributing excess
contributions for the plan
year.
(ii) Exception where plan provided
for matching contributions.--Clause (i)
shall not apply to any plan year if the
plan provided at any time during the
plan year that the requirements of
subparagraph (B) or paragraph
(13)(D)(i)(I) applied to the plan year.
(iii) 4-percent contribution
requirement.--Clause (i)(II) shall not
apply to an arrangement unless the
amount of the contributions described
in subparagraph (C) which the employer
is required to make under the
arrangement for the plan year with
respect to any employee is an amount
equal to at least 4 percent of the
employee's compensation.
[(F)] (G) Other plans.--An arrangement shall
be treated as meeting the requirements under
subparagraph (A)(i) if any other plan
maintained by the employer meets such
requirements with respect to employees eligible
under the arrangement.
(13) Alternative method for automatic contribution
arrangements to meet nondiscrimination requirements.--
(A) In general.--A qualified automatic
contribution arrangement shall be treated as
meeting the requirements of paragraph
(3)(A)(ii).
(B) Qualified automatic contribution
arrangement.--For purposes of this paragraph,
the term ``qualified automatic contribution
arrangement'' [means any cash or deferred
arrangement which meets the requirements of
subparagraphs (C) through (E).] means a cash or
deferred arrangement--
(i) which is described in
subparagraph (D)(i)(I) and meets the
applicable requirements of
subparagraphs (C) through (E), or
(ii) which is described in
subparagraph (D)(i)(II) and meets the
applicable requirements of
subparagraphs (C) and (D).
(C) Automatic deferral.--
(i) In general.--The requirements of
this subparagraph are met if, under the
arrangement, each employee eligible to
participate in the arrangement is
treated as having elected to have the
employer make elective contributions in
an amount equal to a qualified
percentage of compensation.
(ii) Election out.--The election
treated as having been made under
clause (i) shall cease to apply with
respect to any employee if such
employee makes an affirmative
election--
(I) to not have such
contributions made, or
(II) to make elective
contributions at a level
specified in such affirmative
election.
(iii) Qualified percentage.--For
purposes of this subparagraph, the term
``qualified percentage'' means, with
respect to any employee, any percentage
determined under the arrangement if
such percentage is applied uniformly,
does not exceed 10 percent, and is at
least--
(I) 3 percent during the
period ending on the last day
of the first plan year which
begins after the date on which
the first elective contribution
described in clause (i) is made
with respect to such employee,
(II) 4 percent during the
first plan year following the
plan year described in
subclause (I),
(III) 5 percent during the
second plan year following the
plan year described in
subclause (I), and
(IV) 6 percent during any
subsequent plan year.
(iv) Automatic deferral for current
employees not required.--Clause (i) may
be applied without taking into account
any employee who--
(I) was eligible to
participate in the arrangement
(or a predecessor arrangement)
immediately before the date on
which such arrangement becomes
a qualified automatic
contribution arrangement
(determined after application
of this clause), and
(II) had an election in
effect on such date either to
participate in the arrangement
or to not participate in the
arrangement.
(D) Matching or nonelective contributions.--
(i) In general.--The requirements of
this subparagraph are met if, under the
arrangement, the employer--
(I) makes matching
contributions on behalf of each
employee who is not a highly
compensated employee in an
amount equal to the sum of 100
percent of the elective
contributions of the employee
to the extent that such
contributions do not exceed 1
percent of compensation plus 50
percent of so much of such
contributions as exceed 1
percent but do not exceed 6
percent of compensation, or
(II) is required, without
regard to whether the employee
makes an elective contribution
or employee contribution, to
make a contribution to a
defined contribution plan on
behalf of each employee who is
not a highly compensated
employee and who is eligible to
participate in the arrangement
in an amount equal to at least
3 percent of the employee's
compensation.
(ii) Application of rules for
matching contributions.--The rules of
clauses (ii) and (iii) of paragraph
(12)(B) shall apply for purposes of
clause (i)(I).
(iii) Withdrawal and vesting
restrictions.--An arrangement shall not
be treated as meeting the requirements
of clause (i) unless, with respect to
employer contributions (including
matching contributions) taken into
account in determining whether the
requirements of clause (i) are met--
(I) any employee who has
completed at least 2 years of
service (within the meaning of
section 411(a)) has a
nonforfeitable right to 100
percent of the employee's
accrued benefit derived from
such employer contributions,
and
(II) the requirements of
subparagraph (B) of paragraph
(2) are met with respect to all
such employer contributions.
(iv) Application of certain other
rules.--The rules of subparagraphs
(E)(ii) and (F) of paragraph (12) shall
apply for purposes of subclauses (I)
and (II) of clause (i).
(E) Notice requirements.--
(i) In general.--The requirements of
this subparagraph are met if, within a
reasonable period before each plan
year, each employee eligible to
participate in the arrangement for such
year receives written notice of the
employee's rights and obligations under
the arrangement which--
(I) is sufficiently accurate
and comprehensive to apprise
the employee of such rights and
obligations, and
(II) is written in a manner
calculated to be understood by
the average employee to whom
the arrangement applies.
(ii) Timing and content
requirements.--A notice shall not be
treated as meeting the requirements of
clause (i) with respect to an employee
unless--
(I) the notice explains the
employee's right under the
arrangement to elect not to
have elective contributions
made on the employee's behalf
(or to elect to have such
contributions made at a
different percentage),
(II) in the case of an
arrangement under which the
employee may elect among 2 or
more investment options, the
notice explains how
contributions made under the
arrangement will be invested in
the absence of any investment
election by the employee, and
(III) the employee has a
reasonable period of time after
receipt of the notice described
in subclauses (I) and (II) and
before the first elective
contribution is made to make
either such election.
(F) Timing of plan amendment for employer
making nonelective contributions.--
(i) In general.--Except as provided
in clause (ii), a plan may be amended
after the beginning of a plan year to
provide that the requirements of
subparagraph (D)(i)(II) shall apply to
the arrangement for the plan year, but
only if the amendment is adopted--
(I) at any time before the
30th day before the close of
the plan year, or
(II) at any time before the
last day under paragraph (8)(A)
for distributing excess
contributions for the plan
year.
(ii) Exception where plan provided
for matching contributions.--Clause (i)
shall not apply to any plan year if the
plan provided at any time during the
plan year that the requirements of
subparagraph (D)(i)(I) or paragraph
(12)(B) applied to the plan year.
(iii) 4-percent contribution
requirement.--Clause (i)(II) shall not
apply to an arrangement unless the
amount of the contributions described
in subparagraph (D)(i)(II) which the
employer is required to make under the
arrangement for the plan year with
respect to any employee is an amount
equal to at least 4 percent of the
employee's compensation.
(14) Special rules relating to hardship
withdrawals.--For purposes of paragraph (2)(B)(i)(IV)--
(A) Amounts which may be withdrawn.--The
following amounts may be distributed upon
hardship of the employee:
(i) Contributions to a profit-sharing
or stock bonus plan to which section
402(e)(3) applies.
(ii) Qualified nonelective
contributions (as defined in subsection
(m)(4)(C)).
(iii) Qualified matching
contributions described in paragraph
(3)(D)(ii)(I).
(iv) Earnings on any contributions
described in clause (i), (ii), or
(iii).
(B) No requirement to take available loan.--A
distribution shall not be treated as failing to
be made upon the hardship of an employee solely
because the employee does not take any
available loan under the plan.
(l) Permitted disparity in plan contributions or benefits.--
(1) In general.--The requirements of this subsection
are met with respect to a plan if--
(A) in the case of a defined contribution
plan, the requirements of paragraph (2) are
met, and
(B) in the case of a defined benefit plan,
the requirements of paragraph (3) are met.
(2) Defined contribution plan.--
(A) In general.--A defined contribution plan
meets the requirements of this paragraph if the
excess contribution percentage does not exceed
the base contribution percentage by more than
the lesser of--
(i) the base contribution percentage,
or
(ii) the greater of--
(I) 5.7 percentage points, or
(II) the percentage equal to
the portion of the rate of tax
under section 3111(a) (in
effect as of the beginning of
the year) which is attributable
to old-age insurance.
(B) Contribution percentages.--For purposes
of this paragraph--
(i) Excess contribution percentage.--
The term ``excess contribution
percentage'' means the percentage of
compensation which is contributed by
the employer under the plan with
respect to that portion of each
participant's compensation in excess of
the integration level.
(ii) Base contribution percentage.--
The term ``base contribution
percentage'' means the percentage of
compensation contributed by the
employer under the plan with respect to
that portion of each participant's
compensation not in excess of the
integration level.
(3) Defined benefit plan.--A defined benefit plan
meets the requirements of this paragraph if--
(A) Excess plans.--
(i) In general.--In the case of a
plan other than an offset plan--
(I) the excess benefit
percentage does not exceed the
base benefit percentage by more
than the maximum excess
allowance,
(II) any optional form of
benefit, preretirement benefit,
actuarial factor, or other
benefit or feature provided
with respect to compensation in
excess of the integration level
is provided with respect to
compensation not in excess of
such level, and
(III) benefits are based on
average annual compensation.
(ii) Benefit percentages.--For
purposes of this subparagraph, the
excess and base benefit percentages
shall be computed in the same manner as
the excess and base contribution
percentages under paragraph (2)(B),
except that such determination shall be
made on the basis of benefits
attributable to employer contributions
rather than contributions.
(B) Offset plans.--In the case of an offset
plan, the plan provides that--
(i) a participant's accrued benefit
attributable to employer contributions
(within the meaning of section
411(c)(1)) may not be reduced (by
reason of the offset) by more than the
maximum offset allowance, and
(ii) benefits are based on average
annual compensation.
(4) Definitions relating to paragraph (3).--For
purposes of paragraph (3)--
(A) Maximum excess allowance.--The maximum
excess allowance is equal to--
(i) in the case of benefits
attributable to any year of service
with the employer taken into account
under the plan, 3/4 of a percentage
point, and
(ii) in the case of total benefits,
3/4 of a percentage point, multiplied
by the participant's years of service
(not in excess of 35) with the employer
taken into account under the plan.
In no event shall the maximum excess allowance
exceed the base benefit percentage.
(B) Maximum offset allowance.--The maximum
offset allowance is equal to--
(i) in the case of benefits
attributable to any year of service
with the employer taken into account
under the plan, 3/4 percent of the
participant's final average
compensation, and
(ii) in the case of total benefits,
3/4 percent of the participant's final
average compensation, multiplied by the
participant's years of service (not in
excess of 35) with the employer taken
into account under the plan.
In no event shall the maximum offset allowance
exceed 50 percent of the benefit which would
have accrued without regard to the offset
reduction.
(C) Reductions.--
(i) In general.--The Secretary shall
prescribe regulations requiring the
reduction of the 3/4 percentage factor
under subparagraph (A) or (B)--
(I) in the case of a plan
other than an offset plan which
has an integration level in
excess of covered compensation,
or
(II) with respect to any
participant in an offset plan
who has final average
compensation in excess of
covered compensation.
(ii) Basis of reductions.--Any
reductions under clause (i) shall be
based on the percentages of
compensation replaced by the employer-
derived portions of primary insurance
amounts under the Social Security Act
for participants with compensation in
excess of covered compensation.
(D) Offset plan.--The term ``offset plan''
means any plan with respect to which the
benefit attributable to employer contributions
for each participant is reduced by an amount
specified in the plan.
(5) Other definitions and special rules.--For
purposes of this subsection--
(A) Integration level.--
(i) In general.--The term
``integration level'' means the amount
of compensation specified under the
plan (by dollar amount or formula) at
or below which the rate at which
contributions or benefits are provided
(expressed as a percentage) is less
than such rate above such amount.
(ii) Limitation.--The integration
level for any year may not exceed the
contribution and benefit base in effect
under section 230 of the Social
Security Act for such year.
(iii) Level to apply to all
participants.--A plan's integration
level shall apply with respect to all
participants in the plan.
(iv) Multiple integration levels.--
Under rules prescribed by the
Secretary, a defined benefit plan may
specify multiple integration levels.
(B) Compensation.--The term ``compensation''
has the meaning given such term by section
414(s).
(C) Average annual compensation.--The term
``average annual compensation'' means the
participant's highest average annual
compensation for--
(i) any period of at least 3
consecutive years, or
(ii) if shorter, the participant's
full period of service.
(D) Final average compensation.--
(i) In general.--The term ``final
average compensation'' means the
participant's average annual
compensation for--
(I) the 3-consecutive year
period ending with the current
year, or
(II) if shorter, the
participant's full period of
service.
(ii) Limitation.--A participant's
final average compensation shall be
determined by not taking into account
in any year compensation in excess of
the contribution and benefit base in
effect under section 230 of the Social
Security Act for such year.
(E) Covered compensation.--
(i) In general.--The term ``covered
compensation'' means, with respect to
an employee, the average of the
contribution and benefit bases in
effect under section 230 of the Social
Security Act for each year in the 35-
year period ending with the year in
which the employee attains the social
security retirement age.
(ii) Computation for any year.--For
purposes of clause (i), the
determination for any year preceding
the year in which the employee attains
the social security retirement age
shall be made by assuming that there is
no increase in the bases described in
clause (i) after the determination year
and before the employee attains the
social security retirement age.
(iii) Social security retirement
age.--For purposes of this
subparagraph, the term ``social
security retirement age'' has the
meaning given such term by section
415(b)(8).
(F) Regulations.--The Secretary shall
prescribe such regulations as are necessary or
appropriate to carry out the purposes of this
subsection, including--
(i) in the case of a defined benefit
plan which provides for unreduced
benefits commencing before the social
security retirement age (as defined in
section 415(b)(8)), rules providing for
the reduction of the maximum excess
allowance and the maximum offset
allowance, and
(ii) in the case of an employee
covered by 2 or more plans of the
employer which fail to meet the
requirements of subsection (a)(4)
(without regard to this subsection),
rules preventing the multiple use of
the disparity permitted under this
subsection with respect to any
employee.
For purposes of clause (i), unreduced benefits
shall not include benefits for disability
(within the meaning of section 223(d) of the
Social Security Act).
(6) Special rule for plan maintained by railroads.--
In determining whether a plan which includes employees
of a railroad employer who are entitled to benefits
under the Railroad Retirement Act of 1974 meets the
requirements of this subsection, rules similar to the
rules set forth in this subsection shall apply. Such
rules shall take into account the employer-derived
portion of the employees' tier 2 railroad retirement
benefits and any supplemental annuity under the
Railroad Retirement Act of 1974.
(m) Nondiscrimination test for matching contributions and
employee contributions.--
(1) In general.--A defined contribution plan shall be
treated as meeting the requirements of subsection
(a)(4) with respect to the amount of any matching
contribution or employee contribution for any plan year
only if the contribution percentage requirement of
paragraph (2) of this subsection is met for such plan
year.
(2) Requirements.--
(A) Contribution percentage requirement.--A
plan meets the contribution percentage
requirement of this paragraph for any plan year
only if the contribution percentage for
eligible highly compensated employees for such
plan year does not exceed the greater of--
(i) 125 percent of such percentage
for all other eligible employees for
the preceding plan year, or
(ii) the lesser of 200 percent of
such percentage for all other eligible
employees for the preceding plan year,
or such percentage for all other
eligible employees for the preceding
plan year plus 2 percentage points.
This subparagraph may be applied by using the
plan year rather than the preceding plan year
if the employer so elects, except that if such
an election is made, it may not be changed
except as provided by the Secretary.
(B) Multiple plans treated as a single
plan.--If two or more plans of an employer to
which matching contributions, employee
contributions, or elective deferrals are made
are treated as one plan for purposes of section
410(b), such plans shall be treated as one plan
for purposes of this subsection. If a highly
compensated employee participates in two or
more plans of an employer to which
contributions to which this subsection applies
are made, all such contributions shall be
aggregated for purposes of this subsection.
(3) Contribution percentage.--For purposes of
paragraph (2), the contribution percentage for a
specified group of employees for a plan year shall be
the average of the ratios (calculated separately for
each employee in such group) of--
(A) the sum of the matching contributions and
employee contributions paid under the plan on
behalf of each such employee for such plan
year, to
(B) the employee's compensation (within the
meaning of section 414(s)) for such plan year.
Under regulations, an employer may elect to take into
account (in computing the contribution percentage)
elective deferrals and qualified nonelective
contributions under the plan or any other plan of the
employer. If matching contributions are taken into
account for purposes of subsection (k)(3)(A)(ii) for
any plan year, such contributions shall not be taken
into account under subparagraph (A) for such year.
Rules similar to the rules of subsection (k)(3)(E)
shall apply for purposes of this subsection.
(4) Definitions.--For purposes of this subsection--
(A) Matching contribution.--The term
``matching contribution'' means--
(i) any employer contribution made to
a defined contribution plan on behalf
of an employee on account of an
employee contribution made by such
employee, and
(ii) any employer contribution made
to a defined contribution plan on
behalf of an employee on account of an
employee's elective deferral.
(B) Elective deferral.--The term ``elective
deferral'' means any employer contribution
described in section 402(g)(3).
(C) Qualified nonelective contributions.--The
term ``qualified nonelective contribution''
means any employer contribution (other than a
matching contribution) with respect to which--
(i) the employee may not elect to
have the contribution paid to the
employee in cash instead of being
contributed to the plan, and
(ii) the requirements of
subparagraphs (B) and (C) of subsection
(k)(2) are met.
(5) Employees taken into consideration.--
(A) In general.--Any employee who is eligible
to make an employee contribution (or, if the
employer takes elective contributions into
account, elective contributions) or to receive
a matching contribution under the plan being
tested under paragraph (1) shall be considered
an eligible employee for purposes of this
subsection.
(B) Certain nonparticipants.--If an employee
contribution is required as a condition of
participation in the plan, any employee who
would be a participant in the plan if such
employee made such a contribution shall be
treated as an eligible employee on behalf of
whom no employer contributions are made.
(C) Special rule for early participation.--If
an employer elects to apply section
410(b)(4)(B) in determining whether a plan
meets the requirements of section 410(b), the
employer may, in determining whether the plan
meets the requirements of paragraph (2),
exclude from consideration all eligible
employees (other than highly compensated
employees) who have not met the minimum age and
service requirements of section 410(a)(1)(A).
(6) Plan not disqualified if excess aggregate
contributions distributed before end of following plan
year.--
(A) In general.--A plan shall not be treated
as failing to meet the requirements of
paragraph (1) for any plan year if, before the
close of the following plan year, the amount of
the excess aggregate contributions for such
plan year (and any income allocable to such
contributions through the end of such year) is
distributed (or, if forfeitable, is forfeited).
Such contributions (and such income) may be
distributed without regard to any other
provision of law.
(B) Excess aggregate contributions.--For
purposes of subparagraph (A), the term ``excess
aggregate contributions'' means, with respect
to any plan year, the excess of--
(i) the aggregate amount of the
matching contributions and employee
contributions (and any qualified
nonelective contribution or elective
contribution taken into account in
computing the contribution percentage)
actually made on behalf of highly
compensated employees for such plan
year, over
(ii) the maximum amount of such
contributions permitted under the
limitations of paragraph (2)(A)
(determined by reducing contributions
made on behalf of highly compensated
employees in order of their
contribution percentages beginning with
the highest of such percentages).
(C) Method of distributing excess aggregate
contributions.--Any distribution of the excess
aggregate contributions for any plan year shall
be made to highly compensated employees on the
basis of the amount of contributions on behalf
of, or by, each such employee. Forfeitures of
excess aggregate contributions may not be
allocated to participants whose contributions
are reduced under this paragraph.
(D) Coordination with subsection (k) and
402(g).--The determination of the amount of
excess aggregate contributions with respect to
a plan shall be made after--
(i) first determining the excess
deferrals (within the meaning of
section 402(g)), and
(ii) then determining the excess
contributions under subsection (k).
(7) Treatment of distributions.--
(A) Additional tax of section 72(t) not
applicable.--No tax shall be imposed under
section 72(t) on any amount required to be
distributed under paragraph (6).
(B) Exclusion of employee contributions.--Any
distribution attributable to employee
contributions shall not be included in gross
income except to the extent attributable to
income on such contributions.
(8) Highly compensated employee.--For purposes of
this subsection, the term ``highly compensated
employee'' has the meaning given to such term by
section 414(q).
(9) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the
purposes of this subsection and subsection (k),
including regulations permitting appropriate
aggregation of plans and contributions.
(10) Alternative method of satisfying tests.--A
defined contribution plan shall be treated as meeting
the requirements of paragraph (2) with respect to
matching contributions if the plan--
(A) meets the contribution requirements of
subparagraph (B) of subsection (k)(11),
(B) meets the exclusive plan requirements of
subsection (k)(11)(C), and
(C) meets the vesting requirements of section
408(p)(3).
(11) Additional alternative method of satisfying
tests.--
(A) In general.--A defined contribution plan
shall be treated as meeting the requirements of
paragraph (2) with respect to matching
contributions if the plan--
(i) meets the contribution
requirements of subparagraph (B) or (C)
of subsection (k)(12),
(ii) meets the notice requirements of
subsection (k)(12)(D), and
(iii) meets the requirements of
subparagraph (B).
(B) Limitation on matching contributions.--
The requirements of this subparagraph are met
if--
(i) matching contributions on behalf
of any employee may not be made with
respect to an employee's contributions
or elective deferrals in excess of 6
percent of the employee's compensation,
(ii) the rate of an employer's
matching contribution does not increase
as the rate of an employee's
contributions or elective deferrals
increase, and
(iii) the matching contribution with
respect to any highly compensated
employee at any rate of an employee
contribution or rate of elective
deferral is not greater than that with
respect to an employee who is not a
highly compensated employee.
(12) Alternative method for automatic contribution
arrangements.--A defined contribution plan shall be
treated as meeting the requirements of paragraph (2)
with respect to matching contributions if the plan--
(A) is a qualified automatic contribution
arrangement (as defined in subsection (k)(13)),
and
(B) meets the requirements of paragraph
(11)(B).
(13) Cross reference.--For excise tax on certain
excess contributions, see section 4979.
(n) Coordination with qualified domestic relations orders.--
The Secretary shall prescribe such rules or regulations as may
be necessary to coordinate the requirements of subsection
(a)(13)(B) and section 414(p) (and the regulations issued by
the Secretary of Labor thereunder) with the other provisions of
this chapter.
(o) Special Rules for Applying Nondiscrimination Rules to
Protect Older, Longer Service and Grandfathered Participants.--
(1) Testing of defined benefit plans with closed
classes of participants.--
(A) Benefits, rights, or features provided to
closed classes.--A defined benefit plan which
provides benefits, rights, or features to a
closed class of participants shall not fail to
satisfy the requirements of subsection (a)(4)
by reason of the composition of such closed
class or the benefits, rights, or features
provided to such closed class, if--
(i) for the plan year as of which the
class closes and the 2 succeeding plan
years, such benefits, rights, and
features satisfy the requirements of
subsection (a)(4) (without regard to
this subparagraph but taking into
account the rules of subparagraph (I)),
(ii) after the date as of which the
class was closed, any plan amendment
which modifies the closed class or the
benefits, rights, and features provided
to such closed class does not
discriminate significantly in favor of
highly compensated employees, and
(iii) the class was closed before
April 5, 2017, or the plan is described
in subparagraph (C).
(B) Aggregate testing with defined
contribution plans permitted on a benefits
basis.--
(i) In general.--For purposes of
determining compliance with subsection
(a)(4) and section 410(b), a defined
benefit plan described in clause (iii)
may be aggregated and tested on a
benefits basis with 1 or more defined
contribution plans, including with the
portion of 1 or more defined
contribution plans which--
(I) provides matching
contributions (as defined in
subsection (m)(4)(A)),
(II) provides annuity
contracts described in section
403(b) which are purchased with
matching contributions or
nonelective contributions, or
(III) consists of an employee
stock ownership plan (within
the meaning of section
4975(e)(7)) or a tax credit
employee stock ownership plan
(within the meaning of section
409(a)).
(ii) Special rules for matching
contributions.--For purposes of clause
(i), if a defined benefit plan is
aggregated with a portion of a defined
contribution plan providing matching
contributions--
(I) such defined benefit plan
must also be aggregated with
any portion of such defined
contribution plan which
provides elective deferrals
described in subparagraph (A)
or (C) of section 402(g)(3),
and
(II) such matching
contributions shall be treated
in the same manner as
nonelective contributions,
including for purposes of
applying the rules of
subsection (l).
(iii) Plans described.--A defined
benefit plan is described in this
clause if--
(I) the plan provides
benefits to a closed class of
participants,
(II) for the plan year as of
which the class closes and the
2 succeeding plan years, the
plan satisfies the requirements
of section 410(b) and
subsection (a)(4) (without
regard to this subparagraph but
taking into account the rules
of subparagraph (I)),
(III) after the date as of
which the class was closed, any
plan amendment which modifies
the closed class or the
benefits provided to such
closed class does not
discriminate significantly in
favor of highly compensated
employees, and
(IV) the class was closed
before April 5, 2017, or the
plan is described in
subparagraph (C).
(C) Plans described.--A plan is described in
this subparagraph if, taking into account any
predecessor plan--
(i) such plan has been in effect for
at least 5 years as of the date the
class is closed, and
(ii) during the 5-year period
preceding the date the class is closed,
there has not been a substantial
increase in the coverage or value of
the benefits, rights, or features
described in subparagraph (A) or in the
coverage or benefits under the plan
described in subparagraph (B)(iii)
(whichever is applicable).
(D) Determination of substantial increase for
benefits, rights, and features.--In applying
subparagraph (C)(ii) for purposes of
subparagraph (A)(iii), a plan shall be treated
as having had a substantial increase in
coverage or value of the benefits, rights, or
features described in subparagraph (A) during
the applicable 5-year period only if, during
such period--
(i) the number of participants
covered by such benefits, rights, or
features on the date such period ends
is more than 50 percent greater than
the number of such participants on the
first day of the plan year in which
such period began, or
(ii) such benefits, rights, and
features have been modified by 1 or
more plan amendments in such a way
that, as of the date the class is
closed, the value of such benefits,
rights, and features to the closed
class as a whole is substantially
greater than the value as of the first
day of such 5-year period, solely as a
result of such amendments.
(E) Determination of substantial increase for
aggregate testing on benefits basis.--In
applying subparagraph (C)(ii) for purposes of
subparagraph (B)(iii)(IV), a plan shall be
treated as having had a substantial increase in
coverage or benefits during the applicable 5-
year period only if, during such period--
(i) the number of participants
benefitting under the plan on the date
such period ends is more than 50
percent greater than the number of such
participants on the first day of the
plan year in which such period began,
or
(ii) the average benefit provided to
such participants on the date such
period ends is more than 50 percent
greater than the average benefit
provided on the first day of the plan
year in which such period began.
(F) Certain employees disregarded.--For
purposes of subparagraphs (D) and (E), any
increase in coverage or value or in coverage or
benefits, whichever is applicable, which is
attributable to such coverage and value or
coverage and benefits provided to employees--
(i) who became participants as a
result of a merger, acquisition, or
similar event which occurred during the
7-year period preceding the date the
class is closed, or
(ii) who became participants by
reason of a merger of the plan with
another plan which had been in effect
for at least 5 years as of the date of
the merger,
shall be disregarded, except that clause (ii)
shall apply for purposes of subparagraph (D)
only if, under the merger, the benefits,
rights, or features under 1 plan are conformed
to the benefits, rights, or features of the
other plan prospectively.
(G) Rules relating to average benefit.--For
purposes of subparagraph (E)--
(i) the average benefit provided to
participants under the plan will be
treated as having remained the same
between the 2 dates described in
subparagraph (E)(ii) if the benefit
formula applicable to such participants
has not changed between such dates, and
(ii) if the benefit formula
applicable to 1 or more participants
under the plan has changed between such
2 dates, then the average benefit under
the plan shall be considered to have
increased by more than 50 percent only
if--
(I) the total amount
determined under section
430(b)(1)(A)(i) for all
participants benefitting under
the plan for the plan year in
which the 5-year period
described in subparagraph (E)
ends, exceeds
(II) the total amount
determined under section
430(b)(1)(A)(i) for all such
participants for such plan
year, by using the benefit
formula in effect for each such
participant for the first plan
year in such 5-year period, by
more than 50 percent.
In the case of a CSEC plan (as defined
in section 414(y)), the normal cost of
the plan (as determined under section
433(j)(1)(B)) shall be used in lieu of
the amount determined under section
430(b)(1)(A)(i).
(H) Treatment as single plan.--For purposes
of subparagraphs (E) and (G), a plan described
in section 413(c) shall be treated as a single
plan rather than as separate plans maintained
by each employer in the plan.
(I) Special rules.--For purposes of
subparagraphs (A)(i) and (B)(iii)(II), the
following rules shall apply:
(i) In applying section 410(b)(6)(C),
the closing of the class of
participants shall not be treated as a
significant change in coverage under
section 410(b)(6)(C)(i)(II).
(ii) 2 or more plans shall not fail
to be eligible to be aggregated and
treated as a single plan solely by
reason of having different plan years.
(iii) Changes in the employee
population shall be disregarded to the
extent attributable to individuals who
become employees or cease to be
employees, after the date the class is
closed, by reason of a merger,
acquisition, divestiture, or similar
event.
(iv) Aggregation and all other
testing methodologies otherwise
applicable under subsection (a)(4) and
section 410(b) may be taken into
account.
The rule of clause (ii) shall also apply for
purposes of determining whether plans to which
subparagraph (B)(i) applies may be aggregated
and treated as 1 plan for purposes of
determining whether such plans meet the
requirements of subsection (a)(4) and section
410(b).
(J) Spun-off plans.--For purposes of this
paragraph, if a portion of a defined benefit
plan described in subparagraph (A) or (B)(iii)
is spun off to another employer and the spun-
off plan continues to satisfy the requirements
of--
(i) subparagraph (A)(i) or
(B)(iii)(II), whichever is applicable,
if the original plan was still within
the 3-year period described in such
subparagraph at the time of the spin
off, and
(ii) subparagraph (A)(ii) or
(B)(iii)(III), whichever is applicable,
the treatment under subparagraph (A) or (B) of
the spun-off plan shall continue with respect
to such other employer.
(2) Testing of defined contribution plans.--
(A) Testing on a benefits basis.--A defined
contribution plan shall be permitted to be
tested on a benefits basis if--
(i) such defined contribution plan
provides make-whole contributions to a
closed class of participants whose
accruals under a defined benefit plan
have been reduced or eliminated,
(ii) for the plan year of the defined
contribution plan as of which the class
eligible to receive such make-whole
contributions closes and the 2
succeeding plan years, such closed
class of participants satisfies the
requirements of section 410(b)(2)(A)(i)
(determined by applying the rules of
paragraph (1)(I)),
(iii) after the date as of which the
class was closed, any plan amendment to
the defined contribution plan which
modifies the closed class or the
allocations, benefits, rights, and
features provided to such closed class
does not discriminate significantly in
favor of highly compensated employees,
and
(iv) the class was closed before
April 5, 2017, or the defined benefit
plan under clause (i) is described in
paragraph (1)(C) (as applied for
purposes of paragraph (1)(B)(iii)(IV)).
(B) Aggregation with plans including matching
contributions.--
(i) In general.--With respect to 1 or
more defined contribution plans
described in subparagraph (A), for
purposes of determining compliance with
subsection (a)(4) and section 410(b),
the portion of such plans which
provides make-whole contributions or
other nonelective contributions may be
aggregated and tested on a benefits
basis with the portion of 1 or more
other defined contribution plans
which--
(I) provides matching
contributions (as defined in
subsection (m)(4)(A)),
(II) provides annuity
contracts described in section
403(b) which are purchased with
matching contributions or
nonelective contributions, or
(III) consists of an employee
stock ownership plan (within
the meaning of section
4975(e)(7)) or a tax credit
employee stock ownership plan
(within the meaning of section
409(a)).
(ii) Special rules for matching
contributions.--Rules similar to the
rules of paragraph (1)(B)(ii) shall
apply for purposes of clause (i).
(C) Special rules for testing defined
contribution plan features providing matching
contributions to certain older, longer service
participants.--In the case of a defined
contribution plan which provides benefits,
rights, or features to a closed class of
participants whose accruals under a defined
benefit plan have been reduced or eliminated,
the plan shall not fail to satisfy the
requirements of subsection (a)(4) solely by
reason of the composition of the closed class
or the benefits, rights, or features provided
to such closed class if the defined
contribution plan and defined benefit plan
otherwise meet the requirements of subparagraph
(A) but for the fact that the make-whole
contributions under the defined contribution
plan are made in whole or in part through
matching contributions.
(D) Spun-off plans.--For purposes of this
paragraph, if a portion of a defined
contribution plan described in subparagraph (A)
or (C) is spun off to another employer, the
treatment under subparagraph (A) or (C) of the
spun-off plan shall continue with respect to
the other employer if such plan continues to
comply with the requirements of clauses (ii)
(if the original plan was still within the 3-
year period described in such clause at the
time of the spin off) and (iii) of subparagraph
(A), as determined for purposes of subparagraph
(A) or (C), whichever is applicable.
(3) Definitions.--For purposes of this subsection--
(A) Make-whole contributions.--Except as
otherwise provided in paragraph (2)(C), the
term ``make-whole contributions'' means
nonelective allocations for each employee in
the class which are reasonably calculated, in a
consistent manner, to replace some or all of
the retirement benefits which the employee
would have received under the defined benefit
plan and any other plan or qualified cash or
deferred arrangement under subsection (k)(2) if
no change had been made to such defined benefit
plan and such other plan or arrangement. For
purposes of the preceding sentence, consistency
shall not be required with respect to employees
who were subject to different benefit formulas
under the defined benefit plan.
(B) References to closed class of
participants.--References to a closed class of
participants and similar references to a closed
class shall include arrangements under which 1
or more classes of participants are closed,
except that 1 or more classes of participants
closed on different dates shall not be
aggregated for purposes of determining the date
any such class was closed.
(C) Highly compensated employee.--The term
``highly compensated employee'' has the meaning
given such term in section 414(q).
[(o)] (p) Cross reference.--For exemption from tax of a trust
qualified under this section, see section 501(a).
SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES' TRUST.
(a) Taxability of beneficiary of exempt trust.--Except as
otherwise provided in this section, any amount actually
distributed to any distributee by any employees' trust
described in section 401(a) which is exempt from tax under
section 501(a) shall be taxable to the distributee, in the
taxable year of the distributee in which distributed, under
section 72 (relating to annuities).
(b) Taxability of beneficiary of nonexempt trust.--
(1) Contributions.--Contributions to an employees'
trust made by an employer during a taxable year of the
employer which ends with or within a taxable year of
the trust for which the trust is not exempt from tax
under section 501(a) shall be included in the gross
income of the employee in accordance with section 83
(relating to property transferred in connection with
performance of services), except that the value of the
employee's interest in the trust shall be substituted
for the fair market value of the property for purposes
of applying such section.
(2) Distributions.--The amount actually distributed
or made available to any distributee by any trust
described in paragraph (1) shall be taxable to the
distributee, in the taxable year in which so
distributed or made available, under section 72
(relating to annuities), except that distributions of
income of such trust before the annuity starting date
(as defined in section 72(c)(4)) shall be included in
the gross income of the employee without regard to
section 72(e)(5) (relating to amounts not received as
annuities).
(3) Grantor trusts.--A beneficiary of any trust
described in paragraph (1) shall not be considered the
owner of any portion of such trust under subpart E of
part I of subchapter J (relating to grantors and others
treated as substantial owners).
(4) Failure to meet requirements of section 410(b)
(A) Highly compensated employees.--If 1 of
the reasons a trust is not exempt from tax
under section 501(a) is the failure of the plan
of which it is a part to meet the requirements
of section 401(a)(26) or 410(b), then a highly
compensated employee shall, in lieu of the
amount determined under paragraph (1) or (2)
include in gross income for the taxable year
with or within which the taxable year of the
trust ends an amount equal to the vested
accrued benefit of such employee (other than
the employee's investment in the contract) as
of the close of such taxable year of the trust.
(B) Failure to meet coverage tests.--If a
trust is not exempt from tax under section
501(a) for any taxable year solely because such
trust is part of a plan which fails to meet the
requirements of section 401(a)(26) or 410(b),
paragraphs (1) and (2) shall not apply by
reason of such failure to any employee who was
not a highly compensated employee during--
(i) such taxable year, or
(ii) any preceding period for which
service was creditable to such employee
under the plan.
(C) Highly compensated employee.--For
purposes of this paragraph, the term ``highly
compensated employee'' has the meaning given
such term by section 414(q).
(c) Rules applicable to rollovers from exempt trusts.--
(1) Exclusion from income.--If--
(A) any portion of the balance to the credit
of an employee in a qualified trust is paid to
the employee in an eligible rollover
distribution,
(B) the distributee transfers any portion of
the property received in such distribution to
an eligible retirement plan, and
(C) in the case of a distribution of property
other than money, the amount so transferred
consists of the property distributed,
then such distribution (to the extent so transferred)
shall not be includible in gross income for the taxable
year in which paid.
(2) Maximum amount which may be rolled over.--In the
case of any eligible rollover distribution, the maximum
amount transferred to which paragraph (1) applies shall
not exceed the portion of such distribution which is
includible in gross income (determined without regard
to paragraph (1)). The preceding sentence shall not
apply to such distribution to the extent--
(A) such portion is transferred in a direct
trustee-to-trustee transfer to a qualified
trust or to an annuity contract described in
section 403(b) and such trust or contract
provides for separate accounting for amounts so
transferred (and earnings thereon), including
separately accounting for the portion of such
distribution which is includible in gross
income and the portion of such distribution
which is not so includible, or
(B) such portion is transferred to an
eligible retirement plan described in clause
(i) or (ii) of paragraph (8)(B).
In the case of a transfer described in subparagraph (A)
or (B), the amount transferred shall be treated as
consisting first of the portion of such distribution
that is includible in gross income (determined without
regard to paragraph (1)).
(3) Time limit on transfers.--
(A) In general.--Except as provided in
subparagraphs (B) and (C), paragraph (1) shall
not apply to any transfer of a distribution
made after the 60th day following the day on
which the distributee received the property
distributed.
(B) Hardship exception.--The Secretary may
waive the 60-day requirement under subparagraph
(A) where the failure to waive such requirement
would be against equity or good conscience,
including casualty, disaster, or other events
beyond the reasonable control of the individual
subject to such requirement.
(C) Rollover of certain plan loan offset
amounts.--
(i) In general.--In the case of a
qualified plan loan offset amount,
paragraph (1) shall not apply to any
transfer of such amount made after the
due date (including extensions) for
filing the return of tax for the
taxable year in which such amount is
treated as distributed from a qualified
employer plan.
(ii) Qualified plan loan offset
amount.--For purposes of this
subparagraph, the term ``qualified plan
loan offset amount'' means a plan loan
offset amount which is treated as
distributed from a qualified employer
plan to a participant or beneficiary
solely by reason of--
(I) the termination of the
qualified employer plan, or
(II) the failure to meet the
repayment terms of the loan
from such plan because of the
severance from employment of
the participant.
(iii) Plan loan offset amount.--For
purposes of clause (ii), the term
``plan loan offset amount'' means the
amount by which the participant's
accrued benefit under the plan is
reduced in order to repay a loan from
the plan.
(iv) Limitation.--This subparagraph
shall not apply to any plan loan offset
amount unless such plan loan offset
amount relates to a loan to which
section 72(p)(1) does not apply by
reason of section 72(p)(2).
(v) Qualified employer plan.--For
purposes of this subsection, the term
``qualified employer plan'' has the
meaning given such term by section
72(p)(4).
(4) Eligible rollover distribution.--For purposes of
this subsection, the term ``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 trust; except that such term
shall not include--
(A) any distribution which is one of a series
of substantially equal periodic payments (not
less frequently than annually) made--
(i) 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
(ii) for a specified period of 10
years or more,
(B) any distribution to the extent such
distribution is required under section
401(a)(9), and
(C) any distribution which is made upon
hardship of the employee.
If all or any portion of a distribution during 2009 is
treated as an eligible rollover distribution but would
not be so treated if the minimum distribution
requirements under section 401(a)(9) had applied during
2009, such distribution shall not be treated as an
eligible rollover distribution for purposes of section
401(a)(31) or 3405(c) or subsection (f) of this
section.
(5) Transfer treated as rollover contribution under
section 408.--For purposes of this title, a transfer to
an eligible retirement plan described in clause (i) or
(ii) of paragraph (8)(B) resulting in any portion of a
distribution being excluded from gross income under
paragraph (1) shall be treated as a rollover
contribution described in section 408(d)(3).
(6) Sales of distributed property.--For purposes of
this subsection--
(A) Transfer of proceeds from sale of
distributed property treated as transfer of
distributed property.--The transfer of an
amount equal to any portion of the proceeds
from the sale of property received in the
distribution shall be treated as the transfer
of property received in the distribution.
(B) Proceeds attributable to increase in
value.--The excess of fair market value of
property on sale over its fair market value on
distribution shall be treated as property
received in the distribution.
(C) Designation where amount of distribution
exceeds rollover contribution.--In any case
where part or all of the distribution consists
of property other than money--
(i) the portion of the money or other
property which is to be treated as
attributable to amounts not included in
gross income, and
(ii) the portion of the money or
other property which is to be treated
as included in the rollover
contribution,
shall be determined on a ratable basis unless
the taxpayer designates otherwise. Any
designation under this subparagraph for a
taxable year shall be made not later than the
time prescribed by law for filing the return
for such taxable year (including extensions
thereof). Any such designation, once made,
shall be irrevocable.
(D) Nonrecognition of gain or loss.--No gain
or loss shall be recognized on any sale
described in subparagraph (A) to the extent
that an amount equal to the proceeds is
transferred pursuant to paragraph (1).
(7) Special rule for frozen deposits.--
(A) In general.--The 60-day period described
in paragraph (3) shall not--
(i) include any period during which
the amount transferred to the employee
is a frozen deposit, or
(ii) end earlier than 10 days after
such amount ceases to be a frozen
deposit.
(B) Frozen deposits.--For purposes of this
subparagraph, the term ``frozen deposit'' means
any deposit which may not be withdrawn because
of--
(i) the bankruptcy or insolvency of
any financial institution, or
(ii) any requirement imposed by the
State in which such institution is
located by reason of the bankruptcy or
insolvency (or threat thereof) of 1 or
more financial institutions in such
State.
A deposit shall not be treated as a frozen
deposit unless on at least 1 day during the 60-
day period described in paragraph (3) (without
regard to this paragraph) such deposit is
described in the preceding sentence.
(8) Definitions.--For purposes of this subsection--
(A) Qualified trust.--The term ``qualified
trust'' means an employees' trust described in
section 401(a) which is exempt from tax under
section 501(a).
(B) Eligible retirement plan.--The term
``eligible retirement plan'' means--
(i) an individual retirement account
described in section 408(a),
(ii) an individual retirement annuity
described in section 408(b) (other than
an endowment contract),
(iii) a qualified trust,
(iv) an annuity plan described in
section 403(a),
(v) an eligible deferred compensation
plan described in section 457(b) which
is maintained by an eligible employer
described in section 457(e)(1)(A), and
(vi) an annuity contract described in
section 403(b).
If any portion of an eligible rollover
distribution is attributable to payments or
distributions from a designated Roth account
(as defined in section 402A), an eligible
retirement plan with respect to such portion
shall include only another designated Roth
account and a Roth IRA.
(9) Rollover where spouse receives distribution after
death of employee.--If any distribution attributable to
an employee is paid to the spouse of the employee after
the employee's death, the preceding provisions of this
subsection shall apply to such distribution in the same
manner as if the spouse were the employee.
(10) Separate accounting.--Unless a plan described in
clause (v) of paragraph (8)(B) agrees to separately
account for amounts rolled into such plan from eligible
retirement plans not described in such clause, the plan
described in such clause may not accept transfers or
rollovers from such retirement plans.
(11) Distributions to inherited individual retirement
plan of nonspouse beneficiary.--
(A) In general.--If, with respect to any
portion of a distribution from an eligible
retirement plan described in paragraph
(8)(B)(iii) of a deceased employee, a direct
trustee-to-trustee transfer is made to an
individual retirement plan described in clause
(i) or (ii) of paragraph (8)(B) established for
the purposes of receiving the distribution on
behalf of an individual who is a designated
beneficiary (as defined by section
401(a)(9)(E)) of the employee and who is not
the surviving spouse of the employee--
(i) the transfer shall be treated as
an eligible rollover distribution,
(ii) the individual retirement plan
shall be treated as an inherited
individual retirement account or
individual retirement annuity (within
the meaning of section 408(d)(3)(C))
for purposes of this title, and
(iii) section 401(a)(9)(B) (other
than clause (iv) thereof) shall apply
to such plan.
(B) Certain trusts treated as
beneficiaries.--For purposes of this paragraph,
to the extent provided in rules prescribed by
the Secretary, a trust maintained for the
benefit of one or more designated beneficiaries
shall be treated in the same manner as a
designated beneficiary.
(d) Taxability of beneficiary of certain foreign situs
trusts.--For purposes of subsections (a), (b), and (c), a stock
bonus, pension, or profit-sharing trust which would qualify for
exemption from tax under section 501(a) except for the fact
that it is a trust created or organized outside the United
States shall be treated as if it were a trust exempt from tax
under section 501(a).
(e) Other rules applicable to exempt trusts.--
(1) Alternate payees.--
(A) Alternate payee treated as distributee.--
For purposes of subsection (a) and section 72,
an alternate payee who is the spouse or former
spouse of the participant shall be treated as
the distributee of any distribution or payment
made to the alternate payee under a qualified
domestic relations order (as defined in section
414(p)).
(B) Rollovers.--If any amount is paid or
distributed to an alternate payee who is the
spouse or former spouse of the participant by
reason of any qualified domestic relations
order (within the meaning of section 414(p)),
subsection (c) shall apply to such distribution
in the same manner as if such alternate payee
were the employee.
(2) Distributions by United States to nonresident
aliens.--The amount includible under subsection (a) in
the gross income of a nonresident alien with respect to
a distribution made by the United States in respect of
services performed by an employee of the United States
shall not exceed an amount which bears the same ratio
to the amount includible in gross income without regard
to this paragraph as--
(A) the aggregate basic pay paid by the
United States to such employee for such
services, reduced by the amount of such basic
pay which was not includible in gross income by
reason of being from sources without the United
States, bears to
(B) the aggregate basic pay paid by the
United States to such employee for such
services.
In the case of distributions under the civil service
retirement laws, the term ``basic pay'' shall have the
meaning provided in section 8331(3) of title 5, United
States Code.
(3) Cash or deferred arrangements.--For purposes of
this title, contributions made by an employer on behalf
of an employee to a trust which is a part of a
qualified cash or deferred arrangement (as defined in
section 401(k)(2)) or which is part of a salary
reduction agreement under section 403(b) shall not be
treated as distributed or made available to the
employee nor as contributions made to the trust by the
employee merely because the arrangement includes
provisions under which the employee has an election
whether the contribution will be made to the trust or
received by the employee in cash.
(4) Net unrealized appreciation.--
(A) Amounts attributable to employee
contributions.--For purposes of subsection (a)
and section 72, in the case of a distribution
other than a lump sum distribution, the amount
actually distributed to any distributee from a
trust described in subsection (a) shall not
include any net unrealized appreciation in
securities of the employer corporation
attributable to amounts contributed by the
employee (other than deductible employee
contributions within the meaning of section
72(o)(5)). This subparagraph shall not apply to
a distribution to which subsection (c) applies.
(B) Amounts attributable to employer
contributions.--For purposes of subsection (a)
and section 72, in the case of any lump sum
distribution which includes securities of the
employer corporation, there shall be excluded
from gross income the net unrealized
appreciation attributable to that part of the
distribution which consists of securities of
the employer corporation. In accordance with
rules prescribed by the Secretary, a taxpayer
may elect, on the return of tax on which a lump
sum distribution is required to be included,
not to have this subparagraph apply to such
distribution.
(C) Determination of amounts and
adjustments.--For purposes of subparagraphs (A)
and (B), net unrealized appreciation and the
resulting adjustments to basis shall be
determined in accordance with regulations
prescribed by the Secretary.
(D) Lump-sum distribution.--For purposes of
this paragraph--
(i) In general.--The term ``lump-sum
distribution'' means the distribution
or payment within one taxable year of
the recipient of the balance to the
credit of an employee which becomes
payable to the recipient--
(I) on account of the
employee's death,
(II) after the employee
attains age 59 1/2,
(III) on account of the
employee's separation from
service, or
(IV) after the employee has
become disabled (within the
meaning of section 72(m)(7)),
from a trust which forms a part of a plan
described in section 401(a) and which is exempt
from tax under section 501 or from a plan
described in section 403(a). Subclause (III) of
this clause shall be applied only with respect
to an individual who is an employee without
regard to section 401(c)(1), and subclause (IV)
shall be applied only with respect to an
employee within the meaning of section
401(c)(1). For purposes of this clause, a
distribution to two or more trusts shall be
treated as a distribution to one recipient. For
purposes of this paragraph, the balance to the
credit of the employee does not include the
accumulated deductible employee contributions
under the plan (within the meaning of section
72(o)(5)).
(ii) Aggregation of certain trusts
and plans.--For purposes of determining
the balance to the credit of an
employee under clause (i)--
(I) all trusts which are part
of a plan shall be treated as a
single trust, all pension plans
maintained by the employer
shall be treated as a single
plan, all profit-sharing plans
maintained by the employer
shall be treated as a single
plan, and all stock bonus plans
maintained by the employer
shall be treated as a single
plan, and
(II) trusts which are not
qualified trusts under section
401(a) and annuity contracts
which do not satisfy the
requirements of section
404(a)(2) shall not be taken
into account.
(iii) Community property laws.--The
provisions of this paragraph shall be
applied without regard to community
property laws.
(iv) Amounts subject to penalty.--
This paragraph shall not apply to
amounts described in subparagraph (A)
of section 72(m)(5) to the extent that
section 72(m)(5) applies to such
amounts.
(v) Balance to credit of employee not
to include amounts payable under
qualified domestic relations order.--
For purposes of this paragraph, the
balance to the credit of an employee
shall not include any amount payable to
an alternate payee under a qualified
domestic relations order (within the
meaning of section 414(p)).
(vi) Transfers to cost-of-living
arrangement not treated as
distribution.--For purposes of this
paragraph, the balance to the credit of
an employee under a defined
contribution plan shall not include any
amount transferred from such defined
contribution plan to a qualified cost-
of-living arrangement (within the
meaning of section 415(k)(2)) under a
defined benefit plan.
(vii) Lump-sum distributions of
alternate payees.--If any distribution
or payment of the balance to the credit
of an employee would be treated as a
lump-sum distribution, then, for
purposes of this paragraph, the payment
under a qualified domestic relations
order (within the meaning of section
414(p)) of the balance to the credit of
an alternate payee who is the spouse or
former spouse of the employee shall be
treated as a lump-sum distribution. For
purposes of this clause, the balance to
the credit of the alternate payee shall
not include any amount payable to the
employee.
(E) Definitions relating to securities.--For
purposes of this paragraph--
(i) Securities.--The term
``securities'' means only shares of
stock and bonds or debentures issued by
a corporation with interest coupons or
in registered form.
(ii) Securities of the employer.--The
term ``securities of the employer
corporation'' includes securities of a
parent or subsidiary corporation (as
defined in subsections (e) and (f) of
section 424) of the employer
corporation.
(6) Direct trustee-to-trustee transfers.--Any amount
transferred in a direct trustee-to-trustee transfer in
accordance with section 401(a)(31) shall not be
includible in gross income for the taxable year of such
transfer.
(f) Written explanation to recipients of distributions
eligible for rollover treatment.--
(1) In general.--The plan administrator of any plan
shall, within a reasonable period of time before making
an eligible rollover distribution, provide a written
explanation to the recipient--
(A) of the provisions under which the
recipient may have the distribution directly
transferred to an eligible retirement plan and
that the automatic distribution by direct
transfer applies to certain distributions in
accordance with section 401(a)(31)(B),
(B) of the provision which requires the
withholding of tax on the distribution if it is
not directly transferred to an eligible
retirement plan,
(C) of the provisions under which the
distribution will not be subject to tax if
transferred to an eligible retirement plan
within 60 days after the date on which the
recipient received the distribution,
(D) if applicable, of the provisions of
subsections (d) and (e) of this section, and
(E) of the provisions under which
distributions from the eligible retirement plan
receiving the distribution may be subject to
restrictions and tax consequences which are
different from those applicable to
distributions from the plan making such
distribution.
(2) Definitions.--For purposes of this subsection--
(A) Eligible rollover distribution.--The term
``eligible rollover distribution'' has the same
meaning as when used in subsection (c) of this
section, paragraph (4) of section 403(a),
subparagraph (A) of section 403(b)(8), or
subparagraph (A) of section 457(e)(16). Such
term shall include any distribution to a
designated beneficiary which would be treated
as an eligible rollover distribution by reason
of subsection (c)(11), or section 403(a)(4)(B),
403(b)(8)(B), or 457(e)(16)(B), if the
requirements of subsection (c)(11) were
satisfied.
(B) Eligible retirement plan.--The term
``eligible retirement plan'' has the meaning
given such term by subsection (c)(8)(B).
(g) Limitation on exclusion for elective deferrals.--
(1) In general.--
(A) Limitation.--Notwithstanding subsections
(e)(3) and (h)(1)(B), the elective deferrals of
any individual for any taxable year shall be
included in such individual's gross income to
the extent the amount of such deferrals for the
taxable year exceeds the applicable dollar
amount. The preceding sentence shall not apply
to the portion of such excess as does not
exceed the designated Roth contributions of the
individual for the taxable year.
(B) Applicable dollar amount.--For purposes
of subparagraph (A), the applicable dollar
amount is $15,000.
(C) Catch-up contributions.--In addition to
subparagraph (A), in the case of an eligible
participant (as defined in section 414(v)),
gross income shall not include elective
deferrals in excess of the applicable dollar
amount under subparagraph (B) to the extent
that the amount of such elective deferrals does
not exceed the applicable dollar amount under
section 414(v)(2)(B)(i) for the taxable year
(without regard to the treatment of the
elective deferrals by an applicable employer
plan under section 414(v)).
(2) Distribution of excess deferrals.--
(A) In general.--If any amount (hereinafter
in this paragraph referred to as ``excess
deferrals'') is included in the gross income of
an individual under paragraph (1) (or would be
included but for the last sentence thereof) for
any taxable year--
(i) not later than the 1st March 1
following the close of the taxable
year, the individual may allocate the
amount of such excess deferrals among
the plans under which the deferrals
were made and may notify each such plan
of the portion allocated to it, and
(ii) not later than the 1st April 15
following the close of the taxable
year, each such plan may distribute to
the individual the amount allocated to
it under clause (i) (and any income
allocable to such amount through the
end of such taxable year).
The distribution described in clause (ii) may
be made notwithstanding any other provision of
law.
(B) Treatment of distribution under section
401(k).--Except to the extent provided under
rules prescribed by the Secretary,
notwithstanding the distribution of any portion
of an excess deferral from a plan under
subparagraph (A)(ii), such portion shall, for
purposes of applying section 401(k)(3)(A)(ii),
be treated as an employer contribution.
(C) Taxation of distribution.--In the case of
a distribution to which subparagraph (A)
applies--
(i) except as provided in clause
(ii), such distribution shall not be
included in gross income, and
(ii) any income on the excess
deferral shall, for purposes of this
chapter, be treated as earned and
received in the taxable year in which
such income is distributed.
No tax shall be imposed under section 72(t) on
any distribution described in the preceding
sentence.
(D) Partial distributions.--If a plan
distributes only a portion of any excess
deferral and income allocable thereto, such
portion shall be treated as having been
distributed ratably from the excess deferral
and the income.
(3) Elective deferrals.--For purposes of this
subsection, the term ``elective deferrals'' means, with
respect to any taxable year, the sum of--
(A) any employer contribution under a
qualified cash or deferred arrangement (as
defined in section 401(k)) to the extent not
includible in gross income for the taxable year
under subsection (e)(3) (determined without
regard to this subsection),
(B) any employer contribution to the extent
not includible in gross income for the taxable
year under subsection (h)(1)(B) (determined
without regard to this subsection),
(C) any employer contribution to purchase an
annuity contract under section 403(b) under a
salary reduction agreement (within the meaning
of section 3121(a)(5)(D)), and
(D) any elective employer contribution under
section 408(p)(2)(A)(i).
An employer contribution shall not be treated as an
elective deferral described in subparagraph (C) if
under the salary reduction agreement such contribution
is made pursuant to a one-time irrevocable election
made by the employee at the time of initial eligibility
to participate in the agreement or is made pursuant to
a similar arrangement involving a one-time irrevocable
election specified in regulations.
(4) Cost-of-living adjustment.--In the case of
taxable years beginning after December 31, 2006, the
Secretary shall adjust the $15,000 amount under
paragraph (1)(B) at the same time and in the same
manner as under section 415(d), except that the base
period shall be the calendar quarter beginning July 1,
2005, and any increase under this paragraph which is
not a multiple of $500 shall be rounded to the next
lowest multiple of $500.
(5) Disregard of community property laws.--This
subsection shall be applied without regard to community
property laws.
(6) Coordination with section 72.--For purposes of
applying section 72, any amount includible in gross
income for any taxable year under this subsection but
which is not distributed from the plan during such
taxable year shall not be treated as investment in the
contract.
(7) Special rule for certain organizations.--
(A) In general.--In the case of a qualified
employee of a qualified organization, with
respect to employer contributions described in
paragraph (3)(C) made by such organization, the
limitation of paragraph (1) for any taxable
year shall be increased by whichever of the
following is the least:
(i) $3,000,
(ii) $15,000 reduced by the sum of--
(I) the amounts not included
in gross income for prior
taxable years by reason of this
paragraph, plus
(II) the aggregate amount of
designated Roth contributions
(as defined in section 402A(c))
permitted for prior taxable
years by reason of this
paragraph, or
(iii) the excess of $5,000 multiplied
by the number of years of service of
the employee with the qualified
organization over the employer
contributions described in paragraph
(3) made by the organization on behalf
of such employee for prior taxable
years (determined in the manner
prescribed by the Secretary).
(B) Qualified organization.--For purposes of
this paragraph, the term ``qualified
organization'' means any educational
organization, hospital, home health service
agency, health and welfare service agency,
church, or convention or association of
churches. Such term includes any organization
described in section 414(e)(3)(B)(ii). Terms
used in this subparagraph shall have the same
meaning as when used in section 415(c)(4) (as
in effect before the enactment of the Economic
Growth and Tax Relief Reconciliation Act of
2001).
(C) Qualified employee.--For purposes of this
paragraph, the term ``qualified employee''
means any employee who has completed 15 years
of service with the qualified organization.
(D) Years of service.--For purposes of this
paragraph, the term ``years of service'' has
the meaning given such term by section 403(b).
(8) Matching contributions on behalf of self-employed
individuals not treated as elective employer
contributions.--Except as provided in section
401(k)(3)(D)(ii), any matching contribution described
in section 401(m)(4)(A) which is made on behalf of a
self-employed individual (as defined in section 401(c))
shall not be treated as an elective employer
contribution under a qualified cash or deferred
arrangement (as defined in section 401(k)) for purposes
of this title.
(9) Elective deferrals by members of ready reserve.--
(A) In general.--In the case of a qualified
ready reservist for any taxable year, the
limitations of subparagraphs (A) and (C) of
paragraph (1) shall be applied separately with
respect to--
(i) elective deferrals of such
qualified ready reservist with respect
to compensation described in
subparagraph (B), and
(ii) all other elective deferrals of
such qualified ready reservist.
(B) Qualified ready reservist.--For purposes
of this paragraph, the term ``qualified ready
reservist'' means any individual for any
taxable year if such individual received
compensation for service as a member of the
Ready Reserve of a reserve component (as
defined in section 101 of title 37, United
States Code) during such taxable year.
(h) Special rules for simplified employee pensions.--For
purposes of this chapter--
(1) In general.--Except as provided in paragraph (2),
contributions made by an employer on behalf of an
employee to an individual retirement plan pursuant to a
simplified employee pension (as defined in section
408(k))--
(A) shall not be treated as distributed or
made available to the employee or as
contributions made by the employee, and
(B) if such contributions are made pursuant
to an arrangement under section 408(k)(6) under
which an employee may elect to have the
employer make contributions to the simplified
employee pension on behalf of the employee,
shall not be treated as distributed or made
available or as contributions made by the
employee merely because the simplified employee
pension includes provisions for such election.
(2) Limitations on employer contributions.--
Contributions made by an employer to a simplified
employee pension with respect to an employee for any
year shall be treated as distributed or made available
to such employee and as contributions made by the
employee to the extent such contributions exceed the
lesser of--
(A) 25 percent of the compensation (within
the meaning of section 414(s)) from such
employer includible in the employee's gross
income for the year (determined without regard
to the employer contributions to the simplified
employee pension), or
(B) the limitation in effect under section
415(c)(1)(A), reduced in the case of any highly
compensated employee (within the meaning of
section 414(q)) by the amount taken into
account with respect to such employee under
section 408(k)(3)(D).
(3) Distributions.--Any amount paid or distributed
out of an individual retirement plan pursuant to a
simplified employee pension shall be included in gross
income by the payee or distributee, as the case may be,
in accordance with the provisions of section 408(d).
(i) Treatment of self-employed individuals.--For purposes of
this section, except as otherwise provided in subsection
(e)(4)(D)(i), the term ``employee'' includes a self-employed
individual (as defined in section 401(c)(1)(B)) and the
employer of such individual shall be the person treated as his
employer under section 401(c)(4).
(j) Effect of disposition of stock by plan on net unrealized
appreciation.--
(1) In general.--For purposes of subsection (e)(4),
in the case of any transaction to which this subsection
applies, the determination of net unrealized
appreciation shall be made without regard to such
transaction.
(2) Transaction to which subsection applies.--This
subsection shall apply to any transaction in which--
(A) the plan trustee exchanges the plan's
securities of the employer corporation for
other such securities, or
(B) the plan trustee disposes of securities
of the employer corporation and uses the
proceeds of such disposition to acquire
securities of the employer corporation within
90 days (or such longer period as the Secretary
may prescribe), except that this subparagraph
shall not apply to any employee with respect to
whom a distribution of money was made during
the period after such disposition and before
such acquisition.
(k) Treatment of simple retirement accounts.--Rules similar
to the rules of paragraphs (1) and (3) of subsection (h) shall
apply to contributions and distributions with respect to a
simple retirement account under section 408(p).
(l) Distributions from governmental plans for health and
long-term care insurance.--
(1) In general.--In the case of an employee who is an
eligible retired public safety officer who makes the
election described in paragraph (6) with respect to any
taxable year of such employee, gross income of such
employee for such taxable year does not include any
distribution from an eligible retirement plan
maintained by the employer described in paragraph
(4)(B) to the extent that the aggregate amount of such
distributions does not exceed the amount paid by such
employee for qualified health insurance premiums for
such taxable year.
(2) Limitation.--The amount which may be excluded
from gross income for the taxable year by reason of
paragraph (1) shall not exceed $3,000.
(3) Distributions must otherwise be includible.--
(A) In general.--An amount shall be treated
as a distribution for purposes of paragraph (1)
only to the extent that such amount would be
includible in gross income without regard to
paragraph (1).
(B) Application of section 72.--
Notwithstanding section 72, in determining the
extent to which an amount is treated as a
distribution for purposes of subparagraph (A),
the aggregate amounts distributed from an
eligible retirement plan in a taxable year (up
to the amount excluded under paragraph (1))
shall be treated as includible in gross income
(without regard to subparagraph (A)) to the
extent that such amount does not exceed the
aggregate amount which would have been so
includible if all amounts to the credit of the
eligible public safety officer in all eligible
retirement plans maintained by the employer
described in paragraph (4)(B) were distributed
during such taxable year and all such plans
were treated as 1 contract for purposes of
determining under section 72 the aggregate
amount which would have been so includible.
Proper adjustments shall be made in applying
section 72 to other distributions in such
taxable year and subsequent taxable years.
(4) Definitions.--For purposes of this subsection--
(A) Eligible retirement plan.--For purposes
of paragraph (1), the term ``eligible
retirement plan'' means a governmental plan
(within the meaning of section 414(d)) which is
described in clause (iii), (iv), (v), or (vi)
of subsection (c)(8)(B).
(B) Eligible retired public safety officer.--
The term ``eligible retired public safety
officer'' means an individual who, by reason of
disability or attainment of normal retirement
age, is separated from service as a public
safety officer with the employer who maintains
the eligible retirement plan from which
distributions subject to paragraph (1) are
made.
(C) Public safety officer.--The term ``public
safety officer'' shall have the same meaning
given such term by section 1204(9)(A) of the
Omnibus Crime Control and Safe Streets Act of
1968 (42 U.S.C. 3796b(9)(A)), as in effect
immediately before the enactment of the
National Defense Authorization Act for Fiscal
Year 2013.
(D) Qualified health insurance premiums.--The
term ``qualified health insurance premiums''
means premiums for coverage for the eligible
retired public safety officer, his spouse, and
dependents (as defined in section 152), by an
accident or health plan or qualified long-term
care insurance contract (as defined in section
7702B(b)).
(5) Special rules.--For purposes of this subsection--
(A) Direct payment to insurer required.--
Paragraph (1) shall only apply to a
distribution if payment of the premiums is made
directly to the provider of the accident or
health plan or qualified long-term care
insurance contract by deduction from a
distribution from the eligible retirement plan.
(B) Related plans treated as 1.--All eligible
retirement plans of an employer shall be
treated as a single plan.
(6) Election described.--
(A) In general.--For purposes of paragraph
(1), an election is described in this paragraph
if the election is made by an employee after
separation from service with respect to amounts
not distributed from an eligible retirement
plan to have amounts from such plan distributed
in order to pay for qualified health insurance
premiums.
(B) Special rule.--A plan shall not be
treated as violating the requirements of
section 401, or as engaging in a prohibited
transaction for purposes of section 503(b),
merely because it provides for an election with
respect to amounts that are otherwise
distributable under the plan or merely because
of a distribution made pursuant to an election
described in subparagraph (A).
(7) Coordination with medical expense deduction.--The
amounts excluded from gross income under paragraph (1)
shall not be taken into account under section 213.
(8) Coordination with deduction for health insurance
costs of self-employed individuals.--The amounts
excluded from gross income under paragraph (1) shall
not be taken into account under section 162(l).
* * * * * * *
SEC. 403. TAXATION OF EMPLOYEE ANNUITIES.
(a) Taxability of beneficiary under a qualified annuity
plan.--
(1) Distributee taxable under section 72.--If an
annuity contract is purchased by an employer for an
employee under a plan which meets the requirements of
section 404(a)(2) (whether or not the employer deducts
the amounts paid for the contract under such section),
the amount actually distributed to any distributee
under the contract shall be taxable to the distributee
(in the year in which so distributed) under section 72
(relating to annuities).
(2) Special rule for health and long-term care
insurance.--To the extent provided in section 402(l),
paragraph (1) shall not apply to the amount distributed
under the contract which is otherwise includible in
gross income under this subsection.
(3) Self-employed individuals.--For purposes of this
subsection, the term ``employee'' includes an
individual who is an employee within the meaning of
section 401(c)(1), and the employer of such individual
is the person treated as his employer under section
401(c)(4).
(4) Rollover amounts.--
(A) General rule.--If--
(i) any portion of the balance to the
credit of an employee in an employee
annuity described in paragraph (1) is
paid to him in an eligible rollover
distribution (within the meaning of
section 402(c)(4)),
(ii) the employee transfers any
portion of the property he receives in
such distribution to an eligible
retirement plan, and
(iii) in the case of a distribution
of property other than money, the
amount so transferred consists of the
property distributed,
then such distribution (to the extent so
transferred) shall not be includible in gross
income for the taxable year in which paid.
(B) Certain rules made applicable.--The rules
of paragraphs (2) through (7) and (11) and (9)
of section 402(c) and section 402(f) shall
apply for purposes of subparagraph (A).
(5) Direct trustee-to-trustee transfer.--Any amount
transferred in a direct trustee-to-trustee transfer in
accordance with section 401(a)(31) shall not be
includible in gross income for the taxable year of such
transfer.
(b) Taxability of beneficiary under annuity purchased by
section 501(c)(3) organization or public school.--
(1) General rule.--If--
(A) an annuity contract is purchased--
(i) for an employee by an employer
described in section 501(c)(3) which is
exempt from tax under section 501(a),
(ii) for an employee (other than an
employee described in clause (i)), who
performs services for an educational
organization described in section
170(b)(1)(A)(ii), by an employer which
is a State, a political subdivision of
a State, or an agency or
instrumentality of any one or more of
the foregoing, or
(iii) for the minister described in
section 414(e)(5)(A) by the minister or
by an employer,
(B) such annuity contract is not subject to
subsection (a),
(C) the employee's rights under the contract
are nonforfeitable, except for failure to pay
future premiums,
(D) except in the case of a contract
purchased by a church, such contract is
purchased under a plan which meets the
nondiscrimination requirements of paragraph
(12), and
(E) in the case of a contract purchased under
a salary reduction agreement, the contract
meets the requirements of section 401(a)(30),
then contributions and other additions by such employer
for such annuity contract shall be excluded from the
gross income of the employee for the taxable year to
the extent that the aggregate of such contributions and
additions (when expressed as an annual addition (within
the meaning of section 415(c)(2))) does not exceed the
applicable limit under section 415. The amount actually
distributed to any distributee under such contract
shall be taxable to the distributee (in the year in
which so distributed) under section 72 (relating to
annuities). For purposes of applying the rules of this
subsection to contributions and other additions by an
employer for a taxable year, amounts transferred to a
contract described in this paragraph by reason of a
rollover contribution described in paragraph (8) of
this subsection or section 408(d)(3)(A)(ii) shall not
be considered contributed by such employer.
(2) Special rule for health and long-term care
insurance.--To the extent provided in section 402(l),
paragraph (1) shall not apply to the amount distributed
under the contract which is otherwise includible in
gross income under this subsection.
(3) Includible compensation.--For purposes of this
subsection, the term ``includible compensation'' means,
in the case of any employee, the amount of compensation
which is received from the employer described in
paragraph (1)(A), and which is includible in gross
income (computed without regard to section 911) for the
most recent period (ending not later than the close of
the taxable year) which under paragraph (4) may be
counted as one year of service, and which precedes the
taxable year by no more than five years. Such term does
not include any amount contributed by the employer for
any annuity contract to which this subsection applies.
Such term includes--
(A) any elective deferral (as defined in
section 402(g)(3)), and
(B) any amount which is contributed or
deferred by the employer at the election of the
employee and which is not includible in the
gross income of the employee by reason of
section 125, 132(f)(4), or 457.
(4) Years of service.--In determining the number of
years of service for purposes of this subsection, there
shall be included--
(A) one year for each full year during which
the individual was a full-time employee of the
organization purchasing the annuity for him,
and
(B) a fraction of a year (determined in
accordance with regulations prescribed by the
Secretary) for each full year during which such
individual was a part-time employee of such
organization and for each part of a year during
which such individual was a full-time or part-
time employee of such organization.
In no case shall the number of years of service be less
than one.
(5) Application to more than one annuity contract.--
If for any taxable year of the employee this subsection
applies to 2 or more annuity contracts purchased by the
employer, such contracts shall be treated as one
contract.
(7) Custodial accounts for regulated investment
company stock.--
(A) Amounts paid treated as contributions.--
For purposes of this title, amounts paid by an
employer described in paragraph (1)(A) to a
custodial account which satisfies the
requirements of section 401(f)(2) shall be
treated as amounts contributed by him for an
annuity contract for his employee [if--
[(i) the amounts are to be invested
in regulated investment company stock
to be held in that custodial account,
and
[(ii) under the custodial account no
such amounts may be paid or made
available to any distributee (unless
such amount is a distribution to which
section 72(t)(2)(G) applies) before the
employee dies, attains age 59 1/2, has
a severance from employment, becomes
disabled (within the meaning of section
72(m)(7)), or in the case of
contributions made pursuant to a salary
reduction agreement (within the meaning
of section 3121(a)(5)(D)), encounters
financial hardship.] if the amounts are
to be invested in regulated investment
company stock to be held in that
custodial account, and under the
custodial account--
(i) no such amounts may be paid or
made available to any distributee
(unless such amount is a distribution
to which section 72(t)(2)(G) applies)
before--
(I) the employee dies,
(II) the employee attains age
59\1/2\,
(III) the employee has a
severance from employment,
(IV) the employee becomes
disabled (within the meaning of
section 72(m)(7)),
(V) in the case of
contributions made pursuant to
a salary reduction agreement
(within the meaning of section
3121(a)(5)(D)), the employee
encounters financial hardship,
or
(VI) except as may be
otherwise provided by
regulations, with respect to
amounts invested in a lifetime
income investment (as defined
in section 401(a)(38)(B)(ii)),
the date that is 90 days prior
to the date that such lifetime
income investment may no longer
be held as an investment option
under the contract, and
(ii) in the case of amounts described
in clause (i)(VI), such amounts will be
distributed only in the form of a
qualified distribution (as defined in
section 401(a)(38)(B)(i)) or a
qualified plan distribution annuity
contract (as defined in section
401(a)(38)(B)(iv)).
(B) Account treated as plan.--For purposes of
this title, a custodial account which satisfies
the requirements of section 401(f)(2) shall be
treated as an organization described in section
401(a) solely for purposes of subchapter F and
subtitle F with respect to amounts received by
it (and income from investment thereof).
(C) Regulated investment company.--For
purposes of this paragraph, the term
``regulated investment company'' means a
domestic corporation which is a regulated
investment company within the meaning of
section 851(a).
(D) Treatment of custodial account upon plan
termination.--
(i) In general.--If--
(I) an employer terminates
the plan under which amounts
are contributed to a custodial
account under subparagraph (A),
and
(II) the person holding the
assets of the account has
demonstrated to the
satisfaction of the Secretary
under section 408(a)(2) that
the person is qualified to be a
trustee of an individual
retirement plan,
then, as of the date of the
termination, the custodial account
shall be deemed to be an individual
retirement plan for purposes of this
title.
(ii) Treatment as roth ira.--Any
custodial account treated as an
individual retirement plan under clause
(i) shall be treated as a Roth IRA only
if the custodial account was a
designated Roth account.
(8) Rollover amounts.--
(A) General rule.--If--
(i) any portion of the balance to the
credit of an employee in an annuity
contract described in paragraph (1) is
paid to him in an eligible rollover
distribution (within the meaning of
section 402(c)(4)),
(ii) the employee transfers any
portion of the property he receives in
such distribution to an eligible
retirement plan described in section
402(c)(8)(B), and
(iii) in the case of a distribution
of property other than money, the
property so transferred consists of the
property distributed,
then such distribution (to the extent so
transferred) shall not be includible in gross
income for the taxable year in which paid.
(B) Certain rules made applicable.--The rules
of paragraphs (2) through (7), (9), and (11) of
section 402(c) and section 402(f) shall apply
for purposes of subparagraph (A), except that
section 402(f) shall be applied to the payor in
lieu of the plan administrator.
(9) Retirement income accounts provided by churches,
etc.
(A) Amounts paid treated as contributions.--
For purposes of this title--
(i) a retirement income account shall
be treated as an annuity contract
described in this subsection, and
(ii) amounts paid by an employer
described in paragraph (1)(A) to a
retirement income account shall be
treated as amounts contributed by the
employer for an annuity contract for
the employee on whose behalf such
account is maintained.
(B) Retirement income account.--For purposes
of this paragraph, the term ``retirement income
account'' means a defined contribution program
established or maintained by a church, or a
convention or association of churches,
including an organization described in section
414(e)(3)(A), to provide benefits under section
403(b) for an employee described in paragraph
(1) (including an employee described in section
414(e)(3)(B)) or his beneficiaries.
(10) Distribution requirements.--Under regulations
prescribed by the Secretary, this subsection shall not
apply to any annuity contract (or to any custodial
account described in paragraph (7) or retirement income
account described in paragraph (9)) unless requirements
similar to the requirements of sections 401(a)(9) and
401(a)(31) are met (and requirements similar to the
incidental death benefit requirements of section 401(a)
are met) with respect to such annuity contract (or
custodial account or retirement income account). Any
amount transferred in a direct trustee-to-trustee
transfer in accordance with section 401(a)(31) shall
not be includible in gross income for the taxable year
of the transfer.
(11) Requirement that distributions not begin before
age 59 1/2, severance from employment, death, or
disability.--This subsection shall not apply to any
annuity contract unless under such contract
distributions attributable to contributions made
pursuant to a salary reduction agreement (within the
meaning of section 402(g)(3)(C)) may be paid only--
(A) when the employee attains age 59 1/2, has
a severance from employment, dies, or becomes
disabled (within the meaning of section
72(m)(7)),
(B) in the case of hardship, [or]
(C) for distributions to which section
72(t)(2)(G) applies[.], or
(D) except as may be otherwise provided by
regulations, with respect to amounts invested
in a lifetime income investment (as defined in
section 401(a)(38)(B)(ii))--
(i) on or after the date that is 90
days prior to the date that such
lifetime income investment may no
longer be held as an investment option
under the contract, and
(ii) in the form of a qualified
distribution (as defined in section
401(a)(38)(B)(i)) or a qualified plan
distribution annuity contract (as
defined in section 401(a)(38)(B)(iv)).
Such contract may not provide for the distribution of
any income attributable to such contributions in the
case of hardship.
(12) Nondiscrimination requirements.--
(A) In general.--For purposes of paragraph
(1)(D), a plan meets the nondiscrimination
requirements of this paragraph if--
(i) with respect to contributions not
made pursuant to a salary reduction
agreement, such plan meets the
requirements of paragraphs (4), (5),
(17), and (26) of section 401(a),
section 401(m), and section 410(b) in
the same manner as if such plan were
described in section 401(a), and
(ii) all employees of the
organization may elect to have the
employer make contributions of more
than $200 pursuant to a salary
reduction agreement if any employee of
the organization may elect to have the
organization make contributions for
such contracts pursuant to such
agreement.
For purposes of clause (i), a contribution
shall be treated as not made pursuant to a
salary reduction agreement if under the
agreement it is made pursuant to a 1-time
irrevocable election made by the employee at
the time of initial eligibility to participate
in the agreement or is made pursuant to a
similar arrangement involving a one-time
irrevocable election specified in regulations.
For purposes of clause (ii), there may be
excluded any employee who is a participant in
an eligible deferred compensation plan (within
the meaning of section 457) or a qualified cash
or deferred arrangement of the organization or
another annuity contract described in this
subsection. Any nonresident alien described in
section 410(b)(3)(C) may also be excluded.
Subject to the conditions applicable under
section 410(b)(4), there may be excluded for
purposes of this subparagraph employees who are
students performing services described in
section 3121(b)(10) and employees who normally
work less than 20 hours per week.
(B) Church.--For purposes of paragraph
(1)(D), the term ``church'' has the meaning
given to such term by section 3121(w)(3)(A).
Such term shall include any qualified church-
controlled organization (as defined in section
3121(w)(3)(B)).
(C) State and local governmental plans.--For
purposes of paragraph (1)(D), the requirements
of subparagraph (A)(i) (other than those
relating to section 401(a)(17)) shall not apply
to a governmental plan (within the meaning of
section 414(d)) maintained by a State or local
government or political subdivision thereof (or
agency or instrumentality thereof).
(13) Trustee-to-trustee transfers to purchase
permissive service credit.--No amount shall be
includible in gross income by reason of a direct
trustee-to-trustee transfer to a defined benefit
governmental plan (as defined in section 414(d)) if
such transfer is--
(A) for the purchase of permissive service
credit (as defined in section 415(n)(3)(A))
under such plan, or
(B) a repayment to which section 415 does not
apply by reason of subsection (k)(3) thereof.
(14) Death benefits under USERRA-qualified active
military service.--This subsection shall not apply to
an annuity contract unless such contract meets the
requirements of section 401(a)(37).
(c) Taxability of beneficiary under nonqualified annuities or
under annuities purchased by exempt organizations.--Premiums
paid by an employer for an annuity contract which is not
subject to subsection (a) shall be included in the gross income
of the employee in accordance with section 83 (relating to
property transferred in connection with performance of
services), except that the value of such contract shall be
substituted for the fair market value of the property for
purposes of applying such section. The preceding sentence shall
not apply to that portion of the premiums paid which is
excluded from gross income under subsection (b). In the case of
any portion of any contract which is attributable to premiums
to which this subsection applies, the amount actually paid or
made available under such contract to any beneficiary which is
attributable to such premiums shall be taxable to the
beneficiary (in the year in which so paid or made available)
under section 72 (relating to annuities).
* * * * * * *
SEC. 408. INDIVIDUAL RETIREMENT ACCOUNTS.
(a) Individual retirement account.--For purposes of this
section, the term ``individual retirement account'' means a
trust created or organized in the United States for the
exclusive benefit of an individual or his beneficiaries, but
only if the written governing instrument creating the trust
meets the following requirements:
(1) Except in the case of a rollover contribution
described in subsection (d)(3) or in section 402(c),
403(a)(4), 403(b)(8), or 457(e)(16), no contribution
will be accepted unless it is in cash, and
contributions will not be accepted for the taxable year
on behalf of any individual in excess of the amount in
effect for such taxable year under section
219(b)(1)(A).
(2) The trustee is a bank (as defined in subsection
(n)) or such other person who demonstrates to the
satisfaction of the Secretary that the manner in which
such other person will administer the trust will be
consistent with the requirements of this section.
(3) No part of the trust funds will be invested in
life insurance contracts.
(4) The interest of an individual in the balance in
his account is nonforfeitable.
(5) The assets of the trust will not be commingled
with other property except in a common trust fund or
common investment fund.
(6) Under regulations prescribed by the Secretary,
rules similar to the rules of section 401(a)(9) and the
incidental death benefit requirements of section 401(a)
shall apply to the distribution of the entire interest
of an individual for whose benefit the trust is
maintained.
(b) Individual retirement annuity.--For purposes of this
section, the term ``individual retirement annuity'' means an
annuity contract, or an endowment contract (as determined under
regulations prescribed by the Secretary), issued by an
insurance company which meets the following requirements:
(1) The contract is not transferable by the owner.
(2) Under the contract--
(A) the premiums are not fixed,
(B) the annual premium on behalf of any
individual will not exceed the dollar amount in
effect under section 219(b)(1)(A), and
(C) any refund of premiums will be applied
before the close of the calendar year following
the year of the refund toward the payment of
future premiums or the purchase of additional
benefits.
(3) Under regulations prescribed by the Secretary,
rules similar to the rules of section 401(a)(9) and the
incidental death benefit requirements of section 401(a)
shall apply to the distribution of the entire interest
of the owner.
(4) The entire interest of the owner is
nonforfeitable.
Such term does not include such an annuity contract for any
taxable year of the owner in which it is disqualified on the
application of subsection (e) or for any subsequent taxable
year. For purposes of this subsection, no contract shall be
treated as an endowment contract if it matures later than the
taxable year in which the individual in whose name such
contract is purchased attains age 70 1/2; if it is not for the
exclusive benefit of the individual in whose name it is
purchased or his beneficiaries; or if the aggregate annual
premiums under all such contracts purchased in the name of such
individual for any taxable year exceed the dollar amount in
effect under section 219(b)(1)(A).
(c) Accounts established by employers and certain
associations of employees.--A trust created or organized in the
United States by an employer for the exclusive benefit of his
employees or their beneficiaries, or by an association of
employees (which may include employees within the meaning of
section 401(c)(1)) for the exclusive benefit of its members or
their beneficiaries, shall be treated as an individual
retirement account (described in subsection (a)), but only if
the written governing instrument creating the trust meets the
following requirements:
(1) The trust satisfies the requirements of
paragraphs (1) through (6) of subsection (a).
(2) There is a separate accounting for the interest
of each employee or member (or spouse of an employee or
member).
(3) There is a separate accounting for any interest
of an employee or member (or spouse of an employee or
member) in a Roth IRA.
The assets of the trust may be held in a common fund for the
account of all individuals who have an interest in the trust.
(d) Tax treatment of distributions.--
(1) In general.--Except as otherwise provided in this
subsection, any amount paid or distributed out of an
individual retirement plan shall be included in gross
income by the payee or distributee, as the case may be,
in the manner provided under section 72.
(2) Special rules for applying section 72.--For
purposes of applying section 72 to any amount described
in paragraph (1)--
(A) all individual retirement plans shall be
treated as 1 contract,
(B) all distributions during any taxable year
shall be treated as 1 distribution, and
(C) the value of the contract, income on the
contract, and investment in the contract shall
be computed as of the close of the calendar
year in which the taxable year begins.
For purposes of subparagraph (C), the value of the
contract shall be increased by the amount of any
distributions during the calendar year.
(3) Rollover contribution.--An amount is described in
this paragraph as a rollover contribution if it meets
the requirements of subparagraphs (A) and (B).
(A) In general.--Paragraph (1) does not apply
to any amount paid or distributed out of an
individual retirement account or individual
retirement annuity to the individual for whose
benefit the account or annuity is maintained
if--
(i) the entire amount received
(including money and any other
property) is paid into an individual
retirement account or individual
retirement annuity (other than an
endowment contract) for the benefit of
such individual not later than the 60th
day after the day on which he receives
the payment or distribution; or
(ii) the entire amount received
(including money and any other
property) is paid into an eligible
retirement plan for the benefit of such
individual not later than the 60th day
after the date on which the payment or
distribution is received, except that
the maximum amount which may be paid
into such plan may not exceed the
portion of the amount received which is
includible in gross income (determined
without regard to this paragraph).
For purposes of clause (ii), the term
``eligible retirement plan'' means an eligible
retirement plan described in clause (iii),
(iv), (v), or (vi) of section 402(c)(8)(B).
(B) Limitation.--This paragraph does not
apply to any amount described in subparagraph
(A)(i) received by an individual from an
individual retirement account or individual
retirement annuity if at any time during the 1-
year period ending on the day of such receipt
such individual received any other amount
described in that subparagraph from an
individual retirement account or an individual
retirement annuity which was not includible in
his gross income because of the application of
this paragraph.
(C) Denial of rollover treatment for
inherited accounts, etc..--
(i) In general.--In the case of an
inherited individual retirement account
or individual retirement annuity--
(I) this paragraph shall not
apply to any amount received by
an individual from such an
account or annuity (and no
amount transferred from such
account or annuity to another
individual retirement account
or annuity shall be excluded
from gross income by reason of
such transfer), and
(II) such inherited account
or annuity shall not be treated
as an individual retirement
account or annuity for purposes
of determining whether any
other amount is a rollover
contribution.
(ii) Inherited individual retirement
account or annuity.--An individual
retirement account or individual
retirement annuity shall be treated as
inherited if--
(I) the individual for whose
benefit the account or annuity
is maintained acquired such
account by reason of the death
of another individual, and
(II) such individual was not
the surviving spouse of such
other individual.
(D) Partial rollovers permitted.--
(i) In general.--If any amount paid
or distributed out of an individual
retirement account or individual
retirement annuity would meet the
requirements of subparagraph (A) but
for the fact that the entire amount was
not paid into an eligible plan as
required by clause (i) or (ii) of
subparagraph (A), such amount shall be
treated as meeting the requirements of
subparagraph (A) to the extent it is
paid into an eligible plan referred to
in such clause not later than the 60th
day referred to in such clause.
(ii) Eligible plan.--For purposes of
clause (i), the term ``eligible plan''
means any account, annuity, contract,
or plan referred to in subparagraph
(A).
(E) Denial of rollover treatment for required
distributions.--This paragraph shall not apply
to any amount to the extent such amount is
required to be distributed under subsection
(a)(6) or (b)(3).
(F) Frozen deposits.--For purposes of this
paragraph, rules similar to the rules of
section 402(c)(7) (relating to frozen deposits)
shall apply.
(G) Simple retirement accounts.--In the case
of any payment or distribution out of a simple
retirement account (as defined in subsection
(p)) to which section 72(t)(6) applies, this
paragraph shall not apply unless such payment
or distribution is paid into another simple
retirement account.
(H) Application of section 72.--
(i) In general.--If--
(I) a distribution is made
from an individual retirement
plan, and
(II) a rollover contribution
is made to an eligible
retirement plan described in
section 402(c)(8)(B)(iii),
(iv), (v), or (vi) with respect
to all or part of such
distribution,
then, notwithstanding paragraph (2),
the rules of clause (ii) shall apply
for purposes of applying section 72.
(ii) Applicable rules.--In the case
of a distribution described in clause
(i)--
(I) section 72 shall be
applied separately to such
distribution,
(II) notwithstanding the pro
rata allocation of income on,
and investment in, the contract
to distributions under section
72, the portion of such
distribution rolled over to an
eligible retirement plan
described in clause (i) shall
be treated as from income on
the contract (to the extent of
the aggregate income on the
contract from all individual
retirement plans of the
distributee), and
(III) appropriate adjustments
shall be made in applying
section 72 to other
distributions in such taxable
year and subsequent taxable
years.
(I) Waiver of 60-day requirement.--The
Secretary may waive the 60-day requirement
under subparagraphs (A) and (D) where the
failure to waive such requirement would be
against equity or good conscience, including
casualty, disaster, or other events beyond the
reasonable control of the individual subject to
such requirement.
(4) Contributions returned before due date of
return.--Paragraph (1) does not apply to the
distribution of any contribution paid during a taxable
year to an individual retirement account or for an
individual retirement annuity if--
(A) such distribution is received on or
before the day prescribed by law (including
extensions of time) for filing such
individual's return for such taxable year,
(B) no deduction is allowed under section 219
with respect to such contribution, and
(C) such distribution is accompanied by the
amount of net income attributable to such
contribution.
In the case of such a distribution, for purposes of
section 61, any net income described in subparagraph
(C) shall be deemed to have been earned and receivable
in the taxable year in which such contribution is made.
(5) Distributions of excess contributions after due
date for taxable year and certain excess rollover
contributions.--
(A) In general.--In the case of any
individual, if the aggregate contributions
(other than rollover contributions) paid for
any taxable year to an individual retirement
account or for an individual retirement annuity
do not exceed the dollar amount in effect under
section 219(b)(1)(A), paragraph (1) shall not
apply to the distribution of any such
contribution to the extent that such
contribution exceeds the amount allowable as a
deduction under section 219 for the taxable
year for which the contribution was paid--
(i) if such distribution is received
after the date described in paragraph
(4),
(ii) but only to the extent that no
deduction has been allowed under
section 219 with respect to such excess
contribution.
If employer contributions on behalf of the
individual are paid for the taxable year to a
simplified employee pension, the dollar
limitation of the preceding sentence shall be
increased by the lesser of the amount of such
contributions or the dollar limitation in
effect under section 415(c)(1)(A) for such
taxable year.
(B) Excess rollover contributions
attributable to erroneous information.--If--
(i) the taxpayer reasonably relies on
information supplied pursuant to
subtitle F for determining the amount
of a rollover contribution, but
(ii) the information was erroneous,
subparagraph (A) shall be applied by
increasing the dollar limit set forth
therein by that portion of the excess
contribution which was attributable to
such information.
For purposes of this paragraph, the amount allowable as
a deduction under section 219 shall be computed without
regard to section 219(g). (6) Transfer of account
incident to divorce.--The transfer of an individual's
interest in an individual retirement account or an
individual retirement annuity to his spouse or former
spouse under a divorce or separation instrument
described in clause (i) of section 121(d)(3)(C) is not
to be considered a taxable transfer made by such
individual notwithstanding any other provision of this
subtitle, and such interest at the time of the transfer
is to be treated as an individual retirement account of
such spouse, and not of such individual. Thereafter
such account or annuity for purposes of this subtitle
is to be treated as maintained for the benefit of such
spouse.
(7) Special rules for simplified employee pensions or
simple retirement accounts.--
(A) Transfer or rollover of contributions
prohibited until deferral test met.--
Notwithstanding any other provision of this
subsection or section 72(t), paragraph (1) and
section 72(t)(1) shall apply to the transfer or
distribution from a simplified employee pension
of any contribution under a salary reduction
arrangement described in subsection (k)(6) (or
any income allocable thereto) before a
determination as to whether the requirements of
subsection (k)(6)(A)(iii) are met with respect
to such contribution.
(B) Certain exclusions treated as
deductions.--For purposes of paragraphs (4) and
(5) and section 4973, any amount excludable or
excluded from gross income under section 402(h)
or 402(k) shall be treated as an amount
allowable or allowed as a deduction under
section 219.
(8) Distributions for charitable purposes.--
(A) In general.--So much of the aggregate
amount of qualified charitable distributions
with respect to a taxpayer made during any
taxable year which does not exceed $100,000
shall not be includible in gross income of such
taxpayer for such taxable year.
(B) Qualified charitable distribution.--For
purposes of this paragraph, the term
``qualified charitable distribution'' means any
distribution from an individual retirement plan
(other than a plan described in subsection (k)
or (p))--
(i) which is made directly by the
trustee to an organization described in
section 170(b)(1)(A) (other than any
organization described in section
509(a)(3) or any fund or account
described in section 4966(d)(2)), and
(ii) which is made on or after the
date that the individual for whose
benefit the plan is maintained has
attained age 70\1/2\.
A distribution shall be treated as a qualified
charitable distribution only to the extent that
the distribution would be includible in gross
income without regard to subparagraph (A).
(C) Contributions must be otherwise
deductible.--For purposes of this paragraph, a
distribution to an organization described in
subparagraph (B)(i) shall be treated as a
qualified charitable distribution only if a
deduction for the entire distribution would be
allowable under section 170 (determined without
regard to subsection (b) thereof and this
paragraph).
(D) Application of section 72.--
Notwithstanding section 72, in determining the
extent to which a distribution is a qualified
charitable distribution, the entire amount of
the distribution shall be treated as includible
in gross income without regard to subparagraph
(A) to the extent that such amount does not
exceed the aggregate amount which would have
been so includible if all amounts in all
individual retirement plans of the individual
were distributed during such taxable year and
all such plans were treated as 1 contract for
purposes of determining under section 72 the
aggregate amount which would have been so
includible. Proper adjustments shall be made in
applying section 72 to other distributions in
such taxable year and subsequent taxable years.
(E) Denial of deduction.--Qualified
charitable distributions which are not
includible in gross income pursuant to
subparagraph (A) shall not be taken into
account in determining the deduction under
section 170.
(9) Distribution for health savings account
funding.--
(A) In general.--In the case of an individual
who is an eligible individual (as defined in
section 223(c)) and who elects the application
of this paragraph for a taxable year, gross
income of the individual for the taxable year
does not include a qualified HSA funding
distribution to the extent such distribution is
otherwise includible in gross income.
(B) Qualified HSA funding distribution.--For
purposes of this paragraph, the term
``qualified HSA funding distribution'' means a
distribution from an individual retirement plan
(other than a plan described in subsection (k)
or (p)) of the employee to the extent that such
distribution is contributed to the health
savings account of the individual in a direct
trustee- to-trustee transfer.
(C) Limitations.--
(i) Maximum dollar limitation.--The
amount excluded from gross income by
subparagraph (A) shall not exceed the
excess of--
(I) the annual limitation
under section 223(b) computed
on the basis of the type of
coverage under the high
deductible health plan covering
the individual at the time of
the qualified HSA funding
distribution, over
(II) in the case of a
distribution described in
clause (ii)(II), the amount of
the earlier qualified HSA
funding distribution.
(ii) One-time transfer.--
(I) In general.--Except as
provided in subclause (II), an
individual may make an election
under subparagraph (A) only for
one qualified HSA funding
distribution during the
lifetime of the individual.
Such an election, once made,
shall be irrevocable.
(II) Conversion from self-
only to family coverage.--If a
qualified HSA funding
distribution is made during a
month in a taxable year during
which an individual has self-
only coverage under a high
deductible health plan as of
the first day of the month, the
individual may elect to make an
additional qualified HSA
funding distribution during a
subsequent month in such
taxable year during which the
individual has family coverage
under a high deductible health
plan as of the first day of the
subsequent month.
(D) Failure to maintain high deductible
health plan coverage.--
(i) In general.--If, at any time
during the testing period, the
individual is not an eligible
individual, then the aggregate amount
of all contributions to the health
savings account of the individual made
under subparagraph (A)--
(I) shall be includible in
the gross income of the
individual for the taxable year
in which occurs the first month
in the testing period for which
such individual is not an
eligible individual, and
(II) the tax imposed by this
chapter for any taxable year on
the individual shall be
increased by 10 percent of the
amount which is so includible.
(ii) Exception for disability or
death.--Subclauses (I) and (II) of
clause (i) shall not apply if the
individual ceased to be an eligible
individual by reason of the death of
the individual or the individual
becoming disabled (within the meaning
of section 72(m)(7)).
(iii) Testing period.--The term
``testing period'' means the period
beginning with the month in which the
qualified HSA funding distribution is
contributed to a health savings account
and ending on the last day of the 12th
month following such month.
(E) Application of section 72.--
Notwithstanding section 72, in determining the
extent to which an amount is treated as
otherwise includible in gross income for
purposes of subparagraph (A), the aggregate
amount distributed from an individual
retirement plan shall be treated as includible
in gross income to the extent that such amount
does not exceed the aggregate amount which
would have been so includible if all amounts
from all individual retirement plans were
distributed. Proper adjustments shall be made
in applying section 72 to other distributions
in such taxable year and subsequent taxable
years.
(e) Tax treatment of accounts and annuities.--
(1) Exemption from tax.--Any individual retirement
account is exempt from taxation under this subtitle
unless such account has ceased to be an individual
retirement account by reason of paragraph (2) or (3).
Notwithstanding the preceding sentence, any such
account is subject to the taxes imposed by section 511
(relating to imposition of tax on unrelated business
income of charitable, etc. organizations).
(2) Loss of exemption of account where employee
engages in prohibited transaction.--
(A) In general.--If, during any taxable year
of the individual for whose benefit any
individual retirement account is established,
that individual or his beneficiary engages in
any transaction prohibited by section 4975 with
respect to such account, such account ceases to
be an individual retirement account as of the
first day of such taxable year. For purposes of
this paragraph--
(i) the individual for whose benefit
any account was established is treated
as the creator of such account, and
(ii) the separate account for any
individual within an individual
retirement account maintained by an
employer or association of employees is
treated as a separate individual
retirement account.
(B) Account treated as distributing all its
assets.--In any case in which any account
ceases to be an individual retirement account
by reason of subparagraph (A) as of the first
day of any taxable year, paragraph (1) of
subsection (d) applies as if there were a
distribution on such first day in an amount
equal to the fair market value (on such first
day) of all assets in the account (on such
first day).
(3) Effect of borrowing on annuity contract.--If
during any taxable year the owner of an individual
retirement annuity borrows any money under or by use of
such contract, the contract ceases to be an individual
retirement annuity as of the first day of such taxable
year. Such owner shall include in gross income for such
year an amount equal to the fair market value of such
contract as of such first day.
(4) Effect of pledging account as security.--If,
during any taxable year of the individual for whose
benefit an individual retirement account is
established, that individual uses the account or any
portion thereof as security for a loan, the portion so
used is treated as distributed to that individual.
(5) Purchase of endowment contract by individual
retirement account.--If the assets of an individual
retirement account or any part of such assets are used
to purchase an endowment contract for the benefit of
the individual for whose benefit the account is
established--
(A) to the extent that the amount of the
assets involved in the purchase are not
attributable to the purchase of life insurance,
the purchase is treated as a rollover
contribution described in subsection (d)(3),
and
(B) to the extent that the amount of the
assets involved in the purchase are
attributable to the purchase of life, health,
accident, or other insurance, such amounts are
treated as distributed to that individual (but
the provisions of subsection (f) do not apply).
(6) Commingling individual retirement account amounts
in certain common trust funds and common investment
funds.--Any common trust fund or common investment fund
of individual retirement account assets which is exempt
from taxation under this subtitle does not cease to be
exempt on account of the participation or inclusion of
assets of a trust exempt from taxation under section
501(a) which is described in section 401(a).
(g) Community property laws.--This section shall be applied
without regard to any community property laws.
(h) Custodial accounts.--For purposes of this section, a
custodial account shall be treated as a trust if the assets of
such account are held by a bank (as defined in subsection (n))
or another person who demonstrates, to the satisfaction of the
Secretary, that the manner in which he will administer the
account will be consistent with the requirements of this
section, and if the custodial account would, except for the
fact that it is not a trust, constitute an individual
retirement account described in subsection (a). For purposes of
this title, in the case of a custodial account treated as a
trust by reason of the preceding sentence, the custodian of
such account shall be treated as the trustee thereof.
(i) Reports.--The trustee of an individual retirement account
and the issuer of an endowment contract described in subsection
(b) or an individual retirement annuity shall make such reports
regarding such account, contract, or annuity to the Secretary
and to the individuals for whom the account, contract, or
annuity is, or is to be, maintained with respect to
contributions (and the years to which they relate),
distributions aggregating $10 or more in any calendar year, and
such other matters as the Secretary may require. The reports
required by this subsection--
(1) shall be filed at such time and in such manner as
the Secretary prescribes, and
(2) shall be furnished to individuals--
(A) not later than January 31 of the calendar
year following the calendar year to which such
reports relate, and
(B) in such manner as the Secretary
prescribes.
In the case of a simple retirement account under subsection
(p), only one report under this subsection shall be required to
be submitted each calendar year to the Secretary (at the time
provided under paragraph (2)) but, in addition to the report
under this subsection, there shall be furnished, within 31 days
after each calendar year, to the individual on whose behalf the
account is maintained a statement with respect to the account
balance as of the close of, and the account activity during,
such calendar year.
(j) Increase in maximum limitations for simplified employee
pensions.--In the case of any simplified employee pension,
subsections (a)(1) and (b)(2) of this section shall be applied
by increasing the amounts contained therein by the amount of
the limitation in effect under section 415(c)(1)(A).
(k) Simplified employee pension defined.--
(1) In general.--For purposes of this title, the term
``simplified employee pension'' means an individual
retirement account or individual retirement annuity--
(A) with respect to which the requirements of
paragraphs (2), (3), (4), and (5) of this
subsection are met, and
(B) if such account or annuity is part of a
top-heavy plan (as defined in section 416),
with respect to which the requirements of
section 416(c)(2) are met.
(2) Participation requirements.--This paragraph is
satisfied with respect to a simplified employee pension
for a year only if for such year the employer
contributes to the simplified employee pension of each
employee who--
(A) has attained age 21,
(B) has performed service for the employer
during at least 3 of the immediately preceding
5 years, and
(C) received at least $450 in compensation
(within the meaning of section 414(q)(4)) from
the employer for the year.
For purposes of this paragraph, there shall be excluded
from consideration employees described in subparagraph
(A) or (C) of section 410(b)(3). For purposes of any
arrangement described in subsection (k)(6), any
employee who is eligible to have employer contributions
made on the employee's behalf under such arrangement
shall be treated as if such a contribution was made.
(3) Contributions may not discriminate in favor of
the highly compensated, etc..--
(A) In general.--The requirements of this
paragraph are met with respect to a simplified
employee pension for a year if for such year
the contributions made by the employer to
simplified employee pensions for his employees
do not discriminate in favor of any highly
compensated employee (within the meaning of
section 414(q)).
(B) Special rules.--For purposes of
subparagraph (A), there shall be excluded from
consideration employees described in
subparagraph (A) or (C) of section 410(b)(3).
(C) Contributions must bear uniform
relationship to total compensation.--For
purposes of subparagraph (A), and except as
provided in subparagraph (D), employer
contributions to simplified employee pensions
(other than contributions under an arrangement
described in paragraph (6)) shall be considered
discriminatory unless contributions thereto
bear a uniform relationship to the compensation
(not in excess of the first $200,000) of each
employee maintaining a simplified employee
pension.
(D) Permitted disparity.--For purposes of
subparagraph (C), the rules of section
401(l)(2) shall apply to contributions to
simplified employee pensions (other than
contributions under an arrangement described in
paragraph (6)).
(4) Withdrawals must be permitted.--A simplified
employee pension meets the requirements of this
paragraph only if--
(A) employer contributions thereto are not
conditioned on the retention in such pension of
any portion of the amount contributed, and
(B) there is no prohibition imposed by the
employer on withdrawals from the simplified
employee pension.
(5) Contributions must be made under written
allocation formula.--The requirements of this paragraph
are met with respect to a simplified employee pension
only if employer contributions to such pension are
determined under a definite written allocation formula
which specifies--
(A) the requirements which an employee must
satisfy to share in an allocation, and
(B) the manner in which the amount allocated
is computed.
(6) Employee may elect salary reduction
arrangement.--
(A) Arrangements which qualify.--
(i) In general.--A simplified
employee pension shall not fail to meet
the requirements of this subsection for
a year merely because, under the terms
of the pension, an employee may elect
to have the employer make payments--
(I) as elective employer
contributions to the simplified
employee pension on behalf of
the employee, or
(II) to the employee directly
in cash.
(ii) 50 percent of eligible employees
must elect.--Clause (i) shall not apply
to a simplified employee pension unless
an election described in clause (i)(I)
is made or is in effect with respect to
not less than 50 percent of the
employees of the employer eligible to
participate.
(iii) Requirements relating to
deferral percentage.--Clause (i) shall
not apply to a simpl
