II 109th CONGRESS 1st Session S. 1590 IN THE SENATE OF THE UNITED STATES July 29, 2005 Mr. Bayh introduced the following bill; which was read twice and referred to the Committee on Finance A BILL To amend the Internal Revenue Code of 1986 to increase participation and savings in cash or deferred plans through automatic contribution and default investment arrangements, and for other purposes.

1.

Short title

This Act may be cited as the Making Savings Automatic Act of 2005.

2.

Increasing participation and savings in cash or deferred plans through automatic contribution arrangements

(a)

Automatic contribution arrangements required for section 401(k) safe harbor

Section 401(k)(12)(A) of the Internal Revenue Code of 1986 (relating to alternative methods of meeting nondiscrimination requirements) is amended by striking and at the end of clause (i), by striking the period at the end of clause (ii), and by adding at the end the following new clause: (iii)constitutes an automatic contribution trust under paragraph (13). . (b)

Automatic contribution trust

Section 401(k) of the Internal Revenue Code of 1986 (relating to cash or deferred arrangement) is amended by adding at the end the following new paragraph: (13)

Automatic contribution trust

(A)

Automatic contribution trust defined

(i)

In general

For purposes of paragraph (12)(A)(iii), the term automatic contribution trust means an arrangement— (I)except as provided in clause (ii), under which 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 the applicable percentage of the employee’s compensation, and (II)which meets the requirements of subparagraph (B). (ii)

Exceptions

(I)

Exception for existing employees

Clause (i)(I) shall not apply to any employee who was eligible to participate in the arrangement (or a predecessor arrangement) immediately before the first date on which the arrangement is an automatic contribution trust. (II)

Election out

Each employee eligible to participate in the arrangement may specifically elect not to have contributions made under clause (i), and such clause shall cease to apply to compensation paid on or after the effective date of the election. (iii)

Applicable percentage

For purposes of this subparagraph— (I)

In general

The term applicable percentage means, with respect to any employee, the percentage (not less than 3 percent) determined under the arrangement. (II)

Increase in percentage

In the case of the second plan year beginning after the first date on which the election under clause (i)(I) is in effect with respect to the employee and any succeeding plan year, the applicable percentage shall be a percentage equal to the sum of the applicable percentage for the employee as of the close of the preceding plan year plus the number of percentage points (not less than 1 percentage point) specified by the plan. Such increase shall continue until the applicable percentage is at least 10 percent or such higher percentage specified by the plan. (B)

Notice requirements

(i)

In general

The requirements of this subparagraph are met if the requirements of clauses (ii) and (iii) are met. (ii)

Reasonable period to make election

The requirements of this clause are met if each employee to whom subparagraph (A)(i) applies— (I)receives a notice explaining the employee’s right under the arrangement to elect not to have elective contributions made on the employee’s behalf, and how contributions made under the arrangement will be invested in the absence of any investment election by the employee, and (II)has a reasonable period of time after receipt of such notice and before the first elective contribution is made to make such election. (iii)

Annual notice of rights and obligations

The requirements of this clause are met if each employee eligible to participate in the arrangement is, within a reasonable period before any year, given notice of the employee’s rights and obligations under the arrangement. The requirements of clauses (i) and (ii) of paragraph (12)(D) shall be met with respect to the notices described in clauses (ii) and (iii) of this subparagraph. (c)

Matching contributions

Section 401(m)(11)(A) of the Internal Revenue Code of 1986 (relating to additional alternative method of satisfying nondiscrimination test for matching contributions and employee contributions) is amended by striking and at the end of clause (ii), by striking the period at the end of clause (iii) and inserting , and and by adding at the end the following new clause: (iii)meets the requirements of subsection (k)(12)(A)(iii). . (d)

Investments and preemption

(1)

Control deemed to have been exercised with respect to default investment arrangements

Section 404(c) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1104(c)) is amended by adding at the end the following new paragraph: (4)

Treatment of default investment arrangement

(A)

In general

A participant in an individual account plan shall, for purposes of paragraph (1), be treated as exercising control over the assets in the account with respect to the amount of contributions made under a default investment arrangement. (B)

Default investment arrangement defined

For purposes of this paragraph, the term default investment arrangement means an arrangement— (i)which meets the requirements of subparagraph (C), (ii)under which the participant is treated as having elected to have the employer exercise control over the assets in his account until the participant specifically elects to exercise such control, and (iii)under which assets described in clause (ii) are invested in accordance with regulations prescribed by the Secretary. Such regulations shall provide guidance on the appropriateness of designating default investments that include a mix of asset classes consistent with long-term capital appreciation. The regulations shall also provide guidance on the designation of default investments in individual account plans that are not designed to meet the requirements of this section.(C)

Notice requirements

(i)

Time for notice

The administrator of a default investment arrangement shall, within a reasonable period before each plan year, give to each employee to whom a default investment arrangement applies for such plan year 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)

Form of notice; response

A notice shall not be treated as meeting the requirements of clause (i) with respect to an employee unless— (I)the notice includes a notice explaining the employee's right under the arrangement to elect to exercise control over the assets in his account, (II)the employee has a reasonable period of time after receipt of the notice described in subclause (I) and before the assets are first invested to make such election, and (III)the notice explains how contributions made under the arrangement will be invested in the absence of any investment election by the employee. . (2)

Preemption of conflicting state regulation

Section 514 of such Act (29 U.S.C. 1144) is amended by adding at the end the following new subsection: (e)

Automatic contribution arrangements

(1)

In general

Notwithstanding any other provision of this section, any law of a State which would directly or indirectly prohibit or restrict the inclusion in any plan of an automatic contribution arrangement shall be superseded. The Secretary may prescribe regulations which would establish minimum standards that such arrangements would be required to satisfy in order for this subsection to apply. (2)

Automatic contribution arrangement defined

For purposes of this subsection, the term automatic contribution arrangement means an arrangement— (A)which meets the requirements of paragraph (3), (B)under which a participant may elect to have the employer make payments as contributions under the plan on behalf of the participant, or to the participant directly in cash, (C)under which the participant is treated as having elected to have the employer make such contributions in an amount equal to a uniform percentage of compensation provided under the plan until the participant specifically elects not to have such contributions made (or specifically elects to have such contributions made at a different percentage), and (D)under which contributions described in subparagraph (C) are invested in accordance with regulations prescribed by the Secretary. Such regulations shall provide guidance on the appropriateness of designating default investments that include a mix of asset classes consistent with long-term capital appreciation.(3)

Notice requirement

(A)

In general

The administrator of an individual account plan shall, within a reasonable period before each plan year, give to each employee to whom an automatic contribution arrangement applies for such plan year 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. (B)

Other requirements

A notice shall not be treated as meeting the requirements of subparagraph (A) with respect to an employee unless— (i)the notice includes a notice explaining 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)the employee has a reasonable period of time after receipt of the notice described in clause (i) and before the first elective contribution is made to make such election, and (iii)the notice explains how contributions made under the arrangement will be invested in the absence of any investment election by the employee. . (e)

Corrective distributions

(1)

In general

Section 414 of the Internal Revenue Code of 1986 (relating to definitions and special rules) is amended by adding at the end the following new subsection: (w)

Automatic contribution arrangements

(1)

In general

For purposes of this title, the amount of any corrective distribution from a plan shall be treated as if such amount had never been held in such plan and shall be treated as a payment of compensation from the employer maintaining the plan to the employee receiving such distribution. (2)

Corrective distribution

For purposes of this subsection, the term corrective distribution means a distribution from an applicable employer plan of all amounts attributable to an erroneous automatic contribution. (3)

Erroneous automatic contribution

For purposes of this subsection, the term erroneous automatic contribution means an elective contribution made on behalf of an employee under any applicable employer plan pursuant to a plan provision treating the employee as having elected to have the employer make such elective contribution until the employee affirmatively elects not to have such contribution made or affirmatively elects to make contributions at a specified level, if the following requirements are satisfied: (A)Within the applicable period, the employee notifies the plan administrator that the employee elects to have the elective contribution treated as an erroneous automatic contribution. (B)The sum of the elective contributions that are treated as erroneous automatic contributions with respect to an employee does not exceed the greater of— (i)$400, or (ii)the amount of the elective contributions described in paragraph (3) with respect to the employee which where made during the first 4 payroll periods to which the arrangement applies. (4)

Applicable employer plan

For purposes of this subsection, the term applicable employer plan has the meaning given such term by subsection (v)(6)(A). (5)

Applicable period

For purposes of this subsection, the term applicable period means, with respect to an employee, the 3-month period that begins on the first date that an amount is withheld from compensation payable to the employee in order to make a plan contribution pursuant to a plan provision described in paragraph (3). . (2)

Vesting conforming amendments

(A)

Internal Revenue Code of 1986

(i)Section 411(a)(3)(G) of such Code is amended by inserting an erroneous automatic contribution under section 414(w), after 402(g)(2)(A),. (ii)The heading of section 411(a)(3)(G) of such Code is amended by inserting “or erroneous automatic contribution” before the period. (iii)Section 401(k)(8)(E) of such Code is amended by inserting an erroneous automatic contribution under section 414(w), after 402(g)(2)(A),. (iv)The heading of section 401(k)(8)(E) of such Code is amended by inserting “or erroneous automatic contribution” before the period. (B)

Employee Retirement Income Security Act of 1974

Section 203(a)(3)(F) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1053(a)(3)(F)) is amended by inserting an erroneous automatic contribution under section 414(w) of such Code, after 402(g)(2)(A) of such Code,. (f)

Application of automatic contribution requirement to Federal Thrift Savings Plan

Section 8432(a) of title 5, United States Code, is amended by adding at the end the following: (4)(A)An employee who begins employment after January 1, 2006, or any Member who is elected or appointed to office after that date (regardless of whether that employee (or Member) has prior periods of service covered under this chapter or chapter 83) shall be treated as having made an election to make contributions under subsection (b) in an amount equal to the applicable percentage of the employees compensation unless the employee specifically elects not to have such contributions made (B)(i)For purposes of this paragraph, the term applicable percentage means, with respect to any employee, 3 percent. (ii)In the case of the second plan year beginning after the first date on which the election under subparagraph (A) is in effect with respect to the employee and any succeeding plan year, the applicable percentage shall be a percentage equal to the sum of the applicable percentage for the employee as of the close of the preceding plan year plus the number of percentage points (not less than 1 percentage point) specified by the plan. Such increase shall continue until the applicable percentage is 10 percent. (C)Each employee to whom subparagraph (A) applies shall— (i)receive a notice explaining the employee’s right under the Thrift Savings Plan to elect not to have elective contributions made on the employee’s behalf, and how contributions made under the Thrift Savings Plan will be invested in the absence of any investment election by the employee, and (ii)have a reasonable period of time after receipt of such notice and before the first elective contribution is made to make such election. A similar notice shall be provided within a reasonable period of time before each calendar year.(D)In the case of an employee who does not make an investment election, the Thrift Savings Plan shall invest the contributions in accordance with the regulations prescribed by the Secretary of Labor under section 404(c)(4)(B) of the Employee Retirement Income Security Act of 1974. . (g)

Effective date

(1)

In general

Except as provided in paragraph (2), the amendments made by this section shall apply to plan years beginning after December 31, 2005. (2)

Regulations

Final regulations under section 404(c)(4)(B)(iii) of the Employee Retirement Income Security Act of 1974 (added by this section) shall be issued no later than 6 months after the date of enactment of this Act.

3.

Direct payment of tax refunds to individual retirement plans

(a)

In general

Paragraph (3) of section 219(f) of the Internal Revenue Code of 1986 is amended to read as follows: (3)

Time when contributions made

(A)

In general

Except as provided in subparagraph (B), for purposes of this subsection, 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). (B)

Direct payment of tax refunds to individual retirement plans

(i)

In general

To the extent provided in rules prescribed by the Secretary, a tax refund owed to a taxpayer and paid directly to an individual retirement plan shall be deemed a contribution made by the taxpayer— (I)on the last day of the taxable year to which such refund relates, and (II)on account of such taxable year. (ii)

Limitation

This subparagraph shall not apply to a tax refund unless such refund is shown on a return filed not later than the time prescribed by law for filing the return for the taxable year to which such refund relates (not including extensions thereof). (iii)

Direct payment

For purposes of this subparagraph, a tax refund is paid directly to an individual retirement plan if it is paid in the form of a direct transfer from the Secretary to the trustee or issuer of the individual retirement plan. (iv)

Tax refund

For purposes of this subparagraph, the term tax refund means any overpayment of an internal revenue tax under section 6401 which the Secretary may credit or refund under section 6402 (after application of subsections (c), (d), and (e) thereof). . (b)

Regulations

(1)

In general

Not later than 1 year after the date of enactment of this Act, the Secretary of the Treasury shall issue rules which permit a taxpayer— (A)to elect to have all or any portion of a tax refund owed to the taxpayer paid directly to an individual retirement plan, (B)to specify the individual retirement plan to which such tax refund is to be paid (and the investment option in which such tax refund is to be invested), and (C)to the extent provided in rules prescribed by the Secretary, to specify the taxable year on account of which such payment is made, except that the Secretary may require that the amount subject to such an election exceed a dollar threshold determined by the Secretary as necessary or appropriate to ensure the administrability of such elections. (2)

Information

The Secretary may require that the taxpayer provide, and agree to the disclosure of, any information necessary to pay the tax refund to the individual retirement plan specified by the taxpayer. (3)

Special rule

The Secretary may provide that if, for any reason, the trustee or issuer does not accept payment of a tax refund, the tax refund shall instead be paid as if the taxpayer had not elected a direct payment to an individual retirement plan. (c)

Effective date

The amendments made by this section shall apply to taxable years the due date for which (without regard to any extension) occurs after the date on which final rules implementing the amendments made by this section are prescribed.

4.

Credit to encourage universal access to opt out direct deposit retirement savings

(a)

In general

Subpart D of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 (relating to business related credits) is amended by adding at the end the following new section:

45J.

Employer salary reduction costs

(a)

General rule

For purposes of section 38, in the case of the first taxable year which includes the date that a qualified salary reduction arrangement of the eligible employer becomes effective, the employer salary reduction cost credit determined under this section for such taxable year is the amount determined under subsection (b). (b)

Amount of credit

The amount of the credit determined under this section for any taxable year with respect to an eligible employer shall be equal to 50 percent of the costs paid or incurred by the taxpayer in establishing the qualified salary reduction arrangement referred to in subsection (a). (c)

Eligible employer

For purposes of this section, the term eligible employer means, with respect to any calendar year in which the taxable year begins, an employer which maintains a qualified salary reduction arrangement meeting the requirements of subsection (d) and which did not maintain a qualified plan or arrangement (within the meaning of subsection (d)(8)) for the preceding 2 calendar years. (d)

Employee access to opt out salary reduction contributions to individual retirement plans

(1)

In general

Every employer which does not maintain a qualified plan or arrangement for a calendar year may provide a qualified salary reduction arrangement for the calendar year. (2)

Qualified salary reduction arrangement

For purposes of this section, the term qualified salary reduction arrangement means a salary reduction arrangement which meets the requirements of paragraphs (4) and (5). (3)

Salary reduction arrangement

For purposes of this section, the term salary reduction arrangement means a written arrangement of an employer under which— (A)an employee eligible to participate in the arrangement may elect to— (i)contribute to an individual retirement plan established by or on behalf of the employee by having the employer make direct deposit payments to the plan by payroll deduction, or (ii)receive the amounts directly as cash compensation, (B)no other contributions may be made under the arrangement, (C)each employee eligible to participate in the arrangement is treated as having elected to have the employer make elective contributions under subparagraph (A)(i) in an amount equal to the applicable percentage (within the meaning of section 401(k)(13)(A)(iii)) of the employee’s compensation unless the employee specifically elects not to have such contributions made, and (D)there is established the methods by which contributions made under the arrangement will be invested in the absence of any investment election by the employee. (4)

Participation requirements

(A)

In general

The requirements of this paragraph are met with respect to a salary reduction arrangement for a year only if, under the arrangement, all employees of the employer are eligible to make the election under paragraph (3)(A). (B)

Excludable employees

An employer may exclude from the requirement under paragraph (3) employees described in section 410(b)(3) and any employee who has not completed hours of service for the employer on a regular basis during a period of at least 30 consecutive days during the calendar year. (5)

Administrative requirements

The requirements of this paragraph are met with respect to any salary reduction arrangement if, under the arrangement— (A)the employer must make the payments elected under paragraph (3)(A) or required under paragraph (3)(C) not later than the close of the 30-day period following the last day of the month with respect to which the contributions are to be made, or, if later, the deadline under applicable rules and regulations for the employer to deposit tax under section 3102 for wages paid in that month, (B)an employee may elect to terminate participation in the arrangement at any time during the year, except that if an employee so terminates, the arrangement may provide that the employee may not elect to resume participation until the beginning of the next year, (C)each employee eligible to participate may elect, during the 60-day period before the beginning of any year (and the 60-day period before the first day the employee is eligible to participate), to participate in the arrangement, or to modify the amounts subject to the arrangement, for such year, and (D)immediately before the period for which an election described in paragraph (3)(A) may be made, the employer provides a notice to each employee of the employee’s opportunity to make the election and the maximum amount which may be contributed to an individual retirement plan on an annual basis. (6)

Use of designated financial institution

An employer shall not be treated as failing to satisfy the requirements of this subsection or any other provision of this title merely because the employer makes all contributions (or all contributions on behalf of employees who do not specify an individual retirement plan, trustee, or issuer to receive the contributions) to individual retirement plans of a designated trustee or issuer. The preceding sentence shall not apply unless each participant is notified in writing that the participant’s balance may be transferred without cost or penalty to another individual retirement plan in accordance with subsection (d)(3). (7)

Model notice

The Secretary shall provide a model notice, written in a manner calculated to be understandable to the average worker, that employers may use to satisfy the requirement of paragraphs (5)(D) and (6). Model notices shall be provided in English, in Spanish, and in any other language deemed appropriate by the Secretary. (8)

Qualified plan or arrangement

For purposes of this section, an employer is treated as maintaining a qualified plan or arrangement for a calendar year if the employer maintains for such year a plan, contract, pension, or trust described in subparagraph (A) or (B) of section 219(g)(5) or an eligible deferred compensation plan (within the meaning of section 457(b)) with respect to which contributions are made, or benefits are accrued, for service in such year. (e)

Salary reduction contributions treated like other contributions to individual retirement plans

(1)

Tax treatment unaffected

The fact that a contribution to an individual retirement plan is made on behalf of an employee under a qualified salary reduction arrangement instead of being made directly by the employee shall not affect the deductibility or other income tax treatment of the contribution or of other amounts under this title. (2)

Salary reduction contributions taken into account

Any contribution made on behalf of an employee under a qualified salary reduction arrangement shall be taken into account in applying the limitations on contributions to individual retirement plans and the other provisions of this title applicable to individual retirement plans as if the contribution had been made to the plan directly by the employee.

. (b)

Credit allowed as part of general business credit

Section 38(b) of the Internal revenue Code of 1986 (defining current year business credit) is amended by striking plus at the end of paragraph (18), by striking the period at the end of paragraph (19) and inserting , plus, and by adding at the end the following new paragraph: (20)in the case of an eligible employer (as defined in section 45J(c)), the employer salary reduction cost credit determined under section 45J(a). . (c)

Treatment as default investment arrangement

Section 404(c)(4)(B) of the Employee Retirement Income security Act of 1974, as added by section 2 of this Act, is amended by adding at the end the following new sentence: For purposes of this subsection, an arrangement described in section 45J(d) shall be treated as a default investment arrangement. (d)

Clerical amendment

The table of sections for subpart D of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new item: Sec. 45J. Employer salary reduction costs. . (e)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2005.