[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[S. 1819 Introduced in Senate (IS)]








109th CONGRESS
  1st Session
                                S. 1819

 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.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                            October 4, 2005

  Mr. Santorum (for himself and Mr. Bennett) 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.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``401(k) Enhancement Act: Encouraging 
Retirement Savings''.

SEC. 2. INCREASING PARTICIPATION AND SAVINGS IN CASH OR DEFERRED PLANS 
              THROUGH AUTOMATIC CONTRIBUTION ARRANGEMENTS.

    (a) In General.--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) Nondiscrimination requirements for automatic 
        contribution trusts.--
                    ``(A) In general.--A cash or deferred arrangement 
                shall be treated as meeting the requirements of 
                paragraph (3)(A)(ii) if such arrangement constitutes an 
                automatic contribution trust.
                    ``(B) Automatic contribution trust.--
                            ``(i) In general.--For purposes of this 
                        paragraph, 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 subparagraphs (C) and (D).
                            ``(ii) Exceptions.--
                                    ``(I) Employer election with 
                                respect to existing employees.--An 
                                employer may elect not to have clause 
                                (i)(I) apply to all employees who were 
                                eligible to participate in the 
                                arrangement (or a predecessor 
                                arrangement) immediately before the 
                                first date on which the arrangement is 
                                an automatic contribution trust. The 
                                employer shall make the election under 
                                this subclause before such first date.
                                    ``(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.
                    ``(C) 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 50 percent of the 
                                elective contributions of the employee 
                                to the extent such elective 
                                contributions 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,
                        The rules of clauses (ii) and (iii) of 
                        paragraph (12)(B) shall apply for purposes of 
                        subclause (I). The rules of paragraph 
                        (12)(E)(ii) shall apply for purposes of 
                        subclauses (I) and (II).
                            ``(ii) Other plans.--An arrangement shall 
                        be treated as meeting the requirements under 
                        clause (i) if any other plan maintained by the 
                        employer meets such requirements with respect 
                        to employees eligible under the arrangement.
                    ``(D) 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 
                        (B)(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.''
    (b) Matching Contributions.--Section 401(m) of the Internal Revenue 
Code of 1986 (relating to nondiscrimination test for matching 
contributions and employee contributions) is amended by redesignating 
paragraph (12) as paragraph (13) and by inserting after paragraph (11) 
the following new paragraph:
            ``(12) Alternate method for automatic contribution 
        trusts.--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 
                subparagraphs (B)(i) and (C) of subsection (k)(13);
                    ``(B) meets the notice requirements of subparagraph 
                (D) of subsection (k)(13); and
                    ``(C) meets the requirements of paragraph (11)(B) 
                (ii) and (iii).''.
    (c) Exclusion From Definition of Top-Heavy Plans.--
            (1) Elective contribution rule.--Clause (i) of section 
        416(g)(4)(H) of the Internal Revenue Code of 1986 is amended by 
        inserting ``or 401(k)(13)'' after ``section 401(k)(12)''.
            (2) Matching contribution rule.--Clause (ii) of section 
        416(g)(4)(H) of such Code is amended by inserting ``or 
        401(m)(12)'' after ``section 401(m)(11)''.
    (d) Definition of Compensation.--
            (1) Base pay or rate of pay.--The Secretary of the Treasury 
        shall, not later than December 31, 2006, modify Treasury 
        Regulation section 1.414(s)-1(d)(3) to facilitate the use of 
        the safe harbors in sections 401(k)(12), 401(k)(13), 
        401(m)(11), and 401(m)(12) of the Internal Revenue Code of 
        1986, and in Treasury Regulation section 1.401(a)(4)-3(b), by 
        plans that use base pay or rate of pay in determining 
        contributions or benefits. Such modifications shall include 
        increased flexibility in satisfying section 414(s) of such Code 
        in any case where the amount of overtime compensation payable 
        in a year can vary significantly.
            (2) Application of requirements to separate payroll 
        periods.--Not later than December 31, 2005, the Secretary of 
        the Treasury shall issue rules under subparagraphs (B)(i) and 
        (C)(i) of section 401(k)(13) of such Code and under clause (i) 
        of section 401(m)(12)(A) of such Code that, effective for plan 
        years beginning after December 31, 2005, permit such 
        requirements to be applied separately to separate payroll 
        periods based on rules similar to the rules described in 
        Treasury Regulation sections 1.401(k)-3(c)(5)(ii) and 1.401(m)-
        3(d)(4).
    (e) Section 403(b) Contracts.--Paragraph (11) of section 401(m) of 
the Internal Revenue Code of 1986 is amended by adding at the end the 
following:
                    ``(C) Section 403(b) contracts.--An annuity 
                contract under section 403(b) shall be treated as 
                meeting the requirements of paragraph (2) with respect 
                to matching contributions if such contract meets 
                requirements similar to the requirements under 
                subparagraph (A).''.
    (f) 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.''.
    (g) 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 $500.
            ``(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,''.
    (h) 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) Section 403(b) contracts.--The amendments made by 
        subsection (e) shall apply to years beginning after December 
        31, 1998.
            (3) 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.
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