[Congressional Record Volume 144, Number 96 (Friday, July 17, 1998)]
[Senate]
[Pages S8484-S8487]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. JEFFORDS (for himself, Mr. Bingaman, and Mr. Graham):
  S. 2329. A bill to amend the Internal Revenue Code of 1986 to enhance 
the portability of retirement benefits, and for other purposes; to the 
Committee on Finance.


             the retirement portability account (rap) act.

  Mr. JEFFORDS. Mr. President, today I am introducing S. 2329, the 
Retirement Portability Account (RAP) Act. This bill is a close 
companion to H.R. 3503 introduced by our colleagues Earl Pomeroy of 
North Dakota and Jim Kolbe of Arizona earlier this year. In addition, 
it contains certain elements of H.R. 3788, the Portman-Cardin bill, 
which relate to increased pension portability. Generally this bill is 
intended to be a further iteration of the concepts embodied in both of 
those bills. It standardizes the rules in the Internal Revenue Code 
(IRC) which regulate how portable a worker's retirement savings account 
is, and while it does not make portability of pension benefits perfect, 
it greatly improves the status quo. Consistent with ``greatly improving 
the status quo'', this bill contains no mandates. No employer will be 
``required'' to accept rollovers from other plans. A rollover will 
occur when the employee offers, and the employer agrees to accept, a 
rollover from another plan.
  Under current law, it is not possible for an individual to move an 
accumulated retirement savings account from a section 401(k) (for-
profit) plan to a section 457 (state and local government) deferred 
compensation plan, to an Individual Retirement Account (IRA), then to a 
section 403(b) (non-profit organization) plan and ultimately back into 
a section 401(k) plan, without violating various restrictions on the 
movement of their money. The RAP Act will make it possible for workers 
to take their retirement savings with them when they change jobs 
regardless of the type of employer for which they work.
  This bill will also help make IRAs more portable and will improve the 
uses of conduit IRAs. Conduit IRAs are individual retirement accounts 
to which certain distributions from a qualified retirement plan or from 
another individual retirement account have been transferred. RAP 
changes the rules regulating these IRAs so that workers leaving the 
for-profit, non-profit or governmental field can use a conduit IRA as a 
parking spot for a pre-retirement distribution. These special accounts 
are needed by many workers until they have another employer-sponsored 
plan in which to rollover their savings.
  In many instances, this bill will allow an individual to rollover an 
IRA consisting exclusively of tax-deductible contributions into a 
retirement plan at his or her new place of employment, thus helping the 
individual consolidate retirement savings in a single account. Under 
certain circumstances, the RAP Act will also allow workers to rollover 
any after-tax contributions made at his or her previous workplace, into 
a new retirement plan.

[[Page S8485]]

  Current law requires a worker who changes jobs to face a deadline of 
60 days within which to roll over any retirement savings benefits 
either into an Individual Retirement Account, or into the retirement 
plan of his or her new employer. Failure to meet the deadline can 
result in both income and excise taxes being imposed on the account. We 
believe that this deadline should be waived under certain circumstances 
and we have outlined them in the bill. Consistent with the Pomeroy-
Kolbe bill, in case of a Presidentially-declared natural disaster or 
military service in a combat zone, the Treasury Department will have 
the authority to disallow imposition of any tax penalty for the account 
holder. Consistent with the additional change proposed by the Portman-
Cardin bill, however, we have included a waiver of tax penalties in the 
case of undue hardship, such as a serious personal injury or illness 
and we have given the Department of the Treasury the authority to waive 
this deadline, as well.
  The Retirement Account Portability bill will also change two 
complicated rules which harm both plan sponsors and plan participants; 
one dealing with certain business sales (the so-called ``same desk'' 
rule) and the other dealing with retirement plan distribution options. 
Each of these rules has impeded true portability of pensions and we 
believe they ought to be changed.
  In addition, this bill will extend the Pension Benefit Guaranty 
Corporation's (PBGC) Missing Participant program to defined benefit 
multiemployer pension plans. Under current law, the PBGC has 
jurisdiction over both single-employer and multiemployer defined 
benefit pension plans. A few years ago, the agency initiated a program 
to locate missing participants from terminated, single-employer plans. 
The program attempts to locate individuals who are due a benefit, but 
who have not filed for benefits due to them, or who have attempted to 
find their former employer but failed to receive their benefits. This 
bill expands the missing participant program to multiemployer pension 
plans.
  I know of no reason why individuals covered by a multiemployer 
pension plans should not have the same protections as participants of 
single-employer pension plans and this change will help more former 
employees receive all the benefits to which they are entitled. This 
bill does not expand the missing participants program to defined 
contribution plans. Supervision of defined contribution plans is 
outside the statutory jurisdiction of the PBGC and I have not heard 
strong arguments for including those plans within the jurisdiction of 
the agency.
  In a particularly important provision, the Retirement Account 
Portability bill will allow public school teachers and other state and 
local employees who move between different states and localities to use 
their savings in their section 403(b) plan or section 457 deferred 
compensation arrangement to purchase ``service credit'' in the plan in 
which they are currently participating, and thus obtain greater pension 
benefits in the plan in which they conclude their career. However, the 
bill does not allow the use of a lump sum cash-out from a defined 
benefit plan to be rolled over to a section 403(b) or section 457 plan.
  As a final note, this bill, this bill does not reduce the vesting 
schedule from the current five year cliff vesting (or seven year 
graded) to a three year cliff or six year graded vesting schedule. I am 
not necessarily against the shorter vesting schedules, but I feel that 
this abbreviated vesting schedule makes a dramatic change to tax law 
without removing some of the disincentives to maintaining a pension 
plan that businesses--especially small businesses--desperately need.
  Mr. President, I ask unanimous consent that a summary of the bill be 
printed in the Record.
  There being no objection, the summary was ordered to be printed in 
the Record, as follows:

  Increasing Portability for Pension Plan Participants: Facilitating 
                               Rollovers

       Under current law, an ``eligible rollover distribution'' 
     may be either (1) rolled over by the distributee into an 
     ``eligible retirement plan'' if such rollover occurs within 
     60 days of the distribution, or (2) directly rolled over by 
     the distributing plan to an ``eligible retirement plan.'' An 
     ``eligible rollover distribution'' does not include any 
     distribution which is required under section 401(a)(9) or any 
     distribution which is part of a series of substantially equal 
     periodic payments made for life, life expectancy or over a 
     period of ten years or more. An ``eligible retirement plan'' 
     is another section 401 plan, a section 403(a) plan or an IRA. 
     (If the distributee is a surviving spouse of a participant, 
     ``eligible retirement plans'' consist only of IRAs.) Under 
     these rules, for example, amounts distributed from a section 
     401(k) plan may not be rolled over to a section 403(b) 
     arrangement.
       In the case of a section 403(b) arrangement, distributions 
     which would be eligible rollover distributions except for the 
     fact that they are distributed from a section 403(b) 
     arrangement may be rolled over to another section 403(b) 
     arrangement or an IRA. Under these rules, amounts distributed 
     from a section 403(b) may not be rolled over into a section 
     401(k) plan.
       When an ``eligible rollover distribution'' is made, the 
     plan administrator must provide a written notice to the 
     distributee explaining the availability of a direct rollover 
     to another plan or an IRA, that failure to exercise that 
     option will result in 20% being withheld from the 
     distribution and that amounts not directly rolled over may be 
     rolled over by the distributee within 60 days.
       Under ``conduit IRA'' rules, an amount may be rolled over 
     from a section 401 or 403(a) plan to an IRA and subsequently 
     rolled over to a section 401 or 403(a) plan if amounts in the 
     IRA are attributable only to rollovers from section 401 or 
     403(a) plans. Also under conduit IRA rules, an amount may be 
     rolled over from a section 403(b) arrangement to an IRA and 
     subsequently rolled over to a section 403(b) arrangement if 
     amounts in the IRA are attributable only to rollovers from 
     section 403(b) arrangements.
       In the case of a section 457 deferred compensation plan, 
     distributions may not be rolled over by a distributee; 
     however, amounts may be transferred from one section 457 plan 
     to another section 457 plan without giving rise to income to 
     the plan participant.
       A participant in a section 457 plan is taxed on plan 
     benefits that are not transferred when such benefits are paid 
     or when they are made available. In contrast, a participant 
     in a qualified plan or a section 403(b) arrangement is only 
     taxed on plan benefits that are actually distributed.
       Under this proposal, ``eligible rollover distributions'' 
     from a section 401 plan could be rolled over to another 
     section 401 plan, a section 403(a) plan, a section 403(b) 
     arrangement, a section 457 deferred compensation plan 
     maintained by a state or local government or an IRA. 
     Likewise, ``eligible rollover distributions'' from a section 
     403(b) arrangement could be rolled over to the same broad 
     array of plans and IRAs. Thus, an eligible rollover 
     distribution from a section 401(k) plan could be rolled over 
     to a section 403(b) arrangement and vice versa. (As under 
     current law, if the distributee is a surviving spouse of a 
     participant, the distribution could only be rolled over into 
     an IRA.)
       Eligible rollover distributions from all section 457 
     deferred compensation plans could be rolled over to the same 
     broad array of plans and IRAs; however, the rules regarding 
     the mandatory 20% withholding would not apply to the section 
     457 plans. A section 457 plan maintained by a government 
     would be made an eligible retirement plan for purposes of 
     accepting rollovers from section 401(k), section 403(b) and 
     other plans.
       The written notice required to be provided when an 
     ``eligible rollover distribution'' is made would be expanded 
     to apply to section 457 plans and to include a description of 
     restrictions and tax consequences which will be different if 
     the plan to which amounts are transferred is a different type 
     of plan from the distribution plan.
       Participants who mix amounts eligible for special capital 
     gains and averaging treatment with amounts not so eligible 
     would lose such treatment.
       A participant in a section 457 plan would only be taxed on 
     plan benefits that are not transferred or rolled over when 
     they are actually paid.
       These changes would take effect for distributions made 
     after December 31, 1998.
       The reason for this expansion of current law rules 
     permitting rollovers is to allow plan participants to put all 
     of their retirement plan savings in one vehicle if they 
     change jobs. Given the increasing mobility of the American 
     workforce, it is important to make pension savings portable 
     for those who change employment. This proposal contains no 
     mandates requiring employers to accept rollovers from their 
     new employees. A rollover occurs when the employee makes an 
     offer to move his/her money and the employer accepts the 
     funds.
       Because of the rule that taxes section 457 plan 
     participants on benefits made available, section 457 plans 
     cannot provide plan participants with the flexibility to 
     change benefit payments to fit their changing needs. There is 
     no policy justification for this lack of flexibility.


     rollovers of individual retirement accounts to qualified plans

       Under current law, a taxpayer is not permitted to roll 
     amounts held in an individual retirement account (IRA) (other 
     than a conduit IRA), to a section 401 plan, a 403(a) plan, a 
     403(b) arrangement or a section 457 deferred compensation 
     plan. Currently, the maximum direct IRA contribution is 
     $2,000. Since 1986, generally only individuals with income 
     below certain limits are able to fully deduct

[[Page S8486]]

     IRA contributions. For others, IRA contributions have been 
     nondeductible or partially deductible in some or all years. 
     To the extent that IRA contributions are non-deductible, they 
     have ``basis'' which is not taxed the second time upon 
     distribution from the IRA. The burden of maintaining records 
     of IRA basis has been the taxpayer's, since only the taxpayer 
     has had the information to determine his or her basis at the 
     outset and as an ongoing matter.
       IRAs are generally subject to different regulatory schemes 
     than other retirement savings plans, such as section 401(k)s 
     or section 457 deferred compensation plans, although the 10 
     percent tax penalty on early distributions applies to both 
     qualified plans and IRAs. For example, one cannot take a loan 
     from an IRA, although a recent change in law will make it 
     easier to make a penalty-free withdrawal from an IRA to 
     finance a first-time home purchase or higher-education 
     expenses.
       Under the bill, rollovers of contributory IRAs would be 
     permitted if and only if the individual has never made any 
     nondeductible contributions to his or her IRA and has never 
     had a Roth IRA. The IRA may then be rolled over into a 
     section 401 plan, a section 403(a) plan, a 403(b) arrangement 
     or a section 457 deferred compensation plan. Since the vast 
     majority of IRAs contain only deductible contributions, this 
     change will allow many individuals to consolidate their 
     retirement savings into one account. For those who have both 
     nondeductible and deductible contributions, they may still 
     have two accounts, one containing the majority of funds 
     consolidated in one place and one containing the 
     nondeductible IRA contributions. Once IRA money is rolled 
     over into a plan however, the IRA contributions would become 
     plan money and subject to the rules of the plan except that 
     participants who mix amounts for special capital gains and 
     averaging treatment with amounts not so eligible would lose 
     such treatment. Employers will not be required to accept 
     rollovers for IRAs.
       These changes would apply to distributions after December 
     31, 1998.
       The reasons for this change is to take another step toward 
     increased portability of retirement savings. While this 
     proposal would not guarantee that all retirement savings 
     would be completely portable, it will increase the extent to 
     which such savings are portable and fungible. Other rules and 
     requirements affecting IRAs and their differences and 
     similarities to plan money will continue to be the subject of 
     Congressional scrutiny.


 rollovers of after-tax contributions and rollovers not made within 60 
                            days of receipt

       Under current law, employees are allowed to make after-tax 
     contributions to IRAs, 401(k) plans, and other plans. They 
     are not permitted to roll over distributions of those after-
     tax contributions to an IRA or another plan.
       Rollovers from qualified plans to an IRA (or from an IRA to 
     another IRA) must occur within 60 days of the initial 
     distribution. Income tax withholding rules apply to certain 
     distributions that are not direct trustee-to-trustee 
     transfers from the qualified plan to an IRA or another plan.
       The proposal would allow after-tax contributions to be 
     included in a rollover contribution to an IRA or other types 
     of retirement plans, but it does not require the receiving 
     trustee to track or report the basis. That requirement would 
     be the responsibility of the taxpayer, as in the case of 
     nondeductible IRA contributions.
       The IRS is given the authority to extend the 60-day period 
     where the failure to comply with such requirements is 
     attributable to casualty, disaster or other events beyond the 
     reasonable control of the individual subject to such 
     requirements.
       These changes would generally apply to distributions made 
     after December 31, 1998. The hardship exception to the 60-day 
     rollover period would apply to such 60-day periods expiring 
     after the date of enactment.
       These changes are warranted because after-tax savings in 
     retirement plans enhance retirement security and are 
     particularly attractive to low and middle income taxpayers. 
     Allowing such distributions to be rolled over to an IRA or a 
     plan will increase the chances that those amounts would be 
     retained until needed for retirement.
       Often individuals, particularly widows, widowers and 
     individuals with injuries of illnesses, miss the 60-day 
     window. In other instances, individuals miss the 60-day 
     rollover period because of the failure of third parties to 
     perform as directed. Finally, victims of casualty or natural 
     disaster should not be penalized. A failure to satisfy the 
     60-day rule, by even one day can result in catastrophic tax 
     consequences for a taxpayer that can include immediate 
     taxation of the individual's entire retirement savings (often 
     in a high tax bracket), a 10% early distribution tax, and a 
     substantial depletion of retirement savings. By giving the 
     IRS the authority to provide relief from the 60-day 
     requirement for failures outside the control of the 
     individual, the proposal would give individuals in these 
     situations the ability to retain their retirement savings in 
     an IRA or a qualified plan.


                   Treatment of Forms of Distribution

       Under current law, section 411(d)(6), the ``anti-cutback'' 
     rule generally provides that when a participant's benefits 
     are transferred from one plan to another, the transferee plan 
     must preserve all forms of distribution that were available 
     under the transferor plan.
       Under this proposal, an employee may elect to waive his or 
     her section 411(d)(6) rights and transfer benefits from one 
     defined contribution plan to another defined contribution 
     plan without requiring the transferee plan to preserve the 
     optional forms of benefits under the transferor plan if 
     certain requirements are satisfied to ensure the protection 
     of participants' interests. This proposal would also apply to 
     plan mergers and other transactions having the effect of a 
     direct transfer, including consolidation of benefits 
     attributable to different employers within a multiple 
     employer plan.
       These changes would apply to transfers after December 31, 
     1998.
       The requirement that a defined contribution plan preserve 
     all forms of distribution included in transferor plans 
     significantly increases the cost of plan administration, 
     particularly for employers that make numerous business 
     acquisitions. The requirements also causes confusion among 
     plan participants who can have separate parts of their 
     retirement benefits subject to sharply different plan 
     provision and requirements. The increased cost for the plan 
     and the confusion for the participant brought about by the 
     requirement to preserve all forms of distribution are based 
     on a rule intended to protect a participant's right not to 
     have an arbitrary benefit reduction. The current rule sweeps 
     too broadly since it protects both significant and 
     insignificant rights. Where a participant determines the 
     rights to be insignificant and wants to consolidate his or 
     her retirement benefits, there is no reason not to permit his 
     consolidation. This consolidation increases portability and 
     reduces administrative costs.


  Rationalization of Restrictions on Distributions, The ``Same Desk'' 
                                  Rule

       Generally, under current law, distributions from 401(k) 
     plans are limited to separation from service, death, 
     disability, age 59\1/2\, hardship, plan termination without 
     maintenance of another plan, and certain corporate 
     transactions. The term ``separation from service'' has been 
     interpreted to include a ``same desk'' rule. Under the ``same 
     desk'' rule, distributions to a terminated employee are not 
     permitted if the employee continues performing the same 
     functions for a successor employer (such as a joint venture 
     owned in part by the former employer or the buyer in a 
     business acquisition). The same desk rule also applies to 
     section 403(b) arrangements and section 457 plans, but does 
     not apply to other types of plans such as defined benefit 
     plans.
       Under this proposal, the ``same desk rule'' would be 
     eliminated by replacing ``separation from service'' with 
     ``severance from employment''. Conforming changes would be 
     mad in the comparable provisions of section 403(b) 
     arrangements and eligible deferred compensation plans under 
     section 457. This change would apply to distributions after 
     December 31, 1998.
       Under this proposal, affected employees would be able to 
     roll over their 401(k) account balance to an IRA or to their 
     new employer's 401(k) plan. Modifying the same desk rule so 
     that all of a worker's retirement funds can be transferred to 
     the new employer after a business sale has taken place will 
     allow the employee to keep his or her retirement nest egg in 
     a single place. It will also coordinate the treatment of 
     defined benefit plan benefits with the treatment of 401(k) 
     plans in these types of transactions. Employees do not 
     understand why their 401(k) account must remain with the 
     former employer until they terminate employment with their 
     new employer, especially since this restriction does not 
     apply to other plans in which they participate. The corporate 
     transaction exception provides some relief from the same desk 
     rule but is inapplicable in numerous cases.


    Purchase of Service Credit in Governmental Defined Benefit Plans

       Under current law, employees of State and local governments 
     often have the option of purchasing service credits in their 
     State defined benefit plans in order to make up for the time 
     spent in another State or district. These employees cannot 
     currently use the money they have saved in their section 
     403(b) arrangements or section 457 plans to purchase these 
     service credits.
       This proposal would permit State and local government 
     employees the option to use the funds in their section 403(b) 
     arrangements or section 457 deferred compensation plans to 
     purchase service credits.
       These changes would apply to trustee-to-trustee transfers 
     after December 31, 1998.
       This change will permit employees of State and local 
     governments, particularly teachers, who often move between 
     States and school districts in the course of their careers, 
     to buy a larger defined benefit pension with the savings they 
     have accumulated in a section 403(b) arrangement or section 
     457 deferred compensation plan. The greater number of years 
     of credit that they purchase would reflect a full career of 
     employment rather than two or more shorter periods of 
     employment in different States or districts. Allowing the 
     more flexible use of existing account balances in 403(b) 
     arrangements or section 457 plans will allow more of these 
     employees to purchase service credits and earn a full defined 
     benefit pension.


                      Missing Participants Program

       Under current law in the case of certain terminated single 
     employer defined benefit plans, the Pension Benefit Guaranty 
     Corporation (PBGC) will act as a clearinghouse for benefits 
     due to participants who cannot

[[Page S8487]]

     be located (``missing participants''). Under the program, 
     when a plan is terminated and is unable to locate former 
     workers who are entitled to benefits, the terminating plan is 
     allowed to transfer these benefits to the PBGC which then 
     attempts to locate the employees in question. The missing 
     participants program is limited to certain defined benefit 
     plans.
       This proposal would expand the PBGC's missing participant 
     program to cover multiemployer defined benefit pension plans. 
     The program would not apply to governmental plans or to 
     church plans not covered by the PBGC, however. If a plan 
     covered by the new program has missing participants when the 
     plan terminates, at the option of the plan (or employer, in 
     the case of a single employer plan), the missing 
     participants' benefits could be transferred to the PBGC along 
     with related information.
       This change would take effect with respect to distributions 
     from t4erminating multiemployer plans that occur after the 
     PBGC has adopted final regulations implementing the 
     provision.
       By permitting sponsors the option of transferring pension 
     funds to the PBGC, the chances that a missing participant 
     will be able to recover benefits could be increased.


       Disregarding Rollovers for Purposes of the Cash Out Amount

       Under current law, if a terminated participant has a vested 
     accrued benefit of $5,000 or less, the plan may distribute 
     such benefit in a lump sum without the consent of the 
     participant or the participant's spouse. This $5,000 cash-out 
     limit is not indexed for inflation. In applying the $5,000 
     cash-out rule, the plan sponsor is under regulations required 
     to look back to determine if an individual's account every 
     exceeded $5,000 at the time of any prior distribution. 
     Rollover amounts count in determining the maximum balance 
     which can be involuntarily cashed out.
       This proposal would allow a plan sponsor to disregard 
     rollover amounts in determining eligibility for the cash-out 
     rule, that is, whether a participant's vested accrued benefit 
     exceeds $5,000.
       This proposal would apply to distributions after December 
     31, 1998.
       The reason for this change is to remove a possible reason 
     for employers to refuse to accept rollovers.


                            Plan Amendments

       Under current law, there is generally a short period of 
     time to make plan amendments that reflect the amendments to 
     the law. In addition, the anti-cutback rules can have the 
     unintentioned effect of preventing an employer from amending 
     its plan to reflect a change in the law.
       Amendments to a plan or annuity contract made pursuant to 
     any amendment made by this bill are not required to be made 
     before the last day of the first plan year beginning on or 
     after January 1, 2001. In the case of a governmental plan, 
     the date for amendments is extended to the first plan year 
     beginning on or after January 1, 2003. Operational compliance 
     would, of course be required with respect to all plans as of 
     the applicable effective date of any amendment made by this 
     Act.
       In addition, timely amendments to a plan or annuity 
     contract made pursuant to any amendment made by this Act 
     shall be deemed to satisfy the anti-cutback rules.
       The reason for this change is that plan sponsors need an 
     appropriate amount of time to make changes to their plan 
     documents.
                                 ______