[Senate Report 107-242]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 552
107th Congress                                                   Report
                                 SENATE
 2d Session                                                     107-242

======================================================================



 
        NATIONAL EMPLOYEE SAVINGS AND TRUST EQUITY GUARANTEE ACT

                                _______
                                

                 August 2, 2002.--Ordered to be printed

   Filed under authority of the order of the Senate of August 1, 2002

                                _______
                                

   Mr. Baucus, from the Committee on Finance, submitted the following

                              R E P O R T

                         [To accompany S. 1971]

    The Committee on Finance, to which was referred the bill 
(S. 1971) to amend the Internal Revenue Code of 1986 and the 
Employee Retirement Income Security Act of 1974 to protect the 
retirement security of American workers by ensuring that 
pension assets are adequately diversified and by providing 
workers with adequate access to, and information about, their 
pension plans, and for other purposes, having considered the 
same, reports favorably thereon with an amendment in the nature 
of a substitute and recommends that the bill, as amended, do 
pass.

                                CONTENTS

                                                                   Page
 I. Legislative Background............................................3
II. Explanation of the Bill...........................................3
    Title I. Diversification of Pension Plan Assets...................3
          A. Defined Contribution Plans Required to Provide 
              Employees with Freedom to Invest Their Plan Assets 
              (sec. 101 of the bill, new sec. 401(a)(35) of the 
              Code, and new sec. 204(j) of ERISA)................     3
    Title II. Protection of Employees During Pension Plan Transaction 
    Suspension Period.................................................9
          A. Notice to Participants or Beneficiaries of 
              Transaction Suspension Periods (sec. 201 of the 
              bill, new sec. 4980G of the Code, and new sec. 
              101(i) of ERISA)...................................     9
          B. Inapplicability of Relief from Fiduciary Liability 
              During Suspension of Ability of Participant or 
              Beneficiary to Direct Investments (sec. 202 of the 
              bill and sec. 404(c) of ERISA).....................    13
          C. Clarification of Participant Access to Remedies 
              under ERISA (sec. 203 of the bill and sec. 409 of 
              ERISA).............................................    16
          D. Increased Maximum Bond Amount for Plans Holding 
              Employer Securities (sec. 204 of the bill and sec. 
              412(a) of ERISA)...................................    17
    Title III. Providing Information to Assist Participants..........18
          A. Benefit Statements and Investment Guidelines (secs. 
              301-302 of the bill, new sec. 4980H of the Code, 
              and secs. 104 and 105 of ERISA)....................    18
          B. Information on Optional Forms of Benefit (sec. 303 
              of the bill).......................................    23
          C. Fiduciary Duty to Provide Material Information 
              Relating to Investment in Employer Stock (sec. 304 
              of the bill and sec. 404(c) of ERISA)..............    24
          D. Electronic Disclosure of Insider Trading (sec. 305 
              of the bill and sec. 101 of ERISA).................    26
          E. Fiduciary Rules for Plan Sponsors Designating 
              Independent Investment Advisors (sec. 306 of the 
              bill and new sec. 404(e) of ERISA).................    27
    Title IV. Other Provisions Relating to Pensions..................29
          A. Employee Plans Compliance Resolution System (sec. 
              401 of the bill)...................................    29
          B. Extension to all Governmental Plans of Moratorium on 
              Application of Certain Nondiscrimination Rules 
              Applicable to State and Local Government Plans 
              (sec. 402 of the bill, sec. 1505 of the Taxpayer 
              Relief Act of 1997, and secs. 401(a) and 401(k) of 
              the Code)..........................................    30
          C. Notice and Consent Period Regarding Distributions 
              (sec. 403 of the bill, sec. 417 of the Code, and 
              sec. 205 of ERISA).................................    31
          D. Technical Corrections to Saver Act (sec. 404 of the 
              bill and sec. 517 of ERISA)........................    33
          E. Missing Participants (sec. 405 of the bill and secs. 
              206(f) and 4050 of ERISA)..........................    34
          F. Reduced PBGC Premiums for Small and New Plans (secs. 
              406-407 of the bill and sec. 4006 of ERISA)........    35
          G. Authorization for PBGC to Pay Interest on Premium 
              Overpayment Refunds (sec. 408 of the bill and sec. 
              4007(b) of ERISA)..................................    36
          H. Rules for Substantial Owner Benefits in Terminated 
              Plans (sec. 409 of the bill and secs. 4022 and 4044 
              of ERISA)..........................................    37
          I. Benefit Suspension Notice (sec. 410 of the bill)....    38
          J. Interest Rate Range for Additional Funding 
              Requirements (sec. 411 of the bill, sec. 412 of the 
              Code, and secs. 302 and 4006 of ERISA).............    39
          K. Voluntary Early Retirement Incentive Plans 
              Maintained by Local Educational Agencies and Other 
              Entities (sec. 412 of the bill, sec. 457 of the 
              Code, sec. 3(2)(B) of ERISA, and sec. 4(l)(1) of 
              the Age Discrimination in Employment Act)..........    41
          L. Automatic Rollovers of Certain Involuntary 
              Distributions (sec. 413 of the bill and sec. 404(c) 
              of ERISA)..........................................    44
          M. Extension of Transition Rule to Pension Funding 
              Requirements (sec. 414 of the bill and sec. 769(c) 
              of the Retirement Protection Act of 1994)..........    46
          N. Studies (secs. 421-425 of the bill).................    48
          O. Plan Amendments (sec. 431 of the bill)..............    49
    Title V. Provisions Relating to Executives and Stock Options.....51
          A. Repeal of Limitation on Issuance of Treasury 
              Guidance Regarding Nonqualified Deferred 
              Compensation (sec. 501 of the bill)................    51
          B. Taxation of Deferred Compensation Provided through 
              Offshore Trusts (sec. 502 of the bill and sec. 83 
              of the Code).......................................    54
          C. Treatment of Loans to Executives (sec. 503 of the 
              bill and new sec. 7872A and sec. 7872 of the Code).    56
          D. Required Wage Withholding at Top Marginal Rate for 
              Supplemental Wage Payments in Excess of $1 Million 
              (sec. 504 of the bill and sec. 13273 of the Revenue 
              Reconciliation Act of 1993)........................    59
          E. Chief Executive Officer Required To Sign Corporate 
              Income Tax Returns (sec. 511 of the bill and sec. 
              6062 of the Code)..................................    60
          F. Exclusion of Incentive Stock Options and Employee 
              Stock Purchase Plan Stock Options from Wages (sec. 
              521 of the bill and secs. 421(b), 423(c), 3121(a), 
              3231, and 3306(b) of the Code).....................    61
          G. Capital Gain Treatment on Sale of Stock Acquired 
              from Exercise of Statutory Stock Options to Comply 
              with Conflict of Interest Requirements (sec. 522 of 
              the bill and sec. 421 of the Code).................    62
III.Budget Effects of the Bill.......................................64

          A. Committee Estimates.................................    64
          B. Budget Authority and Tax Expenditures...............    68
          C. Consultation with Congressional Budget Office.......    68
IV. Votes of the Committee...........................................68
 V. Regulatory Impact and Other Matters..............................68
          A. Regulatory Impact...................................    68
          B. Unfunded Mandates Statement.........................    69
          C. Tax Complexity Analysis.............................    69
VI. Changes in Existing Law Made By the Bill as Reported.............70

                       I. LEGISLATIVE BACKGROUND

    The Senate Committee on Finance marked up S. 1971 (the 
``National Employee Savings and Trust Equity Guarantee Act'') 
on July 11, 2002, and ordered the bill, as amended, favorably 
reported by voice vote.
    The Committee held a hearing on February 27, 2002, 
regarding retirement security. The Committee also held a 
hearing on April 18, 2002, regarding corporate governance and 
executive compensation.

                      II. EXPLANATION OF THE BILL


            TITLE I. DIVERSIFICATION OF PENSION PLAN ASSETS


   A. Defined Contribution Plans Required To Provide Employees With 
                  Freedom To Invest Their Plan Assets


(Sec. 101 of the bill, new sec. 401(a)(35) of the Code, and new sec. 
        204(j) of ERISA)

                              PRESENT LAW

In general

    Qualified retirement plans are subject to regulation under 
the Internal Revenue Code (the ``Code'') and under the Employee 
Retirement Income Security Act of 1974 (``ERISA''). Some of the 
requirements under the Code and ERISA for qualified retirement 
plans are identical or very similar. For example, both the Code 
and ERISA impose minimum participation and vesting 
requirements. Other requirements are contained only in the Code 
or only in ERISA. In the case of a Code requirement, failure to 
satisfy the requirement could result in the loss of qualified 
status for the plan or in the imposition of an excise tax. In 
the case of an ERISA requirement, failure to satisfy the 
requirement could result in the imposition of a penalty or a 
civil action by a participant or the Department of Labor.
    The Code and ERISA contain different rules that limit the 
investment of defined contribution plan assets in employer 
securities. The extent to which the limits apply depends on the 
type of plan and the type of contribution involved.

Diversification requirements applicable to employee stock ownership 
        plans (``ESOPs'')

    An ESOP is a defined contribution plan that is designated 
as an ESOP and is designed to invest primarily in stock of the 
employer. An ESOP can be an entire plan or it can be a 
component of a larger defined contribution plan. An ESOP may 
provide for different types of contributions, including 
employer nonelective contributions and others. For example, an 
ESOP may include a 401(k) feature that permits employees to 
make elective deferrals.\1\
---------------------------------------------------------------------------
    \1\ Such an ESOP design is sometimes referred to as a ``KSOP.''
---------------------------------------------------------------------------
    Under the Code,\2\ ESOPs are subject to a requirement that 
a participant who has attained age 55 and who has at least 10 
years of participation in the plan must be permitted to 
diversify the investment of the participant's account in assets 
other than employer securities. The diversification requirement 
applies to a participant for six years, starting with the year 
in which the individual firsts meets the eligibility 
requirements (i.e., age 55 and 10 years of participation). The 
participant must be allowed to elect to diversify up to 25 
percent of the participant's account (50 percent in the sixth 
year), reduced by the portion of the account diversified in 
prior years.
---------------------------------------------------------------------------
    \2\ All references are to provisions of the Code unless otherwise 
indicated.
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    The participant must be given 90 days after the end of each 
plan year in the election period to make the election to 
diversify. In the case of participants who elect to diversify, 
the plan satisfies the diversification requirement if (1) the 
plan distributes the applicable amount to the participant 
within 90 days after the election period, (2) the plan offers 
at least three investment options (not inconsistent with 
Treasury regulations) and, within 90 days of the election 
period, invests the applicable amount in accordance with the 
participant's election, or (3) the applicable amount is 
transferred within 90 days of the election period to another 
qualified defined contribution plan of the employer providing 
investment options in accordance with (2).\3\
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    \3\ Sec. 401(a)(28); IRS Notice 88-56, 1988-1 C.B. 540, Q&A 16.
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10-percent limit on the acquisition of employer securities

    The Employee Retirement Income Security Act of 1974 
(``ERISA'') prohibits money purchase pension plans (other than 
certain plans in existence before the enactment of ERISA) from 
acquiring employer securities if, after the acquisition, more 
than 10 percent of the assets of the plan would be invested in 
employer stock. This 10-percent limitation generally does not 
apply to other types of defined contribution plans.\4\ Thus, 
most defined contribution plans, such as profit-sharing plans, 
stock bonus plans, and ESOPs, are not subject to any limit 
under ERISA on the amount of employer contributions that can be 
invested in employer securities. In addition, a fiduciary 
generally is deemed not to violate the requirement that plan 
assets be diversified with respect to the acquisition or 
holding of employer securities in such plans.\5\
---------------------------------------------------------------------------
    \4\ The 10-percent limitation also applies to defined benefit plans 
and to a defined contribution plan that is part of an arrangement under 
which benefits payable to a participant under a defined benefit plan 
are reduced by benefits under the defined contribution plan (i.e., a 
``floor-offset'' arrangement).
    \5\ Under ERISA, plans that are not subject to the 10-percent 
limitation on the acquisition of employer securities are referred to as 
``eligible individual account plans.''
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    Under ERISA, the 10-percent limitation on the acquisition 
of employer securities, described above, applies separately to 
the portion of a plan consisting of elective deferrals (and 
earnings thereon) if any portion of an individual's elective 
deferrals (or earnings thereon) are required to be invested in 
employer securities pursuant to plan terms or the direction of 
a person other than the participant. This restriction does not 
apply if (1) the amount of elective deferrals required to be 
invested in employer securities does not exceed more than one 
percent of any employee's compensation, (2) the fair market 
value of all defined contribution plans maintained by the 
employer is no more than 10-percent of the fair market value of 
all retirement plans of the employer, or (3) the plan is an 
ESOP.

                           REASONS FOR CHANGE

    The Committee understands that employer securities are one 
possible investment for defined contribution plans. In some 
cases, the plan may offer employer securities as one of several 
investment options made available to plan participants. In 
other cases, the plan may provide that certain contributions 
are invested in employer securities. For example, many plans 
provide that employer matching contributions with respect to 
employee elective deferrals under a qualified cash or deferred 
arrangement are to be invested in employer securities.
    Present law has facilitated and encouraged the acquisition 
of employer securities by qualified plans, particularly in the 
case of ESOPs. Thus, for example, present law provides that the 
dividends paid on employer securities held by an ESOP are 
deductible under certain circumstances and also allows an ESOP 
to borrow to acquire the employer securities. Present law 
recognizes that employer securities can be a profitable 
investment for employees as well as a corporate financing tool 
for employers. Employees who hold employer securities through a 
defined contribution plan often feel that they have a stake in 
the business, leading to increased profitability.
    On the other hand, the Committee recognizes that 
diversification of assets is a basic principle of sound 
investment policy and that requiring that certain contributions 
be invested in employer securities may create tension with the 
objectives of diversification. Failure to adequately diversify 
defined contribution plan investments may jeopardize retirement 
security.
    The Committee believes that allowing participants greater 
opportunity to diversify plan investments in employer stock 
will help participants achieve their retirement security goals, 
while continuing to allow employers and employees the freedom 
to choose their own investments. Thus, the Committee bill 
requires defined contribution plans that hold employer 
securities that are publicly traded to permit qualified plan 
participants to direct the plan to reinvest employer securities 
in other assets. The Committee bill generally requires 
diversification in accordance with the present-law rules 
regarding vesting.
    The Committee believes that the current role of ESOPs 
should be preserved; thus, the bill does not apply additional 
diversification requirements to ``stand alone'' ESOPs, meaning 
ESOPs that do not hold elective deferrals and related 
contributions. Again, the Committee believes this strikes an 
appropriate balance between the principle of diversification 
and the goals served by ESOPs. For example, some ESOPs hold a 
controlling interest in the employer, and the Committee 
believes it is appropriate to encourage this form of ownership.

                        EXPLANATION OF PROVISION

In general

    Under the provision, in order to satisfy the requirements 
under the Code and under ERISA, certain defined contribution 
plans are required to provide diversification rights with 
respect to amounts invested in employer securities. Such a plan 
is required to permit applicable individuals to direct that the 
portion of the individual's account held in employer securities 
be invested in alternative investments. An applicable 
individual includes (1) any plan participant; and (2) any 
beneficiary who has an account under the plan with respect to 
which the beneficiary is entitled to exercise the rights of a 
participant. The time when the diversification requirements 
apply depends on the type of contributions invested in employer 
securities.

Plans subject to requirements

    The diversification requirements generally apply to any 
defined contribution plan holding publicly-traded employer 
securities (i.e., securities issued by the employer or a member 
of the employer's controlled group of corporations \6\ that are 
readily tradable on an established securities market). For this 
purpose, a plan holding employer securities that are not 
publicly traded is generally treated as holding publicly-traded 
employer securities if the employer (or any member of the 
employer's controlled group of corporations) has issued any 
class of publicly-traded stock. This treatment does not apply 
if the employer (and any parent corporation \7\ of the 
employer) has not issued any publicly-traded security or any 
special class of stock that grants particular rights to, or 
bears particular risks for, the holder or the issuer with 
respect to any member of the employer's controlled group that 
has issued any class of publicly-traded stock. The Secretary of 
the Treasury has the authority to provide other exceptions in 
regulations. For example, an exception may be appropriate if no 
stock of the employer maintaining the plan (including stock 
held in the plan) is publicly traded, but a member of the 
employer's controlled group has issued a small amount of 
publicly-traded stock.
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    \6\ For this purpose, ``controlled group of corporations'' has the 
same meaning as under section 1563(a), except that, in applying that 
section, 50 percent is substituted for 80 percent.
    \7\ For this purpose, ``parent corporation'' has the same meaning 
as under section 424(e), i.e., any corporation (other than the 
employer) in an unbroken chain of corporations ending with the employer 
if each corporation other than the employer owns stock possessing at 
least 50 percent of the total combined voting power of all classes of 
stock with voting rights or at least 50 percent of the total value of 
shares of all classes of stock in one of the other corporations in the 
chain.
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    The diversification requirements do not apply to an ESOP 
that (1) does not hold contributions (or earnings thereon) that 
are subject to the special nondiscrimination tests that apply 
to elective deferrals, employee after-tax contributions, and 
matching contributions, and (2) is a separate plan from any 
other qualified retirement plan of the employer. Accordingly, 
an ESOP that holds elective deferrals, employee contributions, 
employer matching contributions, or nonelective employer 
contributions used to satisfy the special nondiscrimination 
tests (including the safe harbor methods of satisfying the 
tests) is subject to the diversification requirements under the 
provision. An ESOP that is subject to the diversification 
requirements under the provision is no longer subject to the 
present-law ESOP diversification rules.\8\
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    \8\ Providing the diversification rights required under the 
provision, or greater diversification rights, will not cause an ESOP to 
fail to be designed to invest primarily in qualifying employer 
securities under section 4975(e)(7)(A).
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    The diversification requirements under the provision do not 
apply to a one-participant retirement plan. A one-participant 
retirement plan is a plan that (1) on the first day of the plan 
year, covers only an individual (or the individual and his or 
her spouse) and the individual owns the entire business 
maintaining the plan (whether or not incorporated) or covers 
only one or more partners (or partners and their spouses) in a 
business partnership, (2) meets the minimum coverage 
requirements without being combined with any other plan that 
covers employees of the business, (3) does not provide benefits 
to anyone except the individuals (and spouses) described in 
(1), (4) does not cover a business that is a member of an 
affiliated service group, a controlled group of corporations, 
or a group of corporations under common control, and (5) does 
not cover a business that uses leased employees.\9\
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    \9\ The term ``one-participant retirement plan'' is defined in the 
provision relating to notice of a transaction suspension period.
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Elective deferrals and employee contributions

    In the case of amounts attributable to elective deferrals 
under a qualified cash or deferred arrangement and employee 
after-tax contributions that are invested in employer 
securities, any applicable individual must be permitted to 
direct that such amounts be invested in alternative 
investments.

Other contributions

    In the case of amounts attributable to all other 
contributions (i.e., nonelective employer contributions and 
employer matching contributions), an applicable individual who 
is a participant with three years of service,\10\ a beneficiary 
of such a participant, or a beneficiary of a deceased 
participant must be permitted to direct that such amounts be 
invested in alternative investments.
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    \10\ Years of service is defined as under the rules relating to 
vesting (sec. 411(a)).
---------------------------------------------------------------------------
    The provision provides a transition rule for amounts 
attributable to these other contributions that are invested in 
employer securities acquired before the first plan year for 
which diversification requirements apply. Under the transition 
rule, for the first three years for which the new 
diversification requirements apply to the plan, the applicable 
percentage of such amounts is subject to diversification as 
shown in Table 1, below. In determining the portion of the 
account subject to diversification under the transition rule, 
any previous diversification of employer securities pursuant to 
an election under the present-law ESOP diversification 
requirements is taken into account. The transition rule does 
not apply to plan participants who have three years of service 
and who have attained age 55 by the beginning of the first plan 
year beginning after December 31, 2002.

     TABLE 1.--APPLICABLE PERCENTAGE FOR EMPLOYER SECURITIES HELD ON
                             EFFECTIVE DATE
------------------------------------------------------------------------
  Plan year for which diversification
                applies                       Applicable percentage
------------------------------------------------------------------------
First year.............................  33 (or, if greater, the amount
                                          that would be required under
                                          present-law ESOP
                                          diversification rule).
Second year............................  66.
Third year.............................  100.
------------------------------------------------------------------------

    The application of the transition rule is illustrated by 
the following example. Suppose that the account of a 
participant with at least three years of service held 120 
shares of employer stock contributed as matching contributions 
before the diversification requirements became effective. In 
the first year for which diversification applies, 33 percent 
(i.e., 40 shares) of that stock is subject to the 
diversification requirements. In the second year for which 
diversification applies, a total of 66 percent of 120 shares of 
stock (i.e., 79 shares, or an additional 39 shares) is subject 
to the diversification requirements. In the third year for 
which diversification applies, 100 percent of the stock, or all 
120 shares, is subject to the diversification requirements. In 
addition, in each year, employer stock in the account 
attributable to elective deferrals and employee after-tax 
contributions is fully subject to the diversification 
requirements, as is any new stock contributed to the account.

Requirements for investment alternatives

    In order to satisfy the diversification requirements, the 
plan is required to give applicable individuals a choice of at 
least three investment options, other than employer securities, 
each of which is diversified and has materially different risk 
and return characteristics. Other investment options offered by 
the plan generally also have to be available. A plan may not 
impose restrictions or conditions with respect to the 
investment of employer securities that are not imposed on the 
investment of other plan assets (other than restrictions or 
conditions imposed by reason of the application of securities 
laws). Such a restriction or condition includes a provision 
under which a participant who divests his or her account of 
employer securities receives less favorable treatment (such as 
a lower rate of employer contributions) than a participant 
whose account remains invested in employer securities. A plan 
does not fail to meet the diversification requirements merely 
because the plan limits the times when investment changes can 
be made to periodic, reasonable opportunities that occur at 
least quarterly.

                             EFFECTIVE DATE

    The provision is generally effective for plan years 
beginning after December 31, 2002. In the case of a plan 
maintained pursuant to one or more collective bargaining 
agreements, the provision is effective for plan years beginning 
after the earlier of (1) the later of December 31, 2003, or the 
date on which the last of such collective bargaining agreements 
terminates (determined without regard to any extension thereof 
after the date of enactment), or (2) December 31, 2004.

   TITLE II. PROTECTION OF EMPLOYEES DURING PENSION PLAN TRANSACTION 
                           SUSPENSION PERIOD


 A. Notice to Participants or Beneficiaries of Transaction Suspension 
                                Periods


(Sec. 201 of the bill, new sec. 4980G of the Code, and new sec. 101(i) 
        of ERISA)

                              PRESENT LAW

    The Code and ERISA require various notices to be provided 
to participants and beneficiaries under an employer-sponsored 
retirement plan regarding their rights under the plan. Present 
law does not specifically require that participants be given 
advance notice of temporary periods during which the ability to 
direct investments or to obtain loans or distributions from the 
plan is restricted.
    Failure to provide a notice required under the Code may 
result in the imposition of an excise tax (e.g., sec. 4980F, 
relating to notice requirements for plans significantly 
reducing benefit accruals) or a reporting penalty (e.g., sec. 
6652(i), relating to a failure to give written explanation of 
qualifying rollover distributions). Failure to provide a notice 
required under ERISA may result in the imposition of a civil 
penalty.\11\
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    \11\ ERISA also permits the Secretary of Labor, a participant, a 
beneficiary, or a plan fiduciary to bring civil action to enforce any 
ERISA requirements.
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                           REASONS FOR CHANGE

    In the course of normal plan operation, periods may occur 
during which a plan participant's ability to direct the 
investment of his or her account or obtain loans or 
distributions from the plan is restricted (a so-called 
``blackout'' period). These periods usually occur in connection 
with administrative changes, such as a change in recordkeepers 
or in the investment options offered under a plan. Such a 
period may result also from changes in the plan in connection 
with a corporate transaction, such as a sale or merger. The 
Committee believes that plan participants should be given 
advance notice of such a period, before the period begins, in 
order to give participants the opportunity to prepare for any 
restrictions that will occur. For example, if the ability to 
direct investments will be restricted, a participant may wish 
to make investment changes before the restriction period 
begins.

                        EXPLANATION OF PROVISION

In general

    Under the provision, the Code and ERISA require that 
advance notice of a transaction suspension period must be 
provided by the administrator of an applicable pension plan to 
the applicable individuals to whom the transaction suspension 
period applies (and to any employeeorganization representing 
such individuals). An applicable individual (as defined under the 
provision relating to diversification) is (1) any plan participant and 
(2) any beneficiary who has an account under the plan with respect to 
which the beneficiary is entitled to exercise the rights of a 
participant. Generally, notice must be provided at least 30 days before 
the beginning of the transaction suspension period.
    An applicable pension plan is a qualified retirement plan 
or annuity, a tax-sheltered annuity plan, or an eligible 
deferred compensation plan of a governmental employer that 
maintains accounts for participants and beneficiaries. An 
applicable pension plan includes a plan that is a governmental 
plan or a church plan, and such a plan is subject to the notice 
requirement under the Code. However, governmental plans 
(including an eligible deferred compensation plan of a 
governmental employer) and church plans are generally exempt 
from ERISA. As a result, the ERISA notice requirement does not 
apply to such a plan.
    An applicable pension plan does not include a one-
participant retirement plan, defined as a plan that (1) on the 
first day of the plan year, covers only an individual (or the 
individual and his or her spouse) and the individual owns the 
entire business maintaining the plan (whether or not 
incorporated) or covers only one or more partners (or partners 
and their spouses) in a business partnership, (2) meets the 
minimum coverage requirements without being combined with any 
other plan that covers employees of the business, (3) does not 
provide benefits to anyone except the individuals (and spouses) 
described in (1), (4) does not cover a business that is a 
member of an affiliated service group, a controlled group of 
corporations, or a group of corporations under common control, 
and (5) does not cover a business that uses leased employees.

Definition of transaction suspension period

    A transaction suspension period means a period of more than 
three consecutive business days during which certain rights are 
significantly restricted. The rights that are relevant for 
purposes of a transaction suspension period are rights 
otherwise provided under the plan to one or more applicable 
individuals to direct investments (including investments in 
employer securities) or to obtain loans or distributions from 
the plan. However, rights that are significantly restricted 
because of the application of securities laws or other 
circumstances specified in regulations and restrictions 
required in connection with a qualified domestic relations 
order are not taken into account in determining whether a 
transaction suspension period occurs.
    Whether an individual's right to direct investments or 
obtain loans or distributions from the plan is significantly 
restricted is generally determined by reference to the normal 
rights and procedures provided under the plan. A variety of 
factors may be relevant in making this determination. For 
example, if, in connection with a change in plan recordkeepers, 
no investment directions, loans, or distributions can be 
executed over a three-day weekend (i.e., a Saturday, a Sunday, 
and a Monday that is a Federal holiday), then no transaction 
suspension period results if the participants would not, under 
the terms of the plan, have been able to engage in such 
transactions during that period in any event. As another 
example, suppose a plan provides that a participant's loan 
request will be processed within 30 days from the time the loan 
request is submitted. The mere fact that, in connection with a 
change in plan administrators, the processing of loan requests 
is suspended for a ten-day period does not result in a 
transaction suspension period if participants' ability to 
submit loan requests continues during the ten-day period and 
the ten-day suspension does not cause the processing of loan 
requests to take longer than the 30-day period provided in the 
plan. In addition, if a plan provides that a participant's 
ability to make investment changes, or obtain a loan or a 
distribution, is limited for a certain period in connection 
with a qualified domestic relations order with respect to the 
participant's account, that limitation generally does not 
result in a transaction suspension period.
    In the case of a right that may be exercised at only 
certain times, for example, on only certain days during a 
month, in determining whether there is a transaction period, it 
may be relevant to consider the time until the right is again 
available. For example, if, under the plan, rights may be 
exercised only on the first three business days of the month, a 
significant restriction placed on those rights for those three 
days has the effect of restricting those rights until the 
following month, even though the restriction is for only three 
days.
    Factors in addition to the time period involved may also be 
relevant in determining whether a transaction suspension period 
occurs, and the relevant factors may vary depending on the 
rights affected. For example, suppose a plan offers a variety 
of investment options, including three options that have 
similar characteristics (e.g., similar risk and return 
characteristics). If the ability to transfer funds into only 
one of these options is restricted, this might not result in a 
transaction suspension period for purposes of the provision, 
because participants have the right to transfer funds into 
similar investment options. In addition, a transaction 
suspension period does not occur as a result of plan provisions 
that restrict a participant's right to direct the investment of 
the assets in his or her account to certain periods, such as 
the first fifteen days of each month.

Timing of notice

    Notice of a transaction suspension period is generally 
required at least 30 days before the beginning of the period. 
An exception applies in the case of a transaction suspension 
period imposed because of an event outside the control of the 
employer, plan, or plan administrator. In that case, notice 
must be provided as soon as reasonably practicable under the 
circumstances. The Secretary of the Treasury is given the 
authority to provide additional exceptions (and to specify the 
time when notice is required) in the case of a transaction 
suspension period due to other circumstances specified by the 
Secretary, including the application of securities laws.
    In the case of a transaction suspension period beginning 
within 30 days after a major corporate disposition by a 
corporation maintaining the plan, the notice requirements are 
treated as met if, not later than 30 days before the 
disposition, the plan administrator (or the employer 
maintaining the plan) provides notice of the transaction 
suspension period. A ``major corporate disposition'' means the 
disposition of substantially all of the stock of the 
corporation, or a subsidiary thereof, or the disposition of 
substantially all of the assets used in a trade or business of 
the corporation or subsidiary. In accordance with Treasury 
regulations, similar rules will apply in the case of an entity 
that is not a corporation.
    It is intended under the provision that participants will 
be given the opportunity to execute investment changes with 
respect to their accounts, or obtain loans or distributions 
otherwise permitted under the plan, before the transaction 
suspension period begins.

Form and content of notice

    Notice of a transaction suspension period must be written 
in a manner calculated to be understood by the average plan 
participant and provide sufficient information (as determined 
under Treasury guidance) to allow the recipients to understand 
the timing and effect of the transaction suspension period. 
Specifically, the notice is required to include (1) the reasons 
for the suspension, (2) an identification of the investments 
and other rights under the plan that are affected, (3) the 
expected beginning date and length of the suspension 
period,\12\ and (4) in the case of a transaction suspension 
period affecting rights related to plan investments, a 
statement that the applicable individual should evaluate the 
appropriateness of current investment decisions in light of the 
inability to direct or diversify assets during the expected 
period of suspension. The notice must be provided in writing 
and may be delivered in electronic or other form that is 
reasonably expected to result in receipt of the notice by the 
applicable individual. The Secretary of the Treasury is 
required, in consultation with the Secretary of Labor, to issue 
a model transaction suspension period notice.
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    \12\ If the expected beginning date or length of the transaction 
suspension period changes after notice has been provided, notice of the 
change must be provided as soon as reasonably practicable.
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Sanctions for failure to provide notice

            Excise tax
    An excise tax generally applies in the case of a failure to 
provide notice of a transaction suspension period as required 
under the Code. A reporting penalty applies in the case of a 
failure related to a governmental plan or a church plan.
    Under the provision, an excise tax is generally imposed on 
the employer if notice of a transaction suspension is not 
provided.\13\ The excise tax is $100 per day for each 
applicable individual with respect to whom the failure 
occurred, until notice is provided or the failure is otherwise 
corrected. If the employer exercises reasonable diligence to 
meet the notice requirements, the total excise tax imposed 
during a taxable year will not exceed $500,000.
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    \13\ In the case of a multiemployer plan, the excise tax is imposed 
on the plan. In the case of a tax-sheltered annuity program under 
section 403(b) that is not treated as established or maintained by the 
employer for purposes of ERISA, the excise tax is imposed on the plan 
administrator.
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    No tax will be imposed with respect to a failure if the 
employer does not know that the failure existed and exercises 
reasonable diligence to comply with the notice requirement. In 
addition, no tax will be imposed if the employer exercises 
reasonable diligence to comply and provides the required notice 
as soon as reasonably practicable after learning of the 
failure. In the case of a failure due to reasonable cause and 
not to willful neglect, the Secretary of the Treasury is 
authorized to waive the excise tax to the extent that the 
payment of the tax would be excessive or otherwise inequitable 
relative to the failure involved.
    The excise tax does not apply in the case of a failure to 
provide notice of a transaction suspension period with respect 
to a governmental plan or a church plan. In that case, on 
notice and demand by the Secretary, a penalty applies of $100 
per day for each applicable individual with respect to whom the 
failure occurs, until notice is provided or the failure is 
otherwise corrected.\14\ The limitations and exceptions to the 
excise tax apply also to the penalty.
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    \14\ In the case of a governmental plan or church plan, a penalty 
does not apply to a failure to provide notice to an employee 
organization.
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            ERISA civil penalty
    In the case of a failure to provide notice of a transaction 
suspension period as required under ERISA, the Secretary of 
Labor is authorized to assess a civil penalty of up to $100 per 
day for each violation.\15\ For this purpose, each violation 
with respect to a single participant or beneficiary is treated 
as a separate violation.
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    \15\ The civil penalty under ERISA does not apply to a governmental 
plan or a church plan that is exempt from ERISA.
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                             EFFECTIVE DATE

    The provision is generally effective for plan years 
beginning after December 31, 2002. In the case of a plan 
maintained pursuant to one or more collective bargaining 
agreements, the provision is effective for plan years beginning 
after the earlier of (1) the later of December 31, 2003, or the 
date on which the last of such collective bargaining agreements 
terminates (determined without regard to any extension thereof 
after the date of enactment), or (2) December 31, 2004. No 
later than 120 days after enactment of the provision, the 
Secretary of the Treasury is required to specify (1) the 
circumstances under which 30 days notice of a transaction 
suspension period is not required and (2) the time by which 
notice is required to be provided in those circumstances.

B. Inapplicability of Relief From Fiduciary Liability During Suspension 
     of Ability of Participant or Beneficiary to Direct Investments


(Sec. 202 of the bill and sec. 404(c) of ERISA)

                              PRESENT LAW

Fiduciary rules under ERISA

    ERISA contains general fiduciary duty standards that apply 
to all fiduciary actions, including investment decisions. ERISA 
requires that a plan fiduciary generally must discharge its 
duties solely in the interests of participants and 
beneficiaries and with care, prudence, and diligence. With 
respect to plan assets, ERISA requires a fiduciary to diversify 
the investments of the plan so as to minimize the risk of large 
losses, unless under the circumstances it is clearly prudent 
not to do so.\16\
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    \16\ Certain defined contribution plans are not subject to the 
diversification requirement for investments or the general prudence 
requirement (to the extent that it requires diversification) with 
respect to investments in employer stock.
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    A plan fiduciary that breaches any of the fiduciary 
responsibilities, obligations, or duties imposed by ERISA is 
personally liable to make good to the plan any losses to the 
plan resulting from such breach and to restore to the plan any 
profits the fiduciary has made through the use of plan assets. 
A plan fiduciary may be liable also for a breach of 
responsibility by another fiduciary (a ``co-fiduciary'') in 
certain circumstances.

Special rule for participant control of assets

    ERISA provides a special rule for a defined contribution 
plan that permits participants to exercise control over the 
assets in their individual accounts. Under the special rule, if 
a participant exercises control over the assets in his or her 
account (as determined under regulations), the participant is 
not deemed to be a fiduciary by reason of such exercise 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 
exercise of control.
    Regulations issued by the Department of Labor describe the 
requirements that must be met in order for a participant to be 
treated as exercising control over the assets in his or her 
account. With respect to investment options:
     the plan must provide at least three different 
investment options, each of which is diversified and has 
materially different risk and return characteristics;
     the plan must allow participants to give 
investment instructions with respect to each investment option 
under the plan with a frequency that is appropriate in light of 
the reasonably expected market volatility of the investment 
option (the general volatility rule);
     at a minimum, participants must be allowed to give 
investment instructions at least every three months with 
respect to least three of the investment options, and those 
investment options must constitute a broad range of options 
(the three-month minimum rule);
     participants must be provided with detailed 
information about the investment options, information regarding 
fees, investment instructions and limitations, and copies of 
financial data and prospectuses; and
     specific requirements must be satisfied with 
respect to investments in employer stock to ensure that 
employees' buying, selling, and voting decisions are 
confidential and free from employer influence.
    If these and the other requirements under the regulations 
are met, a plan fiduciary may be liable for the investment 
options made available under the plan, but not for the specific 
investment decisions made by participants.

                           REASONS FOR CHANGE

    The Committee believes that participants generally should 
not be considered to exercise control over the assets in their 
accounts when they are prevented from making investment changes 
because of a transaction suspension period. On the other hand, 
transaction suspension periods are sometimes necessary to 
ensure the proper administration of a plan. Accordingly, the 
Committee believes that a fiduciary that fulfills its fiduciary 
responsibilities under ERISA in connection with authorizing the 
transaction suspension period should not be responsible for 
losses that occur during the transaction suspension period with 
respect to investments chosen by the participant.

                        EXPLANATION OF PROVISION

    Under the provision, relief from fiduciary liability for 
any loss or breach resulting from a participant's exercise of 
control over assets generally does not apply in the case of a 
transaction suspension period during which the ability of the 
participant to direct the investment of the assets in his or 
her account is suspended by a plan sponsor or fiduciary. For 
this purpose, transaction suspension period is defined as under 
the provision requiring advance notice of a transaction 
suspension period. Under a special rule, if a transaction 
suspension period occurs in connection with a change in the 
investment options offered under the plan, a participant is 
deemed to have exercised control over the assets in his or her 
account before the transaction suspension period if, after 
notice of the change in investment options is given to the 
participant, assets in the account of the participant are 
transferred either (1) to investment options in accordance with 
the participant's affirmative election (provided that the 
election otherwise meets the conditions for the participant to 
exercise control over the assets in the account), or (2) in the 
absence of an affirmative election by the participant and where 
fiduciary relief applied with respect to the prior investment 
options, to investment options with reasonably comparable risk 
and return characteristics in the manner set forth in the 
notice.
    In addition, if the fiduciary meets the requirements of 
ERISA in connection with authorizing the transaction suspension 
period, the fiduciary will not be liable for any loss occurring 
during the period as a result of a participant's or 
beneficiary's exercise of control over assets in his or her 
account before the period. Matters to be considered in 
determining whether the requirements of ERISA were satisfied 
include (but are not limited to) whether the fiduciary(1) 
determined that the expected transaction suspension period was 
reasonable, (2) provided notice of the transaction suspension period 
(as required under another provision of the bill), and (3) acted in 
accordance with the general fiduciary duty standards of ERISA in 
determining whether to enter into the transaction suspension period. 
The Secretary of Labor is required, in consultation with the Secretary 
of Treasury, to issue, before December 31, 2002, final regulations 
providing guidance, including safe harbors, on how plan fiduciaries 
will be able to satisfy their fiduciary responsibilities during a 
transaction suspension period during which the ability of a participant 
or beneficiary to direct the investment of the assets in his or her 
account is suspended.

                             EFFECTIVE DATE

    The provision is generally effective for plan years 
beginning after December 31, 2002. In the case of a plan 
maintained pursuant to one or more collective bargaining 
agreements, the provision is effective for plan years beginning 
after the earlier of (1) the later of December 31, 2003, or the 
date on which the last of such collective bargaining agreements 
terminates (determined without regard to any extension thereof 
after the date of enactment), or (2) December 31, 2004.

     C. Clarification of Participant Access to Remedies Under ERISA


(Sec. 203 of the bill and sec. 409 of ERISA)

                              PRESENT LAW

    ERISA contains several provisions under which a participant 
may bring a civil action against a plan fiduciary.\17\
---------------------------------------------------------------------------
    \17\ ERISA sec. 502(a). Some of these provisions also allow the 
Secretary of Labor or another plan fiduciary to bring a civil action.
---------------------------------------------------------------------------
    A participant may bring a civil action for appropriate 
relief under the general fiduciary liability provision of 
ERISA.\18\ Under this provision, a plan fiduciary that breaches 
any of the fiduciary responsibilities, obligations, or duties 
imposed by ERISA is personally liable to make good to the plan 
any losses to the plan resulting from such breach and to 
restore to the plan any profits the fiduciary has made through 
the use of plan assets. In addition, the fiduciary is subject 
to other equitable or remedial relief as a court deems 
appropriate, including the removal of the fiduciary. This 
general fiduciary liability provision has been interpreted to 
provide broad relief (including money damages) and to authorize 
the award of damages to make the plan whole for investment 
losses due to a breach of fiduciary duty. However, amounts 
recovered under the general fiduciary liability provision are 
not payable to a participant personally, even in the case of a 
civil action brought by a participant, because such recovery 
must be on behalf of the plan.\19\
---------------------------------------------------------------------------
    \18\ ERISA sec. 409, relating to liability for breach of fiduciary 
duty. Participant civil actions for breach of such duties are 
authorized in ERISA sec. 502(a)(2).
    \19\ Massachusetts Mutual Life Insurance Co. v. Russell, 473 U.S. 
134 (1985).
---------------------------------------------------------------------------
    In the case of a recovery with respect to an individual 
account plan,\20\ amounts recovered generally are payable to 
the plan and allocated to participants' accounts.\21\ Issues 
have arisen under present law regarding the extent to which 
damages recovered under the general fiduciary liability 
provision with respect to a breach of fiduciary liability 
affecting a participant's individual account under an 
individual account plan are to be allocated to the 
participant's account.
---------------------------------------------------------------------------
    \20\ Under ERISA, a defined contribution plan is generally referred 
to as an individual account plan.
    \21\ Funds held under a defined contribution plan must be allocated 
to participants' accounts in accordance with a definite formula. The 
plan must provide for the valuation of amounts held by the plan, and 
allocations and adjustments of participants' accounts in accordance 
with the valuation, at least once a year. See Rev. Rul. 80-155, 1980-1 
C.B. 84.
---------------------------------------------------------------------------
    ERISA also gives a participant the right to bring a civil 
action--
     to recover benefits due to him or her under the 
terms of the plan, to enforce his or her rights under the terms 
of the plan, or to clarify his or her rights to future benefits 
under the terms of the plan,\22\ or
---------------------------------------------------------------------------
    \22\ ERISA sec. 502(a)(1)(B).
---------------------------------------------------------------------------
     to enjoin any act or practice which violates any 
provision of this title or the terms of the plan, or to obtain 
other appropriate equitable relief to redress such violations 
or to enforce any provisions of this title or the terms of the 
plan.\23\
---------------------------------------------------------------------------
    \23\ ERISA sec. 502(a)(3).
---------------------------------------------------------------------------
    These provisions enable a participant to seek recovery on 
his or her own behalf, not just on behalf of the plan, 
including recovery for a breach of fiduciary duty.\24\ However, 
``appropriate equitable relief'' that a participant may obtain 
on his or her own behalf does not include money damages (i.e., 
compensatory damages).\25\ Participants in defined contribution 
plans who have brought action against a plan fiduciary under 
one of these ERISA provisions have been denied the recovery of 
damages for the difference between the earnings on their 
accounts and the amount of earnings they would have received if 
the plan administrator had complied with the participants' 
instructions as to the transfer or distribution of the accounts 
because lost earnings are considered compensatory damages.\26\
---------------------------------------------------------------------------
    \24\ Varity Corporation v. Charles Howe, 516 U.S. 489 (1996).
    \25\ Mertens v. Hewitt Associates, 508 U.S. 248 (1993).
    \26\ Helfrich v. PNC Bank, Kentucky, Inc., 267 F.3d 477 (6th Cir. 
2001), cert.den., reported at 2002 U.S. LEXIS 1558 (March 18, 2002); 
Kerr v. Charles F. Vatterott & Co., 184 F.3d 938 (8th Cir. 1999). In 
Ream v. Frey, 107 F.3d 147 (3rd Cir. 1997), a participant brought an 
action under ERISA section 502(a)(3) for breach of fiduciary duty 
against a former trustee of a plan that was no longer functioning. The 
Circuit Court noted that, while the district court seemed to treat the 
complaint as an action for money damages, the participant sought only 
to recover his vested interest in the plan, which largely reflected his 
own contributions, so that the relief granted to the participant could 
be characterized as restitution (i.e., a form of equitable relief).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that, in the case of a breach of 
fiduciary duty that causes financial harm to the accounts of 
individual participants under an individual account plan, ERISA 
was intended to make available the full range of ERISA relief 
so as to put a participant's account in the financial position 
it would have been in if the fiduciary breach had not occurred. 
The Committee wishes to remove any doubt that may exist under 
present law as to whether such relief is available. 
Accordingly, the Committee bill provides that amounts recovered 
for harm to particular accounts is to be allocated to those 
accounts to the extent the court deems appropriate.

                        EXPLANATION OF PROVISION

    The provision clarifies that, in the case of a fiduciary 
breach with respect to an individual account plan, the relief 
available under the general fiduciary liability provision of 
ERISA will, to the extent the court deems appropriate, be 
apportioned to each individual account affected by the breach. 
No inference is intended as to the scope of recovery available 
to participants under present law.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

 D. Increased Maximum Bond Amount for Plans Holding Employer Securities


(Sec. 204 of the bill and sec. 412(a) of ERISA)

                              PRESENT LAW

    ERISA generally requires every fiduciary and every person 
who handles funds or other property of an employee benefit plan 
(a ``plan official'') to be bonded under a qualifying bond. A 
plan official without a qualifying bond is prohibited from 
receiving, handling, or otherwise exercising control of any 
funds or property of an employee benefit plan. The amount of 
the bond is fixed annually at no less than 10 percent of the 
funds handled but must be at least $1,000 and not more than 
$500,000 (unless the Secretary of Labor prescribes a larger 
amount after notice and an opportunity to be heard). Qualifying 
bonds must have a corporate surety which is an acceptable 
surety on Federal bonds and meet certain other requirements.

                           REASONS FOR CHANGE

    The present-law bonding requirement is intended to protect 
employee benefit plan participants against losses that result 
from fraud or dishonesty on the part of plan officials who 
handle plan assets. The maximum amount of the bond has been 
$500,000 since the bonding requirement was enacted in 1962 
under a predecessor to ERISA. The Committee is aware that many 
employee benefit plans have significant investments in employer 
securities. Such investments can be beneficial for plan 
participants; however, recent highly publicized cases regarding 
the financial distress of companies with plans that invest in 
employer securities highlight the additional risks that such 
investments can pose. Thus, the Committee believes it is 
appropriate to provide additional protection for such plans by 
raising the maximum bond amount.

                        EXPLANATION OF PROVISION

    The bill raises the maximum bond amount to $1 million for 
fiduciaries of plans that hold employer securities.

                             EFFECTIVE DATE

    The provision is effective for plan years beginning after 
December 31, 2002.

        TITLE III. PROVIDING INFORMATION TO ASSIST PARTICIPANTS


            A. Benefit Statements and Investment Guidelines


(Secs. 301-302 of the bill, new sec. 4980H of the Code, and secs. 104 
        and 105 of ERISA)

                              PRESENT LAW

Pension benefit statements

    ERISA provides that a plan administrator must furnish a 
benefit statement to any participant or beneficiary who makes a 
written request for such a statement. This requirement applies 
in the case of any plan that is subject to ERISA, including 
defined contribution and defined benefit plans. The benefit 
statement must indicate, on the basis of the latest available 
information, (1) the participant's or beneficiary's total 
accrued benefit, and (2) the participant's or beneficiary's 
vested accrued benefit or the earliest date on which the 
accrued benefit will become vested. A participant or 
beneficiary is not entitled to receive more than one benefit 
statement during any 12-month period. If the plan administrator 
fails or refuses to furnish the benefit statement within 30 
days of the participant's or beneficiary's written request, the 
participant or beneficiary may bring a civil action to recover 
from the plan administrator $100 a day, within the court's 
discretion, or other relief that the court deems proper.\27\
---------------------------------------------------------------------------
    \27\ ERISA also permits the Secretary of Labor, a participant, a 
beneficiary, or a fiduciary to bring civil action to enforce any ERISA 
requirements.
---------------------------------------------------------------------------

Individual statements to participants on separation from service

    A plan administrator must furnish an individual statement 
to each participant who (1) separates from service during the 
year, (2) is entitled to a deferred vested benefit under the 
plan as of the end of the plan year, and (3) whose benefits 
were not paid during the year.\28\ The individual statement 
must set forth the nature, amount and form of the deferred 
vested benefit to which the participant is entitled. The plan 
administrator generally must provide the individual statement 
no later than 180 days after the end of the plan year in which 
the separation from service occurs. If the plan administrator 
fails to provide the individual statement, the Secretary of 
Labor or the participant may bring a civil action for 
appropriate relief.
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    \28\ This information is based on an annual registration statement 
that the plan administrator is required to file under the Code with the 
Secretary of Treasury with respect to all participants who meet these 
requirements for the plan year. The annual registration statement is 
filed by means of Schedule SSA of the Form 5500. The Code and ERISA 
require that the plan administrator furnish an individual statement to 
the participant.
---------------------------------------------------------------------------

Investment guidelines

    Present law does not require that participants be given 
investment guidelines relating to retirement savings.

                           REASONS FOR CHANGE

    The Committee believes that regular information concerning 
the value of retirement benefits, especially the value of 
benefits accumulating in a defined contribution plan account, 
is necessary to increase employee awareness and appreciation of 
the importance of retirement savings. In addition, under some 
employer-sponsored retirement plans, participants are 
responsible for directing the investment of the assets in their 
accounts under the plan. Awareness of investment principles, 
including the need for diversification, is fundamental to 
making investment decisions consistent with long-term 
retirement income security. The Committee believes participants 
should be provided with investment guidelines and information 
for calculating retirement income to enable them to make sound 
investment and retirement savings decisions.

                        EXPLANATION OF PROVISION

Pension benefit statements

            In general
    The provision provides new benefit statement requirements 
under the Code and ERISA, depending in part on the type of plan 
and the individual to whom the statement is provided.
            Requirements for defined contribution plans
    In the case of an applicable pension plan, the plan 
administrator is required under the Code and ERISA to provide a 
benefit statement (1) to an applicable individual who has the 
right to direct the investment of the assets in his or her 
account, at least quarterly, (2) to other applicable 
individuals, at least annually, and (3) to a beneficiary who is 
not an applicable individual, upon written request, but limited 
to one request during any 12-month period. An applicable 
pension plan is defined (as under the provision relating to 
notice of a transaction suspension period) as a qualified 
retirement plan or annuity, a tax-sheltered annuity plan, or an 
eligible deferred compensation plan of a governmental employer 
that maintains accounts for participants and beneficiaries 
(other than a one-participant retirement plan).\29\ An 
applicable individual is defined (as under the provision 
relating to notice of a transaction suspension period) as (1) 
any plan participant and (2) any beneficiary who has an account 
under the plan with respect to which the beneficiary is 
entitled to exercise the rights of a participant.
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    \29\ An applicable pension plan includes a plan that is a 
governmental plan or a church plan, and such a plan is subject to the 
benefit statement requirement under the Code. However, governmental 
plans (including an eligible deferred compensation plan of a 
governmental employer) and church plans are generally exempt from 
ERISA. As a result, the ERISA benefit statement requirement does not 
apply to such a plan.
---------------------------------------------------------------------------
    The benefit statement is required to indicate, on the basis 
of the latest available information, (1) the total benefits 
accrued, and (2) the vested accrued benefit or the earliest 
date on which the accrued benefit will become vested. In 
addition, the statement must include the value of investments 
allocated to the individual's account (determined as of the 
plan's most recent valuation date), including the value of any 
employer securities (without regard to whether the securities 
were contributed by the employer or acquired at the direction 
of the individual), and an explanation of any limitations or 
restrictions on the right of the individual to direct 
investments.
            Requirements for defined benefit plans
    Under the provision, the administrator of a defined benefit 
plan is generally required under ERISA either (1) to furnish a 
benefit statement at least once every three years \30\ to each 
participant who has a vested accrued benefit and who is 
employed by the employer at the time the benefit statements are 
furnished to participants, or (2) to furnish at least annually 
to each such participant notice of the availability of a 
benefit statement and the manner in which the participant can 
obtain it. The notice may be included with other communications 
to the participant if done in a manner reasonably designed to 
attract the attention of the participant.
---------------------------------------------------------------------------
    \30\ The Secretary of Labor is authorized to provide that years in 
which no employee or former employee benefits under the plan need not 
be taken into account in determining the three-year period.
---------------------------------------------------------------------------
    The administrator of a defined benefit plan is also 
required to furnish a benefit statement to a participant or 
beneficiary upon written request, limited to one request during 
any 12-month period.
    A benefit statement is required to indicate, on the basis 
of the latest available information, (1) the total benefits 
accrued, and (2) the vested accrued benefit or the earliest 
date on which the accrued benefit will become vested. In the 
case of a statement provided to a participant (other than at 
the participant's request), information may be based on 
reasonable estimates determined under regulations prescribed by 
the Secretary of Labor.
            Form of benefit statement
    The benefit statement is required to be written in a manner 
calculated to be understood by the average plan participant. It 
is required to be provided in writing and may be delivered in 
electronic or other form that is reasonably expected to result 
in receipt of the statement by the applicable individual. For 
example, regulations could permit current benefit statements to 
be provided on a continuous basis through a secure plan website 
for a participant or beneficiary who has access to the website.
    The Secretary of Labor is directed to develop one or more 
model benefit statements, written in a manner calculated to be 
understood by the average plan participant, that may be used by 
plan administrators in complying with the requirements of ERISA 
and the Code. The use of the model statement is optional. It is 
intended that the model statement include items such as the 
amount of nonforfeitable accrued benefits as of the statement 
date that are payable at normal retirement age under the plan, 
the amount of accrued benefits that are forfeitable but that 
may become nonforfeitable under the terms of the plan, 
information on how to contact the SocialSecurity Administration 
to obtain a participant's personal earnings and benefit estimate 
statement, and other information that may be important to understanding 
benefits earned under the plan.

Investment guidelines

            In general
    Under the provision, the plan administrator of an 
applicable pension plan is required under the Code and ERISA to 
provide at least annually a model form relating to basic 
investment guidelines to applicable individuals.\31\ 
``Applicable pension plan'' and ``applicable individual'' are 
defined as under the provision relating to required benefit 
statements.
---------------------------------------------------------------------------
    \31\ The ERISA requirement does not apply to a plan that is exempt 
from ERISA, such as a governmental plan or a church plan.
---------------------------------------------------------------------------
            Model form
    Under the provision, the Secretary of the Treasury is 
directed, in consultation with the Secretary of Labor, to 
develop and make available a model form containing basic 
guidelines for investing for retirement. Such guidelines 
generally include (1) information on the benefits of 
diversification of investments, (2) information on the 
essential differences, in terms of risk and return, of pension 
plan investments, including stocks, bonds, mutual funds and 
money market investments, (3) information on how an 
individual's investment allocations under the plan may differ 
depending on the individual's age and years to retirement, as 
well as other factors determined by the Secretary, (4) sources 
of information where individuals may learn more about pension 
rights, individual investing, and investment advice, and (5) 
such other information related to individual investing as the 
Secretary determines appropriate. In addition, the Secretary 
has the authority to vary the required information depending on 
the type of plan. For example, some information may be omitted 
in the case of a plan that does not provide for investment 
direction by participants.
    The model form must also include addresses for Internet 
sites, and a worksheet, that an individual can use to calculate 
(1) the retirement age annuity value of the individual's vested 
benefits under the plan (determined by reference to varied 
historical annual rates of return and annuity interest rates), 
and (2) other important amounts relating to retirement savings, 
including the amount that an individual must save in order to 
provide a retirement income equal to various percentages of his 
or her current salary (adjusted for expected growth prior to 
retirement). The Secretary of Labor is also required to develop 
an Internet site to be used by an individual in making these 
calculations, the address of which will be included in the 
model form.
    The Secretary of the Treasury is directed to provide at 
least 90 days for public comment before publishing final notice 
of the model form and to update the model form at least 
annually.
    The model form must be written in a manner calculated to be 
understood by the average plan participant and must be in 
writing and may be delivered in electronic or other form that 
is reasonably expected to result in receipt by the applicable 
individual.

Sanctions for failure to provide information

            Excise tax
    Under the provision, an excise tax generally applies in the 
case of a failure to provide a benefit statement or an 
investment guideline model form as required under the Code. 
However, a reporting penalty applies in the case of a failure 
related to a governmental plan or a church plan.
    The excise tax is generally imposed on the employer if a 
required benefit statement or model form is not provided.\32\ 
The excise tax is $100 per day for each participant or 
beneficiary with respect to whom the failure occurs, until the 
benefit statement or model form is provided or the failure is 
otherwise corrected. If the employer exercises reasonable 
diligence to meet the benefit statement or model form 
requirement, the total excise tax imposed during a taxable year 
will not exceed $500,000. The $500,000 annual limit will apply 
separately to failures to provide required benefit statements 
and failures to provide the model form.
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    \32\ In the case of a multiemployer plan, the excise tax is imposed 
on the plan. In the case of a tax-sheltered annuity program under 
section 403(b) that is not treated as established or maintained by the 
employer for purposes of ERISA, the excise tax is imposed on the plan 
administrator.
---------------------------------------------------------------------------
    No tax will be imposed with respect to a failure if the 
employer does not know that the failure existed and exercises 
reasonable diligence to comply with the benefit statement or 
model form requirement. In addition, no tax will be imposed if 
the employer exercises reasonable diligence to comply and 
provides the required benefit statement or model form within 30 
days of learning of the failure. In the case of a failure due 
to reasonable cause and not to willful neglect, the Secretary 
of the Treasury is authorized to waive the excise tax to the 
extent that the payment of the tax would be excessive or 
otherwise inequitable relative to the failure involved.
    The excise tax does not apply in the case of a failure to 
provide a benefit statement or model form with respect to a 
governmental plan or a church plan. In that case, on notice and 
demand by the Secretary, a penalty applies of $100 per day for 
each applicable individual with respect to whom the failure 
occurs, until the benefit statement or model form is provided 
or the failure is otherwise corrected. The limitations and 
exceptions to the excise tax apply also to the penalty.
            ERISA civil penalty
    The ERISA remedies that apply in the case of a failure or 
refusal to provide a benefit statement under present law apply 
if the plan administrator fails or refuses to furnish a benefit 
statement or model form required under the provisions.\33\ That 
is, the participant or beneficiary is entitled to bring a civil 
action to recover from the plan administrator $100 a day, 
within the court's discretion, or such other relief that the 
court deems proper.
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    \33\ The civil penalty under ERISA does not apply to a governmental 
plan or a church plan that is exempt from ERISA.
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                             EFFECTIVE DATE

    The provision is generally effective for plan years 
beginning after December 31, 2003. In the case of a plan 
maintained pursuant to one or more collective bargaining 
agreements, the provision is effective for plan years beginning 
after the earlier of (1) the later of December 31, 2004, or the 
date on which the last of such collective bargaining agreements 
terminates (determined without regard to any extension thereof 
after the date of enactment), or (2) December 31, 2005.

              B. Information on Optional Forms of Benefit


(Sec. 303 of the bill)

                              PRESENT LAW

    Under a defined benefit plan, benefits generally must be 
paid in the form of an annuity for the life of the participant 
unless the participant consents to a distribution in another 
form. In the case of a married participant, benefits must be 
paid in the form of a qualified joint and survivor annuity 
(``QJSA'') unless the participant and his or her spouse consent 
to another form of benefit. A QJSA is an annuity for the life 
of the participant, with a survivor annuity for the life of the 
spouse which is not less than 50 percent (and not more than 100 
percent) of the amount of the annuity payable during the joint 
lives of the participant and his or her spouse. The participant 
and his or her spouse may waive the right to a QJSA provided 
certain requirements are satisfied, including a requirement 
that a written explanation be provided of the effect of a 
waiver of the annuity.
    Defined benefit plans generally provide that a participant 
may choose among other forms of benefit offered under the plan, 
such as a lump sum distribution. These optional forms of 
benefit generally must be actuarially equivalent to the life 
annuity benefit payable to the participant.
    A defined benefit plan must specify the actuarial 
assumptions that will be used in determining optional forms of 
benefit under the plan in a manner that precludes employer 
discretion in the assumptions to be used. For example, a plan 
may specify that a variable interest rate will be used in 
determining actuarial equivalent forms of benefit, but may not 
give the employer discretion to choose the interest rate.
    In addition, statutory actuarial assumptions must be used 
in determining the minimum value of certain optional forms of 
benefit, such as a lump sum. That is, the lump sum payable 
under the plan may not be less than the amount of the lump sum 
that is actuarially equivalent to the life annuity payable to 
the participant, determined using the statutory assumptions. 
The statutory assumptions consist of an applicable mortality 
table (as published by the Internal Revenue Service) and an 
applicable interest rate.

                           REASONS FOR CHANGE

    The Committee believes that a participant should have 
sufficient information to evaluate the relative values of 
various optional forms of benefit available to the participant 
under a plan before making a decision as to which form of 
benefit to elect.

                        EXPLANATION OF PROVISION

    Under the provision, the Secretary of the Treasury is 
directed to issue (within 30 days of enactment of the 
provision) regulations requiring the plan administrator of a 
defined benefit plan that provides optional forms of benefit to 
provide a statement comparing the relative values of optional 
forms of benefits payable under the plan. The statement must be 
provided at a time specified by the Secretary of the Treasury 
and must be written in a manner calculated to be understood by 
the average plan participant. The statement must include such 
information as the Secretary determines appropriate to enable a 
plan participant, spouse, or surviving spouse to make an 
informed decision as to what form of benefit to elect. For 
example, in the case of a plan that provides a subsidized early 
retirement annuity benefit, it is intended that the information 
will include, at a minimum, a quantification of whether and how 
the subsidy is included in determining other forms of benefit 
(e.g., a lump sum) payable at early retirement age.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

     C. Fiduciary Duty To Provide Material Information Relating to 
                      Investment in Employer Stock


(Sec. 304 of the bill and sec. 404(c) of ERISA)

                              PRESENT LAW

    ERISA contains general fiduciary duty standards that apply 
to all fiduciary actions. Among them are requirements that plan 
fiduciaries generally discharge their duties solely in the 
interest of participants and beneficiaries and with care, 
prudence, and diligence. A plan fiduciary that breaches any of 
the fiduciary responsibilities, obligations, or duties imposed 
by ERISA is personally liable to make good to the plan any 
losses to the plan resulting from such breach and to restore to 
the plan any profits the fiduciary has made through the use of 
plan assets. A plan fiduciary may be liable also for a breach 
of responsibility by another fiduciary in certain 
circumstances.
    ERISA provides a special rule for a defined contribution 
plan that permits participants to exercise control over the 
assets in their individual accounts.\34\ Under the special 
rule, if a participant or beneficiary exercises control over 
the assets in his or her account, the participant or 
beneficiary is not deemed to be a fiduciary by reason of such 
exercise 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 or beneficiary's exercise of control.
---------------------------------------------------------------------------
    \34\ ERISA sec. 404(c).
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                           REASONS FOR CHANGE

    The Committee believes that, in the case of a defined 
contribution plan that allows participants and beneficiaries to 
exercise control over the assets in their individual accounts, 
the same material investment information that the plan sponsor 
is required to disclose to investors under securities laws 
should be provided to participants and beneficiaries whose 
accounts are invested in employer stock. The Committee believes 
that plan sponsors and plan administrators should have a 
fiduciary duty to provide this information.

                        EXPLANATION OF PROVISION

    The bill amends ERISA to provide that sponsors and 
administrators of defined contribution plans that permit 
participants and beneficiaries to exercise control over the 
assets in their individual accounts have a fiduciary duty to 
ensure that, in connection with investments of such assets in 
employer stock, the participant or beneficiary is provided with 
the same material investment information that would generally 
be required to be disclosed by the employer to investors under 
applicable securities laws. The provision of misleading 
information by the plan sponsor or administrator is a violation 
of this requirement.
    In the case of a failure to provide material investment 
information, the Secretary of Labor is authorized to assess a 
civil penalty of up to $1,000 per day. In addition, such a 
failure would violate the fiduciary rules of ERISA. As a 
result, the fiduciary could be liable under present-law rules 
to make good to the plan any losses to the plan resulting from 
such breach and to restore to the plan any profits the 
fiduciary has made through the use of plan assets.

                             EFFECTIVE DATE

    The provision is effective with respect to plan years 
beginning after December 31, 2002.

              D. Electronic Disclosure of Insider Trading


(Sec. 305 of the bill and sec. 101 of ERISA)

                              PRESENT LAW

Disclosure rules under ERISA

    ERISA contains rules requiring the provision of certain 
information to employee benefit plan participants and 
beneficiaries by plans sponsors and administrators. For 
example, ERISA generally requires distribution to plan 
participants and beneficiaries of written summaries of employee 
benefit plans as well as summaries of any modifications to 
certain plan provisions. The required disclosures advise 
participants and beneficiaries of their rights and benefits 
under plans and applicable law, provide them access to plan 
financial information, and provide them opportunities to 
prevent or redress any violations of their rights.

Elective deferrals

    A defined contribution plan can accept varied types of 
contributions, depending on the design of the particular plan. 
In general, defined contribution plans can accept elective 
deferrals, which are contributions made under a qualified cash 
or deferred arrangement (i.e., a ``section 401(k) plan'') that 
are made by reason of the employee's election to have the 
employer make the contributions to the plan rather than paying 
them directly to the employee in cash.

                           REASONS FOR CHANGE

    Many defined contribution plans that accept elective 
deferrals permit those deferrals to be invested in employer 
stock or real property. Participants and beneficiaries in such 
plans have the same interest as other investors in receiving 
information about any sale or purchase of employer stock by an 
officer, director, or affiliate of the employer (``insider 
trades''). Thus, the Committee believes that any insider trade 
that is required to be disclosed to the SEC should also be 
specifically disclosed to participants and beneficiaries in the 
plans. The Committee believes that the posting of such 
information on a plan website (or providing it upon request in 
another form) will not unreasonably burden employers and will 
facilitate participants' and beneficiaries' access to the 
information.

                        EXPLANATION OF PROVISION

    The provision amends ERISA to require that an employer that 
sponsors a defined contribution plan that permits elective 
deferrals to be invested in employer stock or real property 
must disclose to participants and beneficiaries any insider 
trade that is required to be disclosed to the SEC. Within a 
reasonable period after disclosure to the SEC, the insider 
trade information must be posted on the plan's website or 
provided upon request, in the case of a participant or 
beneficiary who does not have access to a plan website. It is 
intended that the Department of Labor will provide guidance 
with respect to requests for disclosure in the case of such a 
participant or beneficiary. For example, participants could be 
permitted to make standing requests to receive any insider 
trade disclosures in some other form.
    Under the provision, the SEC is permitted to accept 
electronic disclosure in place of any form of disclosure 
otherwise required with respect to participants and 
beneficiaries.

                             EFFECTIVE DATE

    The provision is effective with respect to plan years 
beginning after December 31, 2002.

E. Fiduciary Rules for Plan Sponsors Designating Independent Investment 
                                Advisors


(Sec. 306 of the bill and new sec. 404(e) of ERISA)

                              PRESENT LAW

    ERISA requires an employee benefit plan to provide for one 
or more named fiduciaries who jointly or severally have the 
authority to control and manage the operation and 
administration of the plan. In addition to fiduciaries named in 
the plan, or identified pursuant to a procedure specified in 
the plan, a person is a plan fiduciary under ERISA to the 
extent the fiduciary exercises any discretionary authority or 
control over management of the plan or exercises authority or 
control over management or disposition of its assets, renders 
investmentadvice for a fee or other compensation, or has any 
discretionary authority or responsibility in the administration of the 
plan. In certain circumstances, a fiduciary under ERISA may be liable 
for a breach of responsibility by a co-fiduciary.

                           REASONS FOR CHANGE

    The Committee believes that providing specific rules under 
which a fiduciary may arrange for independent investment advice 
to be provided to participants who are responsible for 
directing the investment of their retirement assets will 
facilitate the provision of such investment advice without 
undercutting the fiduciary requirements of ERISA. The provision 
of independent investment advice will better enable 
participants to make sound investment decisions.

                        EXPLANATION OF PROVISION

In general

    The provision amends ERISA by adding specific rules dealing 
with the provision of investment advice to plan participants by 
a qualified investment adviser. The provision applies to a 
defined contribution plan that permits a participant or 
beneficiary to exercise investment control over the assets in 
his or her account. Under the provision, if certain 
requirements are met, an employer or other plan fiduciary will 
not be liable for investment advice provided by a qualified 
investment adviser.

Qualified investment adviser

    Under the provision, a ``qualified investment adviser'' is 
defined as a person who is a plan fiduciary by reason of 
providing investment advice and who is also (1) a registered 
investment adviser under the Investment Advisers Act of 1940 or 
registered as an investment adviser under the laws of the State 
(consistent with section 203A of the Investment Advisers Act 
\35\) in which the adviser maintains its principal office, (2) 
a bank or similar financial institution, (3) an insurance 
company qualified to do business under State law, or (4) a 
comparably qualified entity under criteria to be established by 
the Secretary of Labor. In addition, any individual who 
provides investment advice to participants on behalf of the 
investment adviser (such as an employee thereof) is required to 
be (1) a registered investment adviser under Federal or State 
law as described above,\36\ (2) a registered broker or dealer 
under the Securities Exchange Act, (3) a registered 
representative under the Securities Exchange Act or the 
Investment Advisers Act, or (4) any comparably qualified 
individual under criteria to be established by the Secretary of 
Labor.
---------------------------------------------------------------------------
    \35\ See, 15 U.S.C. 80b-3a. Nothing in the proposal is intended to 
restrict the authority under present law of any State to assert 
jurisdiction over investment advisers and investment adviser 
representatives based on their presence in the State or the fact that 
they have clients in the State.
    \36\ An individual who is registered as an investment adviser under 
the laws of a State is a qualified investment adviser only if the State 
has an examination requirement to qualify for such registration.
---------------------------------------------------------------------------
    A qualified investment adviser is required to provide the 
following documents to the employer or plan fiduciary: (1) the 
contract for investment advice services, (2) a disclosure of 
the fees to be received by the investment adviser, and (3) 
documentation that the investment advisor is a qualified 
investment adviser. A qualified investment adviser that 
acknowledges its fiduciary status will be a fiduciary under 
ERISA with respect to investment advice provided to a 
participant or beneficiary.

Requirements for employer or other fiduciary

    Before designating the investment adviser and at least 
annually thereafter, the employer or other fiduciary is 
required to obtain written verification that the investment 
adviser (1) is a qualified investment adviser, (2) acknowledges 
its status as a plan fiduciary that is solely responsible for 
the investment advice it provides, (3) has reviewed the plan 
document (including investment options) and determined that its 
relationship with the plan and the investment advice provided 
to any participant or beneficiary, including the receipt of 
fees or compensation, will not violate the prohibited 
transaction rules, (4) will consider any employer securities or 
employer real property allocated to the participant's or 
beneficiary's account in providing investment advice, and (5) 
has the necessary insurance coverage (as determined by the 
Secretary of Labor) for any claim by a participant or 
beneficiary.
    In designating an investment adviser, the employer or other 
fiduciary is required to review the documents provided by the 
qualified investment adviser. The employer or other fiduciary 
is also required to make a determination that there is no 
material reason not to engage the investment adviser.
    In the case of (1) information that the investment adviser 
is no longer qualified or (2) concerns about the investment 
adviser's services raised by a substantial number of 
participants or beneficiaries, the employer or other fiduciary 
is required within 30 days to investigate and to determine 
whether to continue the investment adviser's services.
    An employer or other fiduciary that complies with the 
requirements for designating and monitoring an investment 
adviser will be deemed to have satisfied its fiduciary duty in 
the prudent selection and periodic review of an investment 
adviser and does not bear liability as a fiduciary or co-
fiduciary for any loss or breach resulting from the investment 
advice.

                             EFFECTIVE DATE

    The provision applies to investment advisers designated 
after the date of enactment.

            TITLE IV. OTHER PROVISIONS RELATING TO PENSIONS


             A. Employee Plans Compliance Resolution System


(Sec. 401 of the bill)

                              PRESENT LAW

    A retirement plan that is intended to be a tax-qualified 
plan provides retirement benefits on a tax-favored basis if the 
plan satisfies all of the requirements of section 401(a). 
Similarly, an annuity that is intended to be a tax-sheltered 
annuity provides retirement benefits on a tax-favored basis if 
the program satisfies all of the requirements of section 
403(b). Failure to satisfy all of the applicable requirements 
of section 401(a) or section 403(b) may disqualify a plan or 
annuity for the intended tax-favored treatment.
    The Internal Revenue Service (``IRS'') has established the 
Employee Plans Compliance Resolution System (``EPCRS''), which 
is a comprehensive system of correction programs for sponsors 
of retirement plans and annuities that are intended, but have 
failed, to satisfy the requirements of section 401(a), section 
403(a), or section 403(b), as applicable.\37\ EPCRS permits 
employers to correct compliance failures and continue to 
provide their employees with retirement benefits on a tax-
favored basis.
---------------------------------------------------------------------------
    \37\ Rev. Proc. 2002-47, 2002-29 I.R.B. 1.
---------------------------------------------------------------------------
    The IRS has designed EPCRS to (1) encourage operational and 
formal compliance, (2) promote voluntary and timely correction 
of compliance failures, (3) provide sanctions for compliance 
failures identified on audit that are reasonable in light of 
the nature, extent, and severity of the violation, (4) provide 
consistent and uniform administration of the correction 
programs, and (5) permit employers to rely on the availability 
of EPCRS in taking corrective actions to maintain the tax-
favored status of their retirement plans and annuities.
    The basic elements of the programs that comprise EPCRS are 
self-correction, voluntary correction with IRS approval, and 
correction on audit. The Self-Correction Program (``SCP'') 
generally permits a plan sponsor that has established 
compliance practices to correct certain insignificant failures 
at any time (including during an audit), and certain 
significant failures within a 2-year period, without payment of 
any fee or sanction. The Voluntary Correction Program (``VCP'') 
program 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.
    The IRS has expressed its intent that EPCRS will be updated 
and improved periodically in light of experience and comments 
from those who use it.

                           REASONS FOR CHANGE

    The Committee commends the IRS for the establishment of 
EPCRS and agrees with the IRS that EPCRS should be updated and 
improved periodically. The Committee believes that future 
improvements should facilitate use of the compliance and 
correction programs by small employers and expand the 
flexibility of the programs.

                        EXPLANATION OF PROVISION

    The provision clarifies that the Secretary of the Treasury 
has the full authority to establish and implement EPCRS (or any 
successor program) and any other employee plans correction 
policies, including the authority to waive income, excise or 
other taxes to ensure that any tax, penalty or sanction is not 
excessive and bears a reasonable relationship to the nature, 
extent and severity of the failure.
    The Secretary of the Treasury is directed to continue to 
update and improve EPCRS (or any successor program), giving 
special attention to (1) increasing the awareness and knowledge 
of small employers concerning the availability and use of 
EPCRS, (2) taking into account special concerns and 
circumstances that small employers face with respect to 
compliance and correction of compliance failures, (3) extending 
the duration of the self-correction period under SCP for 
significant compliance failures, (4) expanding the availability 
to correct insignificant compliance failures under SCP during 
audit, and (5) assuring that any tax, penalty, or sanction that 
is imposed by reason of a compliance failure is not excessive 
and bears a reasonable relationship to the nature, extent, and 
severity of the failure.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

B. Extension to all Governmental Plans of Moratorium on Application of 
     Certain Nondiscrimination Rules Applicable to State and Local 
                            Government Plans


(Sec. 402 of the bill, sec. 1505 of the Taxpayer Relief Act of 1997, 
        and secs. 401(a) and 401(k) of the Code)

                              PRESENT LAW

    A qualified retirement plan maintained by a State or local 
government is exempt from the rules concerning 
nondiscrimination (sec. 401(a)(4)) and minimum participation 
(sec. 401(a)(26)). All other governmental plans are not exempt 
from the nondiscrimination and minimum participation rules.

                           REASONS FOR CHANGE

    The Committee believes that application of the 
nondiscrimination and minimum participation rules to 
governmental plans is unnecessary and inappropriate in light of 
the unique circumstances under which such plans and 
organizations operate. Further, the Committee believes that it 
is appropriate to provide for consistent application of the 
minimum coverage, nondiscrimination, and minimum participation 
rules for governmental plans.

                        EXPLANATION OF PROVISION

    The provision exempts all governmental plans (as defined in 
sec. 414(d)) from the nondiscrimination and minimum 
participation rules.

                             EFFECTIVE DATE

    The provision is effective for plan years beginning after 
December 31, 2002.

          C. Notice and Consent Period Regarding Distributions


(Sec. 403 of the bill, sec. 417 of the Code, and sec. 205 of ERISA)

                              PRESENT LAW

    Notice and consent requirements apply to certain 
distributions from qualified retirement plans. These 
requirements relate to the content and timing of information 
that a plan must provide to a participant prior to a 
distribution, and to whether the plan must obtain the 
participant's consent to the distribution. The nature and 
extent of the notice and consent requirements applicable to a 
distribution depend upon the value of the participant's vested 
accrued benefit and whether the joint and survivor annuity 
requirements (sec. 417) apply to the participant.
    If the present value of the participant's vested accrued 
benefit exceeds $5,000,\38\ the plan may not distribute the 
participant's benefit without the written consent of the 
participant. The participant's consent to a distribution is not 
valid unless the participant has received from the plan a 
notice that contains a written explanation of (1) the material 
features and the relative values of the optional forms of 
benefit available under the plan, (2) the participant's right, 
if any, to have the distribution directly transferred to 
another retirement plan or IRA, and (3) the rules concerning 
the taxation of a distribution. If the joint and survivor 
annuity requirements apply to the participant, this notice also 
must contain a written explanation of (1) the terms and 
conditions of the qualified joint and survivor annuity 
(``QJSA''), (2) the participant's right to make, and the effect 
of, an election to waive the QJSA, (3) the rights of the 
participant's spouse with respect to a participant's waiver of 
the QJSA, and (4) the right to make, and the effect of, a 
revocation of a waiver of the QJSA. The plan generally must 
provide this notice to the participant no less than 30 and no 
more than 90 days before the date distribution commences.
---------------------------------------------------------------------------
    \38\ The portion of a participant's benefit that is attributable to 
amounts rolled over from another plan may be disregarded in determining 
the present value of the participant's vested accrued benefit.
---------------------------------------------------------------------------
    If the participant's vested accrued benefit does not exceed 
$5,000, the terms of the plan may provide for distribution 
without the participant's consent. In that case, the plan must 
provide that, if the amount of the distribution exceeds $1,000, 
the plan administrator will transfer the distribution to a 
designated IRA unless the participant elects to receive the 
distribution directly or have it directly transferred to 
another retirement plan or IRA. Before making a distribution, 
the plan administrator generally is required to provide to the 
participant a notice that contains a written explanation of (1) 
the participant's right, if any, to have the distribution 
directly transferred to another retirement plan or IRA, (2) the 
fact that a distribution that exceeds $1,000 will be 
transferred to a designated IRA unless the participant elects 
otherwise, and (3) the rules concerning the taxation of a 
distribution. The plan generally must provide this notice to 
the participant no less than 30 and no more than 90 days before 
the date distribution commences.

                           REASONS FOR CHANGE

    The Committee understands that an employee is not always 
able to evaluate distribution alternatives, select the most 
appropriate alternative, and notify the plan of the selection 
within a 90-day period. The Committee believes that requiring a 
plan to furnish multiple distribution notices to an employee 
who does not make a distribution election within 90 days is 
administratively burdensome. In addition, the Committee 
believes that participants who are entitled to defer 
distributions should be informed of the impact of a decision 
not to defer distribution on the taxation and accumulation of 
their retirement benefits.

                        EXPLANATION OF PROVISION

    Under the provision, a qualified retirement plan is 
required to provide the applicable distribution notice no less 
than 30 days and no more than 180 days before the date 
distribution commences. The Secretary of the Treasury is 
directed to modify the applicable regulations to reflect the 
extension of the notice period to 180 days and to provide that 
the description of a participant's right, if any, to defer 
receipt of a distribution shall also describe the consequences 
of failing to defer such receipt.

                             EFFECTIVE DATE

    The modifications made or required by the provision are 
effective for years beginning after December 31, 2002. In the 
case of a description of the consequences of a participant's 
failure to defer receipt of a distribution that is made before 
the date 90 days after the date on which the Secretary of the 
Treasury makes modifications to the applicable regulations, the 
plan administrator is required to make a reasonable attempt to 
comply with the requirements of the provision.

                 D. Technical Corrections to Saver Act


(Sec. 404 of the bill and sec. 517 of ERISA)

                              PRESENT LAW

    The Savings Are Vital to Everyone's Retirement (``SAVER'') 
Act initiated a public-private partnership to educate American 
workers about retirement savings and directed the Department of 
Labor to maintain an ongoing program of public information and 
outreach. The Act also convened a National Summit on Retirement 
Savings held June 4-5, 1998. A second National Summit on 
Retirement Savings was held February 27 through March 1, 2002, 
co-hosted by the President and the bipartisan Congressional 
leadership. The National Summit brings together experts in the 
fields of employee benefits and retirement savings, key leaders 
of government, and interested parties from the private sector 
and general public. The delegates are selected by the 
Congressional leadership and the President. The National Summit 
is a public-private partnership, receiving substantial funding 
from private sector contributions. The goals ofthe National 
Summits are to: (1) advance the public's knowledge and understanding of 
retirement savings and facilitate the development of a broad-based, 
public education program; (2) identify the barriers which hinder 
workers from setting aside adequate savings for retirement and impede 
employers, especially small employers, from assisting their workers in 
accumulating retirement savings; and (3) develop specific 
recommendations for legislative, executive, and private sector actions 
to promote retirement income savings among American workers.

                           REASONS FOR CHANGE

    The Committee believes it is appropriate to make 
modifications and clarifications regarding the administration 
of future National Summits on Retirement Savings.

                        EXPLANATION OF PROVISION

    Under the provision, future National Summits on Retirement 
Savings are to be held in 2006 and 2010. To facilitate the 
administration of future National Summits, the Department of 
Labor is given authority to enter into cooperative agreements 
(pursuant to the Federal Grant and Cooperative Agreement Act of 
1977) with any appropriate, qualified entity.
    Six new statutory delegates are added to future National 
Summits: the Chairman and Ranking Member of each of the 
following: the Senate Committee on Finance, the House Committee 
on Ways and Means, and the Subcommittee on Employer-Employee 
Relations of the House Committee on Education and the 
Workforce. Further, the President, in consultation with the 
Congressional leadership, is permitted to appoint additional 
Summit participants, not to exceed the lesser of three percent 
of all additional participants or 10 participants, from a list 
of nominees provided by the private sector partner in Summit 
administration. The provision also clarifies that new delegates 
are to be appointed for each future National Summit (as was the 
intent of the original legislation) and sets deadlines for 
their appointment.
    The provision also sets deadlines for the Department of 
Labor to publish the Summit agenda, gives the Department of 
Labor limited reception and representation authority, and 
specifies that the Department of Labor consult with the 
Congressional leadership in drafting the post-Summit report.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                        E. Missing Participants


(Sec. 405 of the bill and secs. 206(f) and 4050 of ERISA)

                              PRESENT LAW

    The plan administrator of a defined benefit pension plan 
that is subject to Title IV of ERISA, is maintained by a single 
employer, and terminates under a standard termination is 
required to distribute the assets of the plan. With respect to 
a participant whom the plan administrator of a single employer 
plan cannot locate after a diligent search, the plan 
administrator satisfies the distribution requirement only by 
purchasing irrevocable commitments from an insurer to provide 
all benefit liabilities under the plan or transferring the 
participant's designated benefit to the Pension Benefit 
Guaranty Corporation (``PBGC''), which holds the benefit of the 
missing participant as trustee until the PBGC locates the 
missing participant and distributes the benefit.
    The PBGC missing participant program is not available to 
multiemployer plans or defined contribution plans and other 
plans not covered by Title IV of ERISA.

                           REASONS FOR CHANGE

    The Committee recognizes that no statutory provision or 
formal regulatory guidance exists concerning an appropriate 
method of handling the benefits of missing participants in 
terminated multiemployer plans or defined contribution plans 
and other plans not subject to the PBGC termination insurance 
program. Therefore, sponsors of these plans face uncertainty 
with respect to the benefits of missing participants. The 
Committee believes that it is appropriate to extend the 
established PBGC missing participant program to these plans in 
order to reduce uncertainty for plan sponsors and increase the 
likelihood that missing participants will receive their 
retirement benefits.

                        EXPLANATION OF PROVISION

    The PBGC is directed to prescribe for terminating 
multiemployer plans rules similar to the present-law missing 
participant rules applicable to terminating single-employer 
plans that are subject to Title IV of ERISA.
    In addition, plan administrators of certain types of plans 
not subject to the PBGC termination insurance program under 
present law are permitted, but not required, to elect to 
transfer missing participants' benefits to the PBGC upon plan 
termination. Specifically, the provision extends the missing 
participants program (in accordance with regulations) to 
defined contribution plans, defined benefit plans that have no 
more than 25 active participants and are maintained by 
professional service employers, and the portion of defined 
benefit plans that provide benefits based upon the separate 
accounts of participants and therefore are treated as defined 
contribution plans under ERISA.

                             EFFECTIVE DATE

    The provision is effective for distributions made after 
final regulations implementing the provision are prescribed.

            F. Reduced PBGC Premiums For Small and New Plans


(Secs. 406-407 of the bill and sec. 4006 of ERISA)

                              PRESENT LAW

    Under present law, the Pension Benefit Guaranty Corporation 
(``PBGC'') provides insurance protection for participants and 
beneficiaries under certain defined benefit pension plans by 
guaranteeing certain basic benefits under the plan in the event 
the plan is terminated with insufficient assets to pay benefits 
promised under the plan. The guaranteed benefits arefunded in 
part by premium payments from employers who sponsor defined benefit 
plans. The amount of the required annual PBGC premium for a single-
employer plan is generally a flat rate premium of $19 per participant 
and an additional variable-rate premium based on a charge of $9 per 
$1,000 of unfunded vested benefits. Unfunded vested benefits under a 
plan generally means (1) the unfunded current liability for vested 
benefits under the plan, over (2) the value of the plan's assets, 
reduced by any credit balance in the funding standard account. No 
variable-rate premium is imposed for a year if contributions to the 
plan were at least equal to the full funding limit.
    The PBGC guarantee is phased in ratably in the case of 
plans that have been in effect for less than five years, and 
with respect to benefit increases from a plan amendment that 
was in effect for less than five years before termination of 
the plan.

                           REASONS FOR CHANGE

    The Committee believes that reducing the PBGC premiums for 
new plans and small plans will reduce the administrative costs 
of establishing and maintaining defined benefit pension plans, 
particularly by small employers.

                        EXPLANATION OF PROVISION

Reduced flat-rate premiums for new plans of small employers

    Under the provision, for the first five plan years of a new 
single-employer plan of a small employer, the flat-rate PBGC 
premium is $5 per plan participant.
    A small employer is a contributing sponsor that, on the 
first day of the plan year, has 100 or fewer employees. For 
this purpose, all employees of the members of the controlled 
group of the contributing sponsor are to be taken into account. 
In the case of a plan to which more than one unrelated 
contributing sponsor contributes, employees of all contributing 
sponsors (and their controlled group members) are to be taken 
into account in determining whether the plan was a plan of a 
small employer.
    A new plan means a defined benefit plan maintained by a 
contributing sponsor if, during the 36-month period ending on 
the date of adoption of the plan, such contributing sponsor (or 
controlled group member or a predecessor of either) has not 
established or maintained a plan subject to PBGC coverage with 
respect to which benefits were accrued for substantially the 
same employees as in the new plan.

Reduced variable-rate PBGC premium for new plans

    The provision provides that the variable-rate premium is 
phased in for new defined benefit plans over a six-year period 
starting with the plan's first plan year. The amount of the 
variable-rate premium is a percentage of the variable premium 
otherwise due, as follows: zero percent of the otherwise 
applicable variable-rate premium in the first plan year; 20 
percent in the second plan year; 40 percent in the third plan 
year; 60 percent in the fourth plan year; 80 percent in the 
fifth plan year; and 100 percent in the sixth plan year (and 
thereafter).
    A new defined benefit plan is defined as described above 
under the provision relating to flat-rate premiums for new 
small employer plans.

Reduced variable-rate PBGC premium for small plans

    In the case of a plan of a small employer, the variable-
rate premium is no more than $5 multiplied by the number of 
plan participants in the plan at the end of the preceding plan 
year. For purposes of the provision, a small employer is a 
contributing sponsor that, on the first day of the plan year, 
has 25 or fewer employees. For this purpose, all employees of 
the members of the controlled group of the contributing sponsor 
are taken into account. In the case of a plan to which more 
than one unrelated contributing sponsor contributes, employees 
of all contributing sponsors (and their controlled group 
members) are taken into account in determining whether the plan 
is a plan of a small employer.

                             EFFECTIVE DATE

    The reduction of the flat-rate premium for new plans of 
small employers and the reduction of the variable-rate premium 
for new plans is effective with respect to plans first 
effective after December 31, 2002. The reduction of the 
variable-rate premium for small plans is effective with respect 
to plan years beginning after December 31, 2002.

   G. Authorization For PBGC To Pay Interest on Premium Overpayment 
                                Refunds


(Sec. 408 of the bill and sec. 4007(b) of ERISA)

                              PRESENT LAW

    The PBGC charges interest on underpayments of premiums, but 
is not authorized to pay interest on overpayments.

                           REASONS FOR CHANGE

    The Committee believes that an employer or other person who 
overpays PBGC premiums should receive interest on a refund of 
the overpayment.

                        EXPLANATION OF PROVISION

    The provision allows the PBGC to pay interest on 
overpayments made by premium payors. Interest paid on 
overpayments is to be calculated at the same rate and in the 
same manner as interest charged on premium underpayments.

                             EFFECTIVE DATE

    The provision is effective with respect to interest 
accruing for periods beginning not earlier than the date of 
enactment.

      H. Rules for Substantial Owner Benefits in Terminated Plans


(Sec. 409 of the bill and secs. 4022 and 4044 of ERISA)

                              PRESENT LAW

    Under present law, the Pension Benefit Guaranty Corporation 
(``PBGC'') provides participants and beneficiaries in a defined 
benefit pension plan with certain minimal guarantees as to the 
receipt of benefits under the plan in case of plan termination. 
The employer sponsoring the defined benefit pension plan is 
required to pay premiums to the PBGC to provide insurance for 
the guaranteed benefits. In general, the PBGC will guarantee 
all basic benefits which are payable in periodic installments 
for the life (or lives) of the participant and his or her 
beneficiaries and are non-forfeitable at the time of plan 
termination. The amount of the guaranteed benefit is subject to 
certain limitations. One limitation is that the plan (or an 
amendment to the plan which increases benefits) must be in 
effect for 60 months before termination for the PBGC to 
guarantee the full amount of basic benefits for a plan 
participant, other than a substantial owner. In the case of a 
substantial owner, the guaranteed basic benefit is phased in 
over 30 years beginning with participation in the plan. A 
substantial owner is one who owns, directly or indirectly, more 
than 10 percent of the voting stock of a corporation or all the 
stock of a corporation. Special rules restricting the amount of 
benefit guaranteed and the allocation of assets also apply to 
substantial owners.

                           REASONS FOR CHANGE

    The Committee believes that the present-law rules 
concerning limitations on guaranteed benefits for substantial 
owners are overly complicated and restrictive and thus may 
discourage some small business owners from establishing defined 
benefit pension plans.

                        EXPLANATION OF PROVISION

    The provision provides that the 60-month phase-in of 
guaranteed benefits applies to a substantial owner with less 
than 50 percent ownership interest. For a substantial owner 
with a 50 percent or more ownership interest (``majority 
owner''), the phase-in occurs over a 10-year period and depends 
on the number of years the plan has been in effect. The 
majority owner's guaranteed benefit is limited so that it 
cannot be more than the amount phased in over 60 months for 
other participants. The rules regarding allocation of assets 
applies to substantial owners, other than majority owners, in 
the same manner as other participants.

                             EFFECTIVE DATE

    The provision is effective for plan terminations with 
respect to which notices of intent to terminate are provided, 
or for which proceedings for termination are instituted by the 
PBGC, after December 31, 2002.

                      I. Benefit Suspension Notice


(Sec. 410 of the bill)

                              PRESENT LAW

    Under present law,\39\ a plan will not fail to satisfy the 
vesting requirements with respect to a participant by reason of 
suspending payment of the participant's benefits while such 
participant is employed. Under the applicable Department of 
Labor (``DOL'') regulations, such a suspension is only 
permissible if the plan notifies the participant during the 
first calendar month or payroll period in which the plan 
withholds benefit payments. Such notice must provide certain 
information and must also include a copy of the plan's 
provisions relating to the suspension of payments.
---------------------------------------------------------------------------
    \39\ ERISA sec. 203(a)(3)(B).
---------------------------------------------------------------------------
    In the case of a plan that does not pay benefits to active 
participants upon attainment of normal retirement age, the 
employer must monitor plan participants to determine when any 
participant who is still employed attains normal retirement 
age. In order to suspend payment of such a participant's 
benefits, generally a plan must, as noted above, promptly 
provide the participant with a suspension notice.

                           REASONS FOR CHANGE

    The Committee believes the regulations relating to the 
benefit suspension notice should be amended to reduce the 
regulatory burden on plan administrators while at the same time 
assuring that adequate information is provided to employees.

                        EXPLANATION OF PROVISION

    Under the provision, the Secretary of Labor is required to 
modify the regulations relating to the benefit suspension 
notice (1) to permit the information currently required to be 
set forth in a suspension notice generally to be included in 
the summary plan description, rather than in a separate notice, 
and (2) not to require that the notice include a copy of 
relevant plan provisions. However, individuals reentering the 
workforce to resume work with a former employer after having 
begun to receive benefits would still receive the notification 
of the suspension of benefits (and a copy of the plan's 
provisions relating to suspension of payments). Such notice is 
required to be provided during the first calendar month, or 
during the first four- or five-week payroll period ending in a 
calendar month, in which the plan withholds payments.

                             EFFECTIVE DATE

    The provision applies for plan years beginning after 
December 31, 2002.

       J. Interest Rate Range For Additional Funding Requirements


(Sec. 411 of the bill, sec. 412 of the Code, and secs. 302 and 4006 of 
        ERISA)

                              PRESENT LAW

In general

    ERISA and the Code impose both minimum and maximum \40\ 
funding requirements with respect to defined benefit pension 
plans. The minimum funding requirements are designed to provide 
at least a certain level of benefit security by requiring the 
employer to make certain minimum contributions to the plan. The 
amount of contributions required for a plan year 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.
---------------------------------------------------------------------------
    \40\ The maximum funding requirement for a defined benefit plan is 
referred to as the full funding limitation. Additional contributions 
are not required if a plan has reached the full funding limitation.
---------------------------------------------------------------------------

Additional contributions for underfunded plans

    Additional contributions are required under a special 
funding rule if a single-employer defined benefit pension plan 
is underfunded.\41\ Under the special rule, a plan is 
considered underfunded for a plan year if the value of the plan 
assets is less than 90 percent of the plan's current 
liability.\42\ The value of plan assets as a percentage of 
current liability is the plan's ``funded current liability 
percentage.''
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    \41\ Plans with no more than 100 participants on any day in the 
preceding plan year are not subject to the special funding rule. Plans 
with more than 100 but not more than 150 participants are generally 
subject to lower contribution requirements under the special funding 
rule.
    \42\ Under an alternative test, a plan is not considered 
underfunded if (1) the value of the plan assets is at least 80 percent 
of current liability and (2) the value of the plan assets was at least 
90 percent of current liability for each of the two immediately 
preceding years or each of the second and third immediately preceding 
years.
---------------------------------------------------------------------------
    If a plan is underfunded, the amount of additional required 
contributions is based on certain elements, including whether 
the plan has an unfunded liability related to benefits accrued 
before 1988 or 1995 or to changes in the mortality table used 
to determine contributions, and whether the plan provides for 
unpredictable contingent event benefits (that is, benefits that 
depend on contingencies that are not reliably and reasonably 
predictable, such as facility shutdowns or reductions in 
workforce). However, the amount of additional contributions 
cannot exceed the amount needed to increase the plan's funded 
current liability percentage to 100 percent.

Required interest rate

    In general, a plan's current liability means all 
liabilities to employees and their beneficiaries under the 
plan. The interest rate used to determine a plan's current 
liability must be within a permissible range of the weighted 
average of the interest rates on 30-year Treasury securities 
for the four-year period ending on the last day before the plan 
year begins.\43\ The permissible range is from 90 percent to 
105 percent. As a result of debt reduction, the Department of 
the Treasury does not currently issue 30-year Treasury 
securities.
---------------------------------------------------------------------------
    \43\ The interest rate used under the plan must be consistent with 
the assumptions which reflect the purchase rates which would be used by 
insurance companies to satisfy the liabilities under the plan (section 
412(b)(5)(B)(iii)(II)).
---------------------------------------------------------------------------

Timing of plan contributions

    In general, plan contributions required to satisfy the 
funding rules must be made within 8\1/2\ months after the end 
of the plan year. If the contribution is made by such due date, 
the contribution is treated as if it were made on the last day 
of the plan year.
    In the case of a plan with a funded current liability 
percentage of less than 100 percent for the preceding plan 
year, estimated contributions for the current plan year must be 
made in quarterly installments during the current plan year. 
The amount of each required installment is 25 percent of the 
lesser of (1) 90 percent of the amount required to be 
contributed for the current plan year or (2) 100 percent of the 
amount required to be contributed for the preceding plan 
year.\44\
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    \44\ No additional quarterly contributions are due once the plan's 
funded current liability percentage for the plan year reaches 100 
percent.
---------------------------------------------------------------------------

PBGC premiums

    Because benefits under a defined benefit pension plan may 
be funded over a period of years, plan assets may not be 
sufficient to provide the benefits owed under the plan to 
employees and their beneficiaries if the plan terminates before 
all benefits are paid. In order to protect employees and their 
beneficiaries, the Pension Benefit Guaranty Corporation 
(``PBGC'') generally insures the benefits owed under defined 
benefit pension plans. Employers pay premiums to the PBGC for 
this insurance coverage.
    In the case of an underfunded plan, additional PBGC 
premiums are required based on the amount of unfunded vested 
benefits. These premiums are referred to as ``variable rate 
premiums.'' In determining the amount of unfunded vested 
benefits, the interest rate used is 85 percent of the interest 
rate on 30-year Treasury securities for the month preceding the 
month in which the plan year begins.

Special interest rate for 2002 and 2003

    Section 405 of the Job Creation and Worker Assistance Act 
of 2002,\45\ enacted March 9, 2002, provides a special interest 
rate rule applicable in determining the amount of additional 
contributions for plan years beginning after December 31, 2001, 
and before January 1, 2004 (the ``applicable plan years''). The 
special rule expands the permissible range of the statutory 
interest rate used in calculating a plan's current liability 
for purposes of applying the additional contribution 
requirements for the applicable plan years. The permissible 
range is from 90 percent to 120 percent for these years.
---------------------------------------------------------------------------
    \45\ Pub. L. No. 107-147.
---------------------------------------------------------------------------
    Under a related special rule, the interest rate used in 
determining the amount of unfunded vested benefits for PBGC 
variable rate premium purposes is increased to 100 percent of 
the interest rate on 30-year Treasury securities for the month 
preceding the month in which the applicable plan year begins.

                           REASONS FOR CHANGE

    Additional contributions are due within 8\1/2\ months after 
the end of the plan year if the plan was sufficiently funded 
for the preceding plan year. The Committee believes that the 
special interest rate rule provided under the Job Creation and 
Worker Assistance Act of 2002 should be phased in for 
contributions for the 2001 plan year that are due within 8\1/2\ 
months after the end of the plan year.

                        EXPLANATION OF PROVISION

    The provision expands the permissible range of the 
statutory interest rate used in calculating a plan's current 
liability for purposes of determining the amount of additional 
contributions for a plan year beginning in 2001 (the ``2001 
plan year'') that must be contributed to the plan within 8\1/2\ 
months after the end of the plan year (e.g., by September 15, 
2002, in the case of a plan that uses the calendar year as the 
plan year). The permissible range is from 90 percent to 108 
percent for this purpose.
    In addition, with respect to the provision of the Job 
Creation and Worker Assistance Act of 2002 providing a special 
rule for the interest rate used in determining the amount of 
unfunded vested benefits for PBGC variable rate premium 
purposes, the provision makes conforming changes so that the 
special rule applies for purposes of notices and reporting 
required with respect to underfunded plans.

                             EFFECTIVE DATE

    The provision is effective as if included in section 405 of 
the Job Creation and Worker Assistance Act of 2002.

   K. Voluntary Early Retirement Incentive Plans Maintained by Local 
                Educational Agencies and Other Entities


(Sec. 412 of the bill, sec. 457 of the Code, sec. 3(2)(B) of ERISA, and 
        sec. 4(l)(1) of the Age Discrimination in Employment Act)

                              PRESENT LAW

Eligible deferred compensation plans of State and local governments and 
        tax-exempt employers

    A ``section 457 plan'' is an eligible deferred compensation 
plan of a State or local government or tax-exempt employer that 
meets certain requirements. For example, amounts that can be 
deferred under section 457 cannot exceed certain dollar limits 
($11,000 for 2002). Amounts deferred under a section 457 plan 
are generally includible in gross income when paid or made 
available (or, in the case of governmental section 457 plans, 
when paid). Subject to certain exceptions (e.g., a qualified 
retirement plan), amounts deferred under a plan that does not 
comply with section 457 (an ``ineligible plan'') are includible 
in income when the amounts are not subject to a substantial 
risk of forfeiture. Section 457 does not apply to any bona fide 
vacation leave, sick leave, compensatory time, severance pay, 
disability pay, or death benefit plan. Additionally, section 
457 does not apply to qualified governmental excess benefit 
plans that provide benefits in excess of those that are 
provided under a qualified retirement plan maintained by the 
governmental employer.

ERISA

    ERISA provides rules governing the operation of most 
employee benefit plans. The rules to which a plan is subject 
depends on whether the plan is an employee welfare benefit plan 
or an employee pension benefit plan. For example, employee 
pension benefit plans are subject to reporting and disclosure 
requirements, participation and vesting requirements, funding 
requirements, and fiduciary provisions. Employee welfare 
benefit plans are not subject to all of these requirements. In 
addition, governmental plans are exempt from ERISA.

Age Discrimination in Employment Act

    The Age Discrimination in Employment Act (``ADEA'') 
generally prohibits discrimination in employment because of 
age. An exemption is provided from certain restrictions in ADEA 
for certain defined benefit plans that offer early retirement 
benefits or social security supplements and for a voluntary 
early retirement incentive plan that is consistent with the 
purposes of ADEA.

                           REASONS FOR CHANGE

    The Committee is aware that some public school districts 
and related tax-exempt education associations provide certain 
employees with voluntary early retirement incentive benefits 
similar to benefits that can be provided under a defined 
benefit plan. If provided under a defined benefit plan, these 
benefits would not be includible in income until paid and would 
also generally be permitted under ADEA. However, for reasons 
related to the structure ofState-maintained defined benefit 
plans covering these employees and fiscal operations of the local 
school districts, these benefits are provided to the employees 
directly, rather than under the defined benefit plan. The Committee 
believes it is appropriate to treat these benefits in a manner similar 
to the treatment that would apply if the benefits were provided under 
the defined benefit plan. The Committee also believes that it is 
appropriate to address the treatment of certain employment retention 
plans maintained by local school districts and related tax-exempt 
education associations

                        EXPLANATION OF PROVISION

Early retirement incentive plans of local educational agencies and 
        education associations

    The provision deals with the treatment of certain voluntary 
early retirement incentive plans under section 457, ERISA, and 
ADEA. The provision applies to voluntary early retirement 
incentive plans that are maintained by local educational 
agencies and tax-exempt education associations which 
principally represent employees of one or more such agencies, 
and that make payments or supplements as an early retirement 
benefit, a retirement-type subsidy, or a social security 
supplement in coordination with a defined benefit plan 
maintained by a State or local government or by such an 
association.
    Under the provision, a voluntary early retirement incentive 
plan is treated as a bona fide severance plan for purposes of 
section 457, and is therefore not subject to the limits under 
section 457, to the extent the payments or supplements could 
otherwise be provided under the defined benefit plan. For 
purposes of the provision, the payments or supplements that 
could otherwise be provided under the defined benefit plan are 
to be determined by applying the accrual and vesting rules for 
defined benefit plans.\46\
---------------------------------------------------------------------------
    \46\ The accrual and vesting rules have the effect of limiting the 
social security supplements and early retirement benefits that may be 
provided under a defined benefit plan; however, government plans are 
exempt from these rules.
---------------------------------------------------------------------------
    Under the provision, a voluntary early retirement incentive 
plan is also treated as a welfare plan for purposes of ERISA 
(other than a governmental plan that is exempt from ERISA). 
Additionally, for purposes of ADEA, the bill provides that a 
voluntary early retirement incentive plan is treated as part of 
the defined benefit plan and that payments or supplements under 
voluntary early retirement incentive plans are not severance 
pay that may be subject to certain deductions under ADEA.

Employment retention plans of local educational agencies and education 
        associations

    The provision deals with the treatment of certain 
employment retention plans under section 457 and ERISA. The 
provision applies to employment retention plans that are 
maintained by local educational agencies and tax-exempt 
education associations which principally represent employees of 
one or more such agencies and that provide compensation to an 
employee (payable on termination of employment) for purposes of 
retaining the services of the employee or rewarding the 
employee for service with educational agencies or associations.
    Under the provision, special tax treatment applies to the 
portion of an employment retention plan that provides benefits 
that do not exceed twice the applicable dollar limit on 
deferrals under section 457 ($11,000 for 2002). The provision 
provides an exception from the rules under section 457 for 
ineligible plans with respect to such portion of an employment 
retention plan. This exception applies for years preceding the 
year in which benefits under the employment retention plan are 
paid or otherwise made available to the employee. In addition, 
such portion of an employment retention plan is not treated as 
providing for the deferral of compensation for tax purposes.
    Under the provision, an employment retention plan is also 
treated as a welfare plan for purposes of ERISA (other than a 
governmental plan that is exempt from ERISA).

                             EFFECTIVE DATE

    The provision is generally effective on the date of 
enactment. The amendments to section 457 apply to taxable years 
ending after the date of enactment. The amendments to ERISA 
apply to plan years ending after the date of enactment. No 
inference is intended to be drawn from the provision as to the 
application of any law to any arrangement to which the 
provision does not apply or for any period or year for which 
the provision does not apply.

      L. Automatic Rollovers of Certain Involuntary Distributions


(Sec. 413 of the bill and sec. 404(c) of ERISA)

                              PRESENT LAW

In general

    If a qualified retirement plan participant ceases to be 
employed by the employer that maintains the plan, the plan may 
distribute the participant's nonforfeitable accrued benefit 
without the consent of the participant (an ``involuntary 
distribution'') and, if applicable, the participant's spouse, 
if the present value of the benefit does not exceed $5,000. 
Generally, a participant may roll over an involuntary 
distribution from a qualified plan to an individual retirement 
account or annuity (an ``IRA'') or to another qualified plan. 
Before making a distribution that is eligible for rollover, a 
plan administrator must provide the participant with a written 
explanation of the ability to have the distribution rolled over 
directly to an IRA or another qualified plan and the related 
tax consequences.

IRS guidance on default rollovers

    Under a 2000 ruling issued by the IRS,\47\ a qualified 
retirement plan may provide that the default form of payment of 
an involuntary distribution is a direct rollover to an IRA, 
unless the participant elects (1) a direct rollover to another 
qualified retirement plan or IRA or (2) to receive the payment 
in cash. Under the plan described in the ruling, the plan 
administrator selected an IRA trustee, custodian or issuer, 
established the IRA on behalf of the participant, and made 
initial investment choices for the account.
---------------------------------------------------------------------------
    \47\ Rev. Rul. 2000-36, 2000-2 C.B. 140.
---------------------------------------------------------------------------
    The ruling noted that the Department of Labor had advised 
the Treasury Department and the IRS that, in the context of a 
default direct rollover as described in the ruling, the 
participant ceases to be a participant covered under the plan 
within the meaning of ERISA and the distributed assets cease to 
be plan assets for purposes of ERISA if the distribution 
constituted the entire benefit rights of the participant. The 
ruling also noted that the Department of Labor had advised that 
the selection of an IRA trustee, custodian, or issuer and IRA 
investment for purposes of a default direct rollover would 
constitute a fiduciary act subject to the general fiduciary 
standards and prohibited transaction provisions of ERISA. In 
addition, the Department of Labor noted that plan provisions 
governing the default direct rollover of distributions, 
including the participant's ability to affirmatively opt out of 
the arrangement, must be described in the plan's summary plan 
description furnished to participants and beneficiaries.

Automatic rollover of involuntary distributions

    Under the Economic Growth and Tax Relief Reconciliation Act 
of 2001 (``EGTRRA''),\48\ a direct rollover to an IRA must be 
automatic for an involuntary distribution that exceeds $1,000 
and that is an eligible rollover distribution from a qualified 
retirement plan.\49\ That is, the distribution must be rolled 
over automatically to a designated IRA, unless the participant 
affirmatively elects to have the distribution transferred to a 
different IRA or a qualified plan or to receive it directly.
---------------------------------------------------------------------------
    \48\ Pub. L. No. 107-16.
    \49\ Section 401(a)(31)(B) of the Code, as added by section 657 of 
EGTRRA.
---------------------------------------------------------------------------

ERISA fiduciary rules

    ERISA contains general fiduciary duty standards that apply 
to all fiduciary actions related to employer-sponsored pension 
plans, including actions related to the investment of plan 
assets. However, these fiduciary rules generally do not apply 
to IRAs.
    ERISA provides a special rule for a defined contribution 
plan that permits participants to exercise control over the 
assets in their individual accounts.\50\ Under the special 
rule, if a participant exercises control over the assets in his 
or her account (as determined under regulations), the 
participant is not deemed to be a fiduciary by reason of such 
exercise 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 exercise of control.
---------------------------------------------------------------------------
    \50\ ERISA sec. 404(c).
---------------------------------------------------------------------------
    In connection with the EGTRRA provisions relating to 
automatic direct rollovers, the ERISA provision dealing with 
fiduciary liability when a participants exercises control over 
the assets in his or her account was amended to provide that, 
in the case of an automatic direct rollover, the participant is 
treated as exercising control over the assets in the IRA upon 
(1) the earlier of a rollover of all or a portion of the amount 
to another IRA, or one year after the automatic rollover is 
made, or (2) the making of an automatic rollover in a manner 
consistent with guidance provided by the Secretary of 
Labor.\51\ EGTRRA directed the Secretary of Labor to prescribe 
regulations, not later than three years after the date of 
enactment of EGTRRA, providing safe harbors under which the 
designation of an institution and investment of funds in 
accordance with the automatic direct rollover provision are 
deemed to satisfy the general fiduciary duty requirements of 
ERISA.\52\ The automatic rollover provisions apply to 
distributions made after the Department of Labor has adopted 
final regulations providing the required safe harbor. No such 
regulations have been adopted.
---------------------------------------------------------------------------
    \51\ ERISA sec. 404(c)(3), as added by section 657 of EGTRRA. 
Section 411(t) of the Job Creation and Worker Assistance Act of 2002 
made clerical corrections to the wording of this provision.
    \52\ ERISA sec. 404(a).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee recognizes that the provision added to ERISA 
in connection with the automatic rollover requirement, under 
which the individual is treated as exercising control over the 
assets in the IRA, has caused concern as to whether the assets 
in the IRA would be treated as plan assets that are subject to 
the fiduciary rules of ERISA. Such treatment would be 
inconsistent with the Department of Labor's position that, in 
the case of a default direct rollover to an IRA, the 
distributed assets cease to be plan assets. Confusion over 
whether the fiduciary rules of ERISA would apply with respect 
to assets held in an IRA has made it difficult for the 
Department of Labor to issue guidance related to automatic 
rollovers, including safe harbors for the designation of an 
institution to hold the distributed assets and the investment 
of the assets after distribution. The Committee believes it is 
appropriate to clarify the operation of the automatic rollover 
provision. This will facilitate the issuance of guidance by the 
Department of Labor and the implementation of the automatic 
rollover provision.

                        EXPLANATION OF PROVISION

    The provision repeals the ERISA provision relating to when 
a participant is considered to exercise control over the assets 
in an IRA following an automatic rollover. The provision thus 
clarifies that amounts transferred from a qualified retirement 
plan to an IRA in an automatic rollover are no longer plan 
assets for ERISA purposes, as indicated under the Department of 
Labor's position with respect to default direct rollovers 
before the enactment of EGTRRA. In addition, the provision 
directs the Department of Labor, not later than December 31, 
2002, to issue interim final regulations, or other 
administrative guidance, under which the designation of an 
institution and investment of funds in accordance with the 
automatic rollover provision are deemed to satisfy the general 
fiduciary duty requirements of ERISA.\53\ The provision 
provides that the automatic rollover provision applies to 
distributions made after December 31, 2003.
---------------------------------------------------------------------------
    \53\ Sec. 404(a) of ERISA.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective as if included in the provisions 
of EGTRRA.

    M. Extension of Transition Rule to Pension Funding Requirements


(Sec. 414 of the bill and sec. 769(c) of the Retirement Protection Act 
        of 1994)

                              PRESENT LAW

    Under present law, defined benefit pension plans are 
required to meet certain minimum funding rules. In some cases, 
additional contributions are required if a defined benefit 
pension plan is underfunded. Additional contributions generally 
are not required in the case of a plan with a funded current 
liability percentage of at least 90 percent. A plan's funded 
current liability percentage is the value of plan assets as a 
percentage of current liability. In general, a plan's current 
liability means all liabilities to employees and their 
beneficiaries under the plan. Quarterly minimum funding 
contributions are required in the case of certain underfunded 
plans.
    The Pension Benefit Guaranty Corporation (``PBGC'') insures 
benefits under most defined benefit pension plans in the event 
the plan is terminated with insufficient assets to pay for plan 
benefits. The PBGC is funded in part by a flat-rate premium per 
plan participant, and a variable rate premium based on plan 
underfunding.
    Under present law, a special rule modifies the minimum 
funding requirements in the case of certain plans. The special 
rule applies in the case of plans that (1) were not required to 
pay a variable rate PBGC premium for the plan year beginning in 
1996, (2) do not, in plan years beginning after 1995 and before 
2009, merge with another plan (other than a plan sponsored by 
an employer that was a member of the controlled group of the 
employer in 1996), and (3) are sponsored by a company that is 
engaged primarily in interurban or interstate passenger bus 
service.
    The special rule treats a plan to which it applies as 
having a funded current liability percentage of at least 90 
percent for plan years beginning after 1996 and before 2005 if 
for such plan year the funded current liability percentage is 
at least 85 percent. If the funded current liability of the 
plan is less than 85 percent for any plan year beginning after 
1996 and before 2005, the relief from the minimum funding 
requirements applies only if certain specified contributions 
are made.
    For plan years beginning after 2004 and before 2010, the 
funded current liability percentage will be deemed to be at 
least 90 percent if the actual funded current liability 
percentage is at least at certain specified levels. The relief 
from the minimum funding requirements applies for a plan year 
beginning in 2005, 2006, 2007, or 2008 only if contributions to 
the plan for the plan year equal at least the expected increase 
in current liability due to benefits accruing during the plan 
year.

                           REASONS FOR CHANGE

    The present-law funding rules for plans maintained by 
certain interstate bus companies were enacted because the 
generally applicable funding rules required greater 
contributions for such plans than were warranted give the 
special characteristics of such plans. In particular, these 
plans are closed to new participants and have demonstrated 
mortality significantly greater than that predicted under 
mortality tables that the plans would otherwise be required to 
use for minimum funding purposes. The Committee believes that 
it is appropriate to provide an extension of the special 
minimum funding rules for these plans for two years.

                        EXPLANATION OF PROVISION

    The provision modifies the special funding rules for plans 
sponsored by a company engaged primarily in interurban or 
interstate passenger bus service by providing that, for plan 
years beginning in 2004 and 2005, the funded current liability 
percentage of the plan will be treated as at least 90 percent 
for purposes of determining the amount of required 
contributions (100 percent for purposes of determining the 
timing of plan contributions). In addition, for these years, 
the mortality table used under the plan will be used in 
determining the amount of unfunded vested benefits under the 
plan.

                             EFFECTIVE DATE

    The provision is effective with respect to plan years 
beginning after December 31, 2002.

                               N. Studies


(Secs. 421-425 of the bill)

                              PRESENT LAW

    Present law does not require studies specifically relating 
to the revitalization of defined benefit plans, floor-offset 
ESOPs, an insurance system for defined contribution plans, or 
fees related to the investment of defined contribution plan 
assets.

                           REASONS FOR CHANGE

    The Committee has a continuing interest in retirement 
income security and in the roles that defined contribution 
plans and defined benefit plans play in providing that 
security. The Committee believes it is appropriate to conduct 
studies of certain issues relating to defined contribution 
plans, specifically, the establishment of an insurance 
arrangement for defined contribution plans, administrative and 
transactions fees charged in connection with the investment of 
defined contribution plan assets, and existing floor-offset 
ESOP arrangements, as well as a study of possible ways to 
revitalize interest in defined benefit plans.

                        EXPLANATION OF PROVISION

Study regarding insurance system for individual account plans

    The Pension Benefit Guaranty Corporation (the ``PBGC'') is 
required, as soon as practicable after the date of enactment, 
to undertake a study relating to the establishment of an 
insurance system for defined contribution plans and to report 
the results thereof, with recommendations for legislative 
changes, within two years after the date of enactment, to the 
House Committees on Ways and Means and on Education and the 
Workforce and the SenateCommittees on Finance and on Health, 
Education, Labor, and Pensions. In conducting the study, the PBGC is 
required to consider the feasibility of such a system, the problem with 
insuring investments in employer securities, and options for developing 
such a system.

Study regarding fees charged by individual account plans \54\
---------------------------------------------------------------------------

    \54\ Under ERISA, a defined contribution plan is generally referred 
to as an individual account plan.
---------------------------------------------------------------------------
    The Department of Labor is required to undertake a study of 
the administrative and transaction fees incurred by 
participants and beneficiaries in connection with the 
investment of assets in their accounts under defined 
contribution plans and to report the results thereof, with 
recommendations for legislative changes, within one year after 
the date of enactment, to the House Committees Ways and Means 
and on Education and the Workforce and the Senate Committees on 
Finance and on Health, Education, Labor, and Pensions. In 
conducting the study, the Department of Labor is required to 
consider how the fees compare to fees charged for similar 
services provided to investors not in defined contribution 
plans and whether participants and beneficiaries are adequately 
notified of the fees.

Study on revitalizing defined benefit plans

    The Secretary of the Treasury is required to undertake a 
study on ways to revitalize employer interest in defined 
benefit plans and to report the results thereof, with 
recommendations for legislative changes, within 18 months after 
the date of enactment, to the House Committees on Ways and 
Means and on Education and the Workforce and the Senate 
Committees on Finance and on Health, Education, Labor, and 
Pensions. In conducting the study, the Secretary is required to 
consider (1) ways to encourage the establishment of defined 
benefit plans by small and mid-sized employers, (2) ways to 
encourage the continued maintenance of defined benefit plans by 
larger employers, and (3) legislative proposals to accomplish 
these objectives.

Study on floor-offset ESOPs \55\
---------------------------------------------------------------------------

    \55\ A floor-offset arrangement is an arrangement under which 
benefits payable to a participant under a defined benefit plan are 
reduced by benefits under a defined contribution plan. Generally, in 
the case of a floor-offset arrangement, ERISA prohibits the defined 
contribution plan from acquiring employer securities if, after the 
acquisition, more than 10 percent of the assets of the plan would be 
invested in employer stock. However, under a special transition rule, 
this prohibition does not apply to a defined contribution plan, 
including an ESOP, that is part of a floor-offset arrangement 
established on or before December 17, 1987.
---------------------------------------------------------------------------
    The PBGC is required to undertake a study to determine the 
number of floor-offset ESOPs still in existence and the extent 
to which such plans pose a risk to plan participants or 
beneficiaries or to the PBGC and to report the results thereof, 
with legislative proposals, within 12 months after the date of 
enactment, to the House Committees on Ways and Means and on 
Education and the Workforce and the Senate Committees on 
Finance and on Health, Education, Labor, and Pensions.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                           O. Plan Amendments


 (Sec. 431 of the bill)

                              PRESENT LAW

    Plan amendments to reflect amendments to the law generally 
must be made by the time prescribed by law for filing the 
income tax return of the employer for the employer's taxable 
year in which the change in law occurs.

                           REASONS FOR CHANGE

    The Committee believes that employers should have adequate 
time to amend their plans to reflect amendments to the law 
while operating their plans in compliance with such amendments.

                        EXPLANATION OF PROVISION

    The provision permits certain plan amendments made pursuant 
to the changes made by the bill or by the Economic Growth and 
Tax Relief Reconciliation Act of 2001 (the ``2001 Act''), or 
regulations issued thereunder, to be retroactively effective. 
If the plan amendment meets the requirements of the provision, 
then the plan will be treated as being operated in accordance 
with its terms and the amendment will not violate the 
prohibition of reductions of accrued benefits for purposes of 
the Internal Revenue Code. In order for this treatment to 
apply, the plan amendment is required to be made on or before 
the last day of the first plan year beginning on or after 
January 1, 2005 (January 1, 2007, in the case of a governmental 
plan). If the amendment is required to be made to retain 
qualified status as a result of the changes in the law (or 
regulations), the amendment is required to be made 
retroactively effective as of the date on which the change 
became effective with respect to the plan and the plan is 
required to be operated in compliance until the amendment is 
made. Amendments that are not required to retain qualified 
status but that are made pursuant to the changes made by the 
bill or the 2001 Act (or applicable regulations) could be made 
retroactive as of the first day the plan is operated in 
accordance with the amendment.
    A plan amendment will not be considered to be pursuant to 
the bill or the 2001 Act (or applicable regulations) if it has 
an effective date before the effective date of the provision of 
the bill or Act (or regulations) to which it relates. 
Similarly, the provision does not provide relief from section 
411(d)(6) for periods prior to the effective date of the 
relevant provision (or regulations) or the plan amendment.
    The Secretary is authorized to provide exceptions to the 
relief from the prohibition on reductions in accrued benefits. 
It is intended that the Secretary will not permit inappropriate 
reductions in contributions or benefits that are not directly 
related to the provisions of the bill or the 2001 Act. For 
example, it is intended that a plan that incorporates the 
section 415 limits by reference can be retroactively amended to 
impose the section 415 limits in effect before the 2001 
Act.\56\ On the other hand, suppose a plan incorporates the 
section 401(a)(17) limit on compensation by reference and 
provides for an employer contribution of three percent of 
compensation. It is expected that the Secretary will provide 
that the plan cannot be amended retroactively to reduce the 
contribution percentage for those participants not affected by 
the section 401(a)(17) limit, even though the reduction will 
result in the same dollar level of contributions for some 
participants because of the increase in compensation taken into 
account under the plan as a result of the increase in the 
section 401(a)(17) limit under the 2001 Act. As another 
example, suppose that under present law a plan is top-heavy and 
therefore a minimum benefit is required under the plan, and 
that under the provisions of the 2001 Act, the plan is not be 
considered to be top-heavy. It is expected that the Secretary 
will generally permit plans to be retroactively amended to 
reflect the new top-heavy provisions of the 2001 Act.
---------------------------------------------------------------------------
    \56\ See also, section 411(j)(3) of the Job Creation and Worker 
Assistance Act of 2002, which provides a special rule for plan 
amendments adopted on or before June 30, 2002, in connection with the 
2001 Act, in the case of a plan that incorporated the section 415 
limits by reference on June 7, 2001, the date of enactment of the 2001 
Act.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

      TITLE V. PROVISIONS RELATING TO EXECUTIVES AND STOCK OPTIONS


  A. Repeal of Limitation on Issuance of Treasury Guidance Regarding 
                   Nonqualified Deferred Compensation


(Sec. 501 of the bill)

                              PRESENT LAW

General tax treatment of nonqualified deferred compensation

    The determination of when amounts deferred under a 
nonqualified deferred compensation arrangement are includible 
in the gross income of the individual earning the compensation 
depends on the facts and circumstances of the arrangement. A 
variety of tax principles and Code provisions may be relevant 
in making this determination, including the doctrine of 
constructive receipt, the economic benefit doctrine, the 
provisions of section 83 relating generally to transfers of 
property in connection with the performance of services, and 
provisions relating specifically to nonexempt employee trusts 
(sec. 402(b)) and nonqualified annuities (sec. 403(c)).
    In general, the time for inclusion of nonqualified deferred 
compensation depends on whether the arrangement is unfunded or 
funded. If the arrangement is unfunded, then the compensation 
is generally includible in income when it is actually or 
constructively received. If the arrangement is funded, then 
income is includible for the year in which the individual's 
rights are transferable or not subject to a substantial risk of 
forfeiture.
    In general, an arrangement is considered funded if there 
has been a transfer of property under section 83. Under that 
section, a transfer of property occurs when a person acquires a 
beneficial ownership interest in such property. The term 
``property'' is defined very broadly for purposes of section 
83.\57\ Property includes real and personal property other than 
money or an unfunded and unsecured promise to pay money in the 
future. Property also includes a beneficial interest in assets 
(including money) that are transferred or set aside from claims 
of the creditors of the transferor, for example, in a trust or 
escrow account. Accordingly, if, in connection with the 
performance of services, vested contributions are made to a 
trust on an individual's behalf and the trust assets may be 
used solely to provide future payments to the individual, the 
payment of the contributions to the trust constitutes a 
transfer of property to the individual that is taxable under 
section 83. On the other hand, deferred amounts are generally 
not includible in income in situations where nonqualified 
deferred compensation is payable from general corporate funds 
that are subject to the claims of general creditors, as such 
amounts are treated as unfunded and unsecured promises to pay 
money or property in the future.
---------------------------------------------------------------------------
    \57\ Treas. Reg. sec. 1.83-3(e). This definition in part reflects 
previous IRS rulings on nonqualified deferred compensation.
---------------------------------------------------------------------------
    As discussed above, if the arrangement is unfunded, then 
the compensation is generally includible in income when it is 
actually or constructively received under section 451. Income 
is constructively received when it is credited to an 
individuals' account, set apart, or otherwise made available so 
that it can be drawn on at any time. Income is not 
constructively received if the taxpayer's control of its 
receipt is subject to substantial limitations or restrictions. 
A requirement to relinquish a valuable right in order to make 
withdrawals is generally treated as a substantial limitation or 
restriction.
    Special statutory provisions govern the timing of the 
deduction for nonqualified deferred compensation, regardless of 
whether the arrangement covers employees or nonemployees and 
regardless of whether the arrangement is funded or 
unfunded.\58\ Under these provisions, the amount of 
nonqualified deferred compensation that is includible in the 
income of the individual performing services is deductible by 
the service recipient for the taxable year in which the amount 
is includible in the individual's income.
---------------------------------------------------------------------------
    \58\ Secs. 404(a)(5), (b) and (d) and sec. 83(h).
---------------------------------------------------------------------------

Rulings on nonqualified deferred compensation

    In the 1960's and early 1970's, various IRS revenue rulings 
considered the tax treatment of nonqualified deferred 
compensation arrangements.\59\ Under these rulings, a mere 
promise to pay, not represented by notes or secured in any way, 
was not regarded as the receipt of income for tax purposes. 
However, if an amount was contributed to an escrow account or 
trust on the individual's behalf, to be paid to the individual 
in future years with interest, the amount was held to be 
includible in income under the economic benefit doctrine. 
Deferred amounts were not currently includible in income in 
situations in which nonqualified deferred compensation was 
payable from general corporate funds that were subject to the 
claims of general creditors and the plan was not funded by a 
trust, or any other form of asset segregation to which 
individuals had any prior or privileged claim.\60\ Similarly, 
current income inclusion did not result when the employer 
purchased an annuity contract to provide a source of funds for 
its deferred compensation liability if the employer was the 
applicant, owner and beneficiary of the annuity contract, and 
the annuity contract was subject to the general creditors of 
the employer.\61\ In these situations, deferred compensation 
amounts were held to be includible in income when actually 
received or otherwise made available.
---------------------------------------------------------------------------
    \59\ The seminal ruling dealing with nonqualified deferred 
compensation is Rev. Rul. 60-31, 1960-1 C.B. 174.
    \60\ Rev. Rul. 69-650, 1969-2 C.B. 106; Rev. Rul. 69-49, 1969-1 
C.B. 138.
    \61\ Rev. Rul. 72-25, 1972-1 C.B. 127. See also, Rev. Rul. 68-99, 
1968-1 C.B. 193, in which the employer's purchase of an insurance 
contract on the life of the employee did not result in an economic 
benefit to the employee if all rights to any benefits under the 
contract were solely the property of the employer and the proceeds of 
the contract were payable only to the employer.
---------------------------------------------------------------------------
    Proposed Treasury regulation 1.61-16, published in the 
Federal Register for February 3, 1978, provided that if a 
payment of an amount of a taxpayer's compensation is, at the 
taxpayer's option, deferred to a taxable year later than that 
in which such amount would have been payablebut for his 
exercise of such option, the amount shall be treated as received by the 
taxpayer in such earlier taxable year.\62\
---------------------------------------------------------------------------
    \62\ Prop. Treas. Reg. 1.61-16, 43 Fed. Reg. 4638 (1978).
---------------------------------------------------------------------------

Section 132 of the Revenue Act of 1978

    Section 132 of the Revenue Act of 1978 \63\ was enacted in 
response to proposed Treasury regulation 1.61-16. Section 132 
of the Revenue Act of 1978 provides that the taxable year of 
inclusion in gross income of any amount covered by a private 
deferred compensation plan is determined in accordance with the 
principles set forth in regulations, rulings, and judicial 
decisions relating to deferred compensation which were in 
effect on February 1, 1978. The term, ``private deferred 
compensation plan'' means a plan, agreement, or arrangement 
under which the person for whom service is performed is not a 
State or a tax-exempt organization and under which the payment 
or otherwise making available of compensation is deferred. 
However, the provision does not apply to certain employer-
provided retirement arrangements (e.g., a qualified retirement 
plan), a transfer of property under section 83, or an 
arrangement that includes a nonexempt employees trust under 
section 402(b). Section 132 was not intended to restrict 
judicial interpretation of the law relating to the proper tax 
treatment of deferred compensation or interfere with judicial 
determinations of what principles of law apply in determining 
the timing of income inclusion.\64\
---------------------------------------------------------------------------
    \63\ Pub. L. No. 95-600.
    \64\ The legislative history to the provision states that the 
Congress believed that the doctrine of constructive receipt should not 
be applied to employees of taxable employers as it would have been 
under the proposed regulation. The Congress also believed that the 
uncertainty surrounding the status of deferred compensation plans of 
taxable organizations under the proposed regulation was not desired and 
should not be permitted to continue.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee is aware of recent press reports of the 
popular use of deferred compensation arrangements by executives 
to defer current taxation of substantial amounts of income. It 
has been reported that executives often use arrangements which 
allow deferral of income, but also provide security of future 
payment to the executive, even if the arrangement, on its face, 
says otherwise. The Committee is concerned that many 
nonqualified deferred compensation arrangements have developed 
which allow improper deferral of income. The Committee believes 
that the Secretary of the Treasury should issue guidance on 
nonqualified deferred compensation targeted to arrangements 
which result in improper deferral of income and should not be 
bound by the restrictions imposed by Section 132 of the Revenue 
Act of 1978, which may impede the Treasury Department from 
issuing appropriate guidance to address such arrangements.

                        EXPLANATION OF PROVISION

    The provision repeals section 132 of the Revenue Act of 
1978. It is intended that the Secretary of the Treasury issue 
guidance with respect to the tax treatment of nonqualified 
deferred compensation arrangements focusing on arrangements 
that improperly defer income. For example, it is intended that 
the Secretary address what is considered a substantial 
limitation under the constructive receipt doctrine and 
situations in which an individual's right to receive 
compensation is, at least in form, subject to substantial 
limitations, but in fact is not so limited. It is also intended 
that the Secretary address arrangements which purport to not be 
funded, but should be treated as so. In addition, it is 
intended that the Secretary address arrangements in which 
assets, by the technical terms of the arrangements, appear to 
be subject to the claims of an employer's general creditors, 
but practically are unavailable to creditors. Arrangements that 
the Secretary is expected to address include the following: the 
ability to receive funds on account of financial hardship, the 
use of trusts or other arrangements under which the rights of 
general creditors to gain access to funds is limited, the use 
of triggers and third-party guarantees to fund arrangements, 
and the ability to receive funds subject to a forfeiture of 
some portion of the participant's deferred compensation (often 
referred to as a ``haircut'').
    It is not intended that the Secretary take the position (as 
taken in proposed Treasury regulation 1.61-16) that all 
elective nonqualified deferred compensation is currently 
includible in income.
    No inference is intended that the Secretary is prohibited 
under present law from issuing guidance with respect to 
nonqualified deferred compensation arrangements or that any 
existing nonqualified deferred compensation guidance issued by 
the Secretary is invalid. In addition, no inference is intended 
that any arrangements covered by future guidance provide 
permissible deferrals of income under present law.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after the date of enactment.

 B. Taxation of Deferred Compensation Provided Through Offshore Trusts


(Sec. 502 of the bill and sec. 83 of the Code)

                              PRESENT LAW

    The determination of when amounts deferred under a 
nonqualified deferred compensation arrangement are includible 
in the gross income of the individual earning the compensation 
depends on the facts and circumstances of the arrangement. A 
variety of tax principles and Code provisions may be relevant 
in making this determination, including the doctrine of 
constructive receipt, the economic benefit doctrine, the 
provisions of section 83 relating generally to transfers of 
property in connection with the performance of services, and 
provisions relating specifically to nonexempt employee trusts 
(sec. 402(b)) and nonqualified annuities (sec. 403(c)).
    In general, the time for inclusion of nonqualified deferred 
compensation depends on whether the arrangement is unfunded or 
funded. If the arrangement is unfunded, then the compensation 
is generally includible in income when it is actually or 
constructively received (i.e., when it is paid or otherwise 
made available). If the arrangement is funded, then income 
isincludible for the year in which the individual's rights are 
transferable or not subject to a substantial risk of forfeiture.
    In general, an arrangement is considered funded if there 
has been a transfer of property under section 83. Under that 
section, a transfer of property occurs when a person acquires a 
beneficial ownership interest in such property. The term 
``property'' is defined very broadly for purposes of section 
83.\65\ Property includes real and personal property other than 
money or an unfunded and unsecured promise to pay money in the 
future. Property also includes a beneficial interest in assets 
(including money) that are transferred or set aside from claims 
of the creditors of the transferor, for example, in a trust or 
escrow account. Accordingly, if, in connection with the 
performance of services, vested contributions are made to a 
trust on an individual's behalf and the trust assets may be 
used solely to provide future payments to the individual, the 
payment of the contributions to the trust constitutes a 
transfer of property to the individual that is taxable under 
section 83. On the other hand, deferred amounts are generally 
not includible in income in situations where nonqualified 
deferred compensation is payable from general corporate funds 
that are subject to the claims of general creditors, as such 
amounts are treated as unfunded and unsecured promises to pay 
money or property in the future.
---------------------------------------------------------------------------
    \65\ Treas. Reg. sec. 1.83-3(e). This definition in part reflects 
previous IRS rulings on nonqualified deferred compensation.
---------------------------------------------------------------------------

Rabbi trusts

    A ``rabbi trust'' is a trust or other fund established by 
the employer to hold assets from which nonqualified deferred 
compensation payments will be made. The trust or fund is 
generally irrevocable and does not permit the employer to use 
the assets for purposes other than to provide nonqualified 
deferred compensation. However, the terms of the trust or fund 
provide that the assets are subject to the claims of the 
employer's creditors in the case of bankruptcy.
    As discussed above, for purposes of section 83, property 
includes a beneficial interest in assets set aside from the 
claims of creditors, such as in a trust or fund, but does not 
include an unfunded and unsecured promise to pay money in the 
future. In the case of a rabbi trust, terms providing that the 
assets are subject to the claims of creditors of the employer 
in the case of bankruptcy have been the basis for the 
conclusion that the creation of a rabbi trust does not cause 
the related nonqualified deferred compensation arrangement to 
be funded for income tax purposes.\66\ As a result, no amount 
is included in income by reason of the rabbi trust; generally 
income inclusion occurs as payments are made from the trust.
---------------------------------------------------------------------------
    \66\ This conclusion was first provided in a 1980 private ruling 
issued by the IRS with respect to an arrangement covering a rabbi; 
hence the popular name ``rabbi trust.'' Priv. Ltr. Rul. 8113107 (Dec. 
31, 1980).
---------------------------------------------------------------------------
    The Internal Revenue Service has issued guidance setting 
forth model rabbi trust provisions.\67\ Revenue Procedure 92-64 
provides a safe harbor for taxpayers who adopt and maintain 
grantor trusts in connection with unfunded deferred 
compensation arrangements. The model trust language requires 
that the trust provide that all assets of the trust are subject 
to the claims of the general creditors of the company.
---------------------------------------------------------------------------
    \67\ Rev. Proc. 92-64, 1992-2 C.B. 422, modified in part by Notice 
2000-56, 2000-2 C.B. 393.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee is aware of recent press reports of the 
popular use of deferred compensation arrangements by executives 
to defer current taxation of substantial amounts of income. It 
has been reported that executives often use arrangements which 
allow deferral of income, but also provide security of future 
payment to the executive, even if the arrangement, on its face, 
says otherwise. Since the concept of a rabbi trust was 
developed, techniques have developed that attempt to protect 
the assets from creditors despite the terms of the trust. For 
example, the trust or fund may be located in a foreign 
jurisdiction, making it difficult or impossible for creditors 
to reach the assets. Amounts used to provide deferred 
compensation that are held in a trust located in a foreign 
jurisdiction are difficult to reach by creditors, in many cases 
so difficult that the assets are effectively out of the reach 
of general creditors. The Committee believes that except in 
limited situations, the primary purpose of such arrangements is 
to protect the assets from the claims of general creditors. 
Thus, such assets should not be considered to be subject to the 
claims of creditors under U.S. tax laws.

                        EXPLANATION OF PROVISION

    The provision provides that assets that are designated or 
otherwise available for the use of providing nonqualified 
deferred compensation and are located outside the United States 
(e.g., in a foreign trust, arrangement or account) are not 
treated as subject to the claims of general creditors. 
Therefore, to the extent of such assets, nonqualified deferred 
compensation amounts are not treated as unfunded and unsecured 
promises to pay, but are treated as property under section 83 
and includible in income when the right to the compensation is 
no longer subject to a substantial risk of forfeiture, 
regardless of when the compensation is paid. No inference is 
intended that nonqualified deferred compensation assets located 
outside of the U.S. would be treated as subject to the claims 
of creditors under present law.
    The provision does not apply to assets located in a foreign 
jurisdiction if substantially all of the services to which the 
nonqualified deferred compensation relates are performed in 
such foreign jurisdiction.
    The provision is specifically intended to apply to foreign 
trusts and arrangements that effectively shield from the claims 
of general creditors any assets intended to satisfy 
nonqualified deferred compensation obligations. The provision 
provides the Secretary of the Treasury authority to prescribe 
regulations as are necessary to carry out the provision and to 
provide additional exceptions for specific arrangements which 
do not result in improper deferral of U.S. tax if the assets 
involved in the arrangement are readily accessible in any 
insolvency or bankruptcy proceeding.

                             EFFECTIVE DATE

    The provision is effective for amounts deferred after the 
date of enactment in taxable years ending after such date.

                  C. Treatment of Loans to Executives


(Sec. 503 of the bill and new sec. 7872A and sec. 7872 of the Code)

                              PRESENT LAW

    In general, gross income includes all income from any 
source, including compensation for past, present or future 
services, unless an exclusion applies. The proceeds of a bona 
fide loan are not income for Federal tax purposes, because the 
recipient is obligated to repay the loan. The issue of whether 
a payment is a bona fide loan or represents income to the payee 
may arise in various contexts (including in an employment 
context) and depends on the facts and circumstances. In 
analyzing whether there is an obligation to repay an amount, 
relevant factors include the existence of (1) a promissory note 
or other evidence of indebtedness, (2) a schedule for repayment 
of a sum certain in the reasonably foreseeable future, (3) 
collateral or security, and (4) the payee's ability to repay, 
as well as the actual practice of the parties with respect to 
enforcing repayment obligations.
    Under present law, a loan that provides for the payment of 
interest at a rate below the applicable Federal rate (a 
``below-market-rate loan'') between certain parties is 
recharacterized as a transaction in which the lender made a 
loan to the borrower in exchange for a note requiring the 
payment of interest at the applicable Federal rate. In the case 
of compensation-related loans, this rule results in the parties 
being treated as if: (1) the borrower paid interest to the 
lender at the applicable Federal rate which is includible in 
income by the lender, and (2) the lender paid compensation to 
the employee or other person performing services. A 
compensation-related loan is a below-market loan directly or 
indirectly between an employer and an employee or between an 
independent contractor and a person for whom such independent 
contractor provides services.
    In general, a below-market-rate loan is either a demand 
loan, the interest on which is payable at less than the 
applicable Federal rate, or a term loan, under which the amount 
of the loan exceeds the present value of all payments due under 
the loan, using a discount rate equal to the applicable Federal 
rate. A demand loan is any loan which is payable on demand of 
the lender; a term loan is any loan other than a demand loan.

                           REASONS FOR CHANGE

    The Committee is aware of recent press reports regarding 
loans made to executives by corporations. In some cases, the 
total amount loaned to a single individual has been 
extraordinary. For example, loans totaling over $90 million and 
even several billions of dollars have been reported publicly. 
In some cases such loans could not have been obtained from a 
commercial lender on similar terms. The Committee is concerned 
that there is no business purpose for such loans, other than to 
provide a benefit to the executive, and that such loans are in 
essence compensatory in nature. Thus, the Committee believes 
that loans to executives and certain other individuals in 
connection with the performance of services should be treated 
as compensation unless certain requirements are satisfied.
    In addition, the Committee believes that the present-law 
rules regarding below-market-rate loans do not require the 
imputation of an adequate rate of interest in the case of very 
large loans. Thus, the Committee believes the imputed interest 
rate on such loans should be increased.

                        EXPLANATION OF PROVISION

Certain loans treated as compensation

    Under the provision, an arrangement that would otherwise be 
a direct or indirect loan \68\ made to an applicable employee 
of a C corporation is treated as compensation (and therefore 
includible in gross income and wages for payroll tax purposes) 
unless certain requirements are satisfied. An applicable 
employee is an officer, director,\69\ five-percent owner of the 
employer, or any employee of the employer if outstanding loans 
from the employer exceed $1 million. In the case of a person 
who is an applicable employee solely by reason of having 
outstanding loans in excess of $1 million, only the amount of 
outstanding loans in excess of such amount is treated as 
compensation. Amounts treated as compensation under the 
provision are treated as a supplemental wage payment on the 
date the loan was made.
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    \68\ For example, a loan from the employer to a child or other 
family member of the employee would be considered a loan to the 
employee.
    \69\ All directors are treated as employees for purposes of the 
provision.
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    A direct or indirect loan is treated as compensation under 
the provision unless (1) there is a promissory note or other 
written evidence of indebtedness, (2) there is adequate 
collateral or security for the debt, and (3) there is a fixed 
schedule for repayment providing for substantially equal 
payments (or such other form as permitted by the Secretary) 
over a period not to exceed 10 years.\70\ The following may not 
be taken into account in determining whether there is adequate 
collateral or security for the loan: (1) any stock or capital 
or profits interest in the employer, (2) any option or other 
contract to purchase such stock or interests, (3) any 
restricted stock or ownership interest, (4) any nonqualified 
deferred compensation, or (5) other similar assets to the 
extent provided by the Secretary.
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    \70\ An arrangement that would otherwise be treated as a loan will 
not be treated as compensation under the provision merely because the 
loan is a below-market-rate loan. In such cases, the arrangement is 
treated as a loan and the below-market-rate loan rules (as modified 
under the provision) will apply to impute interest.
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    Loans from qualified plans and relocation loans are not 
subject to the provision. A relocation loan is a loan the 
proceeds of which are used by the employee to purchase a 
principal residence if the purchase is in connection with the 
commencement of work by an employee or a change in the 
principal place of work of an employee to which section 217 
applies (relating to the deduction for moving expenses).
    The provision also does not apply to a loan which, without 
regard to the provision, is recharacterized as compensation or 
dividends with respect to which amounts are otherwiseincludible 
in gross income. The provision is not intended to impose tax on amounts 
otherwise includible in gross income.
    Except in the case of repayments, as described below, the 
below-market-rate loan rules do not apply to an arrangement to 
the extent that it is treated as compensation under the 
provision. In addition, to the extent that a loan is treated as 
compensation under the provision, the rules relating to 
interest on certain deferred payments (sec. 483), loans from 
foreign trusts (sec. 643(i)), and the determination of issue 
price in the case of certain debt instruments issued for 
property (sec. 1274) do not apply.
    The Secretary is directed to prescribe rules for the 
application of the Federal tax laws in the event an applicable 
employee repays any amount of a loan which was includible in 
income under the provision. To the extent the Secretary 
determines appropriate, such rules are to provide that (1) the 
employee is allowed a deduction (and the employer is to include 
in gross income) for the taxable year of the repayment any 
portion of the amount repaid that was included in income of the 
employee (or allowed as a deduction to the employer), and (2) 
the amount treated as compensation for employment tax purposes 
(other than income tax withholding) for the calendar year of 
the repayment are reduced by the portion of any amount repaid 
that was previously treated as compensation. It is intended 
that any deduction provided to an applicable employee with 
respect to a repayment is to be subject to the two-percent 
floor on itemized deductions. It is also intended that the 
Secretary prescribe rules, to the extent appropriate, providing 
for application of and adjustments to the below-market-rate 
loan rules in the case of repayments.
    The Secretary is authorized to issue such regulations as 
are necessary or appropriate to carry out the provision. It is 
expected that such rules will address situations such as the 
payment of a bonus that coincides with a payment under the loan 
agreement, and rules specifying the proper treatment of an 
arrangement treated as a loan when made if the employee 
subsequently fails to make scheduled payments when due.

Imputed interest rate for below-market-rate loans

    If the amount of all outstanding loans of an applicable 
individual (not taking into account loans treated as 
compensation) with respect to the same service recipient 
exceeds $1 million,\71\ then the interest rate imputed under 
the below-market-rate loan rules is the applicable Federal rate 
plus three percentage points. This increased interest rate 
applies on the outstanding balance in excess of $1 million. 
Such amount is treated as a separate loan for this purpose.
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    \71\ All loans from the employer (whether or not below-market-rate 
loans) are taken into account in determining whether the $1 million 
threshold is exceeded.
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                             EFFECTIVE DATE

    The provision is effective for loans made or refinanced 
after the date of enactment. Except as provided by the 
Secretary, modifications to a loan after the effective date are 
considered a new loan. It is intended that a demand loan 
outstanding on the effective date is not treated as a new loan 
after the effective date merely because it is a demand loan.

D. Required Wage Withholding at Top Marginal Rate for Supplemental Wage 
                    Payments in Excess of $1 Million


(Sec. 504 of the bill and sec. 13273 of the Revenue Reconciliation Act 
        of 1993)

                              PRESENT LAW

    An employer must withhold income taxes from wages paid to 
employees; there are several possible methods for determining 
the amount of income tax to be withheld. The IRS publishes 
tables (Publication 15, ``Circular E'') to be used in 
determining the amount of income tax to be withheld. The tables 
generally reflect the income tax rates under the Code so that 
withholding approximates the ultimate tax liability with 
respect to the wage payments. In some cases, ``supplemental'' 
wage payments (e.g., bonuses or commissions) may be subject to 
withholding at a flat rate,\72\ based on the third lowest 
income tax rate under the Code (27 percent for 2002).\73\
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    \72\ Sec. 13273 of the Revenue Reconciliation Act of 1993.
    \73\ Sec. 101(c)(11) of the Economic Growth and Tax Relief 
Reconciliation Act of 2001.
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                           REASONS FOR CHANGE

    The Committee believes that because most employees who 
receive annual supplemental wage payments in excess of $1 
million will ultimately be taxed at the highest marginal rate, 
it is appropriate to raise the withholding rate on such 
payments so that withholding more closely approximates the 
ultimate tax liability with respect to these payments.

                        EXPLANATION OF PROVISION

    Under the provision, once annual supplemental wage payments 
to an employee exceed $1 million, any additional supplemental 
wage payments to the employee in that year are subject to 
withholding at the highest income tax rate (38.6 percent for 
2002), regardless of any other withholding rules and regardless 
of the employee's Form W-4.
    This rule applies only for purposes of wage withholding; 
other types of withholding (such as pension withholding and 
backup withholding) are not affected.

                             EFFECTIVE DATE

    The provision is effective with respect to wage payments 
made after December 31, 2002.

   E. Chief Executive Officer Required To Sign Corporate Income Tax 
                                Returns


(Sec. 511 of the bill and sec. 6062 of the Code)

                              PRESENT LAW

    The Code requires \74\ that the income tax return of a 
corporation must be signed by either the president, the vice-
president, the treasurer, the assistant treasurer, the chief 
accounting officer, or any other officer of the corporation 
authorized by the corporation to sign the return.
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    \74\ Sec. 6062.
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    The Code also imposes \75\ a criminal penalty on any person 
who willfully signs any tax return under penalties of perjury 
that that person does not believe to be true and correct with 
respect to every material matter at the time of filing. If 
convicted, the person is guilty of a felony; the Code imposes a 
fine of not more than $100,000 \76\ ($500,000 in the case of a 
corporation) or imprisonment of not more than three years, or 
both, together with the costs of prosecution.
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    \75\ Sec. 7206.
    \76\ Pursuant to 18 U.S.C. 3571, the maximum fine for an individual 
convicted of a felony is $250,000.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the filing of accurate tax 
returns is essential to the proper functioning of the tax 
system. The Committee believes that requiring that the chief 
executive officer of a corporation sign its corporate income 
tax returns will elevate the level of care given to the 
preparation of those returns.

                        EXPLANATION OF PROVISION

    The bill requires that the chief executive officer of a 
corporation sign that corporation's income tax returns. If the 
corporation does not have a chief executive officer, the IRS 
may designate another officer of the corporation; otherwise, no 
other person is permitted to sign the income tax return of a 
corporation. The Committee intends that the IRS issue general 
guidance, such as a revenue procedure, to (1) address 
situations when a corporation does not have a chief executive 
officer, and (2) define who the chief executive officer is, in 
situations (for example) when the primary official bears a 
different title or when a corporation has multiple chief 
executive officers. The Committee intends that, in every 
instance, the highest ranking corporate officer (regardless of 
title) sign the tax return.

                             EFFECTIVE DATE

    The provision is effective for returns filed after the date 
of enactment.

  F. Exclusion of Incentive Stock Options and Employee Stock Purchase 
                     Plan Stock Options From Wages


(Sec. 521 of the bill and secs. 421(b), 423(c), 3121(a), 3231, and 
        3306(b) of the Code)

                              PRESENT LAW

    Generally, when an employee exercises a compensatory option 
on employer stock, the difference between the option price and 
the fair market value of the stock (i.e., the ``spread'') is 
includible in income as compensation. In the case of an 
incentive stock option or an option to purchase stock under an 
employee stock purchase plan (collectively referred to as 
``statutory stock options''), the spread is not included in 
income at the time of exercise.\77\
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    \77\ Sec. 421.
---------------------------------------------------------------------------
    If the statutory holding period requirements are satisfied 
with respect to stock acquired through the exercise of a 
statutory stock option, the spread, and any additional 
appreciation, will be taxed as capital gain upon disposition of 
such stock. Compensation income is recognized, however, if 
there is a disqualifying disposition (i.e., if the statutory 
holding period is not satisfied) of stock acquired pursuant to 
the exercise of a statutory stock option.
    Federal Insurance Contribution Act (``FICA'') and Federal 
Unemployment Tax Act (``FUTA'') taxes (collectively referred to 
as ``employment taxes'') are generally imposed in an amount 
equal to a percentage of wages paid by the employer with 
respect to employment.\78\ The applicable Code provisions \79\ 
do not provide an exception from FICA and FUTA taxes for wages 
paid to an employee arising from the exercise of a statutory 
stock option.
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    \78\ Secs. 3101, 3111 and 3301.
    \79\ Secs. 3121 and 3306.
---------------------------------------------------------------------------
    There has been uncertainty in the past as to employer 
withholding obligations upon the exercise of statutory stock 
options. On June 25, 2002, the IRS announced in Notice 2002-47 
\80\ that until further guidance is issued, it would not assess 
FICA or FUTA taxes, or impose Federal income tax withholding 
obligations, upon either the exercise of a statutory stock 
option or the disposition of the stock acquired pursuant to the 
exercise of a statutory stock option.
---------------------------------------------------------------------------
    \80\ Notice 2002-47, 2002-28 I.R.B. 1.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee agrees with the position taken by the IRS in 
Notice 2002-47 and believes that it is appropriate to clarify 
statutorily the treatment of statutory stock options for 
employment tax and income tax withholding purposes. The 
Committee believes that it is appropriate to provide specific 
exclusions from withholding requirements for wages attributable 
to statutory stock options.

                        EXPLANATION OF PROVISION

    The provision provides specific exclusions from FICA and 
FUTA wages for remuneration on account of the transfer of stock 
pursuant to the exercise of an incentive stock option or under 
an employee stock purchase plan, or any disposition of such 
stock. Thus, under the provision, FICA and FUTA taxes do not 
apply upon the exercise of a statutory stock option.\81\ The 
provision also provides that such remuneration is not taken 
into account for purposes of determining Social Security 
benefits.
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    \81\ The provision also provides a similar exclusion for wages 
under the Railroad Retirement Tax Act.
---------------------------------------------------------------------------
    Additionally, the provision provides that Federal income 
tax withholding is not required on a disqualifying disposition, 
nor when compensation is recognized in connection with an 
employee stock purchase plan discount. Present law reporting 
requirements continue to apply.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

 G. Capital Gain Treatment on Sale of Stock Acquired From Exercise of 
      Statutory Stock Options To Comply With Conflict of Interest 
                              Requirements


(Sec. 522 of the bill and sec. 421 of the Code)

                              PRESENT LAW

Statutory stock options

    Generally, when an employee exercises a compensatory option 
on employer stock, the difference between the option price and 
the fair market value of the stock (i.e., the ``spread'') is 
includible in income as compensation. Upon such exercise, an 
employer is allowed a corresponding compensation deduction. In 
the case of an incentive stock option or an option to purchase 
stock under an employee stock purchase plan (collectively 
referred to as ``statutory stock options''), the spread is not 
included in income at the time of exercise.\82\
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    \82\ Sec. 421.
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    If an employee disposes of stock acquired upon the exercise 
of a statutory option, the employee generally is taxed at 
capital gains rates with respect to the excess of the fair 
market value of the stock on the date of disposition over the 
option price, and no compensation expense deduction is 
allowable to the employer, unless the employee fails to meet a 
holding period requirement. The employee fails to meet this 
holding period requirement if the disposition occurs within two 
years after the date the option is granted or one year after 
the date the option is exercised. A disposition that occurs 
prior to the expiration of the applicable holding period(s) (a 
``disqualifying disposition'') does not qualify for capital 
gains treatment. In the event of a disqualifying disposition, 
the income attributable to the disposition is treated by the 
employee as income received in the taxable year in which the 
disposition occurs, and a corresponding deduction is allowable 
to the employer for the taxable year in which the disposition 
occurs.

Sale of property to comply with conflict of interest requirements

    The Code provides special rules for recognizing gain on 
sales of property which are required in order to comply with 
certain conflict of interest requirements imposed by the 
Federal government.\83\ Certain executive branch Federal 
employees (and their spouses and minor or dependent children) 
who are required to divest property in order to comply with 
conflict of interest requirements may elect to postpone the 
recognition of resulting gains by investing in certain 
replacement property within a 60-day period. The basis of the 
replacement property is reduced by the amount of the gain not 
recognized. Permitted replacement property is limited to any 
obligation of the United States or any diversified investment 
fund approved by regulations issued by the Office of Government 
Ethics. The rule applies only to sales under certificates of 
divestiture issued by the President or the Director of the 
Office of Government Ethics.
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    \83\ Sec. 1043.
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                           REASONS FOR CHANGE

    To comply with Federal conflict of interest requirements, 
executive branch personnel may be required, before the 
statutory holding period requirements have been satisfied, to 
divest holdings of stock acquired pursuant to the exercise of 
statutory stock options. Because Federal conflict of interest 
requirements mandate the sale of such shares, the Committee 
believes that such individuals should be afforded the tax 
treatment that would be imposed had the individual held the 
stock for the required holding period.

                        EXPLANATION OF PROVISION

    Under the provision, an eligible person who, in order to 
comply with Federal conflict of interest requirements, is 
required to sell shares of stock acquired pursuant to the 
exercise of a statutory stock option is treated as satisfying 
the statutory holding period requirements, regardless of how 
long the stock was actually held. An eligible person generally 
includes an officer or employee of the executive branch of the 
Federal Government (and any spouse or minor or dependent 
children whose ownership in property is attributable to the 
officer or employee). Because the sale is not treated as a 
disqualifying disposition, the individual is afforded capital 
gain treatment on any resulting gains. Such gains are eligible 
for deferral treatment under section 1043.
    The employer granting the option is not allowed a deduction 
upon the sale of the stock by the individual.

                             EFFECTIVE DATE

    The provision is effective for sales after July 1, 2002.

                    III. BUDGET EFFECTS OF THE BILL


                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate, the following statement is made 
concerning the estimated budget effects of the provisions of 
the committee amendment to the bill as reported.


                B. Budget Authority and Tax Expenditures


Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that the revenue provisions of the committee 
amendment to the bill do not involve new or increased budget 
authority.

Tax expenditures

    In compliance with section 308(a)(2) of the Budget Act, the 
Committee states that the revenue-reducing provisions of the 
committee amendment to the bill involve increased tax 
expenditures (see revenue table in Part III.A., above). The 
revenue increasing provisions of the Committee amendment to the 
bill generally involve reduced tax expenditures (see revenue 
table in Part III.A., above).

            C. Consultation With Congressional Budget Office

    In accordance with section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office has not 
submitted a statement on the committee amendment to the bill. 
The letter from the Congressional Budget Office has not been 
received, and therefore will be provided separately.

                       IV. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of rule XXVI of the 
Standing Rules of the Senate, the following statements are made 
concerning the votes taken on the Committee's consideration of 
the amendment to the bill.

Rollcall votes

    No rollcall votes were taken on the amendment to the bill.

Motion to report the committee amendment

    The amendment to the bill was ordered favorably reported by 
voice vote, a quorum being present, on July 11, 2002.

                 V. REGULATORY IMPACT AND OTHER MATTERS


                          A. Regulatory Impact

    Pursuant to paragraph 11(b) of Rule XXVI of the Standing 
Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact that might be 
incurred in carrying out the provisions of the bill as amended.

Impact on individuals and businesses

    The Committee amendment to the bill includes provisions 
relating to qualified retirement plans, including provisions 
designed to increase retirement income security by (1) 
providing employees with greater opportunity to diversify plan 
investments in employer securities, (2) requiring plans to 
provide additional information with respect to plan benefits 
and investments, and (3) clarifying fiduciary requirements 
under ERISA. The Committee amendment to the bill also includes 
a variety of provisions intended to reduce administrative 
burdens on employers with regard to pension plans, including 
provisions relating to required funding contributions, 
reductions of Pension Benefit Guaranty Corporation premiums for 
certain plans, and other plan administration issues. The 
Committee amendment also includes directives for a number of 
studies relating to specific issues that affect retirement 
income security. Some of these provisions may impose additional 
administrative requirements on employers that sponsor 
retirement plans; however, in some cases the employer may avoid 
application of the provisions through plan design. In addition, 
some of the provisions will reduce regulatory burdens on 
employers that sponsor retirement plans.
    The Committee amendment also includes provisions relating 
to certain executive compensation arrangements and the proper 
tax treatment of such arrangements. The Committee amendment 
requires that tax returns be signed by a company's chief 
executive officer. This provision is not expected to affect 
paperwork burdens.
    The Committee amendment provides that certain stock options 
are not subject to withholding and provides for the treatment 
of stock acquired pursuant to the exercise of stock options to 
comply with Federal conflict-of-interest requirements.

Impact on personal privacy and paperwork

    The provisions of the Committee amendment to the bill do 
not impact personal privacy.
    Some provisions of the bill relating to pension plans will 
reduce paperwork burdens on employers that sponsor qualified 
retirement plans. Other provisions may impose additional 
burdens on employers; however, in many cases an employer may 
reduce such burdens through plan design. The provision 
regarding withholding requirements with respect to certain 
stock options will reduce regulatory burdens on individuals and 
businesses that currently apply withholding to these options. 
The provision relating to the sale of stock to comply with 
conflict of interest rules may require individuals who seek to 
take advantage of the tax benefits provided by the provision to 
maintain records to demonstrate eligibility for the tax 
benefits.

                     B. Unfunded Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
    The Committee has determined that the revenue provisions of 
the bill do not contain Federal mandates on the private sector. 
The Committee has determined that the revenue provisions of the 
bill do not impose a Federal intergovernmental mandate on 
State, local, or tribal governments.

                       C. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the 
Joint Committee on Taxation (in consultation with the Internal 
Revenue Service and the Department of the Treasury) to provide 
a tax complexity analysis. The complexity analysis is required 
for all legislation reported by the 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 
(the ``Code'') and has widespread applicability to individuals 
or small businesses.
    The staff of the Joint Committee on Taxation has determined 
that a complexity analysis is not required under section 
4022(b) of the IRS Reform Act because the bill contains no 
provisions that amend the Code and that have ``widespread 
applicability'' to individuals or small businesses.

        VI. CHANGES IN EXISTING LAW MADE BY THE BILL AS REPORTED

    In the opinion of the Committee, it is necessary in order 
to expedite the business of the Senate, to dispense with the 
requirements of paragraph 12 of rule XXVI of the Standing Rules 
of the Senate (relating to the showing of changes in existing 
law made by the bill as reported by the Committee).

                                  
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